The world of planning and analysis has been experiencing a fundamental shift in recent years. If you are unfamiliar with xP&A, short for eXtended Planning and Analysis, you may not be aware of this shift. So first, what exactly is xP&A? Directly quoting Gartner, “xP&A is the evolution of planning, combining financial and operational planning on a single composable platform. It ’extends‘ traditional FP&A solutions focused solely on finance into other enterprise planning domains such as workforce, sales, operations and marketing.”
Even before the existence of xP&A, FP&A (Financial Planning and Analysis) experts began shifting from the most ubiquitous planning and analysis tool, spreadsheets such as Microsoft Excel, to enterprise platforms built to scale and solve the many issues which come with custom built spreadsheet-based planning tools. Along the way, some of them also realized their colleagues in other areas of their organization were still trapped in what has become inauspiciously known to many as “Excel hell”, where in, as an organization grows and changes over time and so do the demands on planners, spreadsheet models simply fail to meet the continually increasing demands. The reliance on spreadsheet models led to an ever-increasing number of hours each month spent gathering and validating data, updating links and tables as well validating results all within a technology not built to scale or adapt easily to changes or one-off requests from management. Once the recognition of the issues with planning tools built within spreadsheets was combined with a desire to more closely align planning processes across different functions in the organization, xP&A was born.
So, what is procurement planning and how is it connected to xP&A? Simply stated, procurement planning does for the procurement function, what any planning process does for finance, sales or any number of organizational functions which is to align with and support the attainment of the organization’s goals and overall strategic aims. Just like the FP&A function for the Office of the CFO, procurement needs not only insight and clarity to support daily operations but also retrospective and prospective view to facilitate decision making.
In procurement this retrospective view often comes in the form of spend analysis, which is the process of analyzing past spend for potential opportunities to optimize the supplier network and save the organization money by, for example, consolidating spend with fewer vendors to leverage overall buying power. However, more within the vein of xP&A, the prospective process in procurement planning requires both retrospective and prospective data of which the latter often involves consolidating data from multiple disconnected data sources or platforms in the Procure to Pay (P2P) cycle to generate a picture of what is expected and facilitate decisions within the time horizon with which altering any potential outcomes is feasible.
Any number of examples of the types of decisions procurement planning would facilitate could be drawn directly from the current crisis around supply chain disruption because procurement sits at the crossroads of supply and demand within an organization. Many organizations have procurement data not only in the system of record (GL/ERP) but also various external or internal tools for managing bids, requisitions, purchase orders, contracts and approvals as well as contact and coordination with vendors, warehouses and factories. In a modern procurement function, there is a lot of data being generated but rarely a feasible way to corral, analyze and plan with it to make an optimal decision. Additionally, why would procurement spend the money and effort to hire highly trained and motivated professionals just to use them as spreadsheet jockeys who cobble together data from different sources with varying degrees of accuracy in a process that may not even be repeatable on a regular cadence. Our friends in procurement are indeed stuck in the proverbial “Excel hell”.
So, what can be done for our colleagues in procurement and what is in it for the Office of the CFO? Answering the last question first, it is important to discuss the impact procurement has on one of the most important measures of an organizations short-term financial health – working capital. Working capital is a measure of short-term liquidity or stated more broadly it is a measure of a company’s ability to meet short-term obligations using readily available assets. Working capital is typically considered to be comprised of four distinct but related components:
- Cash and cash equivalents
- Accounts receivable
- Accounts payable
Working capital is a simple calculation which involves adding together cash, accounts receivable and inventory from which accounts payable is subtracted for a given period. Reviewing each of these components, we can draw some connections between these, and the influence procurement has on them by way of example. As mentioned above, procurement sits at the crossroads of supply and demand within an organization. While demand planning predicts how much an organization could potentially sell, supply planning determines how an organization meets this demand. This is where the procurement function gets involved particularly with direct materials sourcing which is the sourcing of materials and services used directly in the production of the goods or services the organization sells.
Procurement works with suppliers to negotiate important contract terms such as quantity, price, payment and delivery which inevitably impact inventory, accounts payable and cash. But what happens when there are disruptions in the supply chain? It is quite likely the working capital of many organizations has sagged in recent years due to disruptions and here is an example of why. Suppose the negotiated incoterms (International Commercial Terms) with a large and important international supplier are Free Carrier (FCA). In this instance we can assume the supplier is responsible for delivering the goods to the outbound port at which point liability and ownership is then passed to the buyer and are now on the buyer’s balance sheet in inventory and the supplier bills the buyer for the goods. Disruption hits and the goods are stuck in the departure port and because of the incoterms, the buyer must still pay for them as the seller has completed their obligation. So instinctively, you might assume that inventory of materials increases and cash decreases so there is no change to working capital and while that is true for the current period, you can probably see how this problem will negatively impact working capital given this situation.
The key to working capital is that the assets must be readily available, and this direct materials inventory sitting in a port halfway across the globe is anything but readily available. In our scenario, the cash will be paid to the vendor, likely within a month or two; however, inventory won’t be converted to cash as quickly as normal while its sitting at the outbound port. Add in the compounding effects of missed sales and unhappy customers and working capital is quickly taking some hits. So, what can be done in this situation? Unfortunately, there are no easy answers during this period which has become defined by so many disruptions across countless companies; however, that doesn’t mean answers are impossible to find. Procurement planning facilitates the finding of such answers by giving visibility to options and modeling in real-time the impact those options would have on working capital.
Procurement planning is quickly developing into one of the leading topics in xP&A. As outlined above, leveraging procurement planning in a systematic and repeatable approach adds value to the organization by giving procurement professionals options to overcome issues thus leading to improvements in working capital. With significant ongoing disruptions, this may even become a competitive advantage for some organizations. If you feel ready to change this struggle into a strength and realize the benefits of procurement planning, QueBIT has the knowledge and expertise you need for the journey.