Sales & Operations Planning, with examples

1. Financial Planning & Analysis[FP&A] for Sales and Operations Planning Fox River trail chapter Illinois c.p.a. society June 30, 2011 Barrett Peterson, C.P.A. Manager, Accounting Standards, Procedures, & Analysis TTX 1

2. The need and success requirements FP&A for Sales & Operations Planning 2

3. 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. 3

4. FP&A for Sales and Operations Planning The problem – lack of strategic orchestration Sales Plan Operations Plan Financial Plan 4

5. 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 5

6. FP& A for Sales and Operations Planning The solution – sales and operations planning process Operations Plan Finance Plan Sales Plan Sales & Operations Planning 6

7. FP&A for Sales and Operations Planning Techniques & Tools To Enable Success Foresight/ Statistical Tools Hindsight/KPI Insight/BI ERP/Transaction Systems Warehouse/Marts/ Performance Indicators Master Data Management Data Quality 7

8. FP&A for Sales & Operations Planning Critical Success Factors Statistically Oriented & Skilled Data Focused Decision Making High Quality Data Management Lean Operation Capable Direct Costing Focused with “Flex” Budgets – ABC, GPK Multiple 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 8

9. 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 9

10. 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 10

11. 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 11

12. The sales and operating planning process FP&A for Sales & Operations Planning 12

13. FP&A for Sales & Operations Planning Five Iterative Integrated Components Strategic Planning Demand Planning Supply Planning Supply/Demand Balancing Management Evaluation & Analysis 13

14. FP&A for Sales & Operations Planning The Strategic Planning Component Market Planning New Product Planning Resource Planning Capital Requirements Owned – Facilities, Employees, Equipment Outsourced – Contract Manufacturing & Other Services Material Supply Sourcing for “Owned” Supply Alignment to Corporate Goals Margin Planning & Management 14

15. FP&A for Sales & Operations Planning The Demand Planning Component Quantitative [Statistical] Forecasting Sales, Marketing Input What-if Analysis New Markets Product Launch Pricing – Base, Volume Considerations, Discounting Plans Non-price Demand Shaping – Advertising, Promotion, Channels, Merchandising Orders/Demand Balancing Consensus 15

16. FP&A for Sales & Operations Planning The Supply Planning Component Capacity 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 16

17. FP&A for Sales & Operations Planning The Supply/Demand Balancing Component Product Mix/Merchandising Constraint Management Financial Capacity Covenants and Other Contractual Requirements Supply Chain Capability, Including Logistics What-if Analysis Allocation of Demand to Supply Consensus 17

18. 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 Measurement Root Cause Analysis 18

19. 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 19

20. FP&A for Sales and Operations Planning The role of finance: metrics and analysis for Sales Plan Development and Execution – history, statistics, analytics Production 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 - Profitability Constraints Analyses Production Resource Limits Supply lead-times, quantity requirements, logistics limits Management of Data as a Critical Corporate Asset Focus 20

21. 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 21

22. 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 22

23. 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 23

24. FP&A for Sales and Operations Planning Demand Shaping Mechanisms 24

25. 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 25

26. 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 accuracy Logistics costs and management – cube, distance, and weight Warehouse optimization and management Space cube utilization Flow and operating process 26

27. 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 measurement Working capital management Capital expenditure follow on analysis 27

28. 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 28

29. 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 29

30. FP&A for Sales and Operations Planning What do these have in common? – close is sufficient Precision Level of tie-outs in Plan 30

31. Illustration of a contract manufacturer of liquid health and beauty products FP&A for Sales & Operations Planning 31

32. FP&A for Sales and Operations Overview for Contract Mix and Fill Manufacturer 32

33. FP& A for Sales & Operations Planning Sales Estimating and Planning Sold to order, but with regular customers and regular order flows for many products Analyzed 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 estimating Certain specialty products made to order only Planned timing dependent on order flow rate, other products, and capacity constraints 33

34. 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 34

35. FP&A for Sales & Operations Planning Contract Mix and fill Products Contract Manufacturer 35

36. FP&A for Sales & Operations Planning Contract Mix and Fill Products Contract Manufacturer 36

37. FP&A for Sales & Operations Planning 37

38. 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 38

39. Illustration of a personalized direct mail commercial printer FP&A for Sales & Operations Planning 39

40. FP&A for Sales and Operations Personalized Mail Commercial Printer 40

41. FP&A for Sales & Operations Planning Primary Production Process Flow Raw Materials and Supplies to Printing Line Paper rolls Inks, varnish or other finishing materials, and solvents Printing plates Print Impressions – generally roll-to-roll Personalize Direct Mail Products – roll-to-roll Cut and Fold – impressions, then into “pieces” Mail Insertion for Direct Mail Products 41

42. 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 42

43. FP&A for Sales & Operations Planning 43

44. FP&A for Sales & Operations Planning 44

45. FP&A for Sales & Operations Planning Goebel 6 color web printing press 45

46. FP&A for Sales & Operations Planning Didde 8 color web printing press 46

47. FP& A for Sales & Operations Planning Commercial laser printer for personalization 47

48. FP&A for Sales & Operations Planning “Bindery” Equipment Mail Inserting Machine MBO Folding Machine 48

49. Getting started FP&A for Sales & Operations Planning 49

50. 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 50

51. 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) 51

52. FP&A for Sales & Operations Planning Production Management Improvements Consider lean Six Sigma or other operating procedure and flow improvements Cost 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 52

53. FP&A for Sales & Operations Planning Supply Chain Improvements Evaluate 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 costs Require supply of the production plan – now aligned with the sales plan – plus any buffer accumulation required 53