Bridging finance and supply chain operations improves efficiency
In my earlier blog I examined common obstacles organizations face when bringing together finance and supply chain operations. Now let’s look at the rewards you can reap by actually doing so. Bringing together finance and supply chain operations can make your company more operationally savvy and improve financial efficiency through:
- Exposing potential risks and enabling executable and optimized plans
- Driving sustainable cost reduction and profitable growth through more mature planning models
- Combining rolling forecasts and S&OP to streamline business processes
Tighter integration can also lessen the pain of the budgeting process since a forward rolling plan means managers will already have consensus approval for some of the next year’s requirements through confirmation of the S&OP process. Without finance’s involvement in S&OP, the budget will start from a common plan based on what has happened in past years, and not one actually associated with what your operations team is forecasting will happen next year. According to an Aberdeen Group study, 63% of respondents say they’ve already integrated finance and S&OP to some degree, but only 4% indicate finance is driving that process. While best-in-class companies focus on a more holistic consideration of supply, demand and finance, the vast majority still struggles with more basic supply chain issues like managing demand forecasts within the S&OP plan. The same report shows best-in-class companies are:
- More than twice as likely to consider major constraints during supply and/or demand balancing
- Integrating finance with supply and demand by performing gap analysis and taking corrective action
- Improving inventory management capabilities, with 63% saying they have strong capabilities setting safety stock targets during S&OP cycles
It’s little wonder then that 76% of finance professionals say integrating financial planning and budgeting with S&OP is their top strategic action.
Putting best practices into action
Corporate performance management typically focuses too much on analyzing past actions and not enough on forward looking plans. With IBP, you’ll see the projected financial performance of the company, not just a history of the past, and the variance between the budget and operating and financial plans through metrics. To do this effectively, you must seamlessly integrate financial and operational information. Unfortunately, there’s still widespread use of Excel as the key enabler for S&OP. While that number has dropped from the 70% it once was, it’s still high enough to cause concern.
Extended use of spreadsheets in supply chain planning causes increased room for error (it only takes one misplaced number to throw off all your calculations), and greatly delays the decision-making process. Compiling data from your multiple enterprise resource planning (ERP) systems takes time, and means the numbers you’re working from in your monthly S&OP meeting could already be weeks out of date. One of the most important aspects of financial and supply chain operations integration is the IBP cycle. Making sure your processes are at a certain maturity level will increase the odds of success. To borrow from Gartner, you should be aiming for a stage-five S&OP maturity level, meaning you have the ability to react, anticipate, integrate, collaborate and orchestrate, with that final stage including financial integration into your day-to-day supply chain operations. The typical stages of a monthly S&OP cycle are:
- Data gathering: Gathering information to create a baseline forecast, which includes any plans for new product introductions and sales opportunities
- Demand planning: Creating a demand plan based on forecasts and any demand-shaping activities (e.g. promotions, price incentives, etc.)
- Supply planning: Creating a supply plan after reviewing demonstrated capacity and performing a rough-cut capacity analysis
- Supply/demand balancing: Reconciling supply and demand plans to overcome any potential constraints with machinery, people or suppliers
- Executive review: Planning for revenue, margin and profitability, and approval of supply and demand plans
If this cycle seems familiar, you likely aren’t including any potential financial implications until well into the later stages, once the demand and supply plans have already been set. By implementing IBP, finance plays a bigger role at every stage of the cycle, with both the operational and revenue impacts of changes to the demand and/or supply plans happening much earlier on. Instead of only running scenario simulations to see how to accommodate shifts in demand, you’ll look at how each potential scenario impacts the corporate-wide KPIs. Essentially, you’ll move from just balancing supply and demand during your S&OP meetings, to balancing supply, demand and finance, and creating a consensus plan that accounts for all aspects of the business, not just supply chain.