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

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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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The problem – lack of strategic orchestration

Sales Plan

Financial PlanOperations Plan

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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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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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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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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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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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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


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Five Iterative Integrated Components

Strategic PlanningDemand PlanningSupply PlanningSupply/Demand BalancingManagement Evaluation & Analysis

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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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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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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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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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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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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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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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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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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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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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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

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Life Sciences XDefense and Aircraft X

Healthcare Providers X

Retail X X X

Demand Shaping Mechanisms

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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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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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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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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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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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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


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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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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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Contract Mix and fill Products Contract Manufacturer

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Contract Mix and Fill Products Contract Manufacturer

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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


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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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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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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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Goebel 6 color web printing press

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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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Mail Inserting MachineMBO Folding Machine

“Bindery” Equipment

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GETTING STARTED


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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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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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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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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