Back in September, River Logic was a sponsor at the IE Group S&OP Innovation Summit in Boston, MA. During the event, one of River Logic's customers, Cox Industries discussed how they true Integrated Business Planning at their organization using River Logic's Enterprise OptimizerTM.
EO integrates financials as an input with demand and supply planning, allowing Cox to represent their business holistically. Because of this, their end-to-end planning is fully optimized — it avoids the assumptions and rule-of-thumb based approximations that are commonly relied upon in companies that claim to implement IBP but, in fact, do not. Cox's business plan is able to reflect actual operations and drives accurate, predictable financial results for the company.
Not surprisingly, at that same event Oliver Wight conducted a survey on the state of current Integrated Business Planning Initiatives. While Cox Industries does implement true IBP, there are many companies that incorrectly believe they too are implementing IBP. (This is not necessarily due to any fault of their own, rather software companies falsely claiming they provide the capability.)
To this point, Oliver Wight's survey of S&OP professionals revealed that many IBP initiatives are failing to live up to expecations. Not only that, they were able to gain insight into why these initiatives are failing. In short, they found that these IBP is failing because companies aren't implementing true IBP. Below is an exerpt from their findings that reveals strong data in support of this point.
"A new survey of sales and operations planning (S&OP) professionals, recently conducted by Oliver Wight Americas at the IE Group S&OP Innovation Summit in Boston, finds that many companies are missing a crucial step to success when implementing IBP that may ultimately be putting their bottom line and shareholder’s trust at risk.
The survey found that financial controls are too often put at the bottom of the priority list across operational functions in an S&OP or IBP implementation. Nearly half of respondents (45 percent) said that financial controls, including inventory valuation and disclosure, are not adequately considered in their S&OP or IBP program."
To our previous point, if 45% of respondents state that financial controls aren't considered in their S&OP or IBP program, how can the company claim to have a holistic (i.e. integrated) business view?
We Have to Stop Separating Financials and S&OP
Supply chain has become the go-to place for CFOs to find cost savings, as exemplified by the large scale outsourcing of processes that has happened in the past decade or two. However, the scale has shifted from looking at supply chain as purely a cost center to looking at it as a profit center (again, illustrated by the near-shoring initiatives that are taking place now). CFOs can no longer think of themselves as traditional Sarbanes-Oxley Compliance Officers — they need to be part of the supply chain and commercial strategy process. S&OP is the ideal process for CFOs to become embedded in and contribute towards. However, given what we've seen from surveys like the one discussed in this article, the participation of CFOs in S&OP is still quite limited today.
S&OP strategy commonly involves aggregating plan results into financial impact. This would commonly address things like: How does an approved S&OP plan translate into P&L and cash flow forecasts? This, however, is not enough. Finance and cash is the life blood of the company — it's not possible to separate it from operations.
By considering financials as an input into the S&OP process, companies can focus on more important questions like:
- What plan optimizes profitability?
- What plan optimizes cash flow?
- What plan optimizes ROIC?
- What is the right amount of working capital and its impact on business outcomes?
We'd like to give big thanks to Oliver Wight for taking the time to survey the IBP / S&OP market place and provide us all with such insightful data.