Watch this video where Paul Mol, Global Transformation Program PMO at Electrolux, shares their experience of...
Extended Planning & Analysis (xP&A), is the evolution of financial planning beyond the finance function. It requires planning that is highly integrated with other business functions, a transformation of analytics, and a business partner culture, which combined lead to the requirement for modern FP&A skills in the workforce. In two articles, based on our recent webinar “XP&A in action: Enhancing FP&A Agility with Supply Chain Planning”, I will discuss the future of xP&A and supply chain planning. This first article focuses on integrated planning and decision-making.
Integrated Supply Chain & Financial Planning
According to Gartner®, “Through 2024, 30% of FP&A implementations will be extended to support operational finance processes with 50% requiring a substantial xP&A roadmap from the vendor.”
Although there might be a renewed interest, a formalised integration between supply chain planning and finance is not a new idea. It has been a long-evolving trend. In the 80s, the supply chain developed a process called Sales & Operations Planning (S&OP). This process tries to balance demand and supply in a business in order to understand volume and value discrepancies, assess impacts, and determine action.
Over the years, S&OP has Evolved
S&OP has become more integrated with other business functions. It transformed into what is now called Integrated Business Planning (IBP). A good IBP process can refresh all relevant business plans, project a monthly Rolling Forecast on the EBIT level, and identify P&L risks and opportunities. It then capitalises on those insights by making the best decision possible for the business under the known circumstances.
Arguably, xP&A and IBP have the same objective: tightly integrating strategic, financial, and operational plans with budgets. They’re planning processes that have evolved from a separate functional origin. Both are eager to integrate further and provide better forward insights to facilitate better business decisions. As an IBP manager with a supply chain background, I used to report straight to the CFO and work closely with my FP&A peers to monthly ‘ebitise’ all the business plans. One of my KPIs was monthly EBIT accuracy.
Establishing Full Integration Is No Easy Feat
A business needs to continuously understand its innovation pipeline, sales demand and top-line projection, supply capability, and cost structures. This gets more complicated once we consider the extended supply chain: Tier 1 and Tier 2 suppliers, customers, competitors, market forces, commodity and Fx movements, to name just a few drivers. If they are relevant to our plans, we need to incorporate them and build insights and assumptions around them.
The difficulty of integration with the supply chain was reflected in a poll during the xP&A webinar. The poll indicated that 10% of organisations have full integration status, 52% have partial integration status, and 38% are still disconnected from supply chain planning.
This suggests that over a third of companies don’t have insights into their supply chain opportunities and risks continuously. That is a scary thought in times of disruption like we’ve seen with COVID and, more recently, the war in Europe, where companies had to make big supply chain decisions in days or weeks.
The Transition from Analytics to Decision-Making
Gartner® used to plot prescriptive analysis as the final and most challenging stage of data analytics. Where descriptive analysis answers the question of ‘what happened and why’, the predictive analysis answers the question of ‘what will happen’. A prescriptive analysis will also suggest actions that benefit from the predictions, and predictions show the implication of each option.
We see a transition from Analytics and Business Intelligence (BI) that provide insights to Decision Intelligence (DI), which makes business decisions and actions happen. Gartner® now predicts that, by 2023, more than 33% of large organisations will have analysts practising decision intelligence.
As webinar panellist Paul Mol from Electrolux mentioned:
‘It is about speed and quality of decision making.’
Indeed, the outcome of xP&A can’t just be plans, forecasts and business insights anymore. In the end, businesses must make decisions and act upon them. Facilitating agile decision-making is the logical next step in the evolution of planning and analytics.
Decision and Decision-Making Practices Are Essential
A 2010 HBR article indicates that decision practices drive 95% of business improvement and 50% of employee engagement. A more recent McKinsey survey indicates that, on average, we spend 37% of our time making decisions, and more than half of this time is thought to be spent ineffectively. For middle management, ineffective decision-making reaches 68%.
Another webinar speaker, Marat Lomakov from Ecolab, highlighted the importance of decision speed over accuracy for time-critical decisions. Speed is important, as organisations that make decisions quickly are twice as likely to make high-quality decisions than slow decision-makers.
McKinsey divides decision types into:
- Big-bet decisions: These infrequent and high-risk decisions can potentially shape the company's future.
- Cross-cutting decisions: In these frequent and high-risk decisions, a series of small, interconnected decisions are made by different groups as part of a collaborative, end-to-end decision process.
- Delegated decisions: These frequent and low-risk decisions are effectively handled by an individual or working team, with limited input from others.
- Ad hoc decisions: These infrequent and low-stakes decisions have a narrow scope and impact.
COVID-19 exposed the inability of companies to make rapid cross-cutting or big-bet supply chain decisions. These were impactful decisions like closing a factory, entering or exiting a product category, changing product sourcing, or reallocating limited resources in their supply chain.
Some companies actively bypassed their existing planning processes by installing executive-led COVID-19 war rooms to rapidly implement important decisions, thereby acknowledging that existing planning and decision-making processes were not fit for purpose.
In our world, disruptions are not going to stop. Instead, they are more likely to increase. So, facilitating decisions in a disruptive state must be part of any advanced xP&A and supply chain planning organisation.
The Continuous Rise of Automation
Another major trend is the rise of automation. Supply chain automation has been happening for years. It has long been focused on improving the productivity of laborious, repetitive, or dangerous human activities. We now have automated production facilities, warehouses, and transport in our physical supply chain.
Indeed, after physical labour, the next step is to automate the knowledge worker, either supporting or automating their cognitive tasks. It will help the knowledge worker plan, simulate, decide, and act if required. It will do so at a higher speed, on a larger scale, and with greater consistency, precision, and endurance than any human is capable of.
According to the book Intelligent Automation, 42% of work can be automated, 32% of work can be augmented, and 26% of work can be eliminated. These numbers account for 84% of the workforce. FP&A and supply chain planners will not escape this evolution.
Closing Thoughts: Intelligent Automation Is the Future of xP&A and Decision-Making
There are many hurdles to overcome, but there is no doubt that intelligent automation will play an incremental role in the future of xP&A and decision-making. It has the potential to liberate planners from menial, repetitive tasks, giving time back to focus on more value-adding activities.
It will require new technology, new responsibilities, and a new skill set for the planner. All this will be discussed further in the next article.
This article was first published on the Wolters Kluwer blog.