Finance & S&OP – Love Affair or Mortal Enemies?

We all know the epic “battle” between Sales and Operations regarding forecasting and planning – but how does Finance fit into this? Historically just a recipient of the outcome, Finance has started to play a more active role in the Sales and Operations Planning (S&OP) process. We believe it’s a good thing – but how does one ensure that the engagement is fruitful for all involved parties?

To understand how Finance can be best integrated into the S&OP process, we need to understand what drives Finance when it comes to planning. It is not the same as Sales, whose focus is on maximizing the top line and customer needs to sell more. From our perspective, the drivers of Finance are threefold:

  • Provisioning of operational plans such as FY budget, latest estimate plan, and rolling forecast at the touch of a button
  • Financial forecast accuracy – which includes order shifts into future months, any forms of discounts and price adjustments
  • Ability to apply scenarios and view the impact on top and bottom-line

Hence, a fruitful collaboration between S&OP and Finance can only be achieved if the above drivers are taken into account within the S&OP process. Let’s take a closer look at what this means using our Integrated Business Planning rowing metaphor:

Alignment – Financial targets need to be aligned across all functions

As part of the S&OP process, Finance needs to be aligned with Operations and Sales on both business and process goals:

  • Sales targets
  • Fulfillment targets
  • Profit margin targets

These targets are balanced according to a company’s prioritization, which can change depending on business and market developments or a change in strategic objectives.

Coordination – S&OP process needs to be aligned with Finance reporting timeline

It is crucial that Finance has an active part in the S&OP process and is represented at a minimum in the demand review, pre-executive S&OP and executive S&OP meetings. Depending on the maturity of the Sales organization, we recommend installing additional sales review meetings prior to the demand review meeting to iron out any financial forecast topics between Sales and Finance.

From a timing perspective, the S&OP process needs to be set up so that the outcome of the executive S&OP meetings feeds into the overarching finance reporting timeline. This can be challenging particularly with larger organizations, where regional plans feed into group-level plans. This is one area, where using tactical planning software can reduce preparation and analysis time and thereby minimize the time of a single S&OP cycle.

Steering – Finance stakeholders need to play an active role in the S&OP process

S&OP decision governance needs to incorporate Finance at various levels of the process:

  • Agreed roles and responsibilities within the respective S&OP process meetings
  • Agreed level of decision authority in pre-executive and executive S&OP meetings

We recommend that CFOs personally participate in the executive S&OP meetings – regional CFOs at the regional level and the group CFO at the group-level executive S&OP meeting.

From a Finance perspective, a prerequisite for a robust discussion and sound decision-making is providing the top and bottom-line forecast scenario figures and performance indicators, as well as a comparison to target figures (e.g. budget) in the pre-executive and executive S&OP meetings.

Cadence – A cross-functional harmonized and robust planning data model is key

We cannot stress the importance of a harmonized and robust planning data model enough, when integrating Finance into S&OP. It sets the basis for adequate forecasting, scenario modeling, and decision-making information. In addition, any planning software solution used needs to be able to reflect the data model.

The following aspects need to be considered for a successful Finance integration and defined as part of the planning data model:

  • Consistency in calculating relevant drivers and financial figures such as volumes, gross sales, net sales, and gross profit – we have seen companies with business units that use different calculation methods, which should be avoided
  • Agreement on planning granularity along planning dimensions dependent on the planning horizon
  • Aggregation and disaggregation rules – if planning on a higher level e.g. customer, how are the figures disaggregated to lower planning levels e.g. products, and vice versa?

Equipment – Consider separate, but seamlessly connected volume and finance planning solutions

When it comes to choosing the right supply chain planning solutions, we have in general identified the following three attributes as core:

  • Breadth of resource types planned: ability to plan a broad range of resource types for more feasible supply chain plans
  • Linking plans/decision alignment: ability to/integrate plans and decisions across planning layers and the end-to-end supply chain
  • Planning scenarios: ability to create and manage scenarios, particularly when confronted with supply constraints

With the integration of Finance in mind, we need to consider that financial attributes and variations thereof, such as price, gross sales, discount, COGS, or gross profit, to name a few, need to be considered. Depending on the level of granularity and complexity of the business model, the number of financial figures can be large and impact system performance. In addition, many tactical planning solutions traditionally used for S&OP are not geared to cater to comprehensive finance figure integration in their standard set-up and therefore require substantial customization.

We therefore recommend having one platform that focuses mainly on volume planning (demand and supply), and one system that calculates the financial figures based on the received volume figures. A prerequisite for this to work smoothly apart from the agreed data model, is the ability to exchange data between systems in real time. This is crucial to reach the full potential of scenario modeling as people do not want to wait e.g. a day for data to be transferred from the volume planning system into the financial planning system.

Top management commitment – The CFO needs to be committed for Finance to play their part in the S&OP process

Finally – as with most endeavors within companies – top management commitment and attention are crucial for successful Finance integration in the S&OP process. The CFO needs to champion the involvement of Finance and actively participate in the respective S&OP meetings. In addition, the CxO counterparts need to welcome the active participation of the CFO and Finance function in the process. Only then will the relationship between S&OP and Finance become a true love affair.

If you want to know more about our Integrated Business Planning approach and how to successfully roll it out in your organization, get in touch with us today.