Strategic Corporate Performance Management (CPM) is a type of software that helps organizations to automate financial planning, budgeting, forecasting, reporting, measurement and strategy management processes. Two capabilities promoted by strategic CPM vendors are rolling forecasts and driver-based planning, the latter being an approach that derives financial forecasts from operational activity volumes, or drivers. Global manufacturers have unique requirements for mature forms of these capabilities. However, strategic CPM tools typically don’t support them. This two-part article describes these gaps by focusing on the absence of:

• • • • • • Manufacturing logic, in Part 1 (see below)
          • Prescriptive Analytics, in Part 2 (click here)

The most basic form of this capability gap lies in the absence of manufacturing-specific planning models. These models include logic like bills of materials, routings, lead times, inventory parameters and MRP explosions. From a planning perspective, these models are often maintained at a higher level than those in ERP systems. An illustration of why these capabilities are important for both financial and operational planning is provided in the video below.

This video shows why manufacturing planning model logic can be necessary to quantify how costs, profits, cash flows and foreign currency exposure are affected by operational policies, capabilities and constraints, as well as changes in demand volume, mix and pricing. Some will argue that this manufacturing logic isn’t necessary for financial planning and forecasting purposes. For smaller manufactures, this is true. But for larger ones, the video shows how the absence of such logic can result in processes that are incomplete, inaccurate and slow.

Incorporating manufacturing logic doesn’t mean that detailed bills of materials and routings should be maintained in planning systems. Rather, it entails using higher level ones (often referred to as planning BOMs) that Finance and Operations can share to support integrated planning processes. Without these capabilities, Finance executives ill-equipped to establish the following:

• • • • • • Accurate profit, cash flow and foreign currency exposure forecasting processes
          • Rolling forecasts that are based on operationally realistic driver-based models
          • Financial forecasting processes that are integrated with sales & operations planning
          • Scenario planning processes that support decision making and expose risk

In global manufacturers, complexity levels can reach a point where this basic manufacturing logic cannot fully support these objectives. At this point, what’s required are more advanced models that can quickly and accurately quantify how all aspects of enterprise performance are affected by changes to the physical flow of goods, across supply chains spanning multiple functions and legal entities. These tools are called prescriptive analytics and are described in the 2nd part of this article – click here.

Making improvements to planning and forecasting processes, like those shown above, can be difficult for global manufacturers. It requires modelling capabilities that can cope with the complexities of manufacturing and supply chain operations. However, most strategic CPM tools don’t fully support them.

The key takeaway from this article is that FP&A executives should look outside mainstream strategic CPM tools to establish these capabilities. Further details about this perspective are provided in a separate article entitled, “Finance In Global Manufacturers: Why Strategic CPM Could Soon Be Obsolete – Implications For Selecting Financial Planning & Performance Management Software”.

I welcome comments and opportunities to discuss these points of view. To this end, please feel free to connect with me and join the IBP Collaborative LinkedIn group, a key focus of which is on planning and performance management innovations and interconnected (strategic, financial and operational) issues in companies that manufacture and distribute goods. Also, check out our YouTube Channel for further details about the perspectives contained in this and other LinkedIn posts.