2

PLANNING METHODS AND METHODOLOGIES

Over the years there have been many attempts to help organisations create better joined-up plans. This chapter will include an overview of some of these approaches and ways in which organisations can assess their planning maturity.

PLANNING: WHO, WHAT, WHEN, AND HOW

Planning is a simple concept to understand and yet can be difficult to perform. Part of the reason for this is its multi-faceted nature that, within a business context, can come in a range of types (for example, strategic, operational, financial), functions (for example, sales, logistics, production), and techniques (for example, top-down, bottom-up, driver-based). Plans include different combinations of these areas, depending on the purpose being served. As a consequence, it is easy to lose sight of what each is designed to do and organisations can end up with a mishmash of plans that have little or no connection to what they are trying to achieve.

To get a better understanding of how planning requirements evolve within an organisation, consider the following fictitious company, XYZ, Inc., as it grows into a large, multi-national concern.

Planning Within a Sole Trader

XYZ, Inc. was founded as a re-seller of ballpoint pens. The owner and workforce of four people started out by buying a small range of quality pens from different manufacturers and supplying them to a number of shops within their local area. For XYZ to grow they must ensure that their resale price is competitive with other suppliers and that the anticipated sales revenue covers the cost of buying, marketing, and distributing the pens along with paying wages and other administration expenses.

The planning requirements here are quite simple, and because there is only one person involved, they can be easily modelled in a spread sheet. This will include evaluating discount purchases from suppliers, as well as what discounts could be given to customers should they want to buy in bulk. Output from the model will include a target sales price, the volume to be sold each week, an associated budget for each activity (for example, marketing, travel, and so on), and a cash flow forecast so that adequate funding can be put in place.

Planning as a Small Manufacturer

Business is good. Pen sales increased and they are now sold through a number of wholesalers and large independent shops across the country. However, XYZ is experiencing supply problems in terms of delivery dates and quality, which they feel is vital if they are to retain customers.

To fix these issues and to be more competitive (and more profitable), XYZ believes they need to manufacture some of the pens themselves. This will require an investment in machinery and warehousing capabilities for both components—each pen typically consists of 26 different parts, some of which are purchased, and others are manufactured from raw materials—and for finished stock.

However, these changes will require an increase in the number of outlets they manage in a wider geographic area, and a move to becoming a manufacture, both of which greatly increase organisation risk. This is because the overhead costs to be covered would be much higher, and any miscalculation of variable costs (for example, price) can cause significant losses due to the high volumes involved. There is also a danger of losing customers (and hence revenue) if production does not meet demand, the possibility of wasting resources (which detract from profits) if more goods are produced than is required, and the capital investment for the machinery would need to be funded.

These risks greatly increase the complexity of the planning model(s) required, which now need to cover the following:

• Marketing. This will include a sales forecast broken down into each pen type, along with a budget for the promotional programme.

• Pricing. This needs to be competitive and generate sufficient margin to cover organisational costs and investment. It also needs to evaluate promotional pricing to capture market share.

• Optimum production levels. Management will need to decide which pens to manufacture, at what time, and the levels of stock to be held. This should be linked to the sales forecast.

• Raw material purchases. This will include what materials to buy, from which suppliers, and the levels of stock to be held. This will need to be linked to production levels, but XYZ may want to take advantage of any special offers that suppliers are willing to give.

• Warehousing and logistics. This cover the best way to deliver finished products to customers, which could either be by their own transport capability or via a third-party carrier, depending on location.

• Cash flow and sources of funds. This will need to show how much cash is required by the operation, and how any investment is to be funded.

It is unlikely that all of the preceding risks can be covered by one single model, and that multiple people will need to be involved. However, as the organisation is still relatively small in the number of employees and that they are all based in a single location, using a spread sheet to plan is still possible, although much care needs to be taken when setting up formulae, as an overlooked error could prove catastrophic.

If multiple spreadsheet models are used, then linking them becomes an issue. For example, cash flow will need to take into account sales forecasts by customer and the payment for raw material purchases, both of which could come from different planning spread sheets. As a consequence, the order of how the plan is constructed needs to be carefully managed. For example, production planning needs to be re-evaluated each time a sales forecast is received, and marketing promotions need to reflect what can be produced along with the lead times required for ordering materials.

Planning as a Listed Company

XYZ continues to do well. As part of its strategy for growth, it intends to expand the product range to include complementary stationery items such as pencils, rulers, rubbers, and ink. The management team also plans to expand to multiple locations throughout the country, with some having local manufacturing capabilities. This expansion will be partially achieved through acquisition, funded by becoming a public company and raising capital by selling shares on the stock exchange.

Planning has now become a more extensive process that not only has to cope with the new products and sites involved, but also with providing a clear, realistic strategy that communicates to investors how and when financial returns will be generated. As a result, the planning process includes all of the planning activities previously described, plus

• reviewing the market for writing products so management can decide where growth opportunities lie and how XYZ can take a major share (strategic planning);

• analysing what changes will be needed to the current operation in order to achieve the predicted market share (operational planning);

• assessing how much additional funding will be required for the planned infra-structure (capital planning);

Once these items have been agreed on, then the management team can then decide how

• it wants to allocate its resources (financial and human resources planning) to make the revised operation a reality; and

• how best to optimise its production and logistic capabilities (sales and operational planning) to maximise profitability.

As the plan gets implemented, it is now vital to

• track actual and forecast performance to see what is being achieved (forecasting).

• identify and mitigate risks that could derail the plan (risk management).

• reassess priorities so that adjustments can be made to either keep the plan on track or improve its performance.

As can be seen from this XYZ example, planning is now a multi-user activity that encompasses a range of tasks that are way beyond the capabilities of a spread sheet.

Planning as an International Group

XYZ has now made the big time. With help from the introduction of e-commerce and continued expansion, the company has gone international with a full range of stationery products. Because of this and the need to increasingly develop trade partnerships, decision making has become unwieldy. In response to this challenge, the company has been split into different legal entities so that each one can focus on the needs of individual countries and markets.

Planning has also become a challenge as it not only needs to take into account local trading conditions, but also has to include corporate requirements of tax planning, statutory consolidation, and regulatory reporting where required.

Further still, XYZ is now a recognisable brand and is easily exposed to risks, such as an attack by ‘start-up’ companies (like itself in the early days), who can provide a more personal service to customers, or by bad press on social media sites that dictate what is ‘in’ and ‘out’ of fashion. It will also need to act in a socially responsible way that smaller competitors can often ignore.

The main issue for XYZ is how do they plan and act like a single company when their planning activities are so diverse? How do they co-ordinate the different functions across geographic boundaries in a market that is continually changing? In this respect they are not alone.

THE RISE OF MANAGEMENT FRAMEWORKS AND METHODOLOGIES

As organisations (and the business world) become more complex and involve many people, planning must become better disciplined and organised. Every facet of the business needs to be considered, whether that means sales and operations, logistics, human resources, or tax. The company must be organised so that plans are complete and assembled in a logical sequence. There are dependencies. For example, there is no point in planning cash requirements unless sales forecasts and supplier orders are known with some degree of accuracy. To do this requires an analysis of market trends, competitor activity, and production capacity (and cost) of our own set up. Each part of a plan has the potential to impact another, and some method is needed to conduct planning in an orderly and efficient manner.

To help with this task, a range of management tools have been developed over the years that can be categorised as frameworks, methodologies, or processes. Figure 2-1 depicts examples of these.

Figure 2-1: Sample Management Tools for Dealing With Complexity

For this book we are using the following definitions to distinguish them:

A framework is a structured set of ideas and principles that provides direction on the preferred way of doing something. It is not prescriptive, but is more a set of guidelines that can be customised to suit a particular need or organisation. Examples of these include Risk management, Project management, and Capital asset management.

There are literally hundreds of management frameworks designed to help manage complexity. A recent LinkedIn discussion group listed over 940 as of February 2013, with the count rising on a weekly basis. Typically these frameworks are associated with a specific business area, as can be seen from the examples given, and so they can be considered complementary to the framework being described in this book.

A methodology by contrast is a set of practices that can be used to achieve a particular goal. They are typically more rigid and have a defined, proven set of rules, activities, and deliverables to solve a specific problem. Examples include the Balanced Scorecard, Performance Prism and Six Sigma.

Management methodologies tend to have their followers. An organisation will typically choose one and then adhere to it like a religion. Quite often the methodology will be tailored to the organisation based on their beliefs of what works for them. In the context of this book, methodologies fit within the planning framework as they tend to focus on improvement strategies rather than all aspects of operation.

Business processes are the activities an organisation does, typically across the functional boundaries of the organisation chart, to serve its purpose. These can be broken down into smaller tasks that are generally repeatable and could be automated if required. Examples include Purchase order processing, Invoice to cash, and Sales order to delivery.

Many processes, such as those that deal with payments and receipts, tend to be common across organisations and are carried out according to either a legal framework or as prescribed in the organisations’ operating manual.

To enhance any framework, methodology, or process, management schools and leading business consultants have all contributed articles on how these should be conducted. They are typically grouped into popular topics such as strategy execution, change management, leadership, performance measurement, and so on. It is no wonder that there is confusion as each article seems to focus on a particular topic that expresses that their way is best, but leaves the reader to figure out how to put them all together.

Of course it could be argued that this book is coming up with yet another framework, methodology, and process, but we as the authors do not agree. Our approach is to learn from history and to set out what we believe is important for organisations to plan. To go with this we provide examples of how good practices, whether they are framework, methodology, or process based, can be implemented.

Before we do that, let’s first look at some of the more popular management methodologies that have been shaping the way organisations plan today.

POPULAR MANAGEMENT METHODOLOGIES

Budgetary Control

Budgetary control is probably the most widely used method to plan and control organisational performance. It has been with us for nearly a century. In his book, Budgetary Control, published in 1922, James McKinsey put forward the concept of budgeting as a management framework—a concept that has dominated management practices for most of the 20th century. McKinsey stated that to effectively control an operation, it was necessary to set standards of performance, which should be described in the budget. As well as setting the standard, budgets were also seen as the means of co-ordinating activities between departments.

As Marvin Bower, former chief executive of McKinsey &Company, wrote in his book, Perspective onMcKinsey, the concept of their top-management approach was based on the budget as ‘a statement of policy, expressed in terms of future accounts delegated to units of an organisation’.¹

Today, budgeting is still used as the main method of organisational control. Its strengths are that managers are restricted to spending levels that are not to be exceeded, and there are numerous technology systems that can streamline the process of producing the budget. However, results from the survey shown in Appendix I would indicate that budgetary control is increasingly under attack for a number of reasons:

1. Absence of context. Plans are based on underlying assumptions that are often outside of the control of the organisation. If assumptions made about market growth, price fluctuations, and actions of key competitors are wrong, then any plan based on them will be misdirected. The issue is that these assumptions are rarely tracked or associated with the approved budget amounts, and when an assumption is no longer true, its consequence is lost and the amounts become meaningless.

2. Inappropriate timing. Plans are often seen as being financial in nature that last for a set number of months, typically 12. However, the markets in which organisations operate are continually changing and usually at a faster pace than can be predicted with accuracy at the start of the budgeting process. Some items such as fixed interest rates may be known for years in advance, but other items such as raw material unit cost may only be known for a few months in advance. Trying to put all of these different items onto the same planning time-frame is both unrealistic and diverts attention away from what is really important.

3. Irrelevant content. Plans are typically based around the financial structures and accounts found in an organisation’s general ledger system. Although these structures are good for recording transactions, they are inadequate when it comes to describing actions and initiatives that are supposed to be linked to strategy. Planning and budgeting are not purely financial exercises. Their purpose is to help the organisation allocate resources and assets to achieve strategic goals, but all too often that strategic content is either vague or missing.

4. Inadequate capability. For planning to be of value, there must first be a process that allows management to explore alternative courses of action and to assess their impact on achieving the organisation’s mission. Once those alternatives have been carefully evaluated, the best combination of activities can then be selected and resources allocated as appropriate. Unfortunately, planning is more like a guessing game where managers try to come up with a set of numbers that they think will be acceptable. These numbers are then ascribed to departments rather than projects or initiatives, mainly because the software solution being used does not allow a strategic focus. If the numbers are not acceptable, senior managers will arbitrarily adjust them so that they do add up to their own guess or expectations. However, who knows if any of these numbers make sense in terms of implementing corporate strategy.

Many organisations recognise that budgetary control falls far short of what they need to manage performance, but few companies seem willing to move away from them.

Quality Management Movement

The aim of the quality management movement is to continually improve the current operations of a business. It does this by analysing defects and coming up with ways to reduce or eliminate them. The methodologies associated with the movement all have their roots in manufacturing and include the following:

• Total quality management (TQM) started about the same time as budgetary control, and involved applying statistical techniques to detect and fix problems on production lines to reduce the number of faulty products. These techniques were developed further by William Deming, Joseph Juran, and Armand Feigenbaum during the 1940s and were systematically applied to Japanese manufacturers during the 1950s. In addition to training management, workers were also encouraged to meet regularly to discuss and suggest ideas on how things could be improved. These became known as quality circles and ensured that the methodology was pushed down to all staff levels.

Because of the success of Japanese companies in the 1980s and 1990s, organisations in the West started to take a closer look at improving quality. This launched a range of quality-focused strategies, programmes, and techniques that became the focus for the TQM movement.

TQM is defined as ‘management philosophy and company practices that aim to harness the human and material resources of an organisation in the most effective way to achieve the objectives of the organisation’. It places customer satisfaction at the centre and looks at how all of the processes in the organisation can better work together in serving them.

• Six Sigma came out of Motorola in the 1980s and is based on the tools they developed to improve manufacturing. It became famous after Jack Welch introduced the techniques into General Electric during its period of rapid growth and profitability. The term sigma has its basis in statistics and refers to the deviation from perfection, the idea being that if you can get rid of the deviations, then you have perfection. The sixth sigma is a defect level of less than one in 99.99966 percent.

What sets Six Sigma apart from TQM is the approach, which looks at improving all of the operations within a single business process. There is a defined set of management and statistical methods overseen by teams of people that go under the dubious titles of champions, black belts, green belts, orange belts, and so on, who are experts in these complex methods. Improvement initiatives are set up as six sigma projects that follow a defined sequence of steps with quantified value targets (for example, process cycle time reduction, customer satisfaction, profit increase).

Like any other methodology, those related to quality management are not perfect. There will be issues that can derail the spirit of what the methodology is trying to achieve, including

• Quality versus results. Focusing on improving quality does not necessarily produce profits. As we have seen, the impact of social media and competing with organisations that have a fundamentally different business model can invalidate the output of any improvement initiative.

• Focus on short-term goals. Quality improvement is a long-term process. Organisations that drive and reward staff on this month’s, quarter’s, or year’s goals will never be able to implement the practices required in an efficient and effective manner.

• Alignment with strategy. Quality improvement is the total strategy. Anything else is outside of the methodology and can adversely impact the goal of any existing improvement project.

• Staff motivation. TQM and Six Sigma are surrounded in technical terms and practices that require months, if not years, of training to perfect. As such this generates elite teams whose presence can cause those not involved to feel devalued and their expertise ignored.

• Complexity. TQM and Six Sigma techniques include a variety of analytical tools such as fish bone diagrams, the Define, Measure, Analyze, Improve, Control (DAMIC) improvement cycle, measuring Defects Per Million Opportunities (DPMO), and Pareto analyses. The volume of data required is often immense and finding suitable and reliable sources can be a real problem.

Lean Management

Traditional management is often results oriented. Did we achieve the target? Did we stay within budget? Is our performance better than competitors? The only trouble is that when these objectives are achieved, people tend to relax as if the company has made its goals. But this can lead to a situation where resources could have been put to better use, or whose cost could have been avoided altogether.

Lean management is a companion of the quality movement previously mentioned. Its focus is to provide value to customers and ensure that the processes put in place to deliver goods and services, continually add value. Lean management also promotes minimising or eliminating all forms of waste.

The term lean was coined by a research team headed by Jim Womack, Ph.D., at MIT’s International Motor Vehicle Program. It was used to describe Toyota’s business during the late 1980s, which at the time was considered to be one of the best at generating customer value.

To be a lean organisation is to have adopted a new way of thinking about the way the business is managed. This changes the focus of management away from vertical departments and assets to one that optimises the flow of products and services through the organisation’s business processes (that is, how raw materials are acquired and turned into added-value products for customers).

As a consequence, lean thinking is claimed to

• eliminate waste along entire business processes instead of at isolated points.

• create processes that need less effort, space, capital, and time to make products and services at less cost and with fewer defects, compared to traditional management systems.

• make companies more responsive to changing customer desires for high variety, high quality, low cost, and short delivery lead times.

• enable information management to become simpler and more accurate.

Lean management techniques are being used by organisations in all industries and services, including healthcare and governments. Not all choose to use the word lean, but label what they do as their own system, such as the Toyota Production System or the Danaher Business System.

The main issues around the methodology is that it is often seen as a way to make cuts in costs that can often destroy an organisation’s value chain. It also requires a complete transformation of the way in which the business is measured and managed, something that cannot be achieved in the short-term.

Balanced Scorecard

The Balanced Scorecard is one of the more modern management methodologies around, although it was introduced over 20 years ago. It first appeared as a series of articles by authors Robert Kaplan and David Norton in the Harvard Business Review in the early 1990s, although it was based on the work of General Electric on performance measurement reporting in the 1950s.

The aim of the Balanced Scorecard is to continually improve results by providing feedback on internal business processes and their link to external outcomes. It is promoted as a management system and not just a measurement system. By adopting the methodology, it is hoped that organisations will be able to clarify their vision and strategy, which can then be translated into action.

Two of the more notable facets of the Balanced Scorecard include the following:

1. Perspectives. The methodology views organisations from a number of linked perspectives. The more common being the following:

   • Learning and growth. This includes the activities that help the organisation to develop in meeting customer needs both now and in the future.

   • Business processes. This includes activities on how the business operates in meeting customer needs.

   • Customer. This includes the activities that lead to satisfied and loyal customers.

   • Financial. This includes how the organisation is funded and the financial rewards that emanate.

   Each perspective has a series of measures that are used to plan and report performance.

2. Strategy mapping. Strategy maps are a visual representation on how the organisation generates value They link strategic objectives in each perspective with measures in the form of a cause and effect chain, with the perspectives determining what measures contribute to meeting the overall goals of the organisation. For example, a profit-motivated company will have the financial perspective as its goal, whereas a not-for-profit organisation may see the customer perspective measures as the goal

Given that the Balanced Scorecard methodology was developed at a time when executive information systems and supporting technologies were making real headways into an organisation, there are many software tools that claim to provide management support. However, many of these appear to be limited to ways of generating and disseminating scorecards throughout an organisation.

The issues caused by the Balanced Scorecard include the following:

• It is often seen as just a reporting system and not a planning system.

• Quite often the measures used are backward looking and either not directly related to corporate objectives or they are outside of user control.

• Measures are rarely balanced across the different business perspectives. The financial perspective tends to be overly represented, mainly because of the amount of available data or the one of highest interest to the executives.

• Targets are generally negotiated rather than what is required in order for the business to survive and thrive

• There is no mechanism for improving organisational processes

Beyond Budgeting

Beyond Budgeting is the latest of the methodologies described here, although it is more of a movement with a set of principles than a set of prescribed rules. Those who adopt beyond budgeting concepts tend to choose the ones that they think will work best for them. Despite the title, and the mantra chanted by some advocates that they have ‘dumped the budget’, the method still retains budgets. What has changed, though, is that the traditional budget process has been replaced with a more dynamic and adaptable way of allocating resources that focuses on delivering organisational value.

The Beyond Budgeting Round Table (BBRT) was established at the turn of the century and was brought to a wider audience in an article published in 2003 in the Harvard Business Review. Titled ‘Who Needs Budgets’, the authors Jeremy Hope and Robin Fraser discussed the problems with traditional budgeting and asked why organisations still cling to inflexible planning practices. It then went on to cover the beyond budgeting principles.

For them, beyond budgeting means moving beyond command and control and towards a management model that is more adaptive and empowering for employees. It is about rethinking how organisations are managed where ‘innovative management models represent the only sustainable competitive advantage’. They go on to say that it is also about ‘releasing people from the burdens of stifling bureaucracy and suffocating control systems, trusting them with information and giving them time to think, reflect, share, learn and improve’.

The common principles of the methodology have been set as follows:

• Governance and transparency

○ Values. Bind people to a common cause, not a central plan.

○ Governance. Govern through shared values and sound judgement, not detailed rules and regulations.

○ Transparency. Make information open and transparent, do not restrict and control it.

• Accountable teams

○ Teams. Organise around a seamless network of accountable teams, not centralised functions.

○ Trust. Trust teams to regulate their performance, do not micro-manage them.

○ Accountability. Base accountability on holistic criteria and peer reviews, not on hierarchical relationships.

• Goals and rewards

○ Goals. Set ambitious medium-term goals, not short-term fixed targets.

○ Rewards. Base rewards on relative performance, not on meeting fixed targets.

• Planning and controls

○ Planning. Make planning a continuous and inclusive process, not a top-down annual event.

○ Co-ordination. Co-ordinate interactions dynamically, not through annual budgets.

○ Resources. Make resources available just in time, not just in case.

○ Controls. Base controls on fast, frequent feedback, not budget variances.

The BBRT (www.bbrt.org) provides resources and case studies on organisations that have embraced the beyond budgeting concepts and the success they have achieved.

The issues with beyond budgeting are related to changing the culture of an organisation. It is assumed that everyone is working for the good of the organisation, when other pressures such as rewards and ‘hitting targets’ encourage people to take short cuts or ‘fudge’ the results. This is true of any methodology but more open to abuse with beyond budgeting.

PLANNING AND SUCCESS

In reviewing the planning needs of our company outlined at the start of this chapter, with the aims of management methodologies, it would seem that the two should go hand-in-hand. After all, XYZ’s management wants to be able to better plan (that is to connect its resources with maximising its outputs) and be more reactive when things change. The promise of a management methodology is to facilitate that planning and review process by offering a set of practices that, if followed, will ensure a more reactive process tied to the implementation of strategy.

However, few organisations seem to achieve the methodology promise. It is interesting to note from our own survey that despite most organisations’ claims to use a methodology, most have fundamental issues in the linkage to strategy. In general, there is really nothing wrong with the concepts of each methodology previously described. They are all a product of their time and strive to fix glaring weaknesses in an organisation’s management processes. They all have good points as well as weaknesses inherent in their structure. If they did not have weaknesses, then one of them would triumph over the others and stand the test of time. In our experience, some methodologies tend to fail for the following reasons:

• The need for a quick fix. Quite often management will look to a methodology as a way of fixing a problem in a short period of time. However, quite often what needs fixing is the culture of the business or organisation, and that takes time. It is easy to announce the introduction of a new methodology and to arrange training classes, but to get the principles engrained in every manager’s mind in a way that changes their way of working is far from easy. Change requires a consistent message from senior management, clear communication on why change is necessary, and unwavering support for the principles being established. Changing course part way through the implementation of a methodology is guaranteed to bring failure to any new method being introduced.

• Hype over substance. Organisations may choose to adopt a methodology to solve an issue that cannot be defined or solved. For example, having a vague strategy that cannot be measured is not going to be fixed by introducing a balanced scorecard. Similarly, consultants quick to see an opportunity may contribute to the propagation of hype by promising unrealistic savings or goal attainment.

• Inappropriate systems. In this case, systems refer to the technology solutions designed to support the methodology. It is not uncommon for spread sheets to be promoted as the underlying solution, but they are far from ideal as an enterprise wide system. Additionally, most systems focus on just one aspect of the methodology, such as the scorecard. These methodologies require links to budgets and forecasts, and they involve both financial and non-financial key performance indicator (KPI) measures, which quite often are supported in different, unconnected solutions.

• Lack of success. There is an underlying belief that implementing a methodology will guarantee success. Similarly, there is also a belief that a lack of success means that the methodology has failed. Neither are true. Organisations can ‘get lucky’ despite the methodology being used, or they may just fall victim to catastrophic circumstances, none of which could be predicted or managed by the adopted management system.

The aim of a management methodology is to bring management together around the topic of managing performance and that is it. Success is dependent on the right information being displayed, at the right time and in making the right business decisions. Oh, and a bit of luck is helpful.

However, it is unlikely that an organisation can jump from where it is today into a fully-fledged, continuous planning process. It will require a number of smaller incremental steps that gradually introduce changes over time. Because not everyone is at the same stage, we have developed the following maturity model that describes the different levels of planning being exhibited within organisations today. These different levels can then be used to assess the next steps in developing the planning process.

PLANNING PROCESS MATURITY

Planning Objectives

The overriding factor in developing an effective (and successful) planning process is to assess the level of maturity required by the organisation. Planning maturity can be defined as two sets of objectives that an organisation should desire to achieve: (1) those that relate to the outcome of process itself and (2) those that relate to the behaviour of those involved. These planning objectives are outlined in figure 2-2.

Some of these objectives will be easy to achieve, depending on the complexity of the organisation. For example, in an organisation containing just a few employees that work closely with each other, the behaviour objectives of ownership, accountability, and communication do not require much consideration. These can be assumed to occur as part of a conversation and without recourse to the development of a specific technology. However, in a large organisation containing large numbers of people, spread out over broad geographic areas, these same objectives need to be carefully considered and achieved through the careful design of a supporting planning system.

Figure 2-2: Planning Maturity Objectives

As a result, these objectives become more relevant to the design of planning solution as organisations exhibit more of the following complexity characteristics:

• Large scale. Many and diverse products, services, customers, employees, vendors, purchased parts, and commodities.

• Variability. In demand volume, product and customer mix, inventory and service levels, product pricing, and input costs.

• Rapid change. To products, suppliers, services, processes, projects, operational constraints, and organisation structures.

• Organisation structure. Multiple legal entities, business units (BUs), channels, geographies, and product groups.

• Interdependence. BUs share customers, suppliers, production, and back office services, thereby obscuring profit drivers.

• Globalisation. Lead times across global supply chains, inventory levels, and material availability.

The more that these objectives and complexity characteristics apply to an organisation, the more likely it is that they should consider mov ing to a more mature planning model.

Planning and Forecasting Maturity Levels

The maturity of planning and forecasting processes is driven by the level of model integration. As models become more integrated, they support faster processes that yield greater forward visibility and reduce uncertainty. Figure 2-3 outlines two broad categories that comprise our maturity model: fragmented and integrated planning approaches.

Figure 2-3: Fragmented and Integrated Planning Approaches

These approaches can be further broken down into five stages of planning and forecasting maturity: basic planning, financial integration, partial integration, matrix planning, and dynamic planning. A key feature that separates each of these stages is the type of driver-based planning approach that it employs. Being driver-based means that variables affecting performance or resources can be related to one another. The dependencies between the variables can be modelled. For example, production costs could be related to volume made, which in turn could be related to sales success, and so on. By entering a few numbers, the planning model can make use of these relationships to predict future results. As driv er-based planning becomes more mature, organisations are also able to support more sophisticated scenario planning.

Basic Planning

At this stage, organisations employ traditional bottom up budgeting approaches that are augmented by very basic models. These models are typically based on financial relationships where a planning line is expressed as a percent of another line item or period. The following are examples of this:

• Sales are expressed as a percent increase or decrease over the prior year.

• Cost of sales is expressed as a percent of sales.

• Expenses (for example, salaries and travel) are expressed using either approach.

• Cash flow is expressed as percent of receivables and payables.

The following are some the classic characteristics of these models:

• Any analysis that supports them is often maintained in offline systems or spread sheets.

• Operational reconcilliation is done on an ad hoc basis, if it is done at all.

• There is a loose connection between objectives, targets, budgets, and forecasts.

The effectiveness of these models depends on the complexity of the business. For smaller and less complex organisations, they may support all of the analysis required. However, as complexity rises, these models are not as useful because they are not accurate and they do not support consensus.

Financial Integration

The financial integration stage is one where organisations use operationally-based driver models that estimate how costs behave as volume and revenue changes. Key features of this approach include the following:

• The role of finance is to determine which drivers best quantify the impact of changes.

• This role often entails summarising operational planning models into simpler financial ones.

• The models are typically expressed in terms of cost per driver or per unit of output.

• Examples of drivers include the number of orders, customers products, or shipments.

These models are ty pically developed for financial planning and cost estimating purposes only. Activity-based costing (ABC) is the accepted method to proportionately trace the consumption of resource expenses (for example, wages, supplies, power) to the outputs (for example, product costs) using a cause-and-effect relationship. ABC provides per unit of output level cost rates needed to multiply times forecasted unit of output volume quantities to calculate projected resource capacity expenses. Although operations provide input into developing the models, the level of granularity of ABC’s activity cost pools are typically adequate for strategic insights by having high cost accuracy, but may not be sufficiently detailed to enable operational managers to make operational decisions.

Gary Cokins, co-author of this book, has written a popular book, Activity-Based Cost Management: AnExecutive Guide, that explains how to construct, implement, and apply ABC for strategic and operational analysis, projections, and decision support.

At this stage, many organisations start using balanced scorecards and other performance measurement approaches. However, target setting, budgeting, forecasting, and scenario planning processes are only loosely connected. This is primarily because the planning models are not sophisticated enough to connect KPI targets to resource requirements.

In organisations that experience little change or variability, these models can be very effective. However, more complex ones often experience the following:

• Maintaining models can be time consuming, often resulting in models that are inaccurate.

• Embedded operational assumptions are often only valid across a narrow range of scenarios.

• Models often have to be manually updated to examine the impact of outlying scenarios.

• As a result, organisations can only run a limited number of scenarios, thereby exposing them to potentially unidentified risks.

• Scenario planning can be costly, as significant time and effort goes into validating and reconcilling financial and operational scenario planning efforts.

Partial Integration

At this stage, finance and operations start sharing models and processes in parts of the organisation. Other parts continue to operate processes at level 1 and 2. They do this because it

• reduces the cost of processes and systems.

• results in greater clarity because there is only one plan.

• supports more effective scenario planning in these parts of the business.

• provides greater forward visibility into risk as a result of scenario planning.

• improves process speed by eliminating non-value added activities.

This stage of planning maturity can take many forms. Demand planning is a classic example of where a single model can be used to support more effective processes. The manufacturing sector has led the way in leveraging such integrated models that, at a basic level, provide the means to connect the number of units sold to revenue and average selling price. Beyond that, they enable organisations to

• establish more collaborative demand and revenue planning processes.

• automate the analysis of volume and mix variances on revenue and average selling price.

• support a more effective rolling forecast process that adapts faster to change.

• co-ordinate new product development and promotion planning into demand and revenue forecasting.

Manufacturing has also led the way in developing models that integrate planning of direct costs or cost of sales. Planning bills of materials are used to define the commodities and components of the products they sell and how they are made. This results in a process that simultaneously forecasts

• cost of goods manufactured and sold, together with inventory balances.

• production capacity requirements, together with capacity constraints.

• commodity purchase requirements and related cash flow impact.

• purchase price and production cost variances from standard.

From an indirect perspective, integrated models translate KPI targets, along with departmental volume into the following:

• Staffing requirements

• Departmental budgets and forecasts

• Productivity (cost per outcome) targets

Multiple planning models and systems still exist for organisations at this stage of maturity.

Matrix Planning

At this stage of maturity, organisations shift from traditional functionally-based planning approaches to more horizontal cross-functional and outcome-based approaches. To support this, finance and operations share models and processes across the organisation. The following are key features of this stage:

• Profit and cash flow forecasting is explicitly linked to KPI and revenue targets

• Plans are expressed from both functional and process perspectives

• Budgets and forecasts are expressed in relative terms (cost per output)

• Planning and target setting cuts across functions and BUs

One of the key reasons that organisations shift to such an approach is to optimise performance across functions and BUs. In so doing, they are also recognising the limitations of traditional budgeting processes because they reinforce functional silos and thereby sub optimise performance.

Dynamic Planning

Organisations employ highly sophisticated models that integrate all aspects of planning and forecasting at this stage of maturity One of the primary motives for doing so is to enable organisations to more effectively manage complexity, uncertainty, and risk, a key component ofwhich is more effective scenario planning

These organisations also conduct integrated scenario planning. This includes the ability to simultaneously evaluate the impact of different scenarios on all aspects of performance Four specific capabilities arise at this level of maturity:

• Dynamic models that self-adjust to changes in volume and mix

• Forward looking (activity-based) product and customer profitability and cash flows

• Capacity constrained cash flows, whereby models forecast capacity constraints, along with their impact on cash

• Project and portfolio return on investment where by models quantify the impact of operational changes on the cash flow of project portfolios

As mentioned earlier, the levels of planning maturity described can be used to assess where an organisation is today and the level at which it needs to be

As we come to the end of this chapter, we recognise that the reader can be easily overwhelmed by the array of methods that all seem to point to an idealistic approach to planning. It’s an approach that seems to be devoid of internal politics, where everyone is working for the good ofthe organisation, and there is ample time in which plans can be carefully crafted. In the last part ofthe chapter we looked at the levels ofplanning maturity that organisation’s achieve, irrespective oftheir chosen management methodology.

The reason for doing this is to show that planning is a complex topic and more than just predicting a set of numbers on future performance. However one thing that is missing is in explaining just how does an organisation go about putting a more focused plan together? Well that’s something we will do starting at Chapter 4 ‘Business Planning Framework’, but before then we need to cover the role of planning technology which is the subject of the next chapter.

Endnotes

1 Marvin Bower, Perspective on McKinsey, 1977.