It is striking how often finance and supply chain managers operate in their own planning bubble, disconnected from each other. However, in today's volatile economic landscape – think escalating raw material costs, unpredictable energy markets, and the ever-shifting sands of US import tariffs – this siloed approach can inflict severe damage on a company's crucial KPIs. To put it bluntly, planning in a vacuum, devoid of financial realities, is no longer a viable strategy.
Supply chain planning still occurs in volumes and fails to account for the extreme volatility in raw material and energy prices, or other circumstances such as the introduction of US import tariffs. In these conditions, a calculation in volumes is clearly no longer sufficient. Supply chain planners must also consider prices.
Consequently, there is significant uncertainty surrounding the financial situation of companies. CFOs are confronted with so many conflicting developments that they can no longer confidently speak about future financial results. They need coherent input from their colleagues in production and logistics that aligns with their own message. Conversely, it is essential for the CFO to provide good financial information to their colleagues in supply chain.
In many organizations, the finance department and the supply chain department each create their own plans. This involves a duplicated effort. And often, aligning the financial plan with that of the supply chain is the most labour-intensive task of all. This does not have to be the case. Firstly, a large part of the planning in both departments is identical. Our analysis with Solventure's clients shows that more than eighty percent of this effort aligns well. At least that portion of work should only need to be done once.
Other disadvantages of separate planning include the emergence of two versions of the truth, and sometimes even two completely different truths within the same organization. An additional consequence of each department planning in its own silo, without interaction with other departments, is that inaccuracies arise when they make assumptions about parameters outside their domain of expertise. This also requires extra effort to achieve proper alignment of the two plans.
Companies make the effort of aligning the two plans, but often this only happens once a month. In this way, the company operates temporarily blind and cannot intervene when significant changes occur in the interim. The company works for a month with outdated data. This is no longer viable in a time where rapid decision-making is essential for the survival of every company.
Separate planning processes in the two departments also lead to other departments exploiting the differences in approach. It should come as no surprise, for example, when a commercial director makes very conservative forecasts for the finance director, but at the same time appears to be a great optimist when discussing inventory levels for the following year with colleagues. After all, sales managers want sufficient stock; otherwise, their department cannot sell. When all departments create one plan together, such political games no longer have a chance.
For all these reasons, creating a supply chain plan without financial input is not an option. It is a worst practice, not a best practice. At Solventure, we can no longer defend this outdated approach, and we resolutely advocate for integrated value planning. This is also the subject of my book, Rethinking Supply Chains. In it, I argue for the integration of all planning systems, including sales, marketing, and HR, in addition to finance and supply chain. This is necessary, for example, to correctly plan promotions or to accurately assess the impact on sustainability. In this blog, we will leave these other domains out of consideration for the sake of brevity.
It all starts with a sales forecast, where volume is immediately linked to a unit price.
From then on, every step in the supply chain planning also receives a financial attribute necessary for a correct calculation of costs: raw materials or components, labour, variable and fixed overhead costs. We calculate sales costs on the far left.
A simple calculation comes out of these two blocks: the sales forecast minus the sales costs and the production costs immediately yields the EBIT. This value is essential for the finance department.
The figure also shows the impact of this production plan on working capital in its three components:
All these financial figures come from the block with the production planning.
On the far right we include the fixed assets planning with investments (Capex) and depreciation.
This graph clearly illustrates that supply chain planning can immediately provide the most important components of financial planning. It also calculates a forecast of essential data such as EBIT, Free Cash Flow, working capital, and a forecast of the balance sheet.
At Solventure, we also have connectors and interfaces that make it possible to include financial information in sales & operations planning. By focusing more on this, we can quickly offer the CFO a better plan.
This also provides the CFO with more concrete information about the supply chain, including a realistic view of the physical limitations of raw materials and production capacity. This should help when managers need to intervene to achieve specific financial results. A good forecast of working capital and an improved forecast of gross margin also support financial policy.
A central parameter in the discussion between finance and supply chain is free cash flow. Because as soon as this parameter comes under pressure, the organization will have to intervene in its daily operations to meet its obligations to banks and shareholders. Often, this also needs to yield results quickly.
At that moment the CFO primarily looks at working capital. But many supply chain managers do not know exactly what the CFO means by specific working capital KPIs. And they do not understand why this is important for the finance department. There is still work to be done here to train and coach operational managers.
Conversely, we often see financial managers taking shortcuts due to a lack of knowledge about supply chain effects. You cannot blindly cut inventory. For example, the launch of a new product will have a significant impact on inventory and thus working capital. There are also limitations in the production equipment or the availability of raw materials that a company cannot change instantly.
Better alignment between supply chain and finance should enable the CFO to gain a realistic view of the possible measures to improve free cash flow.
At Solventure, we observe that many CFOs want to move away from the annual budget exercise and evolve towards a monthly rolling forecast. You can only do this if the sales & operations planning follows the same rhythm. We have just shown that this is feasible.
This does not alter the fact that a company adheres to an annual budget as a basis for comparison to track progress or whether managers met their targets and earn their bonuses. In our opinion, resource allocation and the investment plan still belong to an annual budget.
During a recent webinar on this topic, participants asked who should bear the responsibility for this integrated value planning. For us, this is not the most crucial point. What matters is that the two departments consult with each other and together arrive at one plan in which they address the concerns of both.
It is important to know that there is still no good software for this. There are no off-the-shelf packages that can manage this information from both departments simultaneously. Companies still must do the integration themselves for the time being.
Learn how to break down silos, align forecasts, and improve cash flow with integrated value planning.
🎥 Watch our webinar on demand: From S&OP Chaos to Financial Dysfunction – The Hidden Crisis, hosted by Bram Desmet and Nick Verstraete.
