Overcoming obstacles to integrating finance with supply chain operations

AlexaCheater

Using integrated business planning can help

In my earlier blogFinancial planning - Integrated business planning, I explored how integrated business planning (IBP) can help bring together finance and supply chain operations.

IBP helps achieve key performance indicators (KPIs) like sales, customer satisfaction, inventory level and other metrics outlined in the strategic plan. Oliver Wight research shows “companies that do integrated business planning well achieve greater benefits than companies that do not.”

Those benefits, as outlined by the Aberdeen Group, include:

  • 55 day or less cash conversion cycle
  • 74% supply performance
  • 70% SKU-level forecast accuracy
  • 91% customer satisfaction

But it’s not quite as simple as saying, “let’s start doing IBP.”

Integrating finance into your supply chain operations is no easy feat

Disconnected data, processes and people, coupled with technology limitations, often leads to misalignment, frustration and an unrealistic financial plan. That in turn results in inventory issues, forecast inaccuracies and reduced profits, leading to falling stock prices and reduced shareholder value.

Ken Olsen, Director, Deloitte Consulting LLP, notes how IBP can help with the integration. Olsen says IBP improves alignment between strategic planning and finance to produce more accurate forecasts, and helps chief financial officers (CFOs) identify inaccurate numbers before they get committed in the financial plan.

While that sounds great in theory, in practice it requires work to get it right. S&OP diehards insist the financial forecast be a product of the sales forecast. Unfortunately, budget cycles, price forecasts and other external reporting requirements often needed at the aggregate level mean finance develops its forecast independently. Overcoming that challenge means developing meaningful and robust metrics that measure financial performance, and including them in S&OP operations. At the end of the day, the overall goal for everyone, regardless of business function, should be sustained profitability.

Cohesion lets you see emerging disconnects between the financial and demand plans earlier

That becomes critical in developing accountability and getting ahead of inaccuracies that could cause a financial miss. However, you’ll only see those disruptive boulders careening toward you if you have corporate-wide end-to-end visibility. That means bringing together data from multiple sources, whether it’s financial or supply chain-related, into a single system for viewing and analysis. Having the ability to simulate potential scenarios will also help you more easily come to collaborative, consensus-driven decisions focused on metrics aligned with the financial plan.

An example would be sales and marketing driving increased demand through a promotion, without knowing capacity is constrained at one node of the supply chain. Enhanced operational visibility means you’ll be able to spot the inability to support the demand plan before it causes an unfavorable outcome. You can then look at cost-effective alternatives to meet the shift in demand, whether that’s prebuilding or expediting supplier shipments. This enhanced visibility helps executives see exactly where shortfalls or misalignments happen, highlighting opportunities to improve financial metrics.

With siloed processes, you often see a mentality that it’s not happening in my backyard, so why bother paying attention to it. You end up with groups each going their own way. At the end of the day, if the numbers don’t add up, it becomes a game of shifting the blame. Stronger integration between finance and operations means improving that accountability. Each function no longer operates to its own set of goals and standards. Everyone is responsible for working together toward the same set of metrics, and everyone knows the role they play in achieving those numbers.

Successful integration also means CFOs and their teams can take a more active interest and role in S&OP processes and supply chain outcomes, so they’re involved earlier on in course correction and decision-making. This active participation gives CFOs the opportunity to evaluate, monitor and influence the financial impact of the demand plan. Finance should play an active role in setting targets and ensuring you’ve aligned your operational plans with corporate objectives.

Linking financial metrics (revenue, margin, cash flow, etc.) to operational metrics (on-time delivery, inventory turns, capacity utilization, etc.) gives you a way to check if your operational decisions are consistent with your financial objectives.

Overcoming silos, disconnected processes and people, and technology limitations will help make the road to financial and supply chain operations integration a little easier. In my next blog, I’ll explore the kinds of benefits you can achieve by bringing these two functions together.

AlexaCheater

As the Product Marketing Manager at Kinaxis, Alexa helps develop and deliver informative, engaging and entertaining supply chain content that also works to promote how Kinaxis RapidResponse is revolutionizing supply chain planning. She joined Kinaxis in 2015 with more than a decade of communications experience. Alexa holds a Bachelor of Journalism (Honors) from the University of King’s College in Halifax, Nova Scotia.

More blog posts by Alexa Cheater

Discussions

  1. Traditional supply chain management focuses on both information flow and materials. Although, considerable cost reductions can also be achieved through optimally designed financial flows within the supply chain. Savings due to minimized stock levels may easily be offset by the costs to finance the remaining inventory. Integrating financial services into the supply chain management will not create a new (financial) product but it is about realizing unused opportunities for cost reductions.

  2. Thanks for the great comment Ross! I agree, integrating finance into the supply chain is primarily a way to improve inefficiencies and I’d add that it’s also a way to foster better cross-functional alignment across an organization.

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