Business conditions are bad and experts agree the economy will probably deteriorate further in 2009 before improving. In many cases, the problems are the result of banks and other companies making expensive business decisions without properly assessing risk first.
Had these companies modeled their decisions prior to making them, many might not have entered into the transactions they did. It was a lack of modeling and planning that enabled the economy to reach its current crisis point, and rebounding from this mess will require a change in the way businesses plan and execute.
The Manufacturer’s Dilemma
The natural reaction of many manufacturers to the struggling economy has been, “It’s time to hunker-down and focus on cost-cutting,” or “Wait and see.” This is a logical argument.
Conventional wisdom suggests that belts should be tightened when sales slow, and that expenditures should be limited to ‘must-have’ equipment and services. In challenging economic times, businesses are encouraged to make-do with existing processes, regardless how ineffective or inefficient they might be.
On the other hand, a manufacturer’s ability to plan and navigate its activities in a downturn can be critical to its survival. Integrated business planning is designed to help manufacturers become more agile; tie detailed sales forecasts at the production-line level to materials plans, plant scheduling and costing models. These systems enable real-time updates to sales plans and measure their impact on production and inventory levels. As material prices change, manufacturers can leverage these solutions to model changes in their business and forecast the corresponding impact on profitability.
Achieving Integrated Business Planning
For manufacturers, integrated business planning focuses on three components: continuous sales planning; merging and collaborating on the integration of the sales and operations planning process through a defined process (S&OP); and tying sales and production to company profitability through production-cost modeling.
The sales plan/forecast is the cornerstone of any financial plan and with the dynamics of this economy it is imperative that manufacturers: 1. get it right, and 2. (because it’s impossible to get it right) create alternate plans based on available options.
For instance, “What if we get a big order?” or “What does that do to our existing customer service?” or “What happens if two of our customers merge?”
This process can be started immediately -- you don’t need to wait for the next budget cycle. Manufacturers should start by creating monthly rolling sales forecasts that contain projections for the coming 18 to 24 months. Once manufacturers begin the process, those doing the preparing (sales executives and regional sales managers) will realize it is less effort to do it monthly than the annual budget fire drill.
Once completed, the sales plan should incorporate multiple perspectives and facilitate collaboration between sales, manufacturing, inventory and purchasing. This will result in better forecasts.
Balancing plant capacities, inventory levels and customer service levels is key to an executable plan. Keep in mind that sales constructs forecasts by customer and product, but production forecasts are based on the way they manufacture the product in the plant.
To accommodate operations, sales forecasts must be recast in a way that takes into consideration all aspects of production, including assembly line product families, raw materials and inventory. This integration should drive a collaborative sales and operations planning process.
To increase the intelligence in the forecast, the monthly reforecast should culminate in a monthly executive sales and operational planning meeting. The goal of each meeting is to define the sales and production plans for the coming months based on current realities in the market and come to a consensus between sales, production, inventory, purchasing and engineering.
Sales revenue really does not matter if a manufacturer can’t produce the products being sold at a profit. The third component of establishing agility in manufacturing is production-cost modeling.
In an environment that saw the price of gasoline go from $4.00 a gallon to $1.50 per gallon in four months, cost-modeling is imperative. The cost-modeling objective is to monetize the demand and supply plans so that everyone can see the bigger financial picture. Cost-modeling requires discrete modeling which emulates the type of calculations done in a spreadsheet, but the calculations need to be systemized.
SaaS and Integrated Business Planning
To reap the full benefits of an integrated business plan, manufacturers need more than spreadsheets, which are fantastic for some purposes but ultimately limited in their ability to drive long-term business success. What manufacturers need are nimble and flexible solutions that allow a company to react quickly to rapidly changing business conditions.
The solution is to bypass the traditional software license model and purchase a Software as a Service (SaaS) solution. The short definition of SaaS is a model of software deployment where an application is hosted by the vendor and provided as a service to customers over the Web.
SaaS sidesteps the traditional licensed software issues by treating costs as an operational expense and minimizing internal IT resources by leveraging the SaaS vendor’s expertise.
SaaS customers pay a hosting fee on a monthly, quarterly or annual basis, as opposed to paying upfront for the software license. The SaaS vendor assumes all of the implementation, support, training, infrastructure and security risks in exchange for the recurring subscription fee.
The delivery model is based on a service model. It includes not only the software platform but the necessary services and best practices consulting to support a customer’s ongoing implementation of the software.
In the new economy planning is critical. Integrated business planning in manufacturing can fill the critical planning need by integrating sales forecast, operational plans and cost modeling to provide the agility manufacturers need.
However the major stumbling block is often the high cost of software and hardware to implement such a process. In this new economy Software as a Service can provide the necessary functionality to fill the planning role without breaking the bank.
Ric Ratkowski oversees product marketing of Host Analytics’ Corporate Performance Management Suite. He has over 25 years experience in Finance and Accounting and has held strategic roles in the design of financial analytic and performance management applications within the top software companies in the industry. For more information on Host Analytics, visit www.hostanalytics.com