The concept at issue is Integrated Business Planning (IBP), which might seem like a generic term, or what companies do as a matter of course. But management consultants today are pushing it as something quite specific: a best practice that involves linking sales and operations planning (S&OP) with other key aspects of the supply chain, including product portfolios, customer demand data and strategic planning. The desired result, according to S&OP pioneer Oliver Wight Americas, is "one seamless management process."
So far, so good. But a recent survey by Oliver Wight shows that many companies are failing to align their IBP and S&OP initiatives with the financial piece of the puzzle. Among the findings: 45 percent of S&OP professionals weren’t taking financial controls into account when pursuing an IBP initiative. Just 28 percent said those controls were “completely aligned” with overall financial objectives. And 51 percent weren’t factoring in regulatory concerns such as the reporting mandates of the Sarbanes-Oxley Act of 2002 (SOX). The result is a failure to properly allocate the people, materials, time and money that are critical to operating an efficient supply chain.
The missing financial controls can take many forms. They include inventory valuation and disclosure, as well as accurate revenue and volume forecasts. In the case of the latter, companies need to know how often they are hitting their targets, as well as understanding built-in tolerances for missing the mark, says Jim Matthews, principal with Oliver Wight Americas.
Mistakes are always obvious in retrospect. At the time they’re occurring, however, managers might be reluctant to speak up. “I didn’t know it was my job” is a frequent excuse, Matthews says.
He cites the case of a client that had a history of missing strategic targets. It had even closed a plant based on inadequate information, disappointing customers for a full year. At quarter’s end, the company would scramble to sell off excess inventory at a discount, causing buyers to anticipate similar tactics in future.
Such behavior is widespread and extremely costly, says Matthews. But exposing the price of the damage can quickly bring executives around. He was able to show one chief executive officer that the company in question was essentially working for free at its busiest time of demand. “It wasn’t until I did that that I induced them to change the behavior.”
There’s nothing wrong with “stretch” goals, Matthews says. Too often, however, they’re not in line with reality. Companies need to understand the resources that are required to make the desired objective happen.
They also need to track their progress closely. A mature IBP initiative will be reviewed multiple times by key executives, to ensure that capabilities are aligning with long-term objectives. Otherwise, the achievement of an ambitious goal could prove to be more costly than it was worth.
Matthews’ question to many clients is a distressing one: “Do you realize how low in your organization some of the biggest financial decisions are being made?” The oversight can be especially damaging when it comes to complying with SOX, which calls for strict internal controls across the organization.
Matthews has seen numerous companies get in trouble with the U.S. Securities & Exchange Commission because their financial forecasts were overly optimistic. “It was a major shock to everything – projections, stock price and the trust of stakeholders,” he says. IBP, by contrast, equips companies with “a better understanding of what you’re reporting.”
Complete transparency of operations is also essential for the proactive management of supply-chain risk. Properly implemented, IBP “is one of the best mechanisms for allowing the executive team to be more in control of the business,” Matthews says.
A successful IBP will keep the chief financial officer, or equivalent individual overseeing financial affairs, in the loop. In larger companies, that executive should have expert representatives on hand at each stage of the management business review process.
“IBP at its core is about aligning and synchronizing the company – aligning who does what and synchronizing when it is done,” says Matthews. “When this process is done right, each operational function, including finance, enables informed decision-making for company executives and their strategic planning for the organization at large.”
It’s ironic that S&OP – by its very nature a tool for integrating the disciplines within a business – could falter because of a lack of integration when it comes to the financial element. Think of it as the last step in tearing down functional walls. Without it, says Matthews, the organization is doomed to remain “painfully siloed.”