Business leaders in the manufacturing and distribution industries are facing relentless pressure to cut costs and reduce operational inefficiencies while maintaining the quality of output. This is elevating their focus on effective business planning and analysis (BP&A).
According to the results of our latest Global Finance Trends Survey, 42% of CFOs and finance leaders in manufacturing and distribution organizations ranked cost optimization as their top process improvement priority (over technology improvement and risk management). Further, these executives rated financial planning and analysis, profitability reporting and analysis, and strategic planning among the top five priorities for the finance function to improve its capabilities in the coming year.
In the best of times, focusing on strategic business planning and initiatives is a cumbersome task. In today’s uncertain market environment, marred by geopolitical turmoil, workforce challenges, stubbornly high inflation and supply chain disruptions around the world (e.g., the Middle East and the Panama Canal), the inability to prioritize planning and analytics can have devastating effects.
In our conversations with business leaders in the industry, we frequently hear them cite these challenges:
- “Our organization lacks a strategic roadmap linked to the financial planning process.”
- “Keeping up with and adjusting to disruptive external events is nearly impossible.”
- “Initiatives are often reactive and not validated regularly to ensure alignment with the company’s overall direction and goals.”
- “We have large volumes of data; however, we struggle to provide meaningful insights.”
- “Current reporting does not provide leadership with adequate information to understand performance drivers and determine corrective actions in a timely manner.”
A few things become clear from these conversations: Companies that have not made BP&A a core part of their strategic decision-making team are more likely to experience operational stress. Business leaders who fall into this category tend to make impulsive decisions – such as implementing dramatic cost-cutting initiatives to stabilize profitability – that can create more challenges for the organization. A robust BP&A function can unlock the agility necessary to evaluate potential risks and opportunities by analyzing trends and market dynamics. On the other hand, an organization with a poor understanding of its BP&A capabilities is effectively shooting in the dark and hoping to hit its operational marks or goals simply by chance.
It’s critical that BP&A planning processes enable their organizations to more efficiently allocate resources, optimize investments and adapt to changing market conditions by providing insights based on data-driven analytics to support business decisions. To gain a deep understanding of the organization’s planning and analysis capabilities, a company should assess and validate the BP&A function’s various components and benchmark the current state of each against best practices.
First step: Assess your technology and data
Two critical elements necessary to ensure the success of a BP&A organization’s ability to drive informed decision-making relate to technology and data. For manufacturing and distribution companies, it’s imperative to understand the quality and governance of data available, as well as the effectiveness of the planning, reporting and analytics tools used to analyze such data.
An initial assessment should begin with answering questions such as:
- What data is necessary to be able to provide insights to business partners, and does the finance team have the required skill set to analyze such data in a meaningful manner?
- How reliant is the finance team on the use of spreadsheets in planning, reporting and analysis activities?
- When it comes to data governance, what controls are in place to challenge and improve global standards continuously, and who is responsible for ensuring the standards are applied consistently across the organization?
Manufacturing and distribution organizations with mature BP&A functions are able to address these questions confidently, whereas those that do not will struggle. Understanding your organization’s level of BP&A maturity is therefore essential for this exercise.
How do your BP&A capabilities stack up?
Following are some operational indicators that companies can monitor to assess where they stand on the BP&A maturity spectrum.
Business Planning & Analysis Maturity Matrix
Systems and technology
- Basic – Organizations in the earliest stages of maturity rely heavily on spreadsheets. There is a lack of planning and business information (BI) tools and limited integration or collaboration with technology.
- Developing – At the next stage, organizations use basic planning tools and multiple source tools and systems. They tend to have low levels of integration and minimal collaboration.
- Defined – An implemented planning and consolidation tool used to facilitate financial planning processes indicates mid-scale BP&A maturity. These organizations often have some collaborative planning and analysis elements but also rely heavily on IT.
- Advanced – At the advanced stage, integrated planning and collaboration tools are in place. Driver-based planning models are built into systems and the function leverages advanced BI tools.
- Optimized – A fully optimized BP&A function employs integrated and flexible self-service tools as well as automated systems that facilitate real-time collaboration and digital on-demand planning.
Data and analysis
- Basic – Manual data entry, lack of data standardization, undefined business drivers and basic financial reporting are strong indicators of BP&A functions at the lowest rung of maturity.
- Developing – Moderate automation capabilities, descriptive analytics and defined business drivers (though ones that may not be aligned with enterprise standards) typically identify slightly more mature BP&A functions.
- Defined – Organizations that employ driver-based profit-and-loss modeling, standard global data models, diagnostic analytics and enhanced financial reporting are at the mid-level maturity category.
- Advanced – A more advanced BP&A function deploys multi-dimensional analytical drivers, predictive analytics, automated reporting, and tools that enable scenario analysis.
- Optimized – The most mature BP&A functions have integrated three-statement driver-based models, prescriptive analytics and self-service reporting across mobile platforms.
Governance and controls
- Basic – Weak process governance, methodology and outputs as well as ad hoc validation routines indicate basic BP&A functions.
- Developing – At the next level, the ability to identify standards at the business unit level indicates some maturity, even if the organization fails to apply them uniformly or enforce them across the enterprise.
- Defined – At the mid level of maturity, it’s common to find BP&A functions that have some enterprise application of common methods, processes, key performance indicators and reporting, but lack the mindset to improve these elements continuously.
- Advanced – On the upper-end of the maturity spectrum, BP&A functions consistently apply global governance and controls standards.
- Optimized – The most optimized functions possess fully integrated standards and processes.
Prepare for the unknowns
There’s been a sea change in the business risk environment for manufacturing and distribution organizations, with market disruption and threats seemingly at every turn. Manufacturers need to be able to anticipate change and prepare in advance rather than simply react to events. An effective BP&A function is critical to organizational preparedness and should be an integral part of the business strategy. Assessing the maturity and effectiveness of the BP&A function by evaluating its various components is a vital step manufacturing and distribution organizations should take to ensure they are not just in the know but also prepared for unknowns.
Look for upcoming blogs on the people and process components of effective BP&A.
