# Gap Analysis

A gap is the difference between where the plan says the business is heading and where the business needs to be 🎯. In IBP, gap analysis is the structured process of identifying those differences, understanding their drivers, and generating actionable options to close them.

Gap:
The quantified difference between the projected outcome of the current operating plan (demand x supply translated to financials) and the business target (AOP, budget, or strategic plan).

Gap analysis is not an academic exercise. It is the reason financial reconciliation exists — to surface gaps early enough that leadership has time and options to respond, rather than discovering shortfalls at quarter-end when it is too late.

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# Types of Gaps

Not all gaps are the same. Breaking them down by type helps the organization understand root cause and directs attention to the right closure levers.

In practice, gaps rarely appear in isolation. A volume shortfall in a premium segment creates both a volume gap and a mix gap, which compounds into a margin gap. Good gap analysis decomposes the total gap into its constituent parts so that closure actions can be targeted.

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# Identifying Gaps: The Bridge Analysis

The most effective way to visualize and communicate a gap is through a waterfall (bridge) chart. A bridge chart starts with the previous plan or target and walks through each driver of change to arrive at the current projection.

A typical bridge structure:

1. Starting point — Last month's plan or the AOP target
2. Volume changes — Did demand go up or down vs. last cycle?
3. Price / mix changes — Did the revenue-per-unit change?
4. Cost changes — Did input costs, freight, or manufacturing costs shift?
5. New decisions — What is the impact of portfolio changes, promotions, or supply actions taken since last cycle?
6. Ending point — The current projected outcome

The bridge answers the question everyone asks in the MBR: "What changed, and why?" Without it, the conversation devolves into re-explaining the numbers instead of deciding what to do about them.

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# Gap Closure Options

Once a gap is identified and quantified, the next step is generating options to close it. Options typically fall into three categories 🔧.

Demand-side options seek to close the gap by increasing volume or improving revenue per unit.

• Pricing actions — Selective price increases where elasticity allows, or promotional pricing to accelerate volume in priority segments
• Promotions and campaigns — Trade promotions, marketing spend reallocation, or channel incentives to pull demand forward
• New markets or channels — Expanding into adjacent geographies or sales channels to capture incremental volume
• New product acceleration — Pulling forward NPI launches that are close to ready to generate incremental revenue sooner

Best for: Revenue gaps and volume gaps where the constraint is demand, not supply.

Supply-side options seek to close the gap by reducing cost or improving productivity.

• Cost reduction programs — Renegotiating supplier contracts, substituting materials, or consolidating shipments
• Productivity improvement — Manufacturing efficiency initiatives, yield improvement, or labor optimization
• Sourcing changes — Shifting volume to lower-cost suppliers or production sites, dual-sourcing to create competitive pressure
• Inventory optimization — Reducing carrying costs through better inventory policies or safety stock recalibration

Best for: Margin gaps and cost gaps where revenue is tracking but profitability is under pressure.

Portfolio options seek to close the gap by changing the mix of what the business sells.

• Mix shift — Actively steering commercial efforts toward higher-margin products or segments
• Rationalization — Discontinuing low-margin SKUs that consume disproportionate resources (see Portfolio Management)
• NPI prioritization — Accelerating launches with the strongest margin profile, deprioritizing marginal innovation
• Bundle or upsell strategies — Packaging products to improve average revenue per transaction

Best for: Mix gaps and margin gaps where the total volume is adequate but the value per unit is below target.

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# Evaluating Gap Closure Options

Not every option is worth pursuing. A structured evaluation framework prevents the team from chasing low-impact or high-risk actions when better alternatives exist.

The following table maps each option category to its typical profile:

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# How Gaps Flow Through the IBP Cycle

Gap analysis is not a one-time event — it repeats every cycle, with increasing precision:

1. Financial reconciliation — Gaps are identified and quantified. The finance team, working with demand and supply planners, sizes the gap and decomposes it into volume, price, mix, and cost components.
2. Option generation — Cross-functional teams develop closure options. Each option gets a rough impact estimate, timeline, and risk assessment.
3. Pre-MBR preparation — The IBP team packages 2-3 recommended scenarios for leadership, showing the base plan plus closure options and their financial impact.
4. Management Business Review (MBR) — Leadership reviews the gap, evaluates the options, and makes decisions. Approved actions are loaded into the next cycle's plan.
5. Next cycle — The impact of decisions made in the MBR is reflected in updated demand, supply, and financial plans. Any remaining or new gaps restart the process.

The discipline of gap analysis is what separates IBP from reporting. Reporting tells you what happened. Gap analysis tells you what is going to happen, why it falls short, and what you can do about it. That forward-looking, action-oriented posture is the entire point of the process.