Speak financially, get results: Revisited

From the July-August 2025 edition of Supply Chain Management Review.

July-August 2025

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I recently attended a New England Chapter of the Institute of Business Forecasting and Planning (IBF) presentation, given by a seasoned planning manager from a local Boston-area based company. She was formerly at a large, well-known Midwest company and gained plenty of experience working on its sales and operations planning (S&OP) /integrated business planning (IBP) process team. She moved to
the Boston area to implement a new S&OP process at the local company.

While successful in implementing it there, she said she was struggling a bit to get timely input from the finance department with respect to whether or not finalized S&OP demand-supply plans were synchronized with the company’s financial performance goals. It seemed that the input was not provided on a routine basis, and if so, provided after S&OP plans were approved. Near the end of the talk, she asked the audience if anyone had ideas on how to get finance more involved. I offered a simple solution to her problem: Just break up, or parse, your S&OP process into two or more pieces to force the finance group to calculate the performance numbers for each one and just add them up.

After looking at me quizzically, I elaborated, explaining that I had students do research for their MIT Master’s thesis on what businesses do when they have to develop multiple S&OP plans. (In whimsical terms, the students needed to address the challenge, analogously recalling that after “Humpty Dumpty had a great fall, all the king’s horses and all the king’s men could not put Humpty together again.”)

The students’ research found out that P&G, for example, has around 100 forecasting processes and 100 S&OP processes running simultaneously. When asked how it put all the pieces together, P&G managers said the finance group does it. The students’ final recommendation in the thesis was that in order to make sense of multiple independent S&OP plans, financial managers needed to run the numbers for each, and add them together to get the company’s enterprise-wide S&OP plans.

The manager rephrased that this, for example, means a profit-and-loss statement needs to be developed for each process. And of course, she noted that one has to make sure that demand and supply match for each process to ensure independence of the processes. To wit, I said: “Yes.” (See Insights column: “Parsing holds key to better S&OP” (March/April 2012).

I view an SO&P team as being navigators that advise the executive team on whether a company is projected to be on a trajectory to achieve its annual financial performance goals. This includes both the profit-and-loss (P&L) statements, as well as the financial balance sheets that show assets. Thus, it is paramount that all S&OP operational plans be translated into their implications for a company’s financial picture. In addition, this task has to be done by a finance manager(s) on the S&OP team. If not, there would be no reason to have representation by the finance organization on the team.

It has been my long-held view that supply chain managers need to be more adept at understanding financial statements and analyses. Much of supply chain planning is done in terms of the number of units to be sourced, made, and delivered. Minimally about the dollars and cents of it all. Over 12 years ago, in my Insights column titled “Speak financially, get results” (September/October 2012), I postulated that because finance is the language of business, managers should become schooled in financial analyses. A revision to that column follows.        

I got my doctoral degree from the University of Pennsylvania’s Wharton School of Business in an area called operations research (OR). As a new graduate, I’d explain to people unfamiliar with the discipline that it involves the use of the scientific method and quantitative analysis to solve business problems. I had been trained in decision theory, quantitative modeling, and optimization techniques.

When someone would ask what my favorite graduate course was, I would carry on excitedly about my OR methodology course. It was taught by a famous professor who delighted students with stories about companies that had successfully used OR to solve some of their most pressing business problems. Math applied to the real world of business—what course content could be better than that? At least that’s what I thought at the time. I now think “introduction to accounting” should be added to the mix.

Financials are the language of business 

During my 45-plus years of business experience, several things have made me realize the importance of accounting and financial reports to understanding what really makes a business tick. Here are several points to consider.

First, in my November 2008 Insights column, titled “The operational performance triangles,” I presented a triangle that can be used to help conceptualize whether a balanced set of operational performance objectives align to competitive corporate strategies. Two points of the triangle, efficiency and asset utilization, represent those types of performance objectives that directly affect a company’s income statement and balance sheet, respectively. (The third point on the triangle represents customer response objectives that do not directly affect financial reports). My point in that column was that supply chain professionals need to understand how the first two types of operational objectives—efficiency and asset utilization—relate directly to financials.

Also, whenever a large-scale project is to be undertaken, a business case analysis must be developed in financial terms. So, before a supply chain project can get started, executives need to be convinced that it will improve financial performance over the long run.

Lastly, I’m now convinced that all future supply chain leaders will need to be good business people first and supply chain experts second. For this to happen, they must become conversant in the language of business, which is accounting and financially based.

The DuPont Model

Put very simply, all supply chain managers should become conversant in accounting and finance if they want to get ahead. Once conversant, they will be able to build business cases that will resonate closely with executive-level thinking. The DuPont Model (shown in Figure 1) is a good blueprint to use when developing a business case. The model, which according to Wikipedia was established in the mid-1920s, has been used by managers over the years to translate operational plans into their expected financial impact on return-on-assets (ROA). While simple, the model is robust in showing the interconnections among operational productivities, revenues, operating costs, assets and inventories, and their impact
on ROA.

Using a model such as this allows managers to translate operational supply chain improvements into their financial impact. For managers that adopt the model and follow my advice to “think financials,” their executive presentations will go from being “bored-level” to “board-level.” This will help them get the executive approvals they need, as well as those promotions they want.

 

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