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…

What’s your forecast accuracy telling you? Stop and ask a few questions
Forecast accuracy is an important performance metric in any effective S&OP process, but it can be measured in various ways. Comparing your company’s accuracy to an industry standard will be difficult to impossible if you don’t know the details behind the measurement. More importantly, the metric needs to resonate within your organization as a meaningful indicator of forecast relevance. So then…
What details should one consider for forecast accuracy measurement?

Here’s the Steelwedge Top Six:
1. Aggregation level: Are you measuring accuracy at a product SKU or family level? What about other hierarchy levels? Odds are your accuracy will appear to be better at an aggregated level such as family. This happens because variability of forecasts and actuals tend to cancel out one another as data is combined. The result is a smoothing of results and lowering of error calculations. Recommendation: Measure accuracy at the same level as the majority of forecasts are captured.
2. Error Calculation: In its most basic form, accuracy is a measure of the difference between a prediction and what actually happened. How far off were we? Error is equal to the difference between forecast and actual. Often, this is captured as a percentage value called percent error. Mean absolute percent error (MAPE) calculates the average of errors. Since we don’t want positives and negatives to cancel out each other, we use the absolute values of each error. There are other methods, but MAPE is fairly common. Weighted MAPE is a method used to give greater importance (weight) to items with greater activity. Amount of activity may be defined as the proportion a particular item is of the total. Recommendation: Keep it simple. Make sure people understand the measurement and how…