Current times of uncertainty necessitate game plans based on different outcomes. Scenario capability is the backbone of a good IBP process. Be prepared and seize opportunities as they occur.
Balancing demand and supply is a challenge for many companies which even in relatively stable times may necessitate working with different scenarios. Covid-19 related issues and geopolitical turbulences in Europe and Asia put even more pressure on organizations to develop or further mature scenario modelling capabilities. When taking on this challenge, three angles should be considered:
- Monetizing the scenarios
- Embedding the scenarios in your S&OP/IBP process
- Using the proper tools
Financialize your decisions
When you want to move to scenario modeling you need to be able to assess the trade-offs between the different scenarios. Making them financial makes comparison possible.
Make use of the different operational plans that are already being created in your organization. Plans like the marketing plan, sales plan, supply plan, or the factory plan contain key drivers that function as leading indicators. Market growth or share, price positioning, order book, installed base or sales volume can be key drivers impacting your net sales. Factory cost price, manufacturing efficiency, freight and handling costs can be leading indicators that impact your cost of goods sold. Moving down the profit and loss account below ‘integral gross margin’, you will also be able to find key value drivers in existing operation plans.
Demand fluctuations are the driving force behind projections on revenue and variable costs. A proper tool allows you create business rules that help you relate fluctuations in demand to effects on profit and loss, balance sheet, and cash flow items. You will need to identify more drivers and create more business rules to complete the picture. But playing with simple demand scenarios (like ‘low’, ‘most likely’, ‘high’) is often the starting point because it usually has a big influence on multiple line items. Once you created the model, you can run it multiple times playing with the drivers and easily compare different scenarios.
Upgrade your S&OP/IBP process
The key is to (re-)design you process so you periodically take a snapshot of your operational systems which, using a set of predefined business rules, can function as a starting point for making monetized S&OP/IBP plans.
To be able to create these monetized plans you need (more) involvement of the finance or control department in your S&OP/IBP process. Controllers become partners in business, no longer only explaining what happened but helping the organization to anticipate on what is likely going to happen, moving from being primarily reactive to becoming more pro-active – the objective of scenario planning.
Because of its nature of crossing functional borders, the S&OP/IBP process is the most logical place to house scenario planning capabilities. Organizations that have a proper S&OP/IBP process in place typically create several scenarios where they play with the drivers that determine the success of the organization. They play with volume, price, quality and mix of the raw materials used and products sold and, for example, the allocation of quantities to different factories. This results in gradually getting a feeling for what is really important, where the risks and opportunities are. Continuous integrated demand and supply alignment, supported by dedicated scenario planning, is an effective way to evaluate risks in a structured way and determine mitigating actions.
Consider a fast planning tool to support
To effectively and efficiently build scenarios and play with these during the S&OP/IBP process you need a tool that allows you to do so. We see different levels of tool support:
Most immature are often home grown systems to support specific planning tasks and are basically structured Excel with macros and automated up and downloads. They can be cheap, fast and provide a close to the user experience, but become slower with increased amounts of data to process, difficult to maintain, labor intensive (making them less cheap in the end) and error prone.
On the other side of tooling landscape we see advanced planning systems. These are integrated planning system supporting and optimizing various planning processes like demand planning, production planning, S&OP from vendors like SAP, Infor, JDA, OMP, Kinaxis, O9. These have rich functionality, but are complex, expensive, and require IT for implementation. They are considered a long term solution covering a wide array of planning capabilities.
If you don’t want to build something in Excel because of its drawbacks, but also don’t want the complexity of an advanced planning system, there is an alternative combining the best of both worlds: fast planning tools. A flexible platform allowing to build apps to support specific planning processes. Examples are Anaplan, Jedox, and Board. They provide scalable functionality and are cloud based. Fast planning tools feel like ‘structured Excel’ and allow a business driven implementation, without heavy IT involvement and at relatively low investment costs. They bring scenario modelling, design, and implementation close to the end-user, allow rapid implementation, and changes to the model can also be realized quickly.
We are here for you!
We hope this article gives you a good base to start building and playing with scenarios. If you want to know more check out our content on S&OP/IBP and planning solutions!
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