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…

Integrated Business Planning is poised to become the next big thing beyond S&OP. One of the key themes for IBP is linking Operational Plans to Financial Plans.  This linkage enables companies to understand how financial budgets and assumptions can impact operational plans and execution and visa versa.  One of the fundamental requirements for linking financial and operational plans is the ability to translate between units and revenues/margins.  This is certainly easier said than done.  As companies are faced with variable customer-specific pricing structures, rapidly changing prices, cost and promotional activities, simply using a static average selling price and COGS does not provide the level of accuracy needed to understand the true relationship between units and revenue.

One of the key differentiators in the Steelwedge solution is the ability to translate plans between units and renveues.  Steelwedge provides the ability to manage pricing information at various levels in a product hierarchy required to capture the true relationship between operational plans and revenue projections.  In addition, Steelwedge provides the ability to model pricing and cost information in a time-phased manner.  Once the operational plans are translated into revenue and margin projections, finance, operations and sales can begin to compare and reconcile plans on a periodic and exception basis.

To achieve the vision of IBP, companies must have the approporiate enabling technology to perform the basic building blocks for planning.  Accurate unit to revenue conversions is one of many building block that must be done well to realize the vision of IBP.