10. Assumptions: From Theory to Practice
In an earlier article, I explained why assumptions, not numbers, form the foundation of effective business planning. Since then, I have been asked: "Great, but what does this look like in practice?" In business, a solid assumptions framework isn't just good planning—it's about dodging bullets before they're fired.
So let's get concrete.
Why This Matters Now
Planning teams are facing unprecedented volatility. Many are now realising that assumptions frameworks are a vital component to future planning in such an environment. They also ask how to structure them and make them a living part of the planning process rather than a checkbox exercise.
A Real-World Example: Plumbing Supplies Distributor
So let me share what I think an assumptions framework looks like for a New Zealand-based importer and distributor of plumbing supplies with lengthy international supply chains*. Their IBP process tracks just eight critical assumptions across a rolling seven-quarter horizon. These eight are broken into 4 macroeconomic indicators and 4 industry-specific indicators. Any more than that, and you are likely getting into detail and losing the real power of assumptions.
The Eight Key Assumptions
This distributor* focuses on:
NZD Exchange Rate - Critical for an import-based business
Construction-Specific Inflation - Tracks price changes for plumbing materials
Interest Rates - Affect financing costs and customer purchasing power
Housing Market Indicators - Directly influences product demand
Supply Chain Resilience - Measures logistics reliability and lead times
Construction Industry Activity - Monitors volume across residential and commercial sectors
Regulatory Environment - Tracks building code changes affecting product compliance
Competitive Landscape - Follows market share dynamics
Each quarter, these assumptions are updated and debated before numbers are even discussed.
Why This Detail Matters
Remember why assumptions are vital:
Accountability - When the NZD drops to 0.58 instead of rising to 0.63, it's about understanding who owns monitoring that assumption and what actions they'll take.
Early Issue Identification - When housing indicators show a downturn earlier than assumed, the team can adjust inventory strategies before problems arise.
Scenario Planning - Want to model what happens if interest rates remain at 3.75%? The assumptions framework makes it simple to cascade impacts through the plan.
Better Cross-Functional Dialogue - When executives debate whether Q3 will see "strong" or "moderate" construction activity, they're having substantive conversations rather than arguing about revenue targets.
One Company, One Set of Assumptions
These assumptions shouldn't be siloed within IBP. The same assumptions should underpin:
Strategic planning
Annual business planning
Marketing planning
Financial forecasting
Capital investment decisions
Why? Because your company exists in one reality. Using consistent assumptions across all planning activities creates coherence.
Making It Work: Practical Steps
Here's how to implement an effective assumptions framework:
Start With the Critical Few - Begin with the assumptions that truly move the needle.
Use Visual Indicators - Colour-code changes to highlight shifts requiring discussion.
Assign Clear Ownership - Each assumption category needs a designated owner.
Document the "Why" Behind Changes - Capture the rationale, not just the new values.
Build a Feedback Loop - Conduct regular reviews of assumption accuracy.
The Ultimate Test: When Things Go Wrong
This framework really proves its worth when reality fails to meet a carefully constructed plan. Instead of finger-pointing, get the team to focus on what assumption was wrong and to revise it?
Not only that, when you get top-down pressure from the CEO or CFO at budget time to significantly adjust your forecasts, ask them what assumption they think needs changing and why. It’s easy to throw out ‘stretch’ numbers just because they can; it’s a damn sight harder to explain the logic behind them.
The Challenge to You
Ask yourself: Are your assumptions explicitly documented, regularly debated, clearly owned, and systematically tracked?
If not, you're missing the true power of planning. Numbers tell you what might happen; assumptions tell you why and how.
In volatile environments, even if you can eek just a 1% improvement over your competitor by mastering the spaces between the numbers, you are doing better than your competitor, and that’s called winning. Your assumptions may ultimately determine success or failure.
Do you have a simple time-phased assumptions table that underpins not only all your IBP/S&OP plans but all company planning? If not, why not?
#IBP #S&OP #BusinessPlanning #SupplyChain
* The example Plumbing Supplies Distributor is purely fictional for this article, and any resemblance to a real company is purely coincidental. That being said, if you are a NZ Plumbing Supplies Distributor with long supplier lead times and wish to use this assumptions table, go for it.