Blog #38: Bring the Hedging/Risk desk into IBP

My previous blog said some businesses receive a price from the market (the price takers) rather than setting it (the price makers). This blog goes one layer deeper, adding an IBP-specific lens.

If the market sets your price, you almost certainly hedge. FX. Feedstock. Energy. Forward customer contracts. Somewhere in the building, a small team is running a second book - a financial one - shaping a real chunk of your EBITDA. Every week. Sometimes every day.

From what I have seen, often are they’re excluded from your S&OP/IBP. That’s not right.

Where this comes from

S&OP - and its dressed-up cousin IBP - was born in the physical world. Forecast the demand. Plan the supply. Build the inventory. Reconcile the finances. Sign it off in a room. The genesis is 1980s manufacturing. Every step of the standard cycle assumes what’s being planned is stuff - units, tonnes, litres, cases.

That worked when the physical book was the whole business. Still does, for a lot of companies.

But for many others, half the P&L exposure now sits somewhere the physical cycle can’t see. And I don’t just mean commodity traders. Anyone hedging FX with USD revenue and local costs. Anyone locking in feedstock or energy prices. Anyone signing forward customer contracts at fixed prices while their inputs float. That’s a huge sweep of primary industry, food processing, exporters and industrials. It isn’t a niche. And not much is said about that in IBP textbooks.

The eyes-glaze-over problem

Here’s the honest bit. If you’re an IBP practitioner and the treasury team starts talking puts, calls, basis risk, mark-to-market - your eyes glaze over. Fair enough. Mine do too.

That’s the problem. When your eyes glaze over, this whole function slips out of sight of IBP.

But the good news is, you don’t need to master the detail. You need to make sure that dark room where those exotic-sounding decisions get made has a seat at your IBP table.

Look around your next IBP meeting. Who’s there from the trading desk? If nobody comes to mind, that empty chair is the whole piece.

Why it matters

McKinsey ran the numbers in 2019. Poorly integrated hedging can cost a business between 5 and 25 percent of EBITDA. Their fix - integrate the trading decisions with S&OP - can pull EBITDA volatility down by 20 to 25 percent.

A fertiliser company signed six months of forward sales at fixed prices. But they’d only locked in enough natural gas to cover two months of production. Why? Because their IBP process never brought those two decisions together. The gap wasn’t in the numbers. It was in the meeting.

The airlines have lived this longer than anyone. Southwest was well respected because they got their fuel hedging right for several years - they built it into fleet planning and network planning, not just treasury. Others ran their hedge book in a corner and got monstered when the market moved.

Where the second book goes

I’m not saying IBP should own the trading desk. That’s a governance breach. The financial book has its own risk limits, its own reporting line to the CFO, its own cadence. Leave it there.

When production shifts, the hedging team hears about it before the plan is locked. When the market moves, the physical plan gets stress-tested before someone signs the next fixed-price contract. That’s the seam - the place where the physical plan and the financial position get reconciled. That’s what IBP owns. Proximity for information. Separation for governance.

Where does that seam live in the cycle? An optimisation step after Supply Review? Inside Reconciliation? Somewhere else entirely? I’m agnostic on the where. Not on the whether. Somewhere in your monthly cycle, the physical plan and the financial position have to come together. On the same page, in the same room, on the same day.

Better in the room than in a dark closet, doing brilliant work no-one else sees until the write-down lands.

Because - Blog 35 called this out - IBP is how you control your company. And you can’t control what you can’t see.

So - physical book or financial book. Are both in your IBP, or just the one it was originally designed for?

I don’t write these to chase work. I write them because too many planning processes run on autopilot and nobody says anything. If this sparked a thought, that’s enough. If you want to talk about it, find me at planninglab.co.nz/blogs.

#IBP #S&OP