FP&A For Sales And Operations For Sales And Operations Planning Icpas June 302011 20110623


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FP&A For Sales And Operations For Sales And Operations Planning Icpas June 302011 20110623

  1. 1. Financial Planning & Analysis[FP&A] for Sales and Operations Planning<br />Fox River trail chapter Illinois c.p.a. society<br />June 30, 2011<br />Barrett Peterson, C.P.A.<br />Manager, Accounting Standards, Procedures, & Analysis<br />TTX<br />1<br />
  2. 2. The need and success requirements<br />FP&A for Sales & Operations Planning<br />2<br />
  3. 3. FP&A for Sales and Operations Planning<br />The Objective of Sales & Operations Planning:<br />Develop demand sensing capability with conscious trade-off decisions for demand shaping while achieving optimized demand response to achieve planned market position and profitability.<br />3<br />
  4. 4. FP&A for Sales and Operations Planning<br />The problem – lack of strategic orchestration<br />Sales Plan<br />Operations Plan<br />Financial Plan<br />4<br />
  5. 5. FP&A for Sales and Operations Planning<br />Problem indicators:<br />Excess inventory levels<br />Unsatisfactory order fill rates and delivery delays<br />Frequent order/production expediting<br />Unsatisfactory profitability<br />Customer retention failures<br />Unplanned downtime<br />Schedule errors<br />Materials not available<br />Serious bottlenecks<br />High logistics costs [expedited or small load releases] <br />Quality problems<br />Single point forecasting<br />Forecasting inaccuracy<br />Difficult product launches<br />5<br />
  6. 6. FP& A for Sales and Operations Planning<br />The solution – sales and operations planning process<br />Operations Plan<br />Finance Plan<br />Sales Plan<br />Sales & Operations Planning<br />6<br />
  7. 7. FP&A for Sales and Operations Planning<br />Techniques & Tools To Enable Success<br />Foresight/<br />Statistical Tools<br />Hindsight/KPI<br />Insight/BI<br />ERP/Transaction Systems<br />Warehouse/Marts/<br />Performance Indicators<br />Master Data Management<br />Data Quality<br />7<br />
  8. 8. FP&A for Sales & Operations Planning<br />Critical Success Factors<br />Statistically Oriented & Skilled<br />Data Focused Decision Making<br />High Quality Data Management<br />Lean Operation Capable<br />Direct Costing Focused with “Flex” Budgets – ABC, GPK<br />Multiple Margin Analyses – Units, Product Groups, Channels – Direct product margin; margin after semi-variable indirect cost [driver driven]; pre-tax<br />Agile Budgeting and Business Forecasting – Rolling Sales Forecasts and “Flexible” Budgets<br />8<br />
  9. 9. FP&A for Sales and Operations Planning<br />Some Crucial Foundation Tools:<br />Data definitions, consistency, and quality<br />Sales prediction capability, including statistical skills; business analytics<br />Incentives alignment – sales, manufacturing, supply chain, finance – financial; performance appraisal; focus<br />Manufacturing management – lean 6 sigma helpful, not required<br />Operations financial management – good historical data<br />Good historical sales reporting – units and dollars<br />Cost accounting<br />Product and product group margins with GPK type structure [volume variable] preferred<br />Direct Sales Margin focused – “bridge” to classical financials, units driven<br />Minimal allocations, and to sub-totals in the aggregate when used<br />Minimal or no emphasis on production variance analysis – process flow [lean] direct contribution margin focused<br />Return on capital employed oriented<br />Supply chain management – effective design and operation<br />“Business process’ view of the business<br />9<br />
  10. 10. FP&A for Sales & Operations Planning<br />Major Components of an Effective Process<br />New Products Need to be Planned From Conception<br />Design for produceability<br />Ensure capacity adequacy<br />Improve return on capital employed<br />Rolling Forecasting – Sales Units and Direct Margins<br />Semi-Variable costs - driver focused <br />Fixed Cost management<br />“Flexible” Budgeting – Production, Sales, Marketing<br />Direct costs per sales unit<br />“Step” costs based on driver unit variations – average per unit or unit group<br />Fixed costs – essentially unchanged dollars<br />Tying Product Units to Cost Driver Units – the “missing link”<br />Driver unit relationship to product units, e.g. unites per machine hour average<br />Revising the “flex” budget with re-estimated driver units, or product unit proxies for driver units<br />10<br />
  11. 11. FP&A for Sales & Operations Planning<br />Typical Important Entity Requirements<br />Change management capabilities<br />Process orientation and understanding<br />Financial measurement systems, particularly cost accounting and production management metrics; acceptability of “approximates”<br />Develop integrated sales and operations metrics<br />Master data management – common terms, definitions, measures<br />Incentive systems – bonus, performance appraisal<br />Process alignment/Organizational Design<br />Production plan to demand plan<br />Supply chain to production plan <br />Plan review, modification, and corrective adjustments<br />Technology Enablers<br />Data marts and warehouses<br />Business analytics<br />Statistical Analysis Applications<br />Reliable and consistent historical data<br />Sales – units and dollars<br />Direct costs – units and dollars<br />Resource/driver consumption – hours, e.g. - data<br />11<br />
  12. 12. The sales and operating planning process<br />FP&A for Sales & Operations Planning<br />12<br />
  13. 13. FP&A for Sales & Operations Planning<br />Five Iterative Integrated Components<br />Strategic Planning<br />Demand Planning<br />Supply Planning<br />Supply/Demand Balancing<br />Management Evaluation & Analysis<br />13<br />
  14. 14. FP&A for Sales & Operations Planning<br />The Strategic Planning Component<br />Market Planning<br />New Product Planning<br />Resource Planning<br />Capital Requirements<br />Owned – Facilities, Employees, Equipment<br />Outsourced – Contract Manufacturing & Other Services<br />Material Supply Sourcing for “Owned” Supply<br />Alignment to Corporate Goals<br />Margin Planning & Management<br />14<br />
  15. 15. FP&A for Sales & Operations Planning<br />The Demand Planning Component<br />Quantitative [Statistical] Forecasting<br />Sales, Marketing Input<br />What-if Analysis<br />New Markets<br />Product Launch<br />Pricing – Base, Volume Considerations, Discounting Plans<br />Non-price Demand Shaping – Advertising, Promotion, Channels, Merchandising<br />Orders/Demand Balancing<br />Consensus<br />15<br />
  16. 16. FP&A for Sales & Operations Planning<br />The Supply Planning Component<br />Capacity Planning<br />Owned Manufacturing/Operating Capacity<br />Contracted [Out-Sourced] Manufacturing<br />Product Purchases From 3rd Parties<br />Inventory Planning<br />Quantity and Replenishment<br />Location<br />Procurement Planning<br />Vendor Sourcing<br />Quality and Other Requirements<br />Logistics<br />Purchased Services<br />Company Owned<br />16<br />
  17. 17. FP&A for Sales & Operations Planning<br />The Supply/Demand Balancing Component<br />Product Mix/Merchandising<br />Constraint Management<br />Financial Capacity<br />Covenants and Other Contractual Requirements<br />Supply Chain Capability, Including Logistics <br />What-if Analysis<br />Allocation of Demand to Supply<br />Consensus<br />17<br />
  18. 18. FP&A for Sales & Operations Planning<br />The Management Evaluation & Analysis Component<br />KPI Measurement<br />Customer Order Delivery Performance<br />Order Fulfillment Lead Time<br />Inventory Turns, Days of Supply, Other and Relationship to Sales<br />Plan vs. Actual<br />Units, Average Prices, and Direct Margin<br />Indirect Costs<br />Fixed Costs, Including Costs of Capital <br />Forecast Error Measurement<br />Root Cause Analysis<br />18<br />
  19. 19. FP&A for Sales and Operations Planning<br />The Demand Driven Sales and Operations Process<br />Collect competitor, key customer purchasing, pricing, and other sales and marketing input.<br />Build a multi-period statistically derived market demand forecast, including forecast risk. I suggest an 18 to 24 month horizon<br />Compare statistical forecast with sales function forecast and develop consensus.<br />Analyze demand shaping options based on scenario alternatives<br />Agree on key sales, production, customer service, and supply chain metrics<br />Develop a “Monetized” constrained supply plan, considering supply capacity, return requirements, revenue objectives, customer service targets, market penetration objectives, supply chain capabilities, etc.<br />Evaluate alternatives for trade-offs on supply options and demand shaping opportunities.<br />Finalize plan in a consensus meeting.<br />Publish the constrained plan<br />Communicate plan and review monthly compared to planned metrics.<br />Repeat, including rolling forecasts<br />19<br />
  20. 20. FP&A for Sales and Operations Planning<br />The role of finance: metrics and analysis for<br />Sales Plan Development and Execution – history, statistics, analytics<br />Production Planning and Operations – history of cost management separated between direct and indirect reflecting key drivers for each production process<br />Supply Chain Effectiveness – cost more than price, delivery schedule met, production disruption avoided<br />Integrated Financial Overview - Profitability<br />Constraints Analyses<br />Production Resource Limits<br />Supply lead-times, quantity requirements, logistics limits<br />Management of Data as a Critical Corporate Asset Focus<br />20<br />
  21. 21. FP&A for Sales and Operations Planning<br />Constraints – Examples:<br />Capacity – throughput per unit of time by process; storage space; dock space; required process flow<br />Production output to input “yield”<br />Sales Force Expertise<br />Organizational Structure<br />Multi-stage Manufacturing Cycle Time – “Rhythm”/Cycle Time<br />Run Size Economics<br />Purchasing/Supply Chain Management<br />Disturbance/disruption risks<br />Purchasing power<br />Expertise<br />Covenant Restriction on Debt, Equity, Leases, Certain Contracts<br />Labor Agreements<br />Incentive Structures<br />Licensing and Other Contractual Agreements<br />21<br />
  22. 22. FP&A for Sales and Operations Planning<br />Major Metrics:<br />Revenue realization [average price] by SKU and SKU group, compared to plan<br />Direct margins by product, product group, customer, process, compared to plan<br />Perfect order achievement – percentage of orders completed in full on time<br />Customer Order Fulfillment Lead Time<br />Inventory turns and days of supply<br />Working capital management – DSO, AP<br />Production and logistics throughput requirements expressed in units of major drivers required<br />Profitability and return on capital employed<br />Forecast accuracy<br />Sales unit volume and average pricing realized<br />Production operations<br />Supply chain<br />22<br />
  23. 23. FP&A for Sales and Operations Planning<br />Sales Plan Development and Execution:<br />Demand measurement<br />Wanted demand met – market share<br />Wanted demand unable to acquire or supply<br />Unwanted demand<br />Demand shaping analyses and metrics development<br />Pricing decisions<br />Promotion planning and execution<br />Product launch or formulation development<br />Price and margin realization metrics and analyses<br />Sales Unit(s) realized, including multiple units of measure<br />Planned average realized prices<br />Planned direct contribution margins – relationships of pricing and direct cost element cost movements<br />Production and supply resource driver units consumed vs. plan<br />Information collection and management<br />Data definition and consistency – master data management<br />Data marts/warehouse reports design and development<br />Dashboards and drill-down reporting<br />23<br />
  24. 24. FP&A for Sales and Operations Planning<br />Demand Shaping Mechanisms<br />24<br />
  25. 25. FP&A for Sales and Operations Planning<br />Production Planning and Operations Management:<br />Production resource requirement estimation<br />Production resource units [hours] by process<br />Production resource drivers consumed<br />Production scheduling/capacity assessment<br />Resource cost accounting – direct costing/direct margins<br />GPK costing concepts – product unit volume variable<br />Direct driver identification and units of measure metrics<br />Direct driver costing – machine process hours, e.g.<br />Quality and output yield compared to input resources consumed and waste/non-conformance minimization<br />Asset utilization<br />Constraint identification and management<br />Margin plan attainment<br />Capital investment<br />“Fixed” Resource requirements/constraints<br />Process maximum throughput requirements<br />Facility space for production , storage, and inbound or outbound shipment handling, including dock use planning<br />25<br />
  26. 26. FP&A for Sales and Operations Planning<br />Supply Chain Effectiveness:<br />Make vs. buy decisions<br />Contracted/out-sourced supply performance<br />Purchased product quality and timeliness<br />Supply chain performance metrics<br />Cost for required quality<br />Delivery performance – timeliness, quality, quantity accuracy<br />Logistics costs and management – cube, distance, and weight<br />Warehouse optimization and management<br />Space cube utilization<br />Flow and operating process<br />26<br />
  27. 27. FP&A for Sales and Operations Planning<br />Integrated Financial Analyses and Reporting:<br />Profitability measurement<br />Actual vs. plan margin realization<br />Margin to invested capital – actual vs. plan<br />Sales/margins per square foot [capacity required], e.g. [retail, restaurants]<br />Indirect and fixed cost management<br />Executive benchmark reporting with drill-down ability<br />Inventory measurement<br />Working capital management<br />Capital expenditure follow on analysis<br />27<br />
  28. 28. FP&A for Sales and Operations Planning<br />Remember the objective:<br />Profitability improvement<br />Increased measured direct and indirect margin<br />Increased returns on capital employed<br />Cost management on indirect and fixed costs<br />Improved utilization of resource cost drivers<br />Waste elimination<br />Customer satisfaction measures<br />Perfect order improvement<br />Reduced warranty/”make up” costs<br />Market position achievement<br />Market Share<br />Market price realization <br />28<br />
  29. 29. FP&A for Sales and Operations Planning<br />An economics reminder: resource acquisition price is not cost<br />Acquisition price is an input based measure<br />Poor quality a serious offset to the “savings” and impairs other improvement goals<br />Unfocused use is not compensated for by price savings<br />Cost is an output based measure<br />Waste minimization by acquiring the right quality the first time<br />Utilize resources effectively<br />Consider resource “yields” – useable portion [capacity] of units acquired<br />Personnel – time paid not worked<br />Facilities – space built/rented not useable/restricted<br />Cost management/reduction is driven by:<br />Waste/inefficiency elimination – consider lean 6 sigma<br />Resource utilization rates for essential resources<br />Focused use of resources on key objectives<br />29<br />
  30. 30. FP&A for Sales and Operations Planning<br />What do these have in common? – close is sufficient<br />Precision Level of tie-outs in Plan<br />30<br />
  31. 31. Illustration of a contract manufacturer of liquid health and beauty products<br />FP&A for Sales & Operations Planning<br />31<br />
  32. 32. FP&A for Sales and Operations<br />Overview for Contract Mix and Fill Manufacturer<br />32<br />
  33. 33. FP& A for Sales & Operations Planning<br />Sales Estimating and Planning <br />Sold to order, but with regular customers and regular order flows for many products<br />Analyzed continuously updated rolling history of sales by formulation, case pack, bottle size, cap [closure], and label [SKU]. 146 SKUs for 54 formulations.<br />Cases required, for finished goods inventory<br />Bottles required, for the SKU case pack for bottle, cap, label requirements as well as process time estimating<br />Certain specialty products made to order only<br />Planned timing dependent on order flow rate, other products, and capacity constraints<br />33<br />
  34. 34. FP&A for Sales & Operations Planning<br />Primary Production Process Flow<br />Raw Materials to Production<br />Chemicals<br />Bottles<br />Caps<br />Labels<br />Corrugated Cases<br />Batch mixing, up to 2,000 gallons/batch<br />Filling [bottle sizes from 2 ounces to 64 ounces]<br />Gallons from mixing tanks filled into bottles<br />Each bottle capped and labeled inline<br />Case packed on pallet at the end of the line<br />Warehouse Storage - pallets<br />Shipping – pallets<br />Cases and standard pallet load/weight per SKU<br />Distance/destination variable<br />34<br />
  35. 35. FP&A for Sales & Operations Planning<br />Contract Mix and fill Products Contract Manufacturer<br />35<br />
  36. 36. FP&A for Sales & Operations Planning<br />Contract Mix and Fill Products Contract Manufacturer<br />36<br />
  37. 37. FP&A for Sales & Operations Planning<br />37<br />
  38. 38. FP&A for Sales & Operations Planning<br />Information Set Resulting<br />Sales plans by SKU [formulation/case/bottle/label] for units and margin dollars<br />Additional sales units by formulation and gallons for mixing planning<br />Production plans and schedule – mixing and filling<br />Purchasing requirements for short-term and contract negotiations for long-term<br />Components – bottles, closures, labels, corrugated cases<br />Certain major chemicals<br />Overall average waste on product components and estimates of inventory on hand<br />Equipment upgrades justification to improve throughput or reduce waste – capping equipment, water quality control, additional mixing tank capacity, increased power supply for mixing<br />38<br />
  39. 39. Illustration of a personalized direct mail commercial printer<br />FP&A for Sales & Operations Planning<br />39<br />
  40. 40. FP&A for Sales and Operations<br />Personalized Mail Commercial Printer<br />40<br />
  41. 41. FP&A for Sales & Operations Planning<br />Primary Production Process Flow<br />Raw Materials and Supplies to Printing Line<br />Paper rolls<br />Inks, varnish or other finishing materials, and solvents<br />Printing plates<br />Print Impressions – generally roll-to-roll<br />Personalize Direct Mail Products – roll-to-roll<br />Cut and Fold – impressions, then into “pieces”<br />Mail Insertion for Direct Mail Products<br />41<br />
  42. 42. FP&A for Sales & Operations Planning<br />Production Resource Requirements<br />Plate Making<br />Plate materials<br />Hours<br />Chemicals<br />Printing<br />Paper<br />Required cylinders of cut-off size<br />Inks and finishing chemicals like varnish or lacquer<br />Hours<br />Personalization<br />Data file cleansing– customer name, address, and individualizable message(s) text<br />Hours on commercial ink jet type printing equipment<br />Cutting & Folding – hours, including set-up<br />Sorting/Mail Insertion<br />Hours<br />3rd party components required, if any<br />42<br />
  43. 43. FP&A for Sales & Operations Planning<br />43<br />
  44. 44. FP&A for Sales & Operations Planning<br />44<br />
  45. 45. FP&A for Sales & Operations Planning<br />Goebel 6 color web printing press<br />45<br />
  46. 46. FP&A for Sales & Operations Planning<br />Didde 8 color web printing press<br />46<br />
  47. 47. FP& A for Sales & Operations Planning<br />Commercial laser printer for personalization<br />47<br />
  48. 48. FP&A for Sales & Operations Planning<br />“Bindery” Equipment<br />Mail Inserting Machine<br />MBO Folding Machine<br />48<br />
  49. 49. Getting started<br />FP&A for Sales & Operations Planning<br />49<br />
  50. 50. FP&A for Sales and Operations Planning<br />How to proceed:<br />Extend or develop fundamentals<br />Master data management – definition, consistency, quality<br />Collection of “outside-in” market and competitor data<br />Process orientation - cross functional teams - and organization in your firm<br />Collect sales, driver and direct material by a regular process<br />Align performance assessment and bonus/compensation incentives<br />Extend what you have or get started<br />Start with a project and end with a process<br />Data management is initially a “project” type activity<br />The “end” isn’t – Sales & Operations Planning must become a process with rolling forecasts incorporated<br />Develop in stages – avoid a “global” leap from ground zero<br />Production facility wide initial application, or<br />An initial product of product group<br />IT Sophistication – develop upgrade plan<br />Persist – improve over time<br />50<br />
  51. 51. FP&A for Sales and Operations Planning<br />IT Tools and Techniques:<br />Master Data Management – minimize the “tower of Babel” effect<br />Data Warehouse – develop the single “source of truth”<br />Business Analytics<br />Develop business analytics [BI] for historical data<br />Develop an appreciation for statistical analysis/modeling and its limits<br />Microsoft Excel spreadsheets – a nice tool but use sparingly<br />More effective for smaller, less complex scale<br />Difficult to control, and easy to introduce undetected error<br />Consider more elaborate application tools<br />I2 Technologies<br />Oracle Demantra<br />Demand Solutions<br />Infor<br />Logility<br />SAP APO<br />IBM (Cognos)<br />51<br />
  52. 52. FP&A for Sales & Operations Planning<br />Production Management Improvements<br />Consider lean Six Sigma or other operating procedure and flow improvements<br />Cost accounting - develop direct costing data and focus, including drivers for indirect data. Minimize or avoid allocations by analyzing margins.<br />Need good direct materials and indirect process drivers unit data<br />Evaluate production scheduling with emphasis on constraints<br />Focus on throughput per unit of time measures in units and dollars<br />Develop production plan based on agreed sales plan<br />52<br />
  53. 53. FP&A for Sales & Operations Planning<br />Supply Chain Improvements<br />Evaluate opportunities for improved, consolidated sourcing, while avoiding single source risks<br />Align purchasing incentives to avoid sole focus on invoice price<br />Strive to minimize inbound logistics costs<br />Require supply of the production plan – now aligned with the sales plan – plus any buffer accumulation required<br />53<br />