What is Gap Analysis?

Definition and Core Objective

Gap Analysis, within the context of the Integrated Reconciliation Review (IRR), is the financial and operational process of mathematically calculating the difference between the organization's current projected performance (based on the latest IBP plans) and its committed targets (Strategic Plan or Annual Operating Plan).

It is not merely a historical variance report; it is a forward-looking diagnostic tool used to quantify problems, identify root causes, and propose specific corrective actions to the executive team.

At its simplest level, Gap Analysis compares two distinct data sets to determine the health of the business over the rolling 24-to-36-month horizon:

• The Projected Reality (Latest Estimate): The "Financialized Operational Plan." This is the aggregation of the unconstrained demand plan and the constrained supply plan, converted into financial terms (Revenue, Margin, EBITDA, Cash Flow).

• The Commitment (Target): The Annual Operating Plan (AOP), Budget, or longer-term Strategic Plan objectives.

Types of Gaps Analyzed

The IRR analyzes gaps from multiple perspectives to ensure a complete picture is presented to the Management Business Review (MBR):

• Financial Performance Gap: The difference between the latest financial projection (based on the constrained supply plan) and the AOP/Budget.

• Opportunity Gap: The value of demand that cannot be met due to supply constraints. By comparing the financialized unconstrained demand plan to the constrained supply plan, the IRR calculates the specific dollar value of lost market opportunity.

• Strategic Gap: The difference between the current trajectory and long-term milestones, such as market share growth or facility utilization.

The "Bridge" Mechanism

A critical component of Gap Analysis is the creation of a Financial Bridge (often visualized as a waterfall chart). This mechanism explains why the gap exists by decomposing the variance into specific drivers:

• Volume: Variances caused by selling more or fewer units than planned.

• Price: Variances caused by pricing changes or discounting.

• Mix: Variances caused by selling a different proportion of high-margin vs. low-margin products.

• Assumptions: Variances aligned with primary planning assumptions, such as innovation success or competitive actions.

Gap Closing (Corrective Action)

Gap Analysis is incomplete without Gap Closing. The IRR team does not just report the gap; they are responsible for developing actionable recommendations to fix it.

• Scenario Planning: The team models different gap-closing options (e.g., "If we run overtime shifts, we close 50% of the revenue gap, but margin drops by 2%").

• Decision Templates: The output is a formal template presented at the MBR detailing the issue, background, options, and recommended path forward.

• Filtering: Issues that can be resolved within the decision rights of review leaders are handled immediately; only significant gaps requiring executive trade-off decisions are escalated.

About SIMCEL

SIMCEL unites your planning processes into one seamless platform. Whether you're optimizing inventory in Supply, refining forecasts in Demand, aligning financial strategy in Finance, or driving sustainability in Carbon—SIMCEL empowers your team to simulate, visualize, and align every decision across the business. Say goodbye to silos and hello to truly integrated, agile planning.