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Striving for the next level
Sales and operations planning (S&OP) is now moving into a far more strategic realm. As that occurs, CEOs and CFOs should become more involved.
By: Christo Jacobs, solutions director, Business Modelling AssociatesPictureDisplay
Supply and demand is what drives decisionmaking across the organisation. Marketing sees it as ‘push and pull.’ Sales sees it as ‘promise and deliver.’ Operations sees it as ‘in and out’. Finance sees it as ‘revenue and profits’. But regardless of departmental slant, balancing supply with demand continues to challenge the enterprise – from the top executives to the bottom line.
 
The problem with S&OP as it stands today is that the majority of companies still operate with standard costing systems, using spreadsheets to make highly critical business decisions that will impact the future profitability of the company. Increased complexity of operations, rapidly changing market forces and stronger competition are forcing top executives across a variety of industries to re-evaluate the effectiveness of this spreadsheet approach.
 
These spreadsheets cannot provide the enterprisewide information required to effectively evaluate the decisions that yield the best overall financial results. These systems are not holistic, they do not accurately represent or optimise for financial impact of decisions, and they do not communicate the right information to all relevant stakeholders.

Performance management is a difficult task under these circumstances. CFOs cannot understand the top profit drivers and therefore they are less confident of their financial performance commitments. Under this scenario visibility is poor; the CFO is, therefore, at risk of not meeting financial projections and cannot properly anticipate problems.
 
Companies should move towards a more comprehensive system that allows managers to identify the decisions with the best strategic and financial impact to the company. An Integrated Business
 
Planning (IBP) system incorporates activity based costing, constraint-oriented process modelling and comprehensive financial modelling to provide an enterprise-wide view of the business that supports all the important strategic and tactical decisions. IBP tools do two things that other technologies do not.

First, they pull all of the data together into a single representation. This is helpful to a business because for the first time it can look at the origin of data, how that data is used, and how different data silos store identical data differently. All data is pulled together and forced to work together – there is no other way to provide an holistic check and balance on a company’s information. Secondly, constraint modelling reveals, often unexpectedly, how an organisation really works.
 
Besides pulling a whole data picture together, constraint-based modelling builds a mathematical representation of the data that supports analyses in a manner that other data models cannot. For example, if a business can only make so many units of product X, what will its profit be for the year? If a business has a target profit, what are the production requirements for product X? These are two very different models thatsolve differently. Constraint-based modelling is the only technology that can properly represent and solve problems in a variety of ways.
 
Understanding the business end to end, including operational and financial factors, is critical to properly assessing the opportunities and threats facing a company. Today most companies make decisions in silos without taking into account how this will impact another business unit. An holistic model of the enterprise solves this problem by simulating the impact of a decision across the entire physical and financial network, taking into account the relevant constraints and highlighting the real financial impact of a decision.

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