Avoid “Lost in Translation.” Monetize S&OP to Include Finance.
Finance speaks a different language than supply chain. But by monetizing Sales & Operations Planning (S&OP), supply chain planners can speak the language of finance while developing S&OP into a more mature process.
In its report Partner with Finance to Monetize the S&OP Conversation, Gartner says finance is not taking part in S&OP meetings at 40% of companies; mostly because finance leaders are unaware of how S&OP can help a business realize its financial goals and objectives. It’s a problem of “lost in translation”—the differing lingo used by the finance side versus planning, supply, production and logistics.
The language of finance is numbers, but they’re different numbers than the ones used by supply chain. This isn’t just aligning financial planning with S&OP. “Monetizing” the S&OP discussion to focus on value means translating supply chain planning unit and volume numbers into the value-driven financial measurements. For example, a demand planner at an S&OP meeting might say she expects to sell 10,000 units; whereas finance is focused on achieving a gross margin contribution of $12,500. Both numbers are “correct.” But with finance, it’s “show me the money”. Gartner recommends multiplying the planned unit volume:
- by price to generate monetized revenue plans,
- by cost to generate monetized inventory plans,
- by margin to generate monetized profit plans.
Gartner suggests that planners can also nudge finance across the functional divide by correlating their planning KPIs with financial targets. For instance, a Gartner industry benchmarking shows that a 1% increase in forecast accuracy typically achieves:
- 2-7% reduction in the value of total inventory as a percentage of sales (working capital)
- 4-9% decrease in the value of obsolete inventory as a percentage of total stocked goods (product costs)
- 3-9% reduction in transportation costs as a percentage of sales (overhead costs and profitability)
These are numbers that most financial people can appreciate.
The added benefit of a more financially-driven S&OP process is increased maturity. To achieve Gartner’s Stage 4 maturity requires aligning the S&OP plan to reach revenue projections profitably “based on a more accurate understanding of distinct supply chain segments and corresponding cost to serve.” To achieve Stage 5, S&OP must be “a fully integrated business planning forum… (where) metrics are value-based and aligned across the network and enterprise to support the required trade-offs.”
Gartner’s research is echoed by Lora Cecere of Supply Chain Insights. In a recent web seminar entitled S&OP: From Volume to Value she asks, “How do supply chain leaders transition from a cost-based agenda to drive value?” Her research shows that effective Sales and Operations Planning is one of the most highly correlated factors to achieving high level financial success metrics, such a company’s stock price to tangible book value.
But she says that supply chain has to be proactive because finance often isn’t aware of and doesn’t appreciate these benefits. Cecere says that this means moving from measuring and tracking volume to analyzing profitability, and ultimately “what if” analysis and evaluating alternate strategies via “bidirectional orchestration.”
Cecere says that companies shouldn’t confuse this need with “tight integration to ERP.” She says ERP is “reactive”. Value-driven S&OP is about “what’s important”.
In another Gartner report, How to Create an Effective S&OP That Drives Results, the research firm relates an example of two companies. One business, where finance was not involved in S&OP, was crushed by a rapid currency appreciation in the Swiss franc that made its products too pricey for the market. At a second firm, the CFO had factored that risk into the S&OP process, and the company weathered the revaluation by moving inventory abroad ahead of time and identifying sourcing options outside the currency zone. Finance and supply chain spoke the same language—the language of success.