At the end of last year, I made this podcast that predicted that 2022 was going to be the year of ‘anti-lean’ with inventory flooding the market and companies having to offer discounts to shift excess stock.  My theory was that when we combine excess inventory with higher costs, higher interest rates, and a flagging economy, we have the perfect storm and that cash will become King for any business.

Succeeding in this milieu requires building cash reserves and performing effective cash flow forecasting. And that starts by taking a Finance-focused approach to S&OP and inventory management. This intersection between Finance and Ops is always important – but now more than ever.

To help get a handle on bringing S&OP and Finance together to help weather this upcoming economic storm, I spoke to Dean Sorensen, editor of Integrated Business Planning at the International Institute of Forecasters and founder of consulting firm IBP Collaborative. He has worked for companies such as Accenture, KPMG and AT Kearney, advising on finance strategy, cost and performance management and IBP.

The following questions and answers are taken from my conversation with him.

What’s the major difference right now between FP&A and S&OP?

First of all, FP&A is a function within Finance. When making a comparison to S&OP, it’s more relevant to address these differences in terms of a rolling forecast vs S&OP.

First of all, S&OP and IBP focus on supply chain resources and costs.  In most companies this represents anywhere between 50-60% of manufacturing cost structures. FP&A on the other hand focuses on 100% of the cost structure of the business.

Secondly, the structures of these processes are different. FP&A focuses on charts of accounts, whereas S&OP focuses on manufacturing and supply chain activities.  In other words, FP&A is vertically-focused, whereas S&OP and IBP are horizontally-focused.

Third, S&OP has formal mechanisms for optimizing tradeoffs. The classic one being between service levels, supply costs and inventory levels. While an objective of FP&A is to optimize performance, there are no such tradeoff mechanisms to do so.

What’s the difference between a demand plan and financial forecast?

It really depends on who you talk to. Personally, I see absolutely no difference between S&OP and a rolling financial forecast; it’s exactly the same process albeit at different levels of aggregation. The leading indicator of both these processes is an accurate cash flow forecast.

For a good cash flow forecast you need to understand how resources are being consumed. If you don’t understand resource consumption you can’t possibly get cash right. That’s one of the reasons why 99.9% of global manufacturers really struggle with cash flow forecasting. It’s hard to do when you don’t have the right models and that’s something FP&A lacks.

An operationally savvy finance person would acknowledge that you can’t possibly get a good cash flow forecast without a manufacturing model. If you don’t have a lot of changes in volume and mix perhaps you can get away with it but the minute things start getting complicated, you’re stuck. You can’t really run an effective FP&A process without bills routings and a supply chain tool – it just doesn’t work.

If our goal is to understand 100% of the cost structure and get a top-down view of cash flow, which should be the goal of any business, we need to connect supply chain planning with FP&A.

Does S&OP capture the bigger picture of a business?

The other part of the cost structure which, in my view, is falling between the cracks of both FP&A and S&OP, are the overhead cost structures. FP&A tools are really simplistic and as somebody who’s done a lot of cost management and cost reduction projects, traditional costing models are just wrong. We’ve known that for 30 years.

S&OP tools on the other hand are very narrow and fail to consider 100% of the costs. The consequence of that for one particular company I worked with was that because they were planning in silos, they had between 500 million and a billion dollars of sub-optimized resource allocation. These things are still falling between the cracks of finance and ops. 

We’re not showing the big picture of what’s happening inside companies and the overall health of the organization.

Is there redundancy across S&OP & FP&A?

If you look at S&OP and FP&A processes there are so many redundant and non-value activities between the two. We need to step back and look at the process as a whole and see it differently. It’s not that the standard five-step S&OP process is out of date, rather I think it’s missing some steps.

If you step back and look at the process more holistically you’re going to eliminate a whole bunch of things – you’re not going to need as many FP&A people, you’re not going to need a separate S&OP process, you’re not going to separate decision support process.

There’s a whole bunch of good reasons why one would want to have an integrated process that’s designed to be integrated from the beginning instead of operating S&OP and FP&A side-by-side. 

What does that fully integrated process look like?

One of the biggest problems that companies still have is that we still haven’t fixed the functional silo problem. One of the things that’s missing is what I call productivity management where we look horizontally across the business. For example, in an order to cash process, you want people focused on the cost per order, not trying to meet a fixed budget number. 

You also want them focused on customer/segment specific targets. The target for one might be ten dollars per order, while it might be five dollars per order in another.  You might have read the book Beyond Budgeting [by Jeremy Hope and Robin Fraser]. It talks about the bad behavior caused by budgets where neither the rolling forecast nor S&OP have fixed the problem of people being focused on functionally based budgets.

If you want to get them away from that you’ve got to replace it with something so rather than people focusing people on fixed budgets I want to focus them on somebody who owns the order to cash process I want you to hit ten dollars an order or fifty dollars an order or whatever I think it is and those you know those targets may um vary by segment but that I want them focus on relative financial targets. That is an absolute must. 

Beyond redundancy, what are the issues you’re seeing with current planning processes?

One of the biggest problems that companies have is they can’t connect targets to outcomes. Specifically, what do we want to achieve and how much is it going to cost?

Companies can’t manage the trade-offs between production costs, inventory levels, and customer service. From a finance perspective those trade-offs are between cost per order, order fulfillment days, and receivables.

If you take a walk around your company and ask who owns that trade-off you’ll find nobody owns it. The reality is that if you can’t manage those trade-offs, you don’t have a mechanism for optimizing cash flow.

How can demand planning ensure cash is King going forward?

Product mix is a good place to start. If we want to improve cash flow you may choose to offer products with a lower profit margin but will produce higher cash flow, as opposed launching a new product which is going to destroy cash flow. You can tilt decision making like this towards protecting cash.

I know a lot of S&OP processes miss the cash flow forecasting element, focusing instead on cost and service. And they look at inventory as just a target, not as a variable. Cash flow forecasting is missing in a lot of S&OP and FP&A processes right now and having that full visibility onto what cash outlook is important.

If you’re a 10- or 20-billion-dollar company, there’s no way that you’re going to do a cash flow forecast without a supply chain model. I see zero difference between a supply chain model and a cash flow model – it’s the same. If you have changes in volume, mix and price, you can’t possibly maintain that model in an FP&A tool.

Anybody who thinks they’re going to buy an FP&A tool and do cash flow forecasting is fooling themselves.

What you really want is to understand cash flow by business segment and understand resource consumption and cash flow by business segment. The only way that you can do that is by a forward-looking activity based costing model, i.e., a supply chain model.

This is the foundation for highly effective cash flow forecasting because If you can track changes in upstream activity which flow down to a downstream activity, you can relatively easily quantify how that impacts costs and cash flow.

Are planning tools up to the job of effective cash flow forecasting?

Most tools are not even remotely close to having the required level of sophistication. People in the FP&A software space are talking a lot about predictive analytics but the one thing you won’t see them talking a lot about is prescriptive analytics like the supply chain tools use.

The reality is that every finance guy is really going to want a prescriptive analytics tool because if I’m a treasurer I want to know how any given scenario is going to affect my cash flow, my working capital, my foreign currency exposure, my debt exposure, and whether I’m going to run into any debt covenant issues. This intersection between finance and ops is probably one of the least understood areas of business. 

Hopefully companies will start heeding some of these warnings and there’s a big incentive to do so. What we’re talking about is optimizing the cost of complexity and that represents anywhere between kind of three to five percent of sales.

Join us in Orlando for IBF’s Business Planning, Forecasting & S&OP/IBP Conference from October 18-21. With 2 maturity level streams, you’ll find the specific knowledge you need to implement or improve S&OP/IBP and level up your planning skill set. With networking and socializing in a wonderful Florida setting, it’s the biggest and best event of it’s kind. Register now.

2022 is beginning with substantial uncertainty and risk for businesses of all types. Much of this comes from the financial markets, and part of it relates to operating for 2 years in the pandemic. The list is long, but the main risks for demand planning and supply chain management are rising interest rates, shifting currency exchange rates, and price and cost inflation.

The interest rate risk is heightened by the planned normalization policies of central banks, including the Federal Reserve Bank of the U.S. Interest rates have been kept exceptionally low by central banks around the world, going back to the Financial Crisis more than 12 years ago. Rising inflation is forcing central banks to unwind their positions after years of accumulation and to increase their lending rates to banks.

Interest Rate Hikes Mean Changes In Demand

These will affect the cost of borrowing for businesses and consumers alike, in turn affecting the cost of inventory as well as the demand for products by businesses and consumers. For consumers who are acquiring products using debt (borrowing and leasing), the ramifications of higher interest rates can have magnified effects. Interest rates also impact currency exchange rates, adding more risk for global supply chains.

Scenario Planning To Mitigate Financial Risk

Now is the time for Demand Planners and Supply Chain Planners working within FP&A to begin developing risk scenarios for their companies, and to develop strategies to mitigate the financial effects for each. Given the number of risk elements for 2022, and the diversity of their effects by company and industry, scenario testing and planning is especially important. Contingency plans are essential in responding to changing conditions that will alter your product demand and business operations.

How Will Your Customers Respond To Interest Rate Hikes?

Consider how customers and consumers are likely to respond to interest rate changes and inflation in their budgets. For companies in your supply chain, how might they attempt to protect their margins with pricing that affects your costs of operation and your inventories? Consider how you can protect margins with price changes, and how that may affect demand for your products. Given the global nature of our businesses and the effects of currency exchange rates, how might company costs be affected by the coming changes in interest rates?

So, the scenario development and testing, and the development of contingency plans should be systematically undertaken. These should look at the effects on product demand, the effects on operational costs, the effects on inventory costs and financing, and how any ‘margin protection’ actions will impact demand.

How Will Your Responses To Risk Impact Your Trading Partners?

These issues you are facing are shared across all companies in the industry, and across all companies in your supply chain. The responses of each can be additive or multiplicative so Demand Planners need to create scenarios that fully incorporate the risk factors and understand the impacts of any resulting actions on our trade partners, as well as the effects of any actions taken by our suppliers and customers and consumers. Such scenario planning requires cross-functional participation to capture the many possible outcomes and risk factors. FP&A is essential to dollarizing each scenario and each course of action.

FP&A Must Dollarize Each Scenario & Response

Set-up a working group on a cross-functional basis with FP&A taking the lead in putting a dollar value on each scenario and response. This is not an operations forecasting process, but a scenario and contingency planning process. It is important for all members of the working group to realize this. Identifying the interacting elements and their effects on one another is essential. The process and the considerations are dynamic in nature, and will require iterations to test and evaluate the resulting scenarios.

Review these as a group on a regular basis to ensure prompt implementation of contingency plans and action. It is important to be prepared and it is essential to respond to the changing conditions on the ground in a proper and prompt manner.

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 It is important for both supply chain and financial professionals to consider the impact of mitigation and risk management efforts on company financial performance. Projected demand for upcoming periods must be planned for, and we look to balance supply and demand using demand forecasts and collaborative planning forums like S&OP or IBP.

In S&OP/IBP, business considerations and issues will be brought to the table that represent risks to the organization from operational and financial perspective. Strategies and mitigating actions are essential and should be chosen considering the expected financial consequences for the company.

The finance function is a key stakeholder in such forums as they supply information and financial analytics that can be used to ensure that all operations can be financed effectively and that decisions made contribute to a competitive ROI for the business. They are an essential part of the team in estimating and evaluating the alternative risk management alternatives available for risk mitigation strategy actions. Finance and supply chain functions have a shared responsibility for supporting the S&P/IBF processes.

Variation in demand as well as supply chain considerations can contribute to the need for safety stock, for example. It may require higher inventory and more points of distribution for the achievement of the desired level of customer service. It may require supply chain adjustments and mitigation that effect the business economics and business risks. Mitigations most often have financial effects – positive and negative – on the company. This kind of risk mitigation can be expensive.

Demand and sales forecasts are the platforms from which supply planning is launched. We are basing the supply chain structure, plans, and operations on these demand forecasts that then affect revenue and operating profit. Supply chains have a myriad individual supply links that interact with other links in the chain and with other supply chains. There are a host of supply chain risks to be hedged, mitigated, managed, and financially evaluated.

There are risks related to:

Disruptions: Supplier bankruptcies, natural disasters, and labor disputes.

Delays: Inflexible supply sources, capacity utilization, border crossings, customs.

Information Systems: System integration issues, networking problems.

Procurement: Exchange rates, single source materials, components, finished products for resale.

Inventory: Demand and supply volatility and uncertainty, excess and obsolete inventory, inventory holding costs.

Capacity:  Cost of capacity, cost of flexibility, capacity utilization rates, production flows and set-up, operational and financial condition of supply chain partners.

Lead Times and Related Volatility: Transportation, production, assembly, shipping components, supplies, raw materials, work in progress, finished products.

Demand Forecast Error: Excessive promotional activity, innately high volatility of demand, poor handling of data and information, poorly organized and poorly managed forecasting process, excessive forecast overrides and bias, lack of collaboration, key function participation

There are supply chain management mitigation approaches widely used for demand and supply related risks:

1. Increased capacity engagement through redundant suppliers
2. Increased oversight and responsiveness
3. Increased inventory and working capital
4. Increased company and supply flexibility
5. Aggregated demand to reduce uncertainty & forecast error

The mitigation approaches may result in increased product costs, operational costs, transportation costs, distribution costs, warehousing costs, and other supply chain management expense areas. Without the beneficial effects of higher revenue through volume and pricing, the mitigation approaches in isolation will probably have an adverse P&L effect.

They may reduce Net Operating Income, Net Income, and Cash Flow from Operations. So, it is important with support from the financial function to estimate financial effects and plan for actions that aid in improving other areas of the P&L – topline and/or expense – to achieve financial balance.

Impact On The Balance Sheet

Where the mitigations require investment in working capital and long-term capital assets, the balance sheet effects come to the fore. The investments will generally reduce cash, increase inventory, increase fixed assets, increase debt and the associated interest expense.

The Return on Assets and the Return on Equity are both impaired due to the reduced Net Income experienced by the company. The Return on Assets is further impaired by the combination of lower Net Income and higher Total Assets. So, again it is important to find other areas of the P&L and of the Balance Sheet with the support of the financial function where improvements can be made to balance the effects of the mitigation approaches on these key return metrics for the company.

Risk Mitigation Requires Collaboration

Throughout our demand planning and supply chain management efforts, we are dealing with volatility and other sources of risk to the business. The challenge is to be able to mitigate and hedge risks while producing a return on investment for the company.

This requires sharing of information and ideas, collaboration, and cooperation, as well as systematic analysis of costs and benefits expected from the mitigation actions that may be taken. It also requires both a short-term and a long-term perspective in our decision-making processes. The S&OP and the IBP processes are forums within which to do this.

We must consider the financial effects of our demand management and supply chain management activities on the operational and financial success of the company. We cannot do this in isolation. It is important to develop a relationship of collaboration with the finance function of the company to take part in our forecasting and planning processes, providing financial information, analytics, and financial counsel. This can help to realize an effective working relationship that balances the considerations of supply chain efficiency and operations, as well as financial ramifications and competitive financial performance for the company.

For further information on how Finance can benefit from collaboration with demand planning, click here.

Financial planning and analysis (FP&A) is the process of analyzing an organization’s financial strategy. To accomplish this, we need a prediction of a future P&L and cash flow or, in other words, a forecast. Many companies however do not create forecasts, instead operating from budgets, sales targets or some KPIs developed by the Finance department.

None of these are an adequate substitute for a robust forecast.

One of the oft-lamented drawbacks of the annual budget is that it is static in nature and it ignores changes in the marketplace throughout the year. Targets are set based on the various assumptions identified at the beginning of the year and sometimes, before the final budget is signed-off, many of these assumptions are already out-of-date and irrelevant. That reality was driven home in spectacular fashion by the last recession, which saw many carefully prepared budgets rendered meaningless.

Standard Financial Plans Are Disconnected From The Drivers Of The Business

The problem with these kind of budgets is that the forecasting process is disconnected from the specific drivers of the business. It fails to understand that the purpose of forecasting is to provide a picture of the strategic direction of the organization, identify potential risks and opportunities, and coordinate future activities. It is not a performance evaluation tool or a revalidation of the company’s commitments. When forecasting is used as annual performance evaluation yardstick, chances are that executives will purely focus on achieving the targets set at the beginning of the year.

But when the forecast is tied to sound predictive analytics, current sales, and changes in markets, executives have more timely and accurate information that allows them to make better decisions. What’s more, by tying the financial plans to the monthly forecasting cycle, executives can eliminate the annual mindset and become more aligned to business cycles. It is critical that instead of planning once a year on a top down number you are told to hit, forecasting is based on real business demands and the real business environment – and for that we need to update the plan more regularly.

The Power Of Rolling Financial Forecasts

To do this, many companies are abandoning the annual budget and moving towards a rolling forecast or continuous planning. This is a process in which key business drivers are forecasted on a continual basis. To do this, Finance must not try to recreate the annual budget process every month, nor should they shortcut it and just use averages.

Forecasting a P&L is about estimating revenues of sales, costs of goods sold, and SG&A costs (selling, general and administrative expenses) for the upcoming period. At first glance, a tempting and time-saving approach for the organization might look like a summarized P&L for the forecast period. Much better, however, is a more detailed P&L elaboration, reflecting fact-based past experience, the best available knowledge and the soundest assessment of the future environment and business development.

Finance Must Work With Demand Planning

For this reason, the forecast should not be the sole work of the Finance department, for it may not have all elements available to make its own assessment of how the market is developing. Instead, it should be the result of collaboration with the predictive analytics and demand planning functions. Working together they can get the complete picture more efficiently and effectively.

Finance must work with predictive analytics and demand planning for a truly robust forecast

This coordination ensures best practices in data gathering and analysis, modeling, managing assumptions, and, just as important, monitoring performance. Good forecasting and demand planning help us better understand the uncertainty of demand and adapt to changing conditions.

Furthermore, developing a monthly P&L and rolling forecast using the forecast created by the demand planning and forecasting function creates a one number attitude throughout the organization. In this scenario, the same forecast that drives Operations and Sales and Marketing is now driving gross margin, variable cost, and cash flow. While there may be allowances and other financial adjustments to the sales forecast, using the same baseline allows you to tie and understand the drivers and variables better.

What The Rolling Forecast Most Definitely Is Not…

Finally, the rolling forecast is not an annual budget done twelve times a year. If it takes you eight weeks to recreate a forecast every month, you may have a problem. Using the sales forecast generated by demand planning is not only a best practice but saves time and resources and allows finance to focus on financial drivers.

In this new business environment where we need more insights faster and be more agile, we need to leverage resources and processes that are responsive and understand customer demand. As today’s culture of ‘disruptive’ thinking begins to permeate every corner of business, approaches to processes such as budgeting and financial forecasting are also evolving. Being adaptable and collaborative is now the name of the game, and if a company’s finances can’t keep up with ever-changing scenarios, the outlook is grim.

Forward thinking companies have recognized that traditional financial forecasting is inefficient and are getting demand planning to help

Today companies have recognized that traditional financial forecasting is inefficient and have moved to demand planning function or specialized planning and forecasting roles to help. Advanced predictive analytics functions are being leveraged throughout all parts of organizations and for FP&A, it can be a source of strong competitive advantage. This is also the basis of a good rolling forecasting process which invokes consistency and participative cooperation across functions in organizations.

Attention Demand Planners, wouldn’t you AND your CFO both like to know how much profit your current forecast is leaving on his table? Turns out you can; all that’s required is getting a second opinion of your current forecast just like you would if you had an important medical condition. Or, another way to think about it might be as an analytic consultation of your forecast. 

How Does The Second Opinion Forecast Work?

First, a bit of background is in order. As is well understood, the most important element in developing next year’s plan is the forecast. This forecast is “translated” into next year’s profit by subtracting the income statements’ various costs from the forecast’s revenue; specifically, cost of goods sold and sales & marketing, general and administrative costs. These costs come from the budget. Thus, the forecast in concert with the budget determines for the CFO next year’s planned profit.

The Second Opinion Forecast has no dependence on next year’s budget.

The Second Opinion Forecast (SOF) is developed entirely differently; it has NO dependence on next year’s budget. This fact should  please your CFO given the current budget’s widely recognized limitations, including short life-span, how time-consuming it is, and how rapidly its assumptions are outdated.

Rather, SOF accomplishes this independence from the budget by building a model of the income statement, an Operational Income Statement (OIS).  This model integrates two analytic techniques in widespread use today.  The first is Supply Chain network design and the second is demand-sensing modeling (often referred to as marketing-mix modeling).

How To Create An SOF Model

There are three steps involved in creating an SOF model:

Step 1: Working closely with the CFO’s management accountants within FP&A, a model is built from last year’s income statement (i.e. profit and loss) in Supply Chain network design software. This model, the baseline, ensures the model has structural integrity, typically modeling last year’s results to within 1-2%. However, this model differs from network design efforts because its planning horizon is only a year and it includes SG&A costs.

Step 2: This model is then updated with next year’s planning data including:

• Replacing the sales/marketing costs in the baseline model with demand sensing functions which describe how the forecast volumes vary as a function of sales and marketing expenditures
• Reflecting any and all improvements planned for the Supply Chain in the coming year including changes in sourcing, process improvements, in/outsourcing decisions, new production lines, plant facilities, etc.

Step 3: This updated baseline model then selects the Sales & Marketing expenditures which create the most profitable forecast using the demand sensing functions. This demand-sensed forecast is the SOF forecast.

Second Opinion Forecasting allows the income statement to be updated much more quickly and accurately during the year.

Why Is The SOF Important?

The SOF allows the CFO to compliment the current financially-based enterprise planning efforts with the same planning foundation that the Supply Chain currently uses, i.e. Operations. As described below, the benefits the SOF provides for the enterprise in general and the Demand Planners in particular, are significant.

There are a variety of benefits including:

• Creation of a new maximally profitable demand-sensed forecast, the SOF
• The SOF model configures the best Supply Chain required to make and fulfil the SOF, respecting all the Supply Chain’s constraints including sustainability (e.g., energy consumption, carbon emissions
• It allows the income statement to be updated much more quickly and accurately during the year
• It improves the forecast process’s profit results going forward
• It maximizes the return on investment of  sales and marketing expenses
• It fulfils a long-held belief amongst Demand Planning experts that Demand Planning is held back by being purely a Supply Chain-focused function. There’s no real reason it should be limited to Supply Chain.

Seth Godin, bestselling author of the books Tribes and Linchpin, once said in an interview that if you can only do what someone else tells you to do and nothing more, then they can find someone (or something) cheaper than you to do it. If you can creatively think through problems, present solutions and make decisions, then you’re a resource that can’t be replaced.

The Institute of Business Forecasting (IBF) asked professionals a few months back a few simple questions to gauge where people in the profession saw Demand Planning and forecasting in the year 2025. A summary of the report came out in the Winter issue 2017/2018 of the Journal of Business Forecasting (JBF). This and other articles will look deeper at those answers and what the future may hold in regard to people, process, and technology in the realm of Demand Planning.

While we did not ask directly if the role will be fully automated in the future, we did ask what the core competencies for the role will be in the year 2025. This sees a changing and possibly elevated Demand Planning role, one that evolves from analyst to a master of orchestration and provider of insights.

Where do You Fit In The Digital and Demand Planning Revolution?

According to many industry observers, we are today on the cusp of a Fourth Industrial Revolution. Developments in previously disjointed fields such as Artificial Intelligence and Machine Learning, robotics, advanced analytics, 3D printing, and cognitive technology and deep learning are all building on one another. The Internet of Things will help tackle problems ranging from Supply Chain Management to Operations. Concurrent to this, the digital revolution threatens to not just give us more data, but do your job faster, better, and cheaper than you do it.

What does this mean to us, will we be replaced? Your view of a demand planning robot of the future really depends on how you view your role today. If you are only doing what someone else tells you and aggregating data, or relaying what the forecasting system is generating, then they can find something cheaper. If we just need a number, technology can do this faster and more efficiently with greater number of inputs and more accurate outputs.

If you view Demand Planning as discipline that uses data, forecasts and experience to estimate demand and provides solutions for various business needs, then you are the next generation and ahead of the curve.

For the last few decades or more, a forecaster’s role has been considered primarily to provide an accurate single point estimate to a supply chain based on history and inputs from sales people. The fact is that the entire business, not just supply chain, needs insights into what will happen and the focus should be on growing profitability of the enterprise. This requires more complete, detailed analysis and quicker answers. What we are seeing today is that the Demand Planning role is changing and we need to migrate from Big Data to big answers.

We Conducted a Survey Into The Future of The Demand Planning Role And Here’s What You Said

The ability to apply quantitative insight to the wider business context is crucial to the future of the demand planning role.

This was clear as well in the results from the recent online survey conducted by IBF in September 2017. Unsurprisingly, the number one soft skill needed for Demand Planning was Advanced Decision Making (first choice for 34 of the 200 respondents).  I say not this is unsurprising because we are seeing this theme play out across multiple functions (like in FP&A) and is becoming a wider business need. Right after Advanced Decision Making comes our ability to Synthesize Data and Information, followed by Analytics. These top three needs captured almost half (42%) of all responses.

So what does this say about the role of Demand Planning in the future?

The Demand Planner Of The Future Will Be The Story Tellers Who Use Numbers As Their Language

As I mentioned in an earlier post, “My Case for A Centralized Forecasting Process”, Demand Planning can help provide synergies to many other functions and is uniquely qualified and positioned to help a company paint a fuller picture of what is to come. In that article, I referred to us a storyteller who uses numbers as their language. This is seen in the survey with Analytics which received a combined total of 85 first, second and third choices, placing it as a joint top priority. This is not analytics in the sense of a data junkie and a wizz kid at algorithms, but someone who has the ability to develop and plan analytics projects including gathering and visualizing data in response to business needs.

The Demand Planner Of The Future Will Not Report To Supply Chain

It may not (and I believe it won’t) be a Supply Chain role but will be elevated to a more unbiased centralized function with specialties that support multiple purposes and enables decisions making across the organization. The focus of Demand Planning will be more on sales enablement as well as wider ‘business enablement’. When you have more than a dozen people acting as decision-makers and influencers and competing priorities for their time, attention and money, having the right information at the right time to provide context and direction is highly valuable – and that is where the Demand Planner should come in.

The Demand Planner Of The Future Will Focus More On Pre And Post Analytics

The Demand Planner of the future may not be the statistician and programmer you may think we need in the digital world of tomorrow. The truth is that as technology continues to advance, it will not be the creators of the algorithms who will be in high demand but interpreters of them. We see this point clearly illustrated in the survey results; skills like Software Engineering count for only 1% of peoples’ first choices, and Mathematics and Statistics are also low down in the list of priorities.

This is not to say highly sought-after skills like knowledge of R and Python and advanced analytical programming are not needed today but it does provide a glimpse into the Demand Planning role of the future. What will be in more demand is the pre and post analytics that provide insights into what questions to ask, and assist in communicating the impact of the results to the business. These are two soft skills that may never be replaced by machines and are indeed likely to be in greater demand than ever before.

While clearly all of these soft skills or core competencies are important, judging from the responses and what we are in our own organizations, the Demand Planner of 2025 will be an elevated role that will creatively think through problems, present solutions, and make decisions.  And most of all, you will be a resource that can’t be replaced.

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The survey data referred to in this article is based partially from The Institute of Business Forecasting’s (IBF) online survey “Future of Demand Planning and Forecasting”, conducted between September 1, 2017 and October 24, 2017.  The survey focused on three key areas of people, process, and technology as it relates to the demand planning field in the year 2025. The survey consisted of 4 high-level opinion questions asking respondents to rate their first, second, and third choice for each question. Each question had a keyword, along with a definition of that word of how it was to be interpreted for this survey. There were no incentives other than the opportunity to advance the body of knowledge in the profession and we received over 200 responses from people involved or related to the forecasting and demand planning functions.

If you would like to contribute an article to Demand-Planning.com, submit your details and suggested topics to the editorial team here.

Stop me if you have heard this before. We need more accurate forecasts, and we need them faster. Things are becoming more complex and we need to better understand the drivers behind demand. There is an increased need for insights not just numbers, and there is a growing talent shortage of analytical communicators who understand the business. Does this sound like the future of demand planning to you? Then you’re not alone.

Demand Planning and FP&A Face The Same Problems

If you are in the Finance silo and also recognize these challenges, I totally understand. This is becoming the new reality not only in demand planning, but in Financial Planning and Analysis (FP&A), product management and marketing, Product Lifecycle Management (PLM), and Sales and Operation Planning (S&OP). Just ask any thought leaders from any of these functional disciplines or processes and you will hear a similar vision of the future.

Paraphrasing from Larysa Melnychuk, a thought leader and founder of the International FP&A Board, “If any work disciplines can offer us a window to the future, Financial Planning and Analytics (FP&A) is certainly one of them.”  She says that FP&A is feeling the same pressures as demand planning to do more with less, and the need to keep pace with the business of tomorrow. I hear you Larysa – FP&A is not alone. We all seem to be singing from a similar hymn book about the issues, but don’t seem to be on the same page yet as far as the solution. 

If We’re Being Honest, FP&A Is Struggling to Keep Up

Unfortunately, up until just recently, financial analysts’ work focused only on understanding underlying business systems, recording and processing transactions, and then reporting financial results. It was all about the 10-Ks and 10-Qs, and value was added through reporting and analyzing high level ratios and industry comparisons.

What has been missing – and what we are now seeing a growing focus on – is a transition from being a source of trusted information to a source of business insight. What companies and heads of Finance are discovering though, is that their Financial Planning and Analysis (FP&A) performs very well in most data-driven tasks, but it is under-delivering in judgement-based analysis, such as business unit scenario planning and risk-based forecasting.

Among other things, FP&A falls short in judgement-based analysis because of different skill sets, mindset, and scoping discipline. By nature, FP&A analysts tend to fall short in challenging assumptions, they do overly detailed analysis, and fail to highlight the most critical information or drivers in final reports.

FP&A falls short in judgement-based analysis because of different skill sets, mindset, and scoping discipline

This is not just me saying this; the CEB Financial, Planning & Analysis Leadership Council recently issued a report entitled “From Information to Insight: Boosting Finance’s Analytic Maturity.” It synthesizes several CEB studies involving 590 finance directors and heads of FP&A and finance staff with analytics responsibilities across the world, including the Asia-Pacific region.

Among the findings:

Only 5% of heads of FP&A rate their team as effective in conducting analysis to support decisions that require a substantial application of judgment.

Only 5% of FP&A heads are effective in doing analysis that provides comfort about the relevance of long-term strategy in light of market changes, and that inform decision-makers about emerging opportunities.

Just 25% of FP&A heads reckon they are effective in providing analysis that informs decision-makers about the top drivers of variance or performance risks.

That said, a company’s Finance maturity may not require a revamp of the entire department or process. Experts have been preaching for decades now about not creating silos and increased collaboration – maybe we should finally start to listen.

Integration of Demand Planning and Financial Planning Is Critical

Much like Sales and Operations Planning (S&OP) or Product Life Cycle Management (PLM), Financial Planning and Analysis (FP&A) needs to be more than a single functional process and begin to migrate to a business process. In forecasting and demand planning, we talk about the importance of collaboration and cross-functional integration and this needs to be more than just a Supply Chain, Sales or Finance responsibility, but become a whole business function. Just as forecasting must be fully integrated into S&OP or FP&A, it must be fully integrated company-wide to fully leverage the insights generated.

In Demand Planning, mature S&OP environments successfully integrate S&OP and Sales, and the benefits are widely accepted. It requires agents of change within the organization, buy-in from management, and a shift in culture. None of this easy but there is no reason this cannot be extended to include Finance.

Through better collaboration, it will allow a bringing-together of the expertise of different functions, and connect the skills and expertise that already are in Finance more efficiently and effectively. By using a robust forecasting, predictive analytics, and demand planning process outside of finance you can:

1- Generate improved base line forecasts

2- Better identify driver-based forecasts

3- Provide an improved consensus plan

4- Save time and duplication of efforts throughout the organization

 The benefits are clear – companies need to be more agile and efficient.  Sharing the right resources makes sense.  Leveraging predictive analytics inside your organization helps every business function have improved visibility and plan better. Reducing latency in your processes, demand sensing and rapid response forecasting dcan save time and provide the right information quicker to make better decisions.
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The result of this ‘keep out of my sandbox’ mentality is disconnected functional silos.

If It’s So Obvious, Why Hasn’t Forecasting Integration Happened Yet?

Demand Planning and Forecasting Have Evolved In The Supply Chain And S&OP Sphere: Despite all the talk about flat organizational structures, people (and departments) like to keep valuable assets to themselves, and we like to dominate our respective functions rather than see them expand. The result of this ‘keep out of my sandbox’ mentality is disconnected functional silos.

Financial Planning Used To Be More About Budgeting Than Forecasting: It has not been until recently that companies are moving from budgets to rolling forecasts. In addition, much of the adaptation of forecasts in FP&A has been around driver-based forecasting rather than volume-based forecasting used in traditional S&OP.

Many Companies Are Still Reactionary Which Means What We Do is React: We have not had time to focus on what we need to do, much less what we would like to do. For FP&A, it meant spending most of their time reconciling and creating budget targets rather than investigating cost drivers or testing probable outcomes of bundling and pricing options.

In the Past, Different Functions Had Different Goals: Traditionally, PLM was concerned only with branding and innovation; Finance was concerned only with P&L; and S&OP was concerned only with balancing supply and demand. But what was true then isn’t true now, considering the need for businesses to react faster and more efficiently. And that means adopting integrated demand planning and Business Efficiency Planning, the core tenet of which is acting as one and working to the same plan.

Centralizing Demand Planning and Forecasting efforts into FP&A and PLM will allow the whole business to better plan for the future

What Are the Differences Between Forecasters and Finance Analysts?

In the perfect world (or business of tomorrow), forecast analysts and a collaborative demand planning process tend to work with an overall picture. They consider past and current trends to help the company paint a full picture of what is to come. They are storytellers who use numbers as their language.

As a specialized business function, a centralized demand planning and forecasting process helps manage assumptions from multiple inputs such as financial plans, market plans, sales plans, and industry information more effectively. A trained demand planning team has the ability and position to challenge other functions’ assumptions and apply statistical proofs. They have a better understanding of data, different levels of hierarchy forecasts, as well as drivers and statistics that will help minimize bias.

Financial analysts build on forecasters’ work. Where the forecast analyst understands forecast drivers, the financial analysts better understand business drivers. They can better review the financial decisions based on current consensus forecast, stated business objectives, and possible various financial levers and investment options. They look at the company’s finances with a critical eye, trying to spot data anomalies, trends, or deviations – and then introduce strategies for improvement.

A financial analyst brings all that theoretical information down to earth, with tangible insights on key metrics. They are then able to supply a clear projection of what is going to happen financially in the next quarter, the next year, and the next five years – accounting for things like one-time expenses and possible fluctuations in net sales.

Together, they are working in concert and each leveraging their functional expertise so that combined they are a source of trusted business insights.

Ultimately, Financial Analysts Want to Know What We Know

Reducing latency of forecast generation, qualified analytical professionals, better leveraging of predictive analytics, and improved insights into drivers. That’s what Demand Planners achieve and that’s what Financial Analysts want. We all need to see one step ahead. Centralizing and expanding Demand Planning and Forecasting efforts into FP&A and PLM will allow the whole business to better anticipate, and plan for, the future.

What Are The Two Elements That Will Bind S&OP and Finance Together In Harmony?

Together, S&OP, PLM, FP&A and Enterprise Risk Management can start their journey from functional processes to a single Business Efficiency Process. The common threads that will tie these processes together are a demand plan and a centralized forecast, as well as a financial plan complete with impacts to the business. To get there, organizations need to start looking more at synergies within their organizations and build out a well-established demand planning team, as well as a skilled financial planning team. Together, a strong centralized demand planning and forecasting team, along with a vital financial and planning team have the ability for everyone in the organization to plan better and more efficiently and keep pace with the business of tomorrow.

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