This post corresponds to the webinar “Full Circle Planning, Cost Management & Profitability in the Manufacturing Industry.” You can access the recording here.
As we are all aware, today’s manufacturing industry faces multiple ongoing challenges, including:
- Changing customer/consumer demands
- Shrinking operating margins
- Ever-changing compliance and regulatory pressures
- Increasingly globalizing economy
- Lowered availability and visibility of detailed information
Now more than ever, manufacturers' focus is not just on growth, but, more specifically, on profitable growth.
Managing Profitable Growth
When it comes to profitable growth and insight into profitability, the first place to start is the consolidated P&L.
But while the P&L offers information on profitable growth, it does not help manage profitable growth. The financial P&L provides limited insight into costs, profits and their underlying drivers, from the perspective of their lines of business, products, customers, markets and channels. Cost bases are imperfect and are limited to legacy standard costing and unstructured cost extracts. Results lack a matching of costs and revenue to manage margins at the same strategic view as revenue.
The Need to Focus on Strategic P&Ls
To address and contend with these challenges, we recommend a greater focus on more strategic P&Ls for the manufacturing industry.
Strategic P&Ls provide insight into both direct costs and indirect costs.
- Direct Costs include costs directly associated with:
- The making of a product or delivery of a service
- Parts for the product
- Labor for Service Delivery
- Costs directly attributed to the selling to a customer or client
- Shipping and handling expenses
- Customer processing expenses
- Indirect Costs include costs that are not directly attributable to the making of a product, delivery of a service, or the selling to a customer:
- Operating costs (e.g., Call Center, Distribution)
- Selling costs (e.g., Sales & Marketing)
- Investment costs (e.g., R&D, Initiatives)
- G&A costs (e.g., IT, HR, Finance, Admin)
- Finance charges for Cost of Capital Employed
Measurement of indirect costs in particular can be difficult.
What Would A Solution for the Manufacturing Industry Look Like?
With all of this in mind, it’s important to look at the big picture when determining what manufacturers can do to attain strategic P&Ls and overcome their challenges?
The ideal solution for the manufacturing industry would:
- Design, support and evolve to an integrated financial process
- Leverage operating metrics and key assumptions to:
- Link business drivers behind financial performance
- Modify drivers and assumptions to plan future performance and attain strategic P&Ls
- Drive accountability to Lines of Business
- Offer a consistent and transparent framework to support indirect cost attribution
- Use integrated applications and tools to support and adapt to changing business processes
- Provide robust reporting to business for transparency into causal factors
A true full-circle planning, costing and reporting solution that aligns and adapts to an integrated financial process includes the following:
- Driver-based revenue planning and departmental expenses leveraging the actual financial data, operational metrics
- Integrated costing capabilities that can allocate indirect expenses to lines of business by leveraging the same actuals, plans and drivers used in the planning process
- Robust and real-time reporting to surface strategic P&Ls by Customer, Product and other Lines of Business
Some Solutions are Ineffective and Unsustainable
Our team at Ranzal has seen many manufacturers attempt to piece together a solution using various combinations of spreadsheets, ERP, custom and packaged applications.
Typically, spreadsheets are the most common ingredient given their flexibility and accessibility. But spreadsheets tend to be error-prone, highly manual/labor-intensive and prone also to risk regarding controls and governance. We’ve also seen customizing the ERP as a common solution-oriented approach, but this can be too expensive, overly IT-centric and can also be somewhat of a “black box.” And lastly, custom applications are slow to adapt, can promote high effort and cost and also function like a “black box.”
Oracle’s EPM as the Foundation for Full-Circle Planning
We recommend Oracle EPM’s packaged applications to be the foundation to configuring the right full-circle planning, costing and reporting solution that avoids the constraints and risks other avenues bring on.
The specific Oracle EPM offerings that support a full-circle planning, costing and reporting solution involve:
- Planning & Budgeting Cloud Service (PBCS)
- Best-in class solution for financial planning, budgeting and forecasting
- Align top-down and bottom-up processes
- Consistency of assumptions, calculations and methodologies
- And many more features here
- Profitability & Cost Management Cloud Service (PCMCS)
- Computes Profitability for Units, Segments and Services
- Pre-Built Framework for profitability modeling: Dimensions, Support for Multiple Cost Allocation methodologies, Validation reporting
- Graphical Interactive Traceability Maps & Dashboards
- Measures, Allocates and Assigns Cost and Revenues via User-defined Rules
- And many more features here
- Tightly integrated with the Oracle EPM Cloud
- Consistent Administration with EPM Cloud Offerings
- Shared Reporting Tools like Financial Reports & Smart View for Office
- Proven Technology Stack
We believe a comprehensive solution focused on a “Technology Trio” of Integrated Business Analytics, or the convergence of: EPM, BI and BD solutions. Experience and results have shown us that this combination provides the tools and answers needed for improved business performance, increased innovation, better vision, and increased business value.