Integrating finance and operations: how can operations and finance better collaborate to achieve the common goal of profitability?
In this week’s Supply Chain Talk, Arkieva CEO Harpal Singh discusses ways that manufacturers can reduce the disconnect between operations and finance.
To achieve an optimized integrated planning process, finance and operations need to collaborate effectively. However, one sticking point in planning the supply chain is the disconnect between the operational forecast and the financial budget/forecast. All too often, the financial folks are not concerned about the complexities of manufacturing, and the manufacturing folks do not appreciate the larger financial picture. Best-in-class companies have managed to bridge this gap. In chemicals at least, the best-in-class manufacturers are running at an inventory to sales ratio of 8% or so, while their competitors struggle to maintain adequate service at an inventory to sales ratio of 12% or even higher.[Read Previous: Supply Chain Talk: The Secret to Standardization – Imagine Wearing a Standard Shoe Design on Both Feet ]
The problem with Finance and Sales Integration
Sales and Operations Planning diehards keep insisting that the financial forecast should be a consequence of the sales forecast. This is simply not realistic. Because of budget cycles, external reporting requirements, price forecasts, commodity cost forecasts, and the aggregate level at which it is needed; the financial forecast will usually be derived independently.[ Read Also: Supply Chain Talk: Do Numbers Tell the Full Story? ]
Creating Metrics to Measure Financial Performance
Operational performance is, of course, the key to achieving the financial forecast. Just as companies measure orders and bookings against a sales forecast, operational performance and the current outlook must be measured against the financial forecast. What this means is that the companies that are running a monthly tactical planning should create meaningful and robust metrics that measure financial performance.
A reasonable set of metrics to start with are:
- Receivables and inventory levels. These form a significant component of working capital and the reports created for the monthly plan should also project these. This also creates an opportunity to collaborate with finance as to how the inventory should be monetized.
- The gap between the projected revenue based on the operational plan, and the financial forecast. Operations needs to understand that increased volume is not always the answer for a revenue shortfall. Aggressive pricing and product differentiation can create opportunities for revenue growth.
- Actual raw material costs versus the financial projections. This has become increasingly important because of commodity price fluctuations.
- Expediting and extraordinary expenses in the supply chain. These are a reflection of supply chain efficiency. The best in class companies set a threshold for one-time costs in the supply chain and report this monthly.
Finance and operations have different concerns even though they share the overall goal of sustained profitability. The key to integrating finance and operations planning is to provide a mechanism to relate data from each of these functions consistently and routinely. Suitable metrics are the first place to start.[Related Resource: Does Supply Chain Planning Affect Financials? ]
Have a supply chain topic that you would like us to discuss? Join the Arkieva Supply Chain Talk with Arkieva CEO Harpal Singh. Add a comment below or send a tweet to @Arkieva with #ArkievaSCT, or email email@example.com.