Continuing from my post from yesterday (Part 2 in the IBP for High Tech series) – having understood the key capabilities that an effective Integrated Business Planning process should contain, lets understand the linkage between financial planning and Sales and operations planning and the importance of this linkage for an enterprise.
Supply chain practitioners know the definition of S&OP very well – it bears repetition to set the stage here and I’ll refer to the one from APICS “A process to develop tactical plans that provide management the ability to strategically direct its businesses to achieve competitive advantage on a continuous basis by integrating customer-focused marketing plans for new and existing products with the management of the supply chain. The process brings together all the plans for the business (sales, marketing, development, manufacturing, sourcing, and financial) into one integrated set of plans.”
While S&OP is an accepted best practice, the question to ask is – why is it relevant to integrate financial planning with S&OP? the answer is simple – decisions taken during an S&OP process can impact financial metrics like working capital, revenues and margins. More importantly, it can impact the ability to inform the ‘street’ and investors about revisions in the quarterly and annual forecasts in a timely fashion. This is even more relevant for the high tech industry with volatile shifts in demand that may necessitate a change in supply and demand planning but need to incorporate the impact of such decisions on the financial forecasted numbers. An insular, siloed, dysfunctional approach to S&OP will ignore the strategic business goals translated into financial numbers.
Benefits of an integrated S&OP/Financial planning process primarily relate to better line of sight to:
- Changed cash-to-cash cycle times, improving the working capital requirements for the company. Think better inventory turns leading to reduction in levels of inventory, improved capacity utilization and better channel sell-through – ultimately improving the overall working capital position.
- Forecasted return on assets and return on invested capital – ultimately helping the CFO to understand the impact on weighted average cost of capital (WACC) for the company. This is critical since it may provide the CFO directional guidance for financing decisions.
- Future capital investment decisions – think deferring or pulling in additional capacity increases or adding outsourcing partners based on trends reflected over a period of time
- Anticipated profitability by customer, channel and product – this can be used to evaluate segment decisions and ensure resource allocation can consider profitability ranking, in addition to other critical factors.
In the next part of our continuing series on IBP, we will talk about Technical capabilities required to support IBP!
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