“By now, you probably know the first question I am going to ask about the financial review subprocess,” Nolan says.
“Who is the executive process owner for this subprocess?” Jim Simpson, the manufacturing director, replies.
All heads turn toward Janis Novak, the controller. “I guess that would be me,” she says.
“And who is the logical person to be your financial review coordinator?” Nolan asks. “Remember, this person will most likely be involved in the demand review subprocess and the supply review subprocess.”
“Actually, I am fortunate,” Janis says. “I have a couple of very good candidates, but I would prefer not to name the individual now.” Ross has coached Mark to take definitive action whenever he sees an opportunity to move the process forward more quickly. “So when can we expect you to name the coordinator?” Mark asks.
“I can make that decision by Tuesday of next week,” Janis responds.
“Are both of the individuals scheduled for the sales and operations planning class tomorrow and the next day?” Nolan asks.
“They are,” Janis replies.
“Good,” says Nolan. “Now, Janis, I would like some help. Please describe what you think the financial review should look like.”
“I have a vision of how finance fits into the process,” says Janis. She tells the group that she has worked in companies that used a sales and operations planning process, although they did not call it that. However, the process and principles appear to be the same. The processes already existed in the companies when Janis joined the firms, and she played a role as part of the finance team.
“Here is how I see it working at Universal Products,” Janis says. “The finance review subprocess coordinator will participate in the demand review and supply review meetings. If for some reason she does not directly participate, she must be in the communication loop to receive results from both reviews. I am using the word she because both of my candidates for the role are female,” Janis tells the Group.
She goes on to explain that the coordinator makes sure that projected pricing issues are discussed and agreed upon in the demand review and that projected cost issues are discussed and reviewed in the supply review. She has the ability to question and challenge issues in both the demand and supply reviews, but will accurately represent the financial choices of both. She is not empowered to make decisions for demand or supply.
Nolan thinks this is a good time to get the group’s validation. “Is the group okay with what Janis just said?” he asks. Sam Wente, the sales director, says, “It sounds great to me!” “I like what I hear,” Jim Simpson, the manufacturing director, says. “So far, as Janis has described it, finance has not tried to dictate its answer to pricing and cost issues.” “Janis, go on, please,” Nolan commands.
Janis tells the group that the finance review coordinator will keep her personally advised of any significant issues or major changes since the last sales and operations planning cycle. That way, Janis will know what is happening and will not be surprised by any of the plans, changes, or issues. The coordinator will be responsible for taking the quantitative output of the demand review and the supply review and generating the company projected proforma income statement, balance sheet, and cash flow analysis. She also will develop a month-by-month financial projection that demonstrates the effect of any changes to the plan.
“What is the planning horizon for the financial projection?” Anita Cooper, the purchasing manager, asks. Before Janis can reply, Peter Newfeld, the product development/engineering director, speaks up. “I can see where you get revenues, cost of goods sold, and gross margin, but where do you get input for the SG&A?” he asks.
“Let me answer Anita’s question first,” Janis says. “The month-by-month projections would be for the full planning horizon. The projected pro formas will be summed by quarter and by fiscal year, but the data will cover the full planning horizon by month.”
Janis explains that there is an important issue to consider which Ross brought up earlier. The financial projections, the output from the sales and operations planning process, are the numbers that are used to communicate current expectations. One of finance’s responsibilities is to compare the current plan, or the reality today, against the annual business plan.
Gaps that should be discussed in the sales and operations planning meeting will surface in this comparison. These gaps often drive actions that will be reflected in the next sales and operations planning cycle.
Janis turns to Peter. “Now to address your question,” she says. She explains that Universal Products has an approved SG&A plan from the annual plan and from the previous sales and operations planning process. If there are going to be changes to the basic SG&A plan or assumptions behind the plan, they will surface through the process.
It is one of finance’s responsibilities to make sure that issues or changes surface. That is one of the reasons why finance participates in the pre-sales and operations planning subprocess reviews.
“Say, for example,” Janis says, “that engineering finds it needs to allocate more resources for the support of existing products. This issue should surface, and finance must take that into consideration when developing the company proforma financials.”
Mark wants to clarify what financial information will be communicated to corporate. “Will these be the same numbers you send to corporate?” he asks. “No, Mark, not yet,” Janis replies. “The numbers I present to corporate are what we as a team, with your approval, agree upon in the executive sales and operations planning meeting.”
Ray Guy, the final assembly manager, shifts in his chair. “Janis, sometimes the supply organization will be compelled to propose alternatives to meet changes in demand. The decision on those alternatives will be made in the executive sales and operations planning meeting, and they will clearly affect the financial plan. Since you are developing the pro forma before the sales and operations planning meeting, how will you deal with the financial impact of the proposed alternatives?”
“Mark takes a moment to look around the room. Nolan is standing next to where Ross is seated. Ross catches Mark’s eye and smiles because of what is happening. The team is developing ownership and understanding simultaneously. The high-level framework for the sales and operations planning process is being defined by the staff.
Janis clearly has the floor, and the team is engaged in the discussion. “You bring up an important point, Ray,” she says. She tells the group that in one of the companies where she previously worked, the chief financial officer attempted to put precision into the projections. This created a great amount of work and did not allow for easy handling of alternatives.
“I thought the time expended was wasteful,” Janis comments, “since we started with a forecast of demand that was less than precise. Adding precision at the end of the process did not make sense to me.”
Janis explains that in the other company where she previously worked, rough cut financials were developed as part of the sales and operations planning process. The finance team spent more time on analyzing the financial effects of the different proposed alternatives. In essence, “what if” simulations were developed for the different alternatives.
“I believe the first company was tied into a mentality of legal financial accounting, whereas the second company had a much better understanding of management accounting,” Janis comments.
“How did you interface with the general manager?” Mark asks. Janis tells Mark that the results of the financial simulations were available as part of an information package communicated to the general manager and other participants prior to the executive sales and operations planning meeting. The analysis included a comparison of each alternative against the annual plan previously submitted to corporate. This information helped the general manager and other executives in the decision-making and authorization process.
“I would like to make another point,” Janis says. “Sales and operations planning is an authorization process. The discipline, as we used it, was to authorize resources for budget changes through the sales and operations planning process.” She explains that the executive team did not approve a plan without authorizing the necessary resources to achieve it. This is what Ross and Nolan have referred to as “only approving realistic plans.” Picking up on comments from Ross and Nolan about boundary setting, Janis adds that the amount of resources approved became a boundary within which to operate.
Peter grins at Janis. “How do you know so much about sales and operations planning?” he asks.
“I was the financial review coordinator at both companies. I learned through experience,” Janis replies.
“And does the process really work?” Sam Wente asks.
“Oh, yes!” Janis exclaims. “I was surprised that we didn’thave a similar process at Universal Products. I don’t believe sales and operations planning is an option. I believe it is something we must do and do well!”
“Is there a financial review meeting?” Justin Roberts, the marketing manager, Asks.
Janis responds that in the first company where she worked, there was no meeting. It was just an exercise in cranking out and communicating the numbers. In the second company, a brief meeting was conducted after the financial simulations were completed. The result of the financial review meeting was often a specific recommendation developed from the alternative plans.
Ross stands to comment on what Janis has just said. He explains that in the sales and operations planning model developed by the Oliver Wight group, which he showed earlier (Figure 24), this is the reconciliation step or the fourth step in the process.
Janis continues with her discussion. The financial review meeting participants included the demand planner, the supply planner, the financial coordinator, and the controller. Others, including the general manager, were invited. They attended from time to time when there were critical financial issues.
Generally, these other executives did not find it necessary to attend. They were kept well informed during the subprocess reviews and with the information package that was distributed prior to the executive sales and operations planning Meeting.
Mark smiles approvingly at Janis. He is impressed with her knowledge of the process. He will have a valuable resource during the implementation. He also knows that he needs to select a sales and operations planning coordinator, and he is strongly leaning toward appointing Janis.
Nolan walks to the front of the room. “Well, Janis, thank you for giving my presentation. Let me just show a couple of examples of the financial information that can support the sales and operations planning process.” He shows the group two more graphs (Figures 26 and 27).
“Does anyone have any other questions or comments?” Nolan asks while the group studies the examples. “If not, then let’s take a ten-minute break,” he says. “And for planning purposes, it looks like we will be running closer to a 6:30 finish.”
Mark approaches Janis during the break. “I am so pleased and impressed,” he says. “I didn’t know you had this level of knowledge about the process.” “Thanks, Mark,” Janis replies. “I have good knowledge of the financial part, but am not as strong in understanding the entire process,” she explains. “I did not implement the process, nor did I actually participate in the executive sales and operations planning meeting. I know little about demand planning or supply planning, but I do know my part in the process.”
“Don’t sell yourself short,” Mark replies. “You know more about the process than the rest of us.”
Janis excuses herself, leaving Mark alone. Ross taps Mark on the shoulder. “We’ll be addressing the executive sales and operations planning meeting next,” Ross says. “Remember, that’s your meeting. Be sure to allow questions or issues that you feel are important to surface in the discussion. Also, be prepared to name your sales and operations planning coordinator or tell your staff when you will announce your selection.”
“What do you think about Janis being the coordinator?” Mark asks. “I think that would be a great choice from a knowledge point of view,” Ross replies. “However, you need to be comfortable that she has the proper chemistry with the rest of the team. From my observations, it doesn’t appear that chemistry will be a problem, but we will make sure that your team members provide input on candidates before you name the specific individual.” Mark does not look entirely satisfied with Ross’s answer. “Mark, there is no right answer as to who should be your sales and operations planning coordinator,” Ross explains. “In many companies, the coordinator may be on the demand side of the business. Some will come from the supply side, and others will come from finance. The choice is really up to the general manager. The coordinator needs to be someone who is reliable and whose judgment you trust.”