Some Things Change
Sales & Operations Planning (S&OP) has evolved significantly in recent years. The industry hype has increased and S&OP has risen to prominence within many companies. Analysts publish various S&OP maturity curves that enable practitioners to plot their S&OP maturity journey from Phase X to Phase Y. The recent change in S&OP has many dimensions.
The S&OP focus has progressed from a volume/mix to a value/mix emphasis. Sales & Operations Planning has evolved to Integrated Business Planning (IBP) to align various value scenarios with corporate objectives.
The S&OP technology has significantly changed. It is no longer an analytical umbrella that transcends demand and supply planning. S&OP tools now provide comprehensive workflow engines, B2B collaboration capability and comprehensive scenario management. Scenario management 2018 style includes finite capacity optimization engines to generate alternate end-to-end business scenarios. Soon this will use machine learning and prescriptive analytical techniques.
A major evolution of S&OP is the business context. S&OP was traditionally an extension of the core supply chain planning processes and by association focused on least cost operations. However, S&OP provides a unique tool for planning and measuring business growth. Modern S&OP is now the business navigation tool charting the optimal journey to growth while mitigating risk and exploiting opportunity.
Some Things Don’t Change
Amongst all of these changes remains an unfortunate constant. Financial stakeholders are not active participants in the S&OP process.
In 2013, IndustryWeek published an APQC survey that found 40% of companies not only exclude Finance from the S&OP process but often do not see the importance of their contribution. In May 2018, Gartner published a similar survey that found only 39% of the survey companies’ listed S&OP collaboration with finance as extremely effective. So while the S&OP party has improved over the past five years, the party invite has not changed.
S&OP is a cross-functional business process with cross-functional success criteria. Without an active S&OP stakeholder from each cross-functional area, the potential effectiveness and business benefits are limited. Consider a company that is able to monetize their demand plan for revenue budget alignment. This alignment (or misalignment) is important. What is the gap? Can it be recovered within the fiscal year? What is the impact on corporate performance? In the context of these discussions, finance needs to exist not only as a stakeholder, but as an influencer and owner of the plan.
The immediate benefit to Finance is to measure the expected success of their own plans within the current fiscal year. S&OP ensures there is sufficient demand, supply and capacity to support the financial goals of the company. There is a strong correlation between improving S&OP effectiveness and improving financial performance.
Financial success measures run deeper than just budget alignment. The S&OP process is uniquely positioned to provide insight into additional financial performance indicators. S&OP can determine the return on working capital, cash requirements and foreign currency exposures. S&OP monetizes not only the revenue and expense related volumes (supply and demand) but also inventory, accounts payables and accounts receivables.
Imagine an S&OP meeting where two alternate business scenarios are being compared. Both scenarios (A & B) are almost identical in terms of non-financial measures such as service level, resource utilisation, inventory turns, excess stock and expedited freight. The business could select either option and satisfy the KPIs.
However, by including a financial stakeholder, an excessive cash requirement for Plan A is identified as it is sourcing from short payment term suppliers to serve long payment term demand. The long payment term demand source resides in a volatile currency. The company does not have the available cash to meet the required working capital for Plan A. This plan, although pure from a supply chain perspective, could have been catastrophic.
There are many other “secondary” benefits to Finance participating in S&OP. It can be used as an input to building fiscal budgets. S&OP is a valuable platform to explore various future planning scenarios. In a similar manner the S&OP forum can add justification value to CAPEX payback analysis.
How does the S&OP process entice expertise from the Finance Group?
Firstly, S&OP needs to speak the language of the Finance team. Just like any other language, S&OP needs to be translated. Speaking the language means translating volumes to value, inventory to “working capital”, resource utilization to return-on-assets, sales to revenue and accounts receivable.
There must be mutually agreed context. Exactly which events can benefit from aligning financial performance indicators? There is plenty of common ground such as budget alignment, risk assessment, working capital and cash requirement analysis.
S&OP does not need to generate a future P&L and balance sheet for every potential business plan. It must however determine the financial impact of each alternate plan against a baseline using agreed financial performance measures.
How does your company engage finance and P&L owners in the S&OP discussion? Let us know in the comments section below.