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7 Operational Metrics for FP&A to Master on the xP&A Journey
October 17, 2024

By Marcia Williams, Founder and Managing Partner at USM Supply Chain

FP&A Tags
Extended Planning & Analysis (xP&A)
FP&A Business Partnering

FP&A is not just finance. It is not about crunching numbers and reporting, either. FP&A is a strategic role, delivering insights and advising on actions to take. FP&A professionals must breathe the business, knowing the ins and outs of operations and supply chain to strategically position themselves as trusted advisors to the CEO. To gain this knowledge, they should speak the same language.

In this article, you will learn about the following:

  • how to leverage Business Partnering to achieve Extended Planning and Analysis (xP&A) and gain a competitive edge in your FP&A career;
  • how to master 7 operational metrics that matter by speaking supply chain language;
  • and how to combine your financial and operational knowledge to become a trusted advisor to the business.


Leveraging Business Partnering to Get to xP&A

Extended Planning and Analysis (xP&A), Integrated Business Planning (IBP), Integrated FP&A, and other terms refer to the same concept. It presupposes extending financial planning to all functions in an organisation, including strategy and operations. It’s about having one game plan and elevating decision-making beyond the functional silos.

However, getting to xP&A is a journey. The FP&A Trends white paper provides an excellent summary of it. xP&A integrates three financial statements: P&L, balance sheet, and cash flow, and it provides a strategic financial and operational model capable of Scenario Planning.

Advancing from FP&A to xP&A also requires improvements in FP&A Business Partnering. A key difference from general Finance Business Partnering is that “FP&A Business Partners act as change agents who challenge the status quo,” states Larysa Melnychuk in her article.

Melnychuk identifies three maturity stages:

  • basic,
  • developing and
  • leading.

Precisely, in the leading stage, FP&A delivers the highest value as it heavily influences decision-making and helps organisations accomplish business success.

In its article, Ernst & Young (EY) indicates four categories of value, one of which is financial1. Without having an effective FP&A Business Partnering, companies would forego the other three remaining value dimensions, which are customer, people, and societal.

Having worked in operations and finance, I’ve seen that supply chain professionals refer to Business Partnering as stakeholder engagement. But in reality, it is a different terminology. The same struggle applies to collaboration and alignment with other functional teams. These teams don’t understand each other because they speak different languages.

For FP&A professionals, the ability to ask the right questions, become great storytellers, meaningfully provide direction into the future, and mastering the language of operations and supply chain is crucial. They need to translate how operations impact financials. Mastering the seven key metrics below is a great starting point for acquiring this operational language.


Mastering the 7 Operational Metrics that Matter

1. On Time In Full (OTIF)

Supply chain teams live and die by this metric. OTIF, also known as DIFOT (Delivered In Full On Time), measures how well a company delivers what it promises to its customers. Specifically, it checks whether deliveries arrive on time, with the right products, and in the correct quantities.
A high OTIF score means that customers are happy because they get exactly what they ordered when they expect it. A low OTIF score can indicate problems like late deliveries or wrong items, leading to unhappy customers and possibly lost sales.

Let’s say that a company orders 100 corrugated boxes to arrive on Friday. If the delivery arrives on Friday with exactly 100 boxes, that’s a successful OTIF delivery. But if the delivery is late, has fewer boxes, or the wrong products, the OTIF score would be lower for that delivery.

OTIF is also fundamental for FP&A as it influences revenue predictability, cost management, and customer retention. A high OTIF ensures consistent revenue, lower operational costs, and satisfied customers.  All these factors are crucial for accurate financial forecasting and Strategic Planning. Conversely, a low OTIF can lead to lost sales, increased costs, and customer churn, requiring adjustments in financial plans and budgets.

2. Net Promoter Score (NPS)

This metric measures customer satisfaction by asking if clients would recommend a company to others. It is increasing in popularity. About two-thirds of the Fortune 500 companies use NPS because it’s simple to calculate and provides valuable insights into customer loyalty.

NPS differs from OTIF and goes beyond measuring whether customers are happy with a single purchase. It indicates their overall satisfaction or experience with the company and whether they would promote it to others. A high NPS suggests strong customer loyalty, while a low NPS can signal potential issues that could affect future sales.

If a customer loves a product and gives it a high score, they’re considered a promoter. If they’re unhappy and give a low score, they’re detractors. The NPS is calculated by subtracting the percentage of detractors from the percentage of promoters, providing a clear picture of overall customer sentiment.

FP&A should keep a close eye on NPS. It provides insights into customer loyalty, which influences revenue projections, cost management, and long-term financial planning. A high NPS supports stable growth and efficient resource allocation, while a low NPS signals potential risks that may require financial adjustments.

3. Fill Rate

Fill rate is another widely used metric that measures the percentage of customer orders fulfilled with the currently available stock without counting already ordered items that haven’t arrived yet. Fill rate can be measured at different levels, such as by order, line item, or overall.
A high fill rate indicates that the company is able to meet customer demand with the inventory on hand, leading to smooth operations and satisfied customers. However, if the fill rate fluctuates significantly, it can signal potential issues like stockouts, where items run out. It can also be a sign of overstock situations, where too much inventory is held, tying up cash unnecessarily.

If a company has a fill rate of 98%, it means that 98% of customer orders are fulfilled immediately from available stock. However, this high percentage could be due to holding excess inventory, which may not always be financially efficient.

The fill rate significantly impacts the financial aspects. It influences inventory management, cash flow, and operational efficiency. A consistent fill rate supports stable operations and cost control, while fluctuations can signal financial risks that require attention.

4. Days of Supply

It calculates how long the current inventory will last based on the average daily usage or sales rate. This metric is commonly used in manufacturing and retail to manage inventory levels effectively.

Days of supply provide a clear picture of how long a company’s inventory will sustain operations without replenishment. It helps businesses ensure they have enough stock to meet demand without overstocking, which can tie up cash and lead to potential losses.

During the COVID-19 pandemic, many companies experienced extreme fluctuations in their days of supply for products like disinfecting wipes. Initially, they ran out of stock in just days or even hours due to sudden spikes in demand. Later, as demand stabilised, some companies ended up with excess inventory that would take years to sell, highlighting the importance of managing this metric carefully.

Days of supply is another critical metric for FP&A because it directly impacts cash flow, cost management, and inventory efficiency. Monitoring this metric helps the team anticipate potential risks like stockouts or excess inventory, allowing them to make informed decisions on budgeting, forecasting, and working capital management.

5. Aged and Obsolete Inventory

Aged and obsolete inventory indicate potential write-offs on the horizon. Typically, this is the moment when FP&A professionals are aware of inventory challenges since the supply chain team may submit a request for inventory write-off approval.

Write-offs have a negative impact on the P&L due to the losses incurred. The next metric will show operational performance affects cash flow, the lifeblood of any business.

6. Cash to Cash Conversion Cycle

This metric measures the number of days from the investment in raw materials until the company makes money from that investment, getting cash back into the business. The calculation consists of the sum of days inventory outstanding and days of sales outstanding, deducted days of payables outstanding.

I wrote a recent article about the cash conversion cycle using Coca-Cola and Walmart2. Coca-Cola buys ingredients and packaging for manufacturing. While inventory is not being used in production, Coca-Cola has funds tied to such inventory. This is called days of inventory outstanding.

Coca-Cola may sell to Walmart under agreed terms, receiving payment days after shipping. This is called days of sales outstanding. On its end, Coca-Cola has terms with its suppliers. It is what we call days of payables outstanding.

The shorter the cycle is, the better. Coca-Cola has had a negative conversion cycle. This means that Coca-Cola receives payments before having to pay its suppliers.

7. Overall Equipment Effectiveness (OEE)

Operations and Supply Chain also significantly impact CapEx (capital expenses). Overall equipment effectiveness (OEE) is a comprehensive and powerful metric in this area. It covers availability, performance, and quality.

Indeed, OEE is the product of these three factors:

  1. Availability measures the percentage of scheduled production time that the equipment is used, not considering setup time or breakdowns.
  2. Performance shows the actual speed of the equipment compared against the design speed.
  3. Quality measures the percentage of good products over the total.

OEE gives a detailed view of equipment efficiency, helping companies identify areas where improvements can boost productivity and reduce waste, ultimately leading to better financial outcomes.

For example, if a machine is available 90% of the time, runs at 85% of its designed speed, and produces 95% quality products, its OEE would be approximately 72.6%. This indicates that there is room to improve in one or more areas to achieve optimal equipment effectiveness.

Analysing each factor in OEE helps FP&A professionals plan for CapEx and operational expenses more accurately, avoiding surprises later. Indeed, according to McKinsey's research, when combining financial and operational knowledge, FP&A teams position themselves as trusted advisors to the business units.


Combining Financial and Operational Knowledge

The benefits are numerous. In its article “Putting the ‘A’ back in FP&A,” McKinsey highlights different business cases in which cross-functional teams, such as FP&A, sales, operations, and IT, worked together to build dashboards with real-time data to generate and update sales forecasts. This allowed the company to increase their speed, adapt and adjust production accordingly.

Another example included in the abovementioned article is about a consumer products company that created and managed a data lake with financial and non-financial information for better decision-making. By putting all data together, they can answer questions like how to reduce transportation and logistics costs, adopt a holistic approach, and break down the traditional functional silos.


Conclusion

The FP&A function performs at its best by gaining a vast knowledge of the business. The way to accomplish this is through successful FP&A Business Partnering. In pragmatic terms, FP&A professionals should master the language that operations and supply chain speak to ask the right questions and deliver critical insights. A great place to start mastering this new language is learning these seven essential operational metrics included in this article. By combining financial and operational knowledge, FP&A professionals get ready to thrive and become trusted advisors to the business.

References:

  1. Ernst & Young. 30 June 2023. FP&A: Adding long-term business value with evolving role. EY. https://www.ey.com/en_us/insights/consulting/fp-a-adding-long-term-business-value-with-evolving-role
  2. USM Supply Chain. 28 December 2023. Working Capital and Cash Flow at Walmart and Coca-Cola: Explained for Supply Chain and Procurement. USM Supply Chain. https://usmsupplychain.com/working-capital-and-cash-flow-at-walmart-and-coca-cola-explained-for-supply-chain-and-procurement/ 
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