Participation of the financial area in the S&OP process - The importance of quantifying alternative scenarios

The S&OP process, which has already been discussed on several occasions on the ILOS blog, has as its main objective the integration between the company's functional areas and directing its actions to meet demand. It is essential, therefore, that all parties are involved and engaged to help the process in the best possible way. Today I will comment more specifically on the performance of the financial area, and the importance of its contribution to the effectiveness and maturity of the S&OP.

Aligning the sales and operations areas to build a single demand, which will be deployed in production and distribution plans, is a great challenge for companies, but it is a determining factor in the success of the business. The construction of this sales and operations plan is necessary, as in many cases the full service of all demand is made unfeasible by capacity restrictions or other operational difficulties. The company must decide, in scenarios like this, how it should act, either by limiting the product supply during the period, or investing in temporary increases in capacity (such as overtime, for example) to supply all or most of the expected demand.

This type of situation highlights the importance of the participation of the financial area, since failing to meet a part of the demand has an impact on the company's revenues and, on the other hand, expanding the operational capacity entails costs, creating a clear situation for analysis of the financial trade-offs in relation to possible alternatives, and the scenarios must be quantified to make the best decision.

Financial analyzes need to be performed at several stages of S&OP. In the demand planning phase, it is important that the sales volume is transformed into revenue and, when possible, also into margin, offering an initial view of the compliance of the plans with the company's goals and budget, suggesting needs for revision of the commercial actions. In the next step, preparation of operational plans, the costs of the alternatives presented to meet the demand must be evaluated.

However, just calculating the revenue and costs of the plans is not enough. It is important for the financial area to be able to quantify the final plan and perform P&L analyzes (Profits & Losses) so that the expected results, resulting from the plan that will be validated, are presented at the previous meeting. The scenarios should then be discussed together with representatives of other areas, aiming at a consensus on the actions to be taken. These considerations are at the heart of the S&OP process and are fundamental for the company to get closer to the global optimum.

Finally, this result is shown in the executive meeting, the last stage of the process, where the top leadership must make considerations about the alignment of the defined numbers with the company's strategies from a financial perspective, which is why the participation of the financial director in this is necessary. time.

As you can see, the process requires in-depth analysis of financial aspects, and therefore it needs to be supported by appropriate indicators. It is possible and recommended for developing processes to adopt more basic financial data, such as margin or gross profit. In more advanced stages, more complex indicators can be used, such as EBITDA, or analysis of the cost of serving, which will bring even more support to decisions.

After all, the entire S&OP process and its meetings exist exactly to look at the final financial result (the main objective of the organization) seeking the planning that will bring the greatest return for the company as a whole. Therefore, it is important that the financial area is involved in the process, quantifying all plans, preparing alternative scenarios and considering the trade-offs of each possibility. It is a fundamental support pillar for a more evolved, adjusted and effective S&OP process.

References

Gartner (2010) – Sales and Operations Planning Maturity: What Does It Take to Get and Stay There?

Thomas F. Wallace (2001) – S&OP: Sales and Operations Planning