A short introduction to the case company
The case considers a European-based company with a global footprint and revenue of approximately EUR 2.5 billion. The company operates in the commodity sector meaning that it is affected by a volatile market price. It is also within the process industry, relying on expensive assets where capacity increase comes at a huge cost. This leads to a scarce supply because most of the companies in this area are behind on the capacity curve (i.e. not investing in new capacity unless the utilisation of the new machinery will also be close to its maximum). This also means that the entire produced quantity can usually be sold.
Consequently, customer prioritisation becomes the major lever with which to steer the business. The prioritisation can be made based on relevancy of the customer, strategic fit or expected profit. Around 80% of the available supply is allocated to customers based on contracts negotiated the year before. Therefore, the company goes through an annual planning cycle to identify the unconstrained demand and the expected production output in order to allocate the volume to individual customers for maximising long-term profitability.
Challenging the existing process and potential of transformation
In the past, this process was done primarily in Excel and based on historic figures, i.e. profitability per customer from the previous year. As a result, profitability steering was less effective and very time-consuming due to a lack of transparency and frequent data inconsistency. In addition, the company was unable to quickly simulate the volatile market price scenario to manage the risks and prepare contingency plans. Therefore, the company decided to implement SAP IBP as their new planning tool and to modify existing processes to take advantage of the tool’s capabilities.
SAP IBP supports planning in volume as well as financial figures, which bridges the gap between volume and profitability planning. In addition, its strong calculation engine enables simulating and comparing different scenarios in order to mitigate risks and identify opportunities.