Stop me if you have heard this before. We need more accurate forecasts, and we need them faster. Things are becoming more complex and we need to better understand the drivers behind demand. There is an increased need for insights not just numbers, and there is a growing talent shortage of analytical communicators who understand the business. Does this sound like the future of demand planning to you? Then you’re not alone.
Demand Planning and FP&A Face The Same Problems
If you are in the Finance silo and also recognize these challenges, I totally understand. This is becoming the new reality not only in demand planning, but in Financial Planning and Analysis (FP&A), product management and marketing, Product Lifecycle Management (PLM), and Sales and Operation Planning (S&OP). Just ask any thought leaders from any of these functional disciplines or processes and you will hear a similar vision of the future.
Paraphrasing from Larysa Melnychuk, a thought leader and founder of the International FP&A Board, “If any work disciplines can offer us a window to the future, Financial Planning and Analytics (FP&A) is certainly one of them.” She says that FP&A is feeling the same pressures as demand planning to do more with less, and the need to keep pace with the business of tomorrow. I hear you Larysa – FP&A is not alone. We all seem to be singing from a similar hymn book about the issues, but don’t seem to be on the same page yet as far as the solution.
If We’re Being Honest, FP&A Is Struggling to Keep Up
Unfortunately, up until just recently, financial analysts’ work focused only on understanding underlying business systems, recording and processing transactions, and then reporting financial results. It was all about the 10-Ks and 10-Qs, and value was added through reporting and analyzing high level ratios and industry comparisons.
What has been missing – and what we are now seeing a growing focus on – is a transition from being a source of trusted information to a source of business insight. What companies and heads of Finance are discovering though, is that their Financial Planning and Analysis (FP&A) performs very well in most data-driven tasks, but it is under-delivering in judgement-based analysis, such as business unit scenario planning and risk-based forecasting.
Among other things, FP&A falls short in judgement-based analysis because of different skill sets, mindset, and scoping discipline. By nature, FP&A analysts tend to fall short in challenging assumptions, they do overly detailed analysis, and fail to highlight the most critical information or drivers in final reports.
FP&A falls short in judgement-based analysis because of different skill sets, mindset, and scoping discipline
This is not just me saying this; the CEB Financial, Planning & Analysis Leadership Council recently issued a report entitled “From Information to Insight: Boosting Finance’s Analytic Maturity.” It synthesizes several CEB studies involving 590 finance directors and heads of FP&A and finance staff with analytics responsibilities across the world, including the Asia-Pacific region.
Among the findings:
Only 5% of heads of FP&A rate their team as effective in conducting analysis to support decisions that require a substantial application of judgment.
Only 5% of FP&A heads are effective in doing analysis that provides comfort about the relevance of long-term strategy in light of market changes, and that inform decision-makers about emerging opportunities.
Just 25% of FP&A heads reckon they are effective in providing analysis that informs decision-makers about the top drivers of variance or performance risks.
That said, a company’s Finance maturity may not require a revamp of the entire department or process. Experts have been preaching for decades now about not creating silos and increased collaboration – maybe we should finally start to listen.
Integration of Demand Planning and Financial Planning Is Critical
Much like Sales and Operations Planning (S&OP) or Product Life Cycle Management (PLM), Financial Planning and Analysis (FP&A) needs to be more than a single functional process and begin to migrate to a business process. In forecasting and demand planning, we talk about the importance of collaboration and cross-functional integration and this needs to be more than just a Supply Chain, Sales or Finance responsibility, but become a whole business function. Just as forecasting must be fully integrated into S&OP or FP&A, it must be fully integrated company-wide to fully leverage the insights generated.
In Demand Planning, mature S&OP environments successfully integrate S&OP and Sales, and the benefits are widely accepted. It requires agents of change within the organization, buy-in from management, and a shift in culture. None of this easy but there is no reason this cannot be extended to include Finance.
Through better collaboration, it will allow a bringing-together of the expertise of different functions, and connect the skills and expertise that already are in Finance more efficiently and effectively. By using a robust forecasting, predictive analytics, and demand planning process outside of finance you can:
1- Generate improved base line forecasts
2- Better identify driver-based forecasts
3- Provide an improved consensus plan
4- Save time and duplication of efforts throughout the organization
The benefits are clear – companies need to be more agile and efficient. Sharing the right resources makes sense. Leveraging predictive analytics inside your organization helps every business function have improved visibility and plan better. Reducing latency in your processes, demand sensing and rapid response forecasting dcan save time and provide the right information quicker to make better decisions.
The result of this ‘keep out of my sandbox’ mentality is disconnected functional silos.
If It’s So Obvious, Why Hasn’t Forecasting Integration Happened Yet?
Demand Planning and Forecasting Have Evolved In The Supply Chain And S&OP Sphere: Despite all the talk about flat organizational structures, people (and departments) like to keep valuable assets to themselves, and we like to dominate our respective functions rather than see them expand. The result of this ‘keep out of my sandbox’ mentality is disconnected functional silos.
Financial Planning Used To Be More About Budgeting Than Forecasting: It has not been until recently that companies are moving from budgets to rolling forecasts. In addition, much of the adaptation of forecasts in FP&A has been around driver-based forecasting rather than volume-based forecasting used in traditional S&OP.
Many Companies Are Still Reactionary Which Means What We Do is React: We have not had time to focus on what we need to do, much less what we would like to do. For FP&A, it meant spending most of their time reconciling and creating budget targets rather than investigating cost drivers or testing probable outcomes of bundling and pricing options.
In the Past, Different Functions Had Different Goals: Traditionally, PLM was concerned only with branding and innovation; Finance was concerned only with P&L; and S&OP was concerned only with balancing supply and demand. But what was true then isn’t true now, considering the need for businesses to react faster and more efficiently. And that means adopting integrated demand planning and Business Efficiency Planning, the core tenet of which is acting as one and working to the same plan.
Centralizing Demand Planning and Forecasting efforts into FP&A and PLM will allow the whole business to better plan for the future
What Are the Differences Between Forecasters and Finance Analysts?
In the perfect world (or business of tomorrow), forecast analysts and a collaborative demand planning process tend to work with an overall picture. They consider past and current trends to help the company paint a full picture of what is to come. They are storytellers who use numbers as their language.
As a specialized business function, a centralized demand planning and forecasting process helps manage assumptions from multiple inputs such as financial plans, market plans, sales plans, and industry information more effectively. A trained demand planning team has the ability and position to challenge other functions’ assumptions and apply statistical proofs. They have a better understanding of data, different levels of hierarchy forecasts, as well as drivers and statistics that will help minimize bias.
Financial analysts build on forecasters’ work. Where the forecast analyst understands forecast drivers, the financial analysts better understand business drivers. They can better review the financial decisions based on current consensus forecast, stated business objectives, and possible various financial levers and investment options. They look at the company’s finances with a critical eye, trying to spot data anomalies, trends, or deviations – and then introduce strategies for improvement.
A financial analyst brings all that theoretical information down to earth, with tangible insights on key metrics. They are then able to supply a clear projection of what is going to happen financially in the next quarter, the next year, and the next five years – accounting for things like one-time expenses and possible fluctuations in net sales.
Together, they are working in concert and each leveraging their functional expertise so that combined they are a source of trusted business insights.
Ultimately, Financial Analysts Want to Know What We Know
Reducing latency of forecast generation, qualified analytical professionals, better leveraging of predictive analytics, and improved insights into drivers. That’s what Demand Planners achieve and that’s what Financial Analysts want. We all need to see one step ahead. Centralizing and expanding Demand Planning and Forecasting efforts into FP&A and PLM will allow the whole business to better anticipate, and plan for, the future.
What Are The Two Elements That Will Bind S&OP and Finance Together In Harmony?
Together, S&OP, PLM, FP&A and Enterprise Risk Management can start their journey from functional processes to a single Business Efficiency Process. The common threads that will tie these processes together are a demand plan and a centralized forecast, as well as a financial plan complete with impacts to the business. To get there, organizations need to start looking more at synergies within their organizations and build out a well-established demand planning team, as well as a skilled financial planning team. Together, a strong centralized demand planning and forecasting team, along with a vital financial and planning team have the ability for everyone in the organization to plan better and more efficiently and keep pace with the business of tomorrow.