In this blog series, I provide a comprehensive approach to the design, construction, roll-out and maintenance of a modern driver-based planning solution.

Driver-based plans are not a substitute for experience or management intuition but can effectively and efficiently support decision-making. When set up well, they can answer questions such as: 

• What does the future look like based on our current mode of operation?
   
• Are the forecasts on which our plans are based realistic?
   
• What would be the cost of resourcing the strategic plan, and can we afford it?
   
• What would happen if we changed direction or redistributed some of the budget to other areas? 

In order to answer these and other questions, the first step is to determine the decisions the model is to support. It will require understanding the factors on which the decisions will be made. These factors can be broken down into two groups:

1. The first are the measures that link goals, the activities supporting them, and their resource implications. E.g., what does each of the organisation’s business activities (Sales, Production, Customer support, Product/service development and Administration) cost in terms of money, people and additional assets?
    
2. The second shows the interrelationship of departments, groups and activities that work together to achieve a goal. 

If we go back to the first two questions posed at the start of this blog, the model needs to reflect the relationships between measures and structure and how they change over time to make a prediction. With the last two questions, the model would also need to handle the likely changes to be made to the model itself, such as fundamental changes in how departments may be structured in the future.

For example, we will consider a typical commercial company selling products it manufactures. The questions initially to be supported include the first two questions mentioned as bullet points. In order to predict the future and assess the accuracy of a forecast, we need to take the planned sales and costs and document what factors we believe affect them. These factors will be those that are internal to the company and external things outside of the organisation’s control.

Factors can be gauged by analysing previous results and by asking those involved. As each factor is identified, we need to identify what drives them.

For example, sales volume is driven by the number of sales opportunities, which itself is driven by sales enquiries. The sales achieved from these enquiries are related to the number of online promotions placed by the marketing department and the price being asked compared with competitors. Profitability is driven by sales value, less sales cost and cost of production. Production costs are driven by the volume produced, which is a function of overheads, raw materials and staffing.

Considering external factors, we could assume that sales volume is affected by competitor prices and that the cost of raw materials is driven by inflation.

In each of these, we must break down the impact of each factor until we end up with a measure (known as a ‘driver’) that is not worth breaking down further as these items do not have a material effect on consolidated results.

With the third and fourth questions, the model would need to cater for new variables and possibly structural elements that would capture the cost of a project and its impact on current costs, as well as projected sales.

We can’t go into too much detail in this blog, but hopefully, the concept is easily understood. At this stage, we are only documenting the variables and their associated ‘rules’ the model will need to hold and the organisation structure. We are not yet ready to build the model – that will come much later.

In the next blog, I will look at defining the reports and analyses required, as this will impact the overall model design.

This article was first published on the Unit4/Prevero blog.