THE WEEKLY Link

Financial planning in the supply chain

BARRY ELLIOTT

Today, in the final week of our "short course" on Integrated Business Management, the new and improved version of Sales & Operations Planning, we will talk about what we think is the biggest factor that makes it, truly, new and improved.

That factor is the integral role for Finance, whose people can add tremendous value to the planning aspects of the management process. How can this be? After all, we're talking about a supply chain management process, aren't we? Well, in the broadest sense, what else does any organisation do besides manage a supply chain?

In the previous version of Sales & Operations Planning, it was often a process by which mid-level management people from sales and operations got together to try to balance the numbers between what they thought they might like to sell against what they thought they might like to make or buy. It was never intended to be that way, by design, but that is often what resulted.

The reason for this result is that there wasn't the "guiding light" of striving to have a single set of numbers in the business. Now what we are talking about is THE management process that drives from the unconstrained demand plan (what you really, honestly think that the market would take from you if it were available), through the application of practical constraints in the supply plan (making every effort to satisfy the demand by building capacity and/or finding alternate sources of supply if called for) to, now, the integrated reconciliation, led by the finance department.

This is how one achieves a single set of numbers in a business. No longer do you tolerate each "silo" having its own view of things. Marketing has its view, Sales plays the game of pushing the sales people while still covering itself against high expectations, Manufacturing second-guessing what they both say, capacity planning being based on isolated thinking, and Finance is developing a completely different set of numbers for head office or the market.

Indeed, once people get Integrated Business Management working well, there is no longer a need to go through the annual drudgery of zero-based budgeting. Since you are going through this monthly management process and determining that you have a sound set of numbers stretching out to your planning horizon of 18 to 24 months, you can easily (honest) maintain a rolling budget, too. We have had clients refer to their Integrated Business Management implementation programmes as "Beyond Budgeting".

The Integrated Reconciliation is where several things are done, the following being the keys:

- Resolve any mismatches between the demand and supply plans. If that is not possible, evaluate the alternative scenarios that are part of the supply plan and determine which is optimal. If there are market implications, determine which demands should get priority on the constrained supply.

- Conduct a financial appraisal of the demand, supply, and inventory plans. Do they stack up against what the business needs and can afford?

- Reconcile the current view of the plans against the strategy and business plan. Are there gaps? If so, develop gap-closing strategies and tactics and launch actions.

In the third bullet, we allude to the aspect that we feel introduces the role for Finance, as leaders of this step, to add such tremendous value. By conducting insightful analysis and presenting such to the management team, they can bring out a whole new fact-based, forward looking approach.

The key is to find effective ways to present the analysis so that senior management can easily and quickly be informed of developments - particularly since the previous month.

That last point is important. It may seem that this is all a lot of work to do every month. However, that is the crux: this IS done every month. This is THE management process. You perpetually maintain your single set of numbers and only focus on what has changed. It is exception management at its best, focusing on the mid- to long-term future to anticipate and head off problems when you can best manage them.

From this fourth of the five steps, the output is the information pack that goes to the fifth and final step, the management business review, THE management meeting of the month. At that step, the senior team reviews updates to performance results, reviews and approves the demand, supply, and inventory plans for each family, and makes decisions on any recommendations coming in from the integrated reconciliation.

When the finance people lead an effective integrated reconciliation process, the final step is straightforward and focused on what matters.

Weekly Link is co-ordinated by Barry Elliott and Chris Catto-Smith, as an interactive forum for industry professionals. Comments and feedback are welcome at:BElliott@OliverWight-AP.com, cattoc@inet.co.th

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Last Updated : Wednesday April 11, 2007