How manufacturers can stop planning on the past

 

Manufacturers are facing market shifts, workforce demands, and customer preferences that are hard to predict. Even small changes on high-volume production can quickly add up to a big impact.

 

Yet, many manufacturers have not adapted their financial planning and analysis (FP&A) processes to quickly track these unpredictable changes. How can companies make their FP&A more agile, to stop planning on the past?

Mike Hennessey

“First and foremost, understand your product-level costing and make sure that those figures are recent. What we hate to see is product-level costing that’s based on assumptions which are dated, and therefore fueling poor business decisions.”

Mike Hennessey

Grant Thornton CFO Advisory Principal

 

“First and foremost, understand your product-level costing and make sure that those figures are recent,” said Grant Thornton CFO Advisory Principal Mike Hennessey. “What we hate to see is product-level costing that’s based on assumptions which are dated, and therefore fueling poor business decisions.”

 

Manufacturers might not have the systems in place to track small changes in costs, or they might not think those changes matter. “A lot of times, we hear companies say, ‘Well, that shift is immaterial," Hennessey said. “In the manufacturing world, where there's high throughput, pennies make millions. If we were to take a couple of pennies out of a cost of a product that we sell millions of, that has a real impact on the bottom line.”

 

“The best way to understand those changes is to have very robust and detailed product-level costing,” Hennessey said. To develop and maintain that product-level costing, manufacturers need to untangle cost complexities. 

 
 

International Business Report: The US mid-market

 

Data from Grant Thornton International’s International Business Report shows optimism in the US middle market is up sharply. Find out what’s next.

 

Access the report -->

 

 
 
 

 

Insights on FP&A in other industries

 

ARTICLE

 

ARTICLE

 

ARTICLE

 

ARTICLE

 
 

Untangle cost complexities

 
 

Often, manufacturers have a complex costing model for a product, and they don’t feel like they have time to revisit all of the details each year.

 

“They don't feel like they have the capacity to quantify shifts,” Hennessey said, “They bake in assumptions from 2020 for the costing of the plants, and they keep making pricing and production decisions associated with that. Fast forward three years, and they might have had efficiencies in the production of Product A, or reduced material costs, while they’ve had an increase in general overhead or the procurement costs for Product B. If they’re still operating off those 2020 assumptions, they might have a very inaccurate view of Product A's profitability versus Product B.”

 

That’s where effective FP&A needs to do more than just report the figures. It needs to fuel better business planning. “Having that granular view of the total cost to build the product, updated on a regular basis, will allow for good decisions — not just in the short run, for forecasting the current year, but in the long run, tying back to capacity planning, resource planning, facility planning and asset utilization,” Hennessey said.

 
 

Guide your long-term planning

 
 

Manufacturers need in-year agility, but they also need effective long-term planning. That requires insight into a range of factors.

 

“When you're thinking about plant expansions, or reshoring jobs that have been moved overseas, you need to understand the business case,” Hennessey said. “What's the supply? What's the demand? What's the go-to-market strategy?”

 

Accurate FP&A is crucial to support proactive planning for these substantial, long-term issues that demand more than a reactive approach.

 

“Given the heavy fixed cost often associated with a manufacturing plant, it's hard to quickly pivot,” Hennessey said. “We need to understand more than just current supply and demand, more than just the production or procurement of goods and then the output to our customers. We also need to understand what that looks like from a factory footprint. Does that change, as our customers’ needs change over time? What does that do to our current footprint? Does that change the mix within a particular plant? Does it mean you have to shift among plants?”

 

These questions tie into decisions about building, buying or outsourcing. “Look at all of those factors to make sure that you’re adequately structured. On the manufacturing side, you need to be optimizing your footprint, and making sure your flow-through happens in the most opportune and lowest-risk way.”

 

 

 

Utilization is optimization

 

Evaluating and revising your optimization is a complicated exercise, but it starts with analyzing your assets.

 

“It boils down to asset utilization,” Hennessey said. If utilization is declining in one area, how are you going to do to redeploy those assets? If utilization is growing in another area, what is the right time to reinvest and help accelerate that growth? “What we don't want to do is be the anchor to growth because of limited capacity, but we don't want to be the anchor to profitability if those fixed costs stay flat in a declining environment,” Hennessey said. 

Robert Hersh

“Usually, people either see the operations view or the financial view of assets. What we're proposing here is: Let's blend those two.”

Robert Hersh

Grant Thornton Manufacturing Industry National Managing Principal

 

“On the operations side, you’re making sure that assets are as productive as possible — that you are measuring their performance the right way, maintaining them the right way, utilizing them the right way,” said Grant Thornton Manufacturing Industry National Managing Principal Robert Hersh. “Usually, people either see the operations view or the financial view of assets. What we're proposing here is: Let's blend those two. There will always be aspects where they're separate, but to the extent that you can, blend those two views of your production capacity. That can be very powerful.”

 

“Monitoring, maintaining and optimizing those fixed costs is key — and the FP&A function is usually at the center of those discussions,” Hennessey said. 

 

 

 

Beyond the P&L

 

FP&A can help answer other questions for strategic planning, but it needs to go beyond providing P&L impacts and analysis. “I'm not just looking at our operations from revenue through expenses, but looking at what that does from a cash position,” Hennessey said. “Manufacturers often need to minimize inventory, while maximizing customer satisfaction and order fulfillment.” To do that, leaders need solid information that informs decisions about warehousing, supply chains and more.

 

“A lot of the work is to align your supply chain forecast with your P&L forecast. That's the integrated business plan that I often talk about across industries, but it’s paramount within manufacturing,” Hennessey said.

 

When a manufacturer’s FP&A aligns with its supply chain forecast and other facets of business planning, then leaders have the information they need to understand their current agility and inform their long-term projections. That’s when FP&A is the true business partner that executives aspire to collaborate with.

 

Show image description -->

This diagram illustrates ways that FP&A has been evolving toward becoming a business partner. Advanced FP&A teams have learned to deliver the traditional and essential activities more efficiently, which has created the capacity to focus efforts on value-additive business partnering activities.

 

“To bring this back to fundamentals: If we do this right, it impacts the balance sheet, income statement and also certainly affects the cash flow. But you have to pull all of those things together, in a treatment that both the operations and the financial people can understand collectively,” Hersh said.

 
 

Insights on other issues in manufacturing

 

ARTICLE

 

ARTICLE

 

ARTICLE

 

ARTICLE

 

ARTICLE

 
 

Plan on the future, not the past

 
 

“Financial statements, by their very nature, are lagging indicators. Whatever you're talking about in the financials has already happened,” Hennessey said.

 

So, how can FP&A become provide a lens into the future, and how can manufacturers stop planning being reactive to prior-period financials?

 

“The key is for people in FP&A to align the operational KPIs with the eventual financial KPIs,” Hennessey said. “Then, you have insight into the leading indicators, whether that’s waste coming off of a line, machine efficiency, capacity or whatever it is.”

 

To plan effectively, leaders need to go beyond past financial statements to reference dashboards that help them understand real-time information. But then, they need to go even farther.

Mike Hennessey

“You don’t want FP&A from the CFO function to be just a score keeper. You need them to be a business partner, so they can help you focus on strategic insights and ways to take cost out of the business in the most effective way.”

Mike Hennessey

Grant Thornton CFO Advisory Principal

 

“You often hear, ‘You can’t win or lose the game if you don’t know the score,’ which is great,” Hennessey said. “But you don’t want the FP&A team to merely act as a score keeper. You need them to be a business partner, so they can help you focus on strategic insights and ways to optimize costs of the business.”

 

When manufacturers look for cost reductions and operational efficiencies, they often talk about automation. Automation can save time and cost in both the back office and out on the floor. The goal is not for FP&A to only quantify the time savings from automation, but arm manufacturing leaders with additional information to understand and answer the true impact.

 

To help answer those larger questions, you need to leave your desk.

 
 

Leave your desk

 
 

“One thing that I encourage a lot of finance teams to do is to get out on the manufacturing floor, or get out in the supply chain, so that this is not just an Excel exercise,” Hennessey said. “When you understand how the business works, and how the company makes money, the nuances of those processes can help you build the right models and provide the right insights downstream.”

Mike Hennessey

“One thing that I encourage a lot of finance teams to do is to get on the manufacturing floor, or get out in the supply chain, so that this is not just an Excel exercise.”

Mike Hennessey

Grant Thornton CFO Advisory Principal

 

To succeed, manufacturers need financial planning and analysis that actually understands the business rather than operating in isolation.

 

That might seem unnatural to some FP&A teams. “People in finance often like working in financial services, or tech,” said Hennessey, but he emphasized that the tangible nature of manufacturing can make it invigorating, informative and maybe even essential to walk out on the floor.

 

“I think it's much more rewarding, candidly. Working with people on the floor is some of the most satisfying experience. They welcome the support of a different lens, and you’ll get a different perspective from people that have gone through changes over time. They can have perceptions into how to make something more efficient that you may not.”

 

Plus, understanding the talent and function of the floor — beyond the numbers — can be essential to driving successful decisions. “There are instances where you’re automating jobs, so you need to truly make sure you find, align and retain the right pockets of people in operations,” Hennessey said. The productivity and effectiveness of a plant is a story you can’t tell with numbers alone.

 

“FP&A should truly be a business partner in manufacturing. It’s part of a process that's bringing something to market for a customer base,” Hennessey said. To help drive informed decisions into the future, manufacturers need FP&A to understand its part within the larger goal of manufacturing success.

 
 

Contact:

 
 

Insights on FP&A in other industries

 

 

 
 
 
 
 

Our manufacturing featured industry insights