A frequently asked question during sales and operations planning (S&OP) implementation projects is “What is the role of S&OP in monthly financial planning?”  Given that finance and operations need to work hand-in-hand to deliver financial results while maintaining customer satisfaction, effective integration of finance into the S&OP process is an imperative.    An interesting aside is that we are starting to see some of our clients adopt the term “integrated business planning” (IBP) to describe the process of engaging finance in a sales and operations planning process.

From the perspective of the finance team, engagement in IBP or S&OP enhances their ability to identify gaps, evaluate investment opportunities, manage costs, understand trade-offs and improve financial visibility.  From an operational point-of-view, one of the most compelling benefits is the capability to translate unit volume plans into revenue and margin plans.  Effective monthly, bottoms-up, top-down reconciliation of S&OP plans into financial plans is often an eye-opening and ultimately compelling process.

What are key categories of metrics for integrating finance into the process?

Sales Plan Performance Metrics (SPPM) is similar to the BPPM except that it is a measure of the current actual sales versus the prior period sales plan.  This metric is based on a ratio of dollars and may be done on a month+1, quarter, QTD or YTD basis.  It provides a measure of where a company is against their original sales plan.

Business Plan Performance Metrics (BPPM) is the ratio of the current sales plan against the original budget (Annual Operating Plan or AOP) in dollars.  This metric is often expressed as a percentage for the month ahead, though sometimes there are compelling reasons to adopt an aggregate plan value or even a 12 month rolling average.  This metric is often managed at the Product Family by Region hierarchy intersection.  It provides a measure of where a company expects to be for the period ahead versus the original plan.

Inventory Performance Metrics (IPM) is a key indicator of working capital which the finance organization tracks closely.  There are two variants of this metric that are typically used: 1) Actual inventory levels against budgeted inventory in the Annual Operating Plan (AOP), and, 2) Current plan inventory assumptions against original AOP.  The first variant is often expressed as a percentage on a monthly basis at a detail level and may also be aggregated by both region and product family.  The second metric is really a percentage variance “time-series” metric in so much as the horizon for the metric included the current month and 12 or 18 months forward.

Supply Plan Performance Metrics (SUPPM) can be used as a measure of supply performance against demand in units or supply performance against AOP in dollars.  The supply plan metric is helpful both in understanding the gap between actual demand and what was supplied, (and therefore lost dollars) and understanding gaps between the annual operating plan budget and actual production output.  SUPPM can also be converted into an efficiency metric viewed in the context of the monthly and 12 month plan.

Other financial metrics include customer backlog, current inventory level in dollars, and average profit margin by product family for current month, projected out 12 months, etc.  Each of these metrics highlights deviation from the current plan.  Such metrics are often helpful as early indicators of much bigger problems that a company may be facing downstream as the gap between the plan and actual grows.

Many companies also adopt a banded “base case” with upside and worst case planning scenario approach with a focus on setting thresholds.  If exceeded, these thresholds immediately convert yellow flags to red flags.  In addition, it is common practice to adjust or revise the AOP on a quarterly or other basis as gaps are identified and adjusted for.

In any case, in today’s complex and fast changing business world, it is mandatory that finance executives constantly monitor the pulse of their businesses and adopt a proactive management approach.  A lesson learned is that this is impossible without an effective, integrated S&OP process that incorporates financial metrics, a collaborative organizational mindset, and technology enablement.  Executives now also understand that – like a complex dance – it is the interplay between technology, process and people will drive success.  A dedicated S&OP solution provider like Steelwedge supports an integrated approach that incorporates each of these factors and significantly accelerates the adoption of a successful financially integrated S&OP planning process.

Glen Margolis, CEO