According to the 2022 FP&A Trends Survey, the majority of organizations still need to improve the accuracy and predictability of their financial and operational forecasts. The survey identified two important findings:
31% of respondents do not have a single data source everyone trusts. A single data source is a core requirement for successful planning, yet many companies still struggle with this.
Satisfaction with forecast accuracy fell sharply to 39% (down from 54% in 2021). We believe this is driven by high levels of uncertainty and the inability of former forecasting techniques to keep up with an ever-changing environment.
With fluctuating input costs and supply and demand curves - the risks of not producing the right product at the right time have grown. Supply chains in today's global market are longer and more diverse, increasing volatility.
As a result, keeping an organization aligned, especially in relation to its S&OP process, is more challenging than ever. Organizations that used to get by with intuition or by maintaining consistent production now find themselves several steps behind competitors on today's market, and struggle to meet customer needs.
What is xP&A
xP&A, or Extended Planning and Analysis, is a next-generation approach that integrates every organizational function around a shared model. It allows inputs to be captured quickly and accurately in one single tool, supporting effective decision-making. This systematic approach aims to provide timely data-based insights that inform responses to management inquiries quickly and accurately. The key is that with xP&A, there is a single source of truth.
What is S&OP
Traditionally, the S&OP, or Sales and Operational Planning process, is owned by the sales, operations, and supply chain departments. In an S&OP cycle, this group considers supply, demand, and available resources to keep an organization's operations on track, and ultimately keep customers happy.
The goal of S&OP is to align production and sales targets while balancing day-to-day work with short, medium, and long-term goals. These goals enable the organization to respond quickly and efficiently to markets and customer needs.
The monthly S&OP process cycle typically includes the following five steps:
S&OP Process
- Prepare sales forecasts for the next month, quarter, and year.
- Formulate a demand plan.
- Create a supply plan to account for manufacturing capacity, sourcing constraints, and inventory on hand.
- A preliminary meeting to review inputs and offer recommendations.
- Executives finalize the plan and sign off on S&OP targets.
Why Finance Must be Involved in the S&OP Process
For organizations looking to identify high-value opportunities, improving the S&OP process by involving finance leaders equipped with xP&A should rank at the top of the priority list.
While the Sales and Operations planning process is critical for ensuring that a company's financial goals are aligned with its operational plans, too often, finance is not included.
The risks of not including finance are real, as problems develop when operational plans and financial realities are mismatched. For example, if production is ramped up for a product, finance can provide insights on when and how this should be done. Without this alignment, organizations can end up making unprofitable decisions if the costs of producing and storing too much inventory aren't included.
By working together through the S&OP process, finance and operations can ensure that the company meets its financial targets while maintaining efficient and effective operations. Furthermore, incorporating finance into the process brings S&OP into line with corporate financial objectives. This occurs, for example, by checking that cost estimates from other departments reflect reality, rather than using rough or sometimes outdated cost and price estimates.
How xP&A Can help S&OP integrate with finance
Integrating finance further into S&OP processes should be seen as a natural and welcome evolution for S&OP process owners in many organizations today. Highlighting how xP&A can resolve existing pain points, helping teams reach consensus faster, and reducing input frustration, allow more time to be spent on substantive discussions.
Furthermore, when organizations understand how finance can provide leadership around xP&A through the use of asingle platform for S&OP, they will quickly see how the quality, accessibility, and flexibility of data inputs and analytical outputs are enhanced, improving buy-in further.
How to Integrate Finance into the S&OP
The S&OP process is often hindered by a lack of communication between the financial and other teams, meaning that joint objectives bridging the financial and operational sides of the business are missed out on.
To overcome this challenge, the first step is to include a financial analyst in every S&OP. An organizational leader should make the introduction while highlighting how the change will improve the organization's understanding of the costs associated with production plans.
The S&OP must also speak the language of the finance team. And just like any other language, the S&OP format must be translated from volumes into value, inventory into "working capital," and resource utilization into return on assets.
A third way to integrate finance into the S&OP process is to develop joint objectives for the financial and operational departments. This allows both departments to align their goals and establish a common direction.
By taking these steps, companies can ensure that finance is effectively integrated into the S&OP process and improve their decision-making power.
Conclusion
Organizations must effectively embed finance and xP&A throughout their data gathering and assessment in order for their S&OP and processes to reach their full potential.
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