Why S&OP Matters to the CFO - Nexview Consulting

Why S&OP Matters to the CFO Journal of Trading Partner Practices Eric J. Tinker September, 2009

Why S&OP Matters to the CFO Eric J. Tinker Originally Published in the Journal of Trading Partner Practices, September, 2009 Sales & Operations Planning (S&OP) isn’t just for the operations and supply chain types anymore, it’s the platform for continuous improvement that many CFOs are using to both manage risk and drive collaborative performance improvement throughout their organizations. As businesses continue to deal with challenging economic and competitive times, the need to collaborate and operate effectively has never been greater. Boards and CEOs are calling on CFOs and other financial leaders to be champions of cross functional collaboration to ensure actions and decisions made by the company have the best overall effect. A recent survey of CFOs conducted by CFO Research Services (part of CFO Publishing Corporation which publishes CFO Magazine) and SAP indicates that the ideal CFO is being called upon to advise and optimize business operations, build consensus, and increase focus on risk management. Of those surveyed, 90% believed CFOs either bore responsibility for operating process excellence or should provide analytical support and advice.1 Toward that end, many financial executives are becoming key proponents and leaders in their company’s Sales and Operations Planning (S&OP) process. Through S&OP, companies are realizing improvements of 5 – 25% in areas such as reduced inventory and obsolescence, improved on-time-in-full, reduced stock-outs, and reduced premium freight. S&OP is the vehicle for communication, performance measurement, and decision making related to financial planning, and balancing supply and demand to meet company objectives. It consists of a set of meetings

(typically monthly) that examine the product portfolio, achieve consensus on demand, review supply to meet demand, resolve supply and demand imbalances, integrate financial planning, and elevate issues for executive decisions when required. These exceptionbased meetings discuss issues in the medium to longer term horizons (often in the 3-24 month range) and are at the product family level of detail. S&OP sits between the strategic plan and the tactical weekly and day-to-day operations. While many organizations have implemented S&OP to some extent, it is often partially implemented, not being used consistently throughout the company, or not being used as effectively as it could be. More and more financial leaders are using S&OP to drive emphasis and coordination across the enterprise to: Maintain Integrity of Plans and Facilitate Budgeting: Financial leaders have the ultimate accountability for budgeting and financial forecasting. To ensure the forecast maintains its integrity, the financial forecast must tie to the volume plan and the plan must be used consistently throughout the organization. It is very common that sales, marketing, production, and finance all have their own “off-line” variations of the plan. S&OP provides the structure to get leaders to agree on a consistent plan. In most organizations I’ve consulted to, the annual budgeting process is a time consuming, massive effort that frustrates people and results in a plan that quickly becomes out of date. Since S&OP is a monthly planning process over a consistent rolling

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horizon, at budget time, your S&OP plan forms the basis for your budget by containing key monthly calendarized inputs such as revenue and cost of goods sold viewed by product family.

actuals, a target to be achieved by a defined point in the future, and a time phased plan that sets the expected monthly performance improvement from the current state baseline to the future target.

Comply with SOX and Address Budget Gaps Before It’s Too Late: As a CFO or other financial leader seeking to maintain predictability of your top and bottom lines, it’s critical that you are aware of and address gaps between the latest forecast and the annual budget. SarbanesOxley, Section 409 requires notification to the public of material changes in financial condition or operations on an urgent basis. Additionally, the provisions of Section 404 on internal control will be more easily met with a robust planning process. S&OP provides the monthly opportunity to bring functional leaders together to identify gaps and determine the required courses of action before it’s too late. All too often, budget shortfalls are simply rolled into next month’s forecast without defining the specifics on how the gap is to be met. S&OP allows leaders to challenge how gaps will be closed and ensure plans are made in time to execute them. Leaders can collaborate to determine the best overall course, rather than one that best suits a particular area of the company or one that maximizes a misplaced incentive.

Drive Improved Cross Functional Coordination at the Executive Level: Executive S&OP is the place where issues raised from the precursor meetings are resolved. These issues require executive authority and typically involve a decision exceeding a preset dollar threshold. They could involve items such as asset use, significant workforce issues, cross divisional priorities or allocations, a budget gap, or a needed high dollar decision involving a key customer. Often executive teams will integrate a dedicated S&OP section into their monthly staff meeting agenda. In addition to resolving the issue(s), the team will confirm the summary operating plan (dollars and volume) and review the most summary level operational and financial KPIs. By implementing Executive S&OP, the executive team is able to take informed and coordinated action in the best interest of the whole company in a structured manner. Decisions are made based on data and scenario analysis, and result in agreed upon action. While the CEO or Division President certainly referees over his or her staff, it’s often a great opportunity for the CFO to provide the strong right hand to facilitate the team and support a supply chain or S&OP leader who is coordinating the S&OP meeting content.

Integrate and Manage Key Performance Indicators Throughout the Organization: Each meeting in the S&OP flow provides the platform to review and manage KPIs specific to the relevant area of focus. For example, forecast accuracy performance can be reviewed in the Demand Consensus meeting and production execution performance can be reviewed in the Supply Consensus meeting. In the later meetings of Pre-S&OP and Executive S&OP, KPIs are usually examined at more aggregate levels (e.g. business unit) and contain a balance of operational and financial metrics. KPIs should have a defined baseline based on historical

As a financial leader looking to improve cross functional coordination and accountability definition throughout your organization, S&OP is your platform for continuous improvement. It is your collaboration vehicle to ensure a consistently used plan, facilitate the budgeting process, address gaps, aid SOX compliance, and manage KPIs. As a CFO or top financial leader you can actively support S&OP at the executive level, while members of your staff can participate in the earlier meetings of the S&OP


cycle. With S&OP you have the opportunity to plan for future challenges, prevent the same

mistakes from being repeated, and focus on making each month better than the last.

Eric Tinker is the Principal at Nexview Consulting, a consulting firm that specializes in sales & operations planning and operational improvement. Please visit www.nexviewconsulting.com or feel free to comment and share your thoughts and experiences by contacting Eric directly at [email protected]. 1. CFO Research and SAP survey summarized in “The Superstar CFO, Optimizing an Increasingly Complex Role”, Sam Knox, May 2007.
