Next-generation EPM software embeds modeling logic at critical points

A management consultant says the embedded modeling logic in 'EPM2' software can finally get finance and operations planning in sync.

What are the differences among enterprise performance management (EPM) applications and how do these differences translate into tangible business value? Anyone who's been through an EPM selection process understands that these questions can be difficult to answer. But look a little deeper and you'll discover that not all EPM software is alike -- especially in the manufacturing sector.

What's new in EPM and S&OP convergence

Newer EPM applications, which I'll call EPM2, are driving a convergence between EPM and sales and operations planning (S&OP) processes. What results is a more mature integrated business planning (IBP) approach where finance and operations share a single planning and forecasting process.

The idea of such an integrated process is not new. Traditional EPM software vendors have promoted it for years. What's different about EPM2 is embedded and manufacturing-specific modeling logic, in which:

  • Bills of materials and routings support production, inventory (i.e., MRP) and cost planning,
  • Double entry planning automatically drives cash flow, working capital and balance sheet forecasts,
  • Activity-based planning enables cost forecasting from both functional and process perspectives,
  • Cross-entity planning extends production and activity planning across legal entities and
  • Time-based models allow any model parameter or component to be varied by time period.

An important enabler of EPM2 logic is the use of relational, rather than multidimensional, technology architectures. The absence of such logic and architecture is the primary reason why traditional EPM software has had limited success in supporting effective S&OP and IBP processes, especially in complex settings.

Rolling forecasts and scenario planning

EPM2 modeling logic enables significant improvements in the accuracy and speed of cost, profit, cash-flow and working capital forecasting processes. Moreover, it supports similar improvements in scenario planning and what-if analysis. This is because EPM2 models can be maintained at lower levels of detail by broader numbers of operational experts. As a result, integrated financial and operational scenarios can be executed end-to-end without interruption. They also require less manual intervention, because the planning models self-adjust to change, and provide greater insight into risk thanks to more accurate forecasting of financial and operational variables. Broader participation is enabled because results are expressed in terms that are meaningful to front-line experts.

These capabilities provide the basis for more effective rolling forecast and S&OP processes. And because they are part of the same process, rolling forecasts are operationally realistic, while senior executives are more effectively engaged in a profit-based S&OP process.

Tactical value Of EPM2

From a tactical perspective, EPM2 can support more cost-effective processes and solutions. This is because organizations:

  • Need to buy and maintain one solution vs. two (i.e., EPM and S&OP),
  • Don't have to develop or program planning models because they come "out of the box,"
  • Can eliminate many non-value-added activities that result from fragmented processes and systems and
  • Can implement IBP processes and capitalize on resources with strategic value faster than they can with more fragmented approaches.

Strategic value Of EPM2

From a strategic perspective, EPM2 creates value by supporting more effective cross-functional coordination. It enables organizations to develop and reconcile functional and business-process budgets and forecasts, which makes them better equipped to establish effective accountability for targets that cut across multiple functions and entities.

Such capabilities are essential for global organizations whose value propositions span multiple entities and countries. The absence of these capabilities is a key reason many global organizations struggle to manage complexity. A 2007 study by A.T. Kearney valued this capability gap at 3% to 5% of sales for global manufacturers.

More on EPM software

Understand the importance of integrating finance and operations

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See how Gartner ranks CPM suites

For many organizations, the gap persists despite the use of EPM, S&OP and business intelligence technology. In some cases, implementation issues undermine the technology's effectiveness. In others, the technology deployments expose weaknesses in traditional, functionally based planning and budgeting approaches, which don't always fully support the strategies and initiatives -- i.e., operational excellence and sustainable cost reduction -- that manufacturing organizations are pursuing.

Barriers to EPM2 and IBP

One factor that often impedes EPM2 adoption is the continued dominance of departmentally based approaches in how organizations plan and manage their business. The same bias also influences how industry analysts evaluate EPM, S&OP and supply-chain software. As a result, finance often implements financial software and processes to meet its needs while supply-chain executives do likewise. This results in lost opportunities to drive value from organization-wide planning and performance management.

Some people believe the best way to address the problem is to use vendors that provide both EPM and S&OP applications, while others believe in-memory processing is the answer. What's often overlooked is the fact that mature IBP is driven by one primary factor: the degree to which financial and operational applications shared embedded planning-model logic. Without it, in-memory approaches can simply get to the wrong answer faster.

How can organizations overcome these barriers to capitalize on EPM2? For some, making executives aware of cost and capability differences will be enough. For others, it will require two things: education to help people understand these differences and direction from executives to focus design and selection activities on key logic capabilities. A short request for information can help achieve this kind of focus. Email me for an example to help you get started.

EPM2 applications represent new and innovative approaches to planning and managing manufacturing organizations that can reduce planning costs and help manufacturers capitalize on unrealized sources of value.

About the author:
Dean Sorensen is a management consultant and founder of the IBP Collaborative. Email him at deanbsorensen@ibpcollaborative.org.

This was first published in April 2014

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