19 Jul 2023
In part one of this blog series, we looked at some useful frameworks to help guide managers where to look for key assumptions across their business. In this final part, we look at frameworks around procurement, organizational readiness and financial assumptions. These frameworks will provide direction for businesses to source their underlying assumptions to help drive the organization forward.
Procurement assumptions
While procurement could be included in supply chain and operations assumptions, it is too important to the flow of materials not to be considered separately. This is because it is the first input to the supply chain and, if this input is awry, everything else is going to be affected.
A Commodity Profiling Matrix is one of the most commonly-used approaches. It compares the value of purchases with risk or significance, as well as highlighting the volume to drive a purchasing strategy. Without an approach like this and ignoring the procurement impact on a business could prove disastrous when it comes to profit and customer delivery performance.
Organizational readiness assumptions
Organizational readiness or ‘people assumptions’ are notoriously absent in many IBP processes. People assumptions however, pervade everything in a business. For a business to function well there needs to be a collation of people plans, to not only manage the day-to-day business, but also to be strategically ready for the changes that are typically identified to deliver strategy.
While there are various models used in business to ensure capability, culture, reward, and recognition are addressed, there is no framework that matches how these assumptions are viewed in an IBP process, so we developed our own list:
1. Reward, recognition, and appraisal.
2. Culture and change management.
3. Organizational structure and evolution.
4. Competency and capability.
5. Learning and development.
6. Talent management and people turnover.
7. Succession planning.
8. Leadership.
9. High-performing teams.
10. Continuous-improvement methodology and application.
Overall, this list could be simplified to answer one question, “Will we have the right number of people, with the right capability, at the right time, to deliver our strategic goals?”
Some of the key assumptions that could be derived from this investigation are around the number of people, capability and development for the new environment, salaries and wages, staff turnover, and lead time for recruitment.
Financial assumptions
One (or a collection of) commonly-used financial framework is the Three Statement Model. This framework includes three financial statements: the profit and loss (P&L), the balance sheet, and the cash flow statements. By analyzing these statements businesses can identify the key assumptions behind their financial performance, such as revenue growth, cost of goods sold, and operating expenses.
To use these frameworks effectively, businesses must have a clear understanding of the underlying plans that resulted in the financial statements. A business running an IBP process would typically build the financial statements as an outcome of the IBP plans. Financial statements done in isolation are useless. They need to be an outcome of the product, demand and supply plans, which need to be collated and integrated with the P&L, the balance sheet, and cash flow projections on a routine basis. So, Finance’s role is therefore to aggregate and integrate financial assumptions.
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