Integration of Finance and Operations

Recently, an operations executive expressed his frustration about the management’s inability to manage their company in these hard economic times. He complained about limited integration between Finance and Operations affecting their decision making. The CFO runs business models in Excel spreadsheets, but the models are not tied to the operations systems. The scenarios cannot be validated for being operationally realistic. Nevertheless, they set the expectations for the operations.

Without a “reality check” the decisions become surgical mandates. If the CFO demands a 10% drop in inventories, operations manager cannot evaluate its consequences on the customer service. They don’t know whether they could afford even more cuts. Or, what would be the right level of inventory for the current business environment. Such single dimensional approaches often result in unintended consequences elsewhere. More importantly, managers lose the real opportunities of making a number of smaller changes to achieve strategic business goals.

On the flip side, the value of an operational improvement is not known until the end of the quarter when financials accrue. The lack of integration hampers forward looking projections of financial KPI’s. Impact of the proposed initiative is unknown without implementation. Some initiatives succeed while others don’t. In reality the situation is even more troublesome. With many on-going initiatives it is difficult to isolate the successful ones.

On the surface it sounds like a typical silo mentality that exists in most companies. The CFO office does their model and throws a mandate over to the operations. Operational managers do not know the reason why they are being asked to do so. They have no opportunity to contribute in developing a solution to meet real objectives. It being a mandate they work busily to meet without understanding the full situation.

Fortunately, the situation is usually not this critical. The operations managers do talk to the financial managers to understand the situation. This is, however, a partial solution only. Both are talking with their respective expertise but without real facts and data. Without the integrated analytical capability neither can substantiate their proposals with any real analysis for the expected “future” environment. The product mix, volumes, and a whole lot of other variables change frequently over time. If the goal is to reduce overall cost then probably there are many options available that must be considered along with inventory reduction to make it work. Single variable approach is dangerous and often results in moving costs around the strategic business unit netting little to nothing on the bottom-line. This is a far too frequent occurrence in continuous improvement programs.

There are many who believe that such problems can never be solved with any mathematical analysis. They argue no matter the sophistication of mathematics it cannot capture the complexity of the real situation. In my humble opinion this is an uninformed position. Indeed there is no single formula or software that can solve this problem of integrating process and finance. But, it can be achieved by integrating problem solving and mathematical analysis tools in tandem. Rudimentary mathematical analysis such as OEE calculations or static capacity analyses are inadequate for the job.

Commonly used continuous improvement approaches, and even the mentality, are not sufficient for the required restructuring. It requires holistic thinking, which is different from “divide to conquer” approach of continuous improvement. It demands a systematic approach and expertise to identify the correct set of parameters to change simultaneously. You have to create many such scenarios before finding the most feasible solution with minimum risk. Detailed dynamic process, resource requirements and financials analyses with “appropriate” mathematical rigor provide the basis for comparison among scenarios. It’s an iterative process that results in a collaborative solution to meet the strategic business goals. That’s what the discipline of risk management is all about.

We have been studying this problem for over 20 years and have confronted this problem as senior managers and consultants in many different industries. Our consulting business is solely dedicated to this very single issue of connecting operations and financials to strategic business goals. We have developed a set of methods and tools called Profit Mapping focused for rapid restructuring. We invite you to learn more about them at www.menawat.com.

Anil Menawat

The Winds of Change

A business can be like a hanging mobile. Pull on any part of it, and the whole thing will go into a dance until some kind of equilibrium is restored. That's just what happens when you take one part of a production process and change it. We typically focus on that one part, but all the other parts begin to dance around it, sometimes with unexpected results.





Likewise, if the wind comes along, every part of the mobile starts changing all at once. It’s like that now for businesses everywhere, as shockwaves of the global banking crisis reverberate around the world.

Because we’re powerless over external factors, it’s now vital to optimize the profitability of the processes inside our businesses; and we can’t do that without looking deeply into their dynamic interactions. Tools like Value Stream Maps, and measurements like Overall Equipment Effectiveness served us well as a compass might an explorer or a ship’s captain at sea. But now we’re navigating narrow streets and alleyways for survival itself and we need something with the pinpoint accuracy of a GPS if all’s not to be lost. In short we need a way to put a financial value on the disposition of every workflow, asset, unit of labor, utility, raw material and consumable for every conceivable situation…and be able to quickly what-if the whole thing as each new situation presents. Impossible? Up until recently, yes.

Now, it is possible for a company of any size to embrace this level of complexity. You need Profit Mapping’s analytical engine, PAL and a way to hook it up to your process. That connection is made with a Business Execution Profile from which emerges your Process and Policy Map, (a mechanism we’ll talk a little more about another time). For now the message is this. The technology is here to turn the current situation into an unprecedented opportunity. Thousands of companies are going to fail in the near future, but yours doesn’t have to be one of them. Instead you can position it not just to survive, but to absorb the huge amount of additional business that will become available when the shakeout is over. Business you couldn’t win in any other circumstances. But to do it will take a level of agility few companies currently possess. Profit Mapping can give you that edge. Your time has arrived, seize the day.

James O'Sullivan