For supply chain practitioners, an increasingly frequent debate is what is the next step for S&OP maturity? For instance, is it really sales and operations, or a sales, operations and inventory planning process? Is the end goal operations excellence, or is it integrated financial planning and performance?
S&OP can mean many things to different functional teams within the organisation, and having a keen eye on the ultimate goals of the process is of critical importance. For some organisations it can mean facilitating increased sales, enhancing the overall agility of the business to respond faster to changing business conditions, or ensuring strategic business and operational performance goals are accomplished
Manufacturing value chains are driven by economic factors, for instance, the variable cost of labour and materials, or the cost of transportation. Fixed costs of facilities or costs to restructure are certainly important. Access to markets, the cost to serve certain customers, or the specific profitability of customers can also be elements. What product and gross margin goals is the business currently tracking to achieve, and what incremental business or customer orders can impact these goals to the positive? Any of these issues adds the element of financial parameters to the planning and optimisation challenge.
If the next step for S&OP maturity is integrated financial planning and performance then organisations need to be diligent in understanding all the elements required to move the planning process to that ultimate objective.
Moving toward integrated financial planning involves adding important analytical and what-if analysis capabilities to S&OP, and probably cannot be achieved without some form of advanced analytics or decision-making technology. Financial optimisation cannot just be at the highest levels, but must include the ability to support detailed financial planning and analysis at the individual product level. The process has to have a direct link to current cost and financial data related to products or business, data that can sometimes be difficult to garner in traditional supply chain planning software, or some S&OP focused planning applications.
Business Modelling Associates (BMA) views integrated business and financial planning as an extension of S&OP and believes that the next step for S&OP maturity is the application of next generation analytics that allows managers to identify the decisions with the best strategic and financial impact to the company.
An Integrated Business Planning (IBP) system incorporates activity based costing, constraint-oriented process modelling and comprehensive financial modelling to provide an enterprise-wide view of the business that supports all the important strategic and tactical decisions.
With a well-designed IBP system in place, many scenarios can quickly be represented, giving managers insights not previously achievable. Constraint modelling supports enquiries concerning particular events – it’s easier to understand why something is happening. Root cause analysis allows managers to truly understand the implications of their decisions.
IBP tools model not only processes and operations, but also profit, cash flow, and balance sheet implications, all validated to a company’s financials. This enables stronger decision-making and communication empowering executives to evaluate the full financial impact of a decision before it is taken. With IBP tools, a company can accurately represent its value chain end to end - from the supplier’s supplier to the customer’s customer.
If the end goal of S&OP is integrated business and financial planning, shouldn’t the application of some advanced technology that can adequately tie-in timely and key financial data, be a major consideration for your organisation?
Contributed by: Business Modelling Associates, www.businessmodelling.com
