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