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Get a Grip on Reality with Supply Chain Financial Management

Integrating forecasts from supply chain planning solutions into the financial planning systems used by senior executives, planning managers and financial analysts may sound intuitive, but it is in fact rare in today's manufacturing world. In corporate America, most organizations build two separate enterprise plans: a supply chain plan developed within the manufacturing planning groups and a financial plan built by the financial planning group. As a result, individuals within the same organization are operating under two distinctively separate blueprints for the future plans of the business.

Thanks to recent advances in both hardware and software, however, a genuine opportunity now exists to connect these corporate worlds, thus allowing the creation of one cohesive plan for an organization. While such a connection has been theoretically possible for years, increased processor speeds and improved OLAP technology have really opened the door for a service called supply chain financial management (SCFM).

The benefits of this service are fourfold: speed, accuracy, efficiency and cost. Once this type of solution is in place, the speed with which a financial plan can be formulated is expedited significantly because the two most complicated parts of the process are done automatically: the variable costs and the revenue forecasts. The only major component that must still be generated manually is that of fixed costs, and those tend to be much easier to predict than revenues or variable costs.

Accuracy improves dramatically because financial planners no longer need to guess what the variable costs and revenue forecasts will be. Rather, those numbers are fed directly into the financial planning system from the supply chain solution. Further, because supply chain solutions are constraint-based systems, they naturally gravitate toward accuracy - they are designed to give a clear picture of what is possible within an organization, taking into account such constraints as time, personnel, machinery and supplies.

Efficiency improves for several reasons. Because planners and senior executives have more accurate information upon which to base decisions, there are fewer surprises down the road, financial or otherwise. Since plans can be formulated much more quickly, more time is left for fine-tuning, ad hoc reporting and other more value-adding activities, all of which ideally improve enterprise efficiency. Communication between two formerly disparate departments of the enterprise also increases, which is usually a good way to improve efficiency.

Overall cost for developing a company's cohesive plan decreases because less resources are necessary. Exact reductions depend on the company and situation, but a savings of 50 percent is not unreasonable to expect. There's also an indirect cost benefit in that the organization will be further leveraging an existing asset: the supply chain solution.

How It is Done

The toolset: Any number of tools can be used to make SCFM a reality at your company. The key elements include a supply chain solution, a front-end tool and a multidimensional database (MOLAP). There are a number of key reasons why a MOLAP database is recommended as the data repository:

Consolidation Engine

MOLAP databases are able to integrate with multiple data sources. This is a necessary capability because data will be coming from different sources that contain Supply Chain, Pricing and Costing data.

Financial Modeling

MOLAP databases have robust functionality to enable them to serve as the backbone for allocating costs, translating currencies and storing chart-of-account hierarchies. Each company has its own set of financial planning requirements. The inherit flexibility of MOLAP allows companies to utilize a standard technology without needing to give up any of their necessary planning requirements.

Reporting and Analytics: MOLAP is designed to meet a company's standard set of internal reports (used by the general users within the planning and performance groups) and their ad hoc analytical reports (used by the most aggressive users).

The intuitive nature of building reports using MOLAP technology enables the users to build and support the reports they need to run the business. The analytical capabilities of this technology give users the ability to produce exception-based reports. These reports identify bottlenecks in supply chains and cost overruns within retail stores and indicate the most profitable product lines.

Integration: The goal of SCFM is the creation of a comprehensive financial plan. The bulk of work in any such engagement is the integration component. This step must be started as early as possible because of the many nuances that arise when a number of data sources are integrated. Figure 1 indicates the types of data that are required within a SCFM solution:

Figure 1: Data Required within a SCFM Solution

Figure 2 illustrates the system data inputs:

Figure 2: System Data Inputs

The financial plan that is built by using SCFM framework consists of the three financial categories. They are revenue, variable cost and fixed cost.

Figure 3 describes how each of these categories is built.

Figure 3: Building Revenue, Variable Costs and Fixed Costs Forecasts

Communication: A successful implementation will hinge on effective, consistent communication between the counterparts: owners of the supply chain data and those of the financial plan. These parties must communicate on both a technical and business level. Just getting financial and operations people in the same room at the same time can be a real challenge, so getting them to really talk to one another (and listen) is no small task. Once this communication commences, however, all sorts of benefits result. Operations people start explaining nuances about their supply plan that finance people need to understand in order to best utilize supply chain data. Conversely, financial executives get a chance to decipher their plan such that operations people can appreciate where the company is trying to go. All sorts of other collaborative initiatives can result, including data swapping and synchronization of meetings, thus generating additional return on investment.

Politics Not as Usual

One of the greatest benefits (and potential drawbacks, depending upon perspective) of SCFM is that it diminishes the role of politics in financial planning. Suddenly, financial plans are based upon numbers that are very objective because they've been put through an engine that includes all of the constraints and forecasts within the organization. Because the numbers are less subjective, there is less room for play. That doesn't prevent people from doing some analysis around those numbers, but it does require that they do more explaining if the budget they request differs significantly from the numbers that come out of the supply chain system.

This loss of control can be a real issue for the financial planning team because there is a disposition among planners to control their plans. Members of the financial team may worry that the operation's footprint has been extended into the planning group. Often, a financial planning manager will help set the growth of the business. With SCFM, these executives lose some control, because the financial plans will be based off the revenue and variable costs that are projected within the constraint-based supply chain model.

Making It Happen

Linking the operational and planning arms of a company will help ensure that the right hand finally knows what the left is doing. Of course, most people in the corporate world know that change comes slowly and often with great difficulty, especially when budgets are involved. Getting buy-in from the various players throughout an organization can be a real challenge. Following are some tactics to consider for getting the necessary parties on board:

For IT people, focus on the fact that an existing IT asset will be further leveraged, namely the supply chain solution. Further, SCFM can usually be accomplished without any new technology, provided the company already has an OLAP tool and a supply chain planning solution in place. This allows the organization to develop a new solution through the use existing corporate IT assets, which will increase the ROI of these existing IT technologies.

For the financial group, stress the value of operating from objective numbers. The monthly, annual or quarterly moments of truth that planners face when their forecasts are compared with actuals can be most unpleasant. With that reality in mind, most planners are willing to cede some control in return for avoiding the pain associated with faulty forecasting.

For senior management, talk about all the benefits, long- and short-term, financial and organizational. SCFM will bridge not only technology, but people and departments as well. Knowledge will be shared across boundaries that were once all but insurmountable. Employees throughout the company will enjoy a better understanding of what their co-workers do, while at the same time gaining a new appreciation for the value that their own services bring.


Eric Kavanagh is web content developer for DM Review. Prior to joining DM Review, Kavanagh was web editor for TDWI. He also founded and ran Mobius Media, a strategic communications firm based in New Orleans.

Bill Rubin is a principal consultant with ADI Strategies. He can be reached at wrubin@adistrategies.com.

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