Blog #37: Price Makers & IBP.

The electricity spot market cleared at 7:32 this morning. Then again at 8:02. Then again at 8:32. It'll do the same thing all day - forty-eight times before midnight - because that's what it does.

Somewhere in the same building, someone is preparing slides for next month's IBP meeting.

These two facts don't know each other exist. That's the problem. 

Same label. Different game:

When S&OP - the forerunner to IBP - was designed, it was built primarily for manufacturing businesses that shape their own demand signal. Forecast what customers want, plan supply to meet it. Monthly cadence. Rolling horizon. Neat, logical, textbook.

It works beautifully - in those circumstances.

Some businesses set their price. They decide what to offer, how much, at what price point. The market responds. Their planning rhythm and their commercial rhythm are the same thing - a closed loop that a monthly IBP cadence fits like a glove.

Other businesses receive their price. The market sets it - in an auction, a trading bourse, a spot exchange - and they read it. The planning challenge is entirely different. Their job isn't forecasting demand - it's reallocating constrained supply toward the best margin opportunity before the next price signal arrives.

Price-makers and price-takers. Same IBP label. However, a vastly different operational cadence.

This distinction is one of the most fundamental variables in IBP design. The standard frameworks don't name it. The monthly cadence, the demand-first logic, the stable rolling horizon - all of it was designed with one type of business in mind. 

Where the textbook goes quiet:

The price signal in a commodity market doesn't wait for your planning cycle. Grain exchanges move daily. Electricity spot markets clear every thirty minutes in New Zealand, every five minutes in Australia. Dairy commodity auctions run twice a month. Wool, logs, fish quota - all priced by markets that individual processors can't move.

In each case, the planning challenge is the same: how fast can you reallocate your constrained supply when the market just told you something your monthly plan didn't expect?

Put a monthly IBP cycle into that environment and it starts grinding. The cadence is wrong - four weeks between decisions is too slow when the price signal moves daily or fortnightly. The decision rights are wrong - the highest-value call isn't "what do we forecast" but "where do we put our constrained supply right now." The information flow is wrong - by the time commodity intelligence reaches the supply review, the margin window has closed.

The process isn't failing. It's solving the wrong problem. 

IBP still holds - but the design has to be honest:

None of this means running IBP every fortnight, or clearing a new plan every time the spot price moves. The monthly cadence can hold.

But IBP has to do two things at once in a price-taker business. It makes the strategic calls that belong to it - the cross-functional, medium-range decisions that can't be made anywhere else, by anyone else, any other way. And it reviews the faster decisions that couldn't wait - the reallocation calls, the product mix shifts, the allocation decisions made between cycles - to make sure they're still sitting inside the parameters the business agreed to.

IBP is the fulcrum. Above it: the multi-year decisions - capital investment, major strategic bets - that get handed down as the parameters IBP executes toward. Below it: the hourly and daily calls the business makes whether IBP convenes or not. IBP sits in the middle, reviewing what moved below it and executing toward what was decided above it.

The failure isn't the cadence. It's designing an IBP process that doesn't know those faster decisions are happening - and therefore can't review them, govern them, or connect them back to the plan. 

The question worth asking:

Before your next IBP redesign or maturity assessment, answer this: does your business set its price, or receive it?

If you set it - the standard architecture probably fits. Look at execution, not structure.

If you receive it - your IBP cadence may be structurally misaligned with the decisions that actually drive your margin. Not because the process is badly run. Because it was built for a different game.

The fix isn't a new framework. It's knowing which game you're actually in.

So - price-maker or price-taker. Which one is your business, and is your IBP built for the right answer? 

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