Value Leakage in Business Planning
In this video, we will discuss the value leakage that can occur in current state business planning processes. We will explore the following topics:
- Customer service issues
- Excess inventory
- Cost of goods
- The impact of value leakage on P&L
- The importance of planning transformation
Current state business planning processes often lead to value leakage. This can manifest itself in a number of ways, including customer service issues, excess inventory, and cost of goods.
Customer service issues can occur when the supply chain is not able to meet demand. This can lead to lost sales and unhappy customers. Excess inventory can occur when the supply chain is overstocked with the wrong products. This can tie up cash and lead to write-offs. Cost of goods can increase when the supply chain is not able to pre-position the right material and capacity. This can lead to reactive spend on short-term capacity or expediting.
The impact of value leakage on P&L can be significant. For every billion dollars in sales, the impact can be as much as $10 to $15 million of operating profit. This is why planning transformation is one of the most important transformations as part of the digital transformation.
Planning transformation can help to address value leakage by improving visibility, collaboration, and decision-making. This can lead to better customer service, lower inventory levels, and lower cost of goods.
Hey Chakri, so what is the value leakage you're seeing in the current state of business planning? What's the value leakage of current state planning processes? So in other words, what's the potential of driving planning transformation. For attending a lot of these business planning meetings, the monthly and the weekly planning meetings that are attended by the C-Suite.
These are the executives from supply chain, finance, the commercial organization, the product organization, the P&L owners. There's a few topics of discussion that are pretty contentious and that indicate the value leakage. One is obviously around customer service issues. Sales is at the throat of supply chain a lot of times for the product availability issues, which are obviously impacting immediate loss sales.
But more importantly, as the customers have become more demanding, the commercial organization has realizing that they need to be much more flexible in offering more product choices, more choices for customers to, where they buy and how demand is fulfilled. And they're worried whether the supply chain can scale up. That increased complexity, especially when they're struggling with the service levels in the current state supply chain capabilities as well. On the other side, besides the service level issues, inventory is a big topic.
Finance is really worried about the excess inventory. On one side, we have service level issues, The other side we have excess inventory, which means we have a lot of the wrong inventory and inventory is tying up cash. Inventory is also resulting in a lot of write offs as products transition from one generation to the other. So a lot of inventory exposure.
And then the third category is cost of goods. Supply chains are having to spend a lot of money because the right material and the right capacity had not been pre-positioned. A lot of reactive spend is going on to buy short term capacity or expediting, which is all impacting the gross margin negatively. And so these are all driving a lot of P&L impact.
And if I was to quantify that, you know, typically, depending on the maturity of the planning organization, the impact of all this coming together is about for every billion dollars in sales, it's almost 10 to $15 million of operating profit. And so if you're a $10 billion company, that's hundreds of millions of dollars of operating profit impact, and that's pretty significant. So companies have realized that planning transformation is one of the most important transformations as part of the digital transformation to address this value leakage.
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