I was chatting with the
So why is it that today’s financial planning solutions don’t work for operations? Here are some reasons.
1. Not all departments are created equal. The forecasting task of the manager of a non-manufacturing department is usually straightforward. A
2. Reporting requirements. Managers of non-manufacturing departments report results to
3. Planning cadence. FP&A operates on a preset cadence. My friend’s company, for instance, closes its books monthly, reforecasts quarterly, and budgets every year. Ops Finance has to adhere to the FP&A schedule, but also respond and replan due to external factors, such as commodity price and capacity variability.
4. Planning complexity. Cost center forecasting and budgeting is the bread and butter of today’s financial planning systems. While they’re well-suited for that — department rollups and allocations along tidy hierarchies — they fall short when it comes to calculating COGS from fully burdened product costs. That’s because the latter depends on operational detail housed in hairy structures like BOMs, which can’t be modeled in run of the mill financial planning tools.
5. Collaborative planning. Managers of non-manufacturing departments can usually handle their forecasts and budgets on their own. Collaboration in that context is a matter of getting the department plan approved up the chain of command. On the manufacturing side, however, planning is often arranged by commodity or product line, which can span departments. So to assemble a plan for a single department often requires inputs from many different people in different functions.
Upshot
In this light, my friend’s sentiment makes perfect sense. To him and his team, tools for cost center planning benefit consolidation but do little to help his team cost products. It’s also worth noting that this arrangement, which we’ve seen in companies big and small, forces FP&A to treat COGS as a “black box.” Among other things, this makes it next to impossible for FP&A to understand and explain variances in what is often the lion share of corporate spending.
Matt Shore, CEO, Upper Chord, Inc.