Reconciling financial plans and S&OP

Published August 7th, 2009 by Trevor Miles @milesahead 1 Comment

I came across a discussion titled “One Number Planning” & S&OP on demand-planning.com that contends that “… S&OP has to execute against one number, the demand plan/forecast” and that “Too many times that one number was driven by finance and in actuality the budget”.  While having sympathy with the authors perspective,  I think one of the key business problems today is too little integration between Finance and Operations.  My full reply is below.
++++++++++++++++
I agree that the S&OP process has to execute against the demand plan/forecast. We only have to look at the recent economic downturn to understand the fallacy of driving the S&OP from the budget.

But I think that this is only true in the “near term”, where near term will depend on the industry. I know of some companies that run a 3 month S&OP in weekly buckets and others that run a 10 year S&OP in monthly buckets. Typically the longer the term the more companies use “range” forecasting (optimistic, pessimistic, realistic) rather than “single number” forecasting.

In the longer term though, the S&OP plan should focus not only on risk, but also on demand shaping activities which can range from new product introductions, to promotions, and should also include risk factors such as legislative changes. There is a lot of uncertainty this far into the future, which is why companies use range forecasting. The S&OP process in the longer term should be focused on determining how to execute at an operational level to meet the corporate financial objectives. Many in the analyst community refer to this activity as Interated Business Planning (IBP).

But I agree that the demand/supply balancing aspect of S&OP should be driven by a realistic forecast, not the budget.

There is also a great need to reconcile the forward looking plans of all planning activiities, but particularly the S&OP process with the corporate financial goals, typically contained in the budget. Too much of Corporate Performance Management is focused on analyzing what has happened using BI tools. IBP can provide the projected financial performance of the company, which is of course a lot more valuable than analyzing what has happened. One of the key outputs of IBP is the variance between the budget and the plans using financial metrics. To do this effectively requires the seamless integration of financial and operational information. It also requires projections of average selling price, component costs, and operating costs. In the not too distant future it may even require carbon footprint calculations.

In summary, while I agree that the near term S&OP should be driven by a realistic demand plan, I think the budget is a better number to use in the long term as it encapsulates corporate financial goals. In the longer term the purpose of the S&OP should be, as you point out, to identify the gaps and the risks involved in reaching the corporate financial goals.

Follow comments on this blog post via RSS

One Response to “Reconciling financial plans and S&OP”

  1. Business Plan Writers

    Hi,
    I also back budget, for long term purpose. It will give more realistic figures to achieve your goals.

Leave a Reply