Investigating the role of the finance function in the horizontal S&OP alignment

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Investigating the role of the finance function in the horizontal S&OP

alignment

MSc Supply Chain Management

University of Groningen, Faculty of Economics and Business

Marc Neiiendam S3515230

E-mail: M.neiiendam@student.rug.nl

Word count: 10662 excluding reference list and appendices 12/8-2019

Supervisor / University of Groningen PhD candidate H. Dittfeld

Co-assessor / University of Groningen Prof. Dr. D.P. Van Donk

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Abstract

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1. Introduction

It is well established in literature, that the S&OP process should include the finance function (e.g. Ivert, Dukovska-Popovska, Fredriksson, Dreyer, & Kaipia, 2015). One of the outcomes of integrating finance in the S&OP process, is that the focus shifts from volumes to value, and the goal changes from e.g. sales optimization to profit optimization (Grimson & Pyke, 2007; Wagner, Ullrich, & Transchel, 2014). However, it is unclear in literature how the financial focus is implemented, once the finance function is involved. Naturally, the shift of focus also has implications on the cross-functional alignment within the S&OP process. Any organization will inevitably face conflicts of interests between the functions. These conflicts arise, because the goals of the individual functions differ by nature. In case these conflicts are not resolved, they can lead to low operational performance such as late product deliveries (Grimson & Pyke, 2007). How the shift of focus to profit optimization affects the cross-functional alignment, is still missing to be described in literature. Furthermore, it is unclear in literature, where exactly in the S&OP process the finance function has to participate, and what tasks the function should do in the specific S&OP steps.

S&OP aims at balancing the demand and supply that an organization is experiencing, and ultimately optimize profits, by aligning the organization’s different functional plans to one plan. Hence, S&OP is about aligning the plans of the organization on the vertical and horizontal level. However, even though the S&OP process is described in literature as a generic process, and therefore seems fairly easy to implement, both research and practice shows that it is difficult to achieve the expected benefits in practice (Lapide, 2004, 2010; Noroozi & Wikner, 2017). When so many companies are struggling to realize the expected benefits, it signals that there is some aspect of the S&OP process that is still not fully understood, and there is a need for further research, to gain a better understanding. Pagell (2004) points out, that there is a lack of research in the cross-functional alignment within the S&OP process. Lapide (2004) agrees with Pagell, and states that organizations do not achieve the expected benefits, because they did not manage to change the actual S&OP process sufficiently.

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Wikner, 2017). However, the research on S&OP in general is still in its early phase, and researchers are emphasizing the need for more research on the subject (Noroozi & Wikner, 2017; Pagell, 2004). More specifically, Kathuria, Joshi & Porth (2007) found that horizontal alignment within an organization has been significantly less researched than vertical alignment. Hence, Kathuria et al. (2007) agree when Pagell (2004) calls for more research on the cross-functional alignment within an organization. Although a great deal has been researched about S&OP, it is still unclear how the cross-functional alignment is achieved, and how the finance function affects the S&OP process.

This thesis aims to contribute to current theory, by adding research on how the finance function affects the horizontal alignment within the S&OP process by answering the following research question:

“What is the role of the finance function in the alignment of different functional goals in the S&OP process?”

This study explores and elaborates on the theory of how the finance function affects cross-functional alignment within the S&OP process. To do so, a multiple case study was conducted with 5 production companies that all have a S&OP process implemented. Through this multiple case study, this thesis contributes to the existing literature regarding the role of the finance function in the cross-functional alignment within the S&OP process by adding that the attendance of the finance function varies across and within organizations. Further, the tasks of the finance function are researched, and enablers to make the finance function the driving role in both the S&OP process, and the influence on horizontal alignment is found. Lastly, four new roles (Not involved, limited involved, involved and leading) that the finance function can take within the alignment of different functional goals in the S&OP process are presented.

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2. Theoretical background

In this part, relevant concepts will be introduced and defined, in order to giver the reader an understanding of the existing relevant literature. First, relevant S&OP literature will be introduced, followed up by introducing the finance function’s influence and tasks in the S&OP process. Finally, a conceptual framework will be presented.

2.1 What is S&OP?

2.1.1 Definition of S&OP

There exists no universally accepted definition of S&OP, but many researchers turn to the following definition of S&OP as “a process to develop tactical plans that provide management the ability to strategically direct its business to achieve competitive advantage on a continuous basis by integrating customer-focused marketing plans for new and existing products with the management of supply chain. The process brings together all the plans for the business (sales, marketing, development, manufacturing, sourcing and financial) into one integrated set of plans” (e.g. Bozutti & Esposto, 2019, p. 28; Cox and Blackstone, 2004, p. 103 IN Wagner et al., 2014, p. 192). When considering the definition of S&OP, it becomes clear, that it holds two key points, that can help to focus this research. The first key point is the word “process”. The second key point is “strategically direct its business to achieve competitive advantage”. These two key points, can, in terms of the S&OP process, be translated in to “the S&OP process” and “the tasks done in the S&OP process”. The research question of this thesis will therefore be focused on these two variables: the finance function’s participation in the S&OP and the tasks of the finance function.

2.1.2 Characteristics of S&OP

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acknowledges this need for cross-functionality, and that the management makes sure that the individual functions take part in the S&OP process, as the cross-functionality is likely to fail, without top-down support (Muzumdar & Fontanella, 2006). The S&OP process will usually take place monthly (Noroozi & Wikner, 2017). S&OP covers a period of 1-18 months (Grimson & Pyke, 2007), but can range up to 3 years, depending on the industry, product, etc. (Grimson & Pyke, 2007). The length that the S&OP covers (1-18 months) can be classified as the medium term (Tuomikangas & Kaipia, 2014). The effects of a successfully implemented S&OP process are many, and include improved forecast accuracy (Grimson & Pyke, 2007), reduced inventory and lower operating costs (Prokopets, 2012; Wagner et al., 2014). This means that S&OP will lead to a positive effect on the organizations performance.

Even though S&OP is described as a generic process (Noroozi & Wikner, 2017), and therefore seems easy to implement, many organizations find, that it is difficult to achieve the expected benefits from implementing S&OP (Lapide, 2010). Kristensen & Jonsson (2018) state that there is “one-size-fits-all” procedure that will enable an organization to unlock the performance enhancement of S&OP. This is because S&OP is primarily about the people participating. A successful S&OP process therefore requires organizations to break down silos, change its processes and change the culture within the company (Grimson & Pyke, 2007; Noroozi & Wikner, 2017; Pedroso, da Silva, & Tate, 2016).

2.1.3 The S&OP process

The actual process of S&OP has been thoroughly described by several researchers (e.g. Grimson & Pyke, 2007). The S&OP process can be split up in five steps (Wallace, 2006). These steps are sales forecasts, demand planning, supply planning, pre-S&OP meeting and lastly, the final meeting (Bozutti & Esposto, 2019). However, even though it is clear from literature that the finance function should be part of the S&OP process (e.g. Ivert et al., 2015), it is still unclear in literature what the finance function is supposed to contribute with, in the specific steps, of the S&OP process.

2.1.4 Horizontal alignment

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2.2 The finance function in S&OP

In this part, relevant literature about the finance function will be introduced. First, how the addition of the finance function will impact the S&OP process will be presented, followed up by what tasks of the finance function, that are known in literature.

2.2.1 Introducing the finance function to S&OP

S&OP is a cross-functional process, that should involve the finance function, to implement the financial perspective. Some papers refer to S&OP with the finance function integrated, as integrated business planning (IBP) (e.g. Kristensen & Jonsson, 2018). Although some articles use the term IBP for the tactical planning process, this thesis considers it to be equal to S&OP, as S&OP in the first place should have the finance function integrated.

The outcome of integrating the finance function with the S&OP process, is that the S&OP process changes from a traditional process balancing the supply and the demand to a process that aligns the organizations operational plans with the long-term business strategy and the financial objectives (Baumann, 2011). Ivert et al., (2014) further add, that the integration of the finance function within the S&OP process, means that the process changes from being volume-driven to profit-driven. Hence, the finance function measures everything discussed in the S&OP process, based on its profitability impact (Muzumdar & Fontanella, 2006). When it comes to the actual S&OP process, nearly all the top performing organizations have the finance function highly integrated in their S&OP process (Prokopets, 2012). Once the S&OP process becomes value-driven it also indicates, that the S&OP process changes focus to become more long-term (Ivert et al., 2014; Muzumdar & Fontanella, 2006). The change from being volume-driven to profit-driven can be a challenge for the rest of the functions in the S&OP process, as they need to change focus from volumes to profit. The change to focusing on value can be seen in the S&OP integration framework developed by Grimson & Pyke (2007). Further, the finance function is involved in the S&OP process to bring the operational plans together with the financial goals of the organization (Lapide, 2004).

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financial integration is placed outside of the S&OP circle, which suggests that they see the finance function as something that is not integrated within the S&OP process. This is an interesting paradox, while both practice and researchers agree that the finance function should be integrated in the S&OP process to achieve the best results, but in practice the finance function is often not integrated (Grimson & Pyke, 2007; Thomé et al., 2012a). One explanation could be, that most organizations simply haven’t reached a sufficiently mature state of their S&OP process, as S&OP integrated with finance is a sign that the S&OP process is mature (Grimson & Pyke, 2007; “implementation: How are companies doing?,” 2019; Kristensen & Jonsson, 2018).

However, even though many papers (e.g. Ivert et al., 2014; Wagner et al., 2014) agree that the finance function needs to be integrated in the S&OP process, many of these papers are conceptual papers, simply stating that the finance function needs to be involved.

The lack of understanding how to implement the finance function within the S&OP process, and how the addition of the finance function impacts the rest of the S&OP process is problematic. Increasing the profit is an important goal for most organizations. However, the S&OP only starts to focus on profit optimization, once the finance function is integrated within the S&OP process (Wagner et al., 2014).

2.2.2 Tasks of the finance function

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decisions (Prokopets, 2012). These what-if analyses can consist of creating and evaluating several scenarios for profit optimization, such as demand spikes, supply shortages, promotions, etc. Furthermore, these analyses need to be extensive, to give a realistic calculation of the impacts on financial metrics, such as working capital, cash flow, etc. These scenarios should serve as important inputs for the organization, when determining the direction the organization should move in (Baumann, 2011; Grimson & Pyke, 2007; Muzumdar & Fontanella, 2006). Scenario calculations are important, because organizations should base their decisions on real time knowledge of what the financial impact will be. Hence, assumptions about which products are most profitable need to be continuously challenged (Muzumdar & Fontanella, 2006). This further implies, that the finance function should have the permission to change the decisions made in the S&OP process, to improve the financial impact (Badell, Fernández, Guillén, & Puigjaner, 2007).

The new responsibilities of the finance function stated by Prokopets (2012) are all important responsibilities. However, as earlier discussed, many organizations do currently not have the finance function fully integrated within the S&OP process (Grimson & Pyke, 2007; Thomé et al., 2012a), and the role of finance has therefore largely been neglected. The new responsibilities of the finance function stated by Prokopets (2012) show that the responsibilities are very intangible, and therefore can be very difficult to implement in an organization.

2.3 Conceptual framework

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Figure 2.1: Conceptual model Step 1: sales forecast • No cross-functional alignment • Finance is not involved Step 2: Demand planning • Very little cross-functional alignment • Finance might be involved • Demand in monetary terms Step 3: Supply planning • Little cross-functional alignment • Finance is involved • Analyses to meet demand Step 4: Pre S&OP meeting • Cross-functional Alignment • Finance is involved • Update financial report Step 5: Final meeting • Full cross-functional alignment • Finance is involved • Dollarized plan The S&OP process with focus on the cross-functional alignment and the

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3. Methodology

In this part the choice of research method will be presented and explained. Next, the case selection criteria are presented. Finally, the data collection will be described, and followed up by a description of how the collected data will be analyzed.

3.1 Research design

There has been a call for further research in to the cross-functional alignment process within S&OP in previous research (Pagell, 2004). This masters thesis will build on this need for further research. More specifically, this research aims to gain more insights in what the role of the finance function is, in the horizontal alignment within the S&OP process. A multiple case study research design has been chosen as the approach to gain the desired insights. A multiple case study approach is the best way to answer the research question of this thesis for several reasons. There exists little literature about how and what role the finance function plays, in achieving cross-functional alignment within the S&OP process. Case studies are particularly good approaches when investigating how and why questions (Yin, 2014). Further, a case study approach is the best research approach for this research question, because it allows for the phenomenon to be studied in-depth, in the phenomenon’s natural, real life context. Second, case studies are an appropriate approach when the studied phenomenon is not yet fully understood. Third, since case studies are exploratory, case studies are great approaches to build theory, or to refine existing theory (Karlsson, 2016). The research question of this thesis can be characterized as being exploratory as it is investigating how the cross-functional alignment within the S&OP process is achieved. Therefore, it will be of value if the S&OP process can be studied in-depth, in its natural context, to gain a better understanding of the phenomenon in order to refine existing theory. Multiple cases might reduce the depth of the study, but can add to reduce the risk of observer bias (Karlsson, 2016). The units of analyses of this multiple case study are the S&OP processes themselves, from the individual cases of this multiple case study.

3.2 Case selection

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products, does not directly have any production aspect, which naturally is important in S&OP. Further, the cases all have facilities in The Netherlands, in order to increase the chance for face-to-face interviews, instead of conducting interviews via e.g. Skype. The next criterium is that the organization can not be too small. This is important, as small organizations usually have limited financial and managerial resources available, to invest in, for instance, a S&OP process (Wagner, Grosse-Ruyken, & Erhun, 2012). Further, it is important that, within the studied organizations, that the different functions only represent one function. This criterium again leaves out small organizations, as they, if they have an S&OP process implemented, often will have the same employees with job tasks overlapping different functions. This could make it difficult to interview these employees, about how they overcome the different functions conflicts, as the alignment then only involves one person. Cases with both long-standing (case A started in 2012) and newly introduced (case D started in 2019) S&OP processes were selected. This was done to increase the probability of studying cases with both mature and immature S&OP processes as maturity of the S&OP process is correlated to the level of integration of the finance function (Grimson & Pyke, 2007). Lastly, due to the exploratory nature of the research question of this thesis, different companies, e.g. working in different industries and producing different products, were found suitable to participate in this multiple case study, to give a general understanding of the research question, across e.g. industries.

3.3 Data collection

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process has not been thoroughly investigated, the research question is very exploratory. There are therefore not very much available research to ground expectations on.

The primary data collected consists of 5 anonymous organizations. A total of 13 interviews have been conducted. The interviews lasted approximately one hour each. The interviewees were all employees who are directly involved in the S&OP process, e.g. the leader of the S&OP process, a representative of the demand side or a representative of the supply side. All the interviews were, as far as the interviewees allowed it, audio recorded and transcribed. If needed, the interviews were followed up with e-mail correspondences. The interviews were conducted in April and May 2019.

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Table 3.1: Interview overview

Case Interview length pages of

transcript

Job position

Case A, Interview 1 1:29:33 15 European Supply Manager

Case A, interview 2 52:58 9 European Demand Manager

Case A, interview 3 1:16:37 15 Planning and logistics manager and

Supply chain coordinator

Case B, Interview 1 52:48 10 S&OP planner

Case B, Interview 2 1:03:08 10 Sales planner, Value planning

Case C, Interview 1 No permission to record. Interview lasted

approximately an hour.

8 Production planner

8 Supply chain planning manager

5 Customer service & demand planning manager

Case D, Interview 1 54:09 11 Supply chain professional

Case D, Interview 2 1:05:34 8 Operations manager

Case E1, Interview 1 56:26 11 European S&OP manager

Case E2, Interview 2 48:40 10 Supply planning manager

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3.4 Data analysis

Case E1, E2 and E3 were initially thought to be one case, consisting of three interviews, from three different countries. However, during the interview stage, it became apparent, that case E1, E2 and E3 have completely different, and independent S&OP processes, across countries. Because the S&OP processes are the units of analyses, case E was therefore split in to 3 individual cases (E1, E2 and E3), and treated as individual cases, as can be seen in table 3.1.

After all the interviews were conducted, the data analysis process began. The first step was to transcribe all the interviews. The vast amount of data was then reduced to categories, such as “task of finance” and “role of finance”, as can be seen from the coding example on the following page (Karlsson, 2016). Relevant observations were then coded in to these categories. To analyze the data, two steps, as suggested by Eisenhardt (1989), were followed: within case analyses and cross-case analysis. The data analysis had an inductive approach, as that is the most suitable for theory building and refining case studies (Karlsson, 2016). The inductive approach means that there are no pre-defined first order codes. These were developed when going through the interview transcripts. This started off by thoroughly reading the transcripts and identifying the main concepts.

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Table 3.2: Example of coding

3.4.1 Within-case analysis

Once the data was coded, the analysis could begin. First, the pattern within the individual cases was analyzed, by constructing an array of the data (Karlsson, 2016). This helped to gain a deep understanding with each case as its own unit, and to identify the internal patterns of the individual case, with attention to the tasks and the role of the finance function in the horizontal alignment (for instance, what is the finance function responsible for in the S&OP process, can the finance function overrule other functions in case of disagreements, etc.). This was done before trying to generalize across different cases (Eisenhardt, 1989), as this knowledge is needed, to perform the cross-case analysis (Karlsson, 2016).

3.4.2 Cross-case analysis

The cross-case analysis is crucial when trying to create generalizability for the conclusions of this research (Karlsson, 2016). Again, an array was created. Then, a category was chosen, and the different groups were searched, to find differences or similarities (Karlsson, 2016). The next step in the analysis of the data was to look for patterns between the cases. This was done to find generalizability of the results. Cross-case analysis enhances the

Quote

Descriptive code

(summary) Theme

What we want to achieve is one agreed plan. We don’t want to achieve

one agreed figure, we want to have one agreed plan. One agreed plan

What we are saying is its perfect looking if in the financial forecast you say I want to sell 120 and in the S&OP you sell 110. As long as you can

define the 10 difference, or why they are missing. Explain misalignments

And then why are the statistical prices, which is agreed with

controlling, with finance, is that precalculated? The average price for all-in-one in France, lets say is x per 100 pieces, and this is then used to

recalculate everything, S&OP figures, volumes figures in to value. Add value perspective What is the purpose of involving finance in the S&OP process in the first

place?Interviewee: Alignment of figures. One story. Not two stories. That’s very clear. Talk the same language in all the different meetings. To avoid finance says, we will sell 100 and S&OP says 110 or the other

way around. That just creates confusion. Alignment of figures

I would say they are the gate keeper and the linking thing to the

financial result. Link to financial result

Yes, I would say so. Because they are more on the side line. They are sort of “lets get some info”. And the only thing they are really

interested in, is the alignment with the financial forecasting. Finance on the side line

Role of finance / task of finance

Case A, Interview 1

S&OP goal

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4. Findings

In this part, the findings of the interviews will be presented. First, a summary of the key characteristics and a summary of the with-in case analyses will be presented. Then the cross-case analysis will follow.

4.1 With-in case analyses

Due to the amount of cases, the full with-in case analyses can be found in the appendix. However, to enable the reader to, first, gain an understanding of the individual cases, a summary of the individual cases’ key characteristics has been developed in Table 4.1. Second, Table 4.2 presents a summary of the key findings of the with-in case analyses. Even though case E will be treated as three separate cases in the analyses, because the S&OP processes are different, the key characteristics remain similar across case E1, E2 and E3. Case E1, E2 and E3 will therefore be treated as one, when examining the key characteristics.

Table 4.1: Summary of key characteristics of the cases

Cases Key characteristics A B C D E Production network Approximately 90 facilities worldwide Facilities in The Netherlands, Germany and Sweden 1 main facility in The Netherlands, that produce 90% of the products Production has recently been outsourced 30 facilities, mainly in Europe

Product(s) Personal care, consumer tissue and professional hygiene Paper, specialties, starch and protein & foods

Beverages Technology and software solutions

Plastic pipes, e.g. used for supplying water

Markets 150 countries Spread all over the world

Mainly Europe All over the world

25 countries

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Table 4.2: Summary of with-in case analyses Cases A B C D E1 E2 E3 Participation of finance function Exec. Meeting. Varies across coutrines All 3 Demand review + input for S&OP When necessary All 5 All 3 No Tasks of finance function Update financial forecast Update financial forecast, profit optimization Update financial forecast, calculate scenarios, ABC classification Update financial forecast, inform about budget, stock levels and order intake, support process if needed Update financial forecast, calculate scenarios, currently SC driven Drive process, update financial forecast, give information, what needs to be done? Give next years budget, update financial forecast Finance function's involvement in horizontal alignment Limited role Important role When conflicts are escalated rarely has a role Currently no role No role No role Looking to involve finance function further?

Yes Yes Yes Yes Yes Yes No

Role of the finance function

Limited involved

Involved Involved Limited involved

Limited involved

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4.2 Cross-case analysis

4.2.1 Participation of the finance function

When analyzing the participation of the finance function in the S&OP process across the cases, several patterns emerge. In case B, E1 and E2, the finance function participates in all of the organizations’ S&OP meetings. These cases, reveal a possible explanation to why these cases have the finance function participate in all the S&OP meetings. All of the mentioned cases have the finance function participate in the initial S&OP meetings, not necessarily to contribute to the meetings, but to receive information. This also implies, that the finance function within case B, E1 and E2 have a more important role, in the later stages of the S&OP process. This can be seen in case E1, which is currently in the process of changing its S&OP process from being supply chain driven to financially driven. In case E1 specially the 4th_{and the 5}th_{meeting is changing to be led by the finance function, but the}

finance function will also have an important function in the previous meetings, as “the financial role is in everything. Everything must be made financially” (Interview 1, case E) and “in every step, finance must be onboard and there must be a financial output” (interview 1, case E). This becomes evident, for instance in the demand review, where “finance is also onboard to, let’s say that, the demand review predicts not only the quantity of 10.000 pieces will be sold next month, but also that it would be €100.000” (Interview 1, case E).

The pattern consisting of cases A, C and D show that these cases only have the finance function participate in some of the S&OP meetings. In these cases, the finance function only participate in the S&OP meetings, if the function is needed to be present, for instance to actively provide inputs or calculations. Within this group of cases, there seem to be two reasons to why the finance function only participates in some of the S&OP meetings. In case A and D, the finance function does not participate in all of the S&OP meetings, because both their S&OP processes are still at an immature stage. For instance, in case D, they have a S&OP process consisting of a single S&OP meeting, that was described as “a very basic S&OP meeting” (Interview 1, case D), where irrelevant matters are often discussed.

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to produce, for instance if there is a production constraint, without involving the finance function.

Lastly, the findings of case E3 indicated, that stability, such as the stable prices and currencies inside the European Union, enables E3 to leave the finance function out of the S&OP process. However, none of the other cases, which also operate within the European Union, indicated that the same stable prices and currencies enabled them to fully leave out the finance function of their S&OP process. Hence, there is either a, from the interviews, unidentified factor that enables case E3 to leave out the finance function of their S&OP process, or the findings of the remaining cases indicate that case E3 should involve their finance function in the S&OP process.

Further, it is also important to note, that case E1 and E2, that are both from the same organization as case E3, but situated in different countries than case E3 within the European Union, do have a need for the finance function to be attending their S&OP processes. This means, that even within the same organization, there are multiple sites that disagree with interview E3’s statement that “it’s so stable in the European Union, so the finance function does not have to be involved so much” (Interview 3, case E). In fact, case E1 and E2 have their own finance functions attending all of their S&OP process meetings, which indicates that both case E1 and E2 think it is important to have the finance function participating in the S&OP process.

4.2.2 Tasks of the finance function

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very few tasks defined for the finance functions emerge. Case A, D and E3 all seem to struggle to find tasks in the S&OP process, that the finance functions should be responsible for. For instance, case D revealed that all the functions involved in their S&OP process, have access to the information that the finance function brings to the S&OP meetings, as their systems are open, “We have to figure out, what the finance function can do more in the meetings” (case D, interview 1). Similarly, in case A, the finance function attends the S&OP meetings, to gather information, and rarely contributes with anything. Lastly, in case E3 the finance function does not attend any of the S&OP meetings which indicates that E3 has not formulated any important tasks for the finance function. On the contrary, case E3 revealed a disabling factor of involving the finance function in the S&OP process, to the point where the process becomes financially driven. Case E3 has a 3 month horizon, which, according to case E3, is such a short horizon that the finance function cannot drive the S&OP process.

Case B, C and E1 show a different pattern. In these cases, the finance functions have more tasks defined as their responsibilities. In case E1 (the process they are working towards) the finance function is able to instantly calculate scenarios, that will show the financial impact of proposed decisions. Case B is in the process of developing software, that will allow their finance function to instantly calculate scenarios. The finance function in case C is not able to instantly calculate scenarios. Instead, case C has developed its own ABC classification tool. However, it was revealed that the ABC tool is not updated very often. In one instance, approximately 2 years passed by, without the tool being updated.

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according to case E2, an enabling factor to involve the finance function to drive the S&OP process.

4.2.3 The finance function’s role in the horizontal alignment

When looking at the findings of the with-in case analyses, it shows that the finance function in most cases does not have a very influential role in the horizontal alignment. The findings of this study found several reasons, why this is often the case. In case E1, E2 and E3 the finance function does not play any role in achieving horizontal alignment. However, the finance functions of case E1, E2 and E3 do not contribute to achieving horizontal alignment, due to different reasons. Within case E1, the finance function is currently not involved in the horizontal alignment, because they do not have any fixed approach to reaching horizontal alignment. Case E1 therefore reaches horizontal alignment “based on who shouts the loudest… there is no factual or financial approach behind” (Interview 1, case E). However, case E1 is currently working on implementing a fully financially driven horizontal alignment process. This will be possible, when the finance function is able to instantly simulate scenarios “in order to see which direction we are heading” (Interview 1, case E).

In case E2, it is worth noticing, that the finance function does not have any role in the horizontal alignment within the S&OP process. At first, this can seem contradictory, as case E2 has a financially driven S&OP process. However, the reason is, that within case E2, the finance function works in silo, meaning that the function is only concerned about making money. For instance, the finance function might be against a certain product, because they are actually losing money on it. However, this specific product can open doors for E2 to other products, that they will earn a lot more money on. “Finance sometimes has a siloed view on it. It is costing you money to make, but they are not looking at the bigger picture. They are not realizing that this product is part of a range, where a lot of products are making money, and only this product is not” (case E, interview 2). Hence, case E2 shows that even though the S&OP process is financially driven, the finance function does not necessarily have to be involved in the horizontal alignment within the S&OP process, as there can be more aspects that are equally, or more, important than the financial aspect.

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Case A, C and D showed that the finance function does not contribute significantly to reaching horizontal alignment in these organizations. In case A, the finance function calculates the financial impact of decisions made in the S&OP process after the decisions are made. Unless the finance function is explicitly asked to, then the finance function will not participate in achieving horizontal alignment. “It’s pretty much to keep them aware… I would expect that they would have a say in decisions about operational issues. Increase capacity or not. So far I have not seen it” (case A, interview 2). Hence, in case A, the finance function will show the financial impact of the horizontal alignment, that the other functions have achieved.

In case C, the only time the finance function is engaged in reaching horizontal alignment, is when the conflicts of interest can not be solved by the functions themselves. In this case, the conflict will be escalated, and the managing director and the financial director will solve the conflict. In case D, the organization has rules within the organization to settle many of the conflicts of interest to achieve horizontal alignment. For instance, in case the organization has to choose between two customers to sell products to, the organization will usually base the decision on a first come, first served principle. Only in special situations, where the organization has to choose between a key customer and a regular customer, will the organization include financial aspects, such as profit optimization, to make the decision.

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5. Discussion

5.1 General discussion

Considering the findings of this study, none of the cases had the finance function fully integrated, in all of the investigated aspects (participation, tasks and influence in horizontal alignment). This is very much in line with what literature states (Grimson & Pyke, 2007; Thomé et al., 2012a). Further, the S&OP process is described as a generic 5 step process in literature (Noroozi & Wikner, 2017), but the studied cases revealed, that this is not always the case in practice, as some organizations, e.g. case B, C and D have a different S&OP process. In practice, the organizations adapt the S&OP process to the individual organization, and the environment that it operates in. This is also in line with what Kristensen & Jonsson (2018) say, that there is no “one-size-fits-all” procedure for the S&OP process. In their S&OP integration framework Grimson & Pyke (2007) state that, the necessary IT software to create real-time calculations for profit optimizations, is not available. However, the findings of this thesis found, that case e.g. case B is very close to have the software developed. Hence, as one could expect, there has been a development in the available IT software since Grimson & Pyke (2007) wrote their article.

Case E3 indicated that for the finance function to contribute to the S&OP process, by, among other things, changing the focus from volume to value, the time horizon of the process has to be longer, than short-term. This notion is in line with what Ivert et al., (2014) states. Lastly, a clear finding was, that the finance function can take varying roles within the S&OP process, ranging from not participating at all, to a leading role.

5.2 Participation of the finance function

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that the finance function will have a contributing or even driving role, for instance by simulating instant scenarios. This also implies, that the role of the finance function is not necessarily constant, but can change throughout the S&OP process. Case E1 exemplified this important contribution to current literature, by demonstrating, that the finance function participates in the early S&OP meetings because “the financial role is in everything. Everything must be made financially” (Interview 1, case E). Later on, in the S&OP process, the finance function will have to deliver inputs, such as scenario calculations. Case E1, thereby exemplifies one way to integrate the finance function, even in the early S&OP meetings, which both practice and literature’s conceptual papers (e.g. Ivert et al., 2014), which only state that the finance function should be involved in the S&OP process, have not been able to do.

Case C believes that they can develop tools, such as ABC classification, that will allow them to not have the finance function attend all of the S&OP meetings. This is somewhat in line with one of Grimson & Pyke’s (2007) points, when they argue that organizations need to develop software that will allow organizations to instantly calculate the financial impact of various decisions. However, Grimson & Pyke (2007) does not find that this tool will allow the organization to leave out the finance function of the S&OP meetings, actually quite the opposite, Grimson & Pyke (2007) argues that the finance function must be highly involved in the S&OP process. Hence, developing tools, does not enable the organization to fully leave out the finance function of the S&OP process. Furthermore, tools like the ABC classification are developed to address certain issues. The ABC classification tool tells which products are most profitable. However, there are many other potential issues, that the ABC tool can not solve. The finance function should therefore participate in the S&OP process, even though helpful tools have been developed.

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other hand, it seems doubtful that case E3 does not have any issues in the S&OP process, that are somewhat complex and require the knowledge of the finance function.

5.3 Tasks of the finance function

This study found, that a core task of the finance functions, throughout all the cases, was to update the financial forecast. This is in line with what literature calls a traditional responsibility of the finance function (Prokopets, 2012). The new responsibility of the finance function is to lead the entire S&OP process, by, among other things, conducting what-if analyses (Prokopets, 2012). Case E2 supports this claim, as they have a S&OP structure driven by the finance function. Even though only case E2 of the studied cases support this claim, there are indications that more cases will follow in the future. For instance, case E1, is in the process of changing its S&OP process, from a supply chain driven process, to a financially driven process. A possible explanation to why only one of the studied cases practiced the new responsibilities of the finance function could be, that the rest of the cases’ S&OP structure has not reached a sufficiently mature stage, to be financially driven. It is therefore possible that the claim stated by Prokopets (2012) is correct, but the study shows that not all cases have managed to involve the finance function sufficiently, to take on the new responsibilities stated by Prokopets (2012). Even though Prokopets (2012) has defined the new responsibilities of the finance function, then Prokopets (2012) does not mention how the finance function is supposed to start living up to these new responsibilities. The cross-case analysis showed that it was the top management’s order to the finance function to chair the S&OP process, that enabled case E2 to live up to these new responsibilities. This finding is in line with what Muzumdar & Fontanella states (2006).

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The ABC classification tool previously described from case C is in line with literature. However, in case C, the ABC classification tool is not updated very often. This is contradictory to literature, which states that assumptions regarding products profitability needs to be updated constantly (Muzumdar & Fontanella, 2006). Hence, according to literature, case C can continue using this tool, but it is important that the tool is up to date, and two years cannot pass by without updating the tool, as case C cannot assume the profitability of products remain fixed over time.

Prokopets (2012) states that the finance function has traditional and new responsibilities in the S&OP process. This is very much supported by the findings of this thesis. For instance, in case A, where the finance function mainly contributes by making sure the financial forecast is updated. This task reflects Prokopets’ (2012) definition of a traditional responsibility, which is to keep track of the organization. In case E2, the S&OP process is driven by the finance function. This task reflects Prokopets’ (2012) definition of the new responsibility of the finance function, which is to be the leader of the organization, when it comes to making the wanted numbers. However, as both the with-in case analyses and the cross-case analysis have shown, the studied organizations of this thesis indicate that the finance function can have more than the two responsibilities stated by Prokopets (2012). Further, the finance function of case C has more responsibilities than just keeping track of the organization, but the finance function is still not fully integrated, to take on all the new responsibilities stated by Prokopets (2012). Hence, case C seems to be in the middle of the two responsibilities stated by Prokopets (2012). This indicates, that the finance function need to go through several stages, for the finance function to be able to take on all the new responsibilities stated by Prokopets (2012). This indication is in line with Grimson & Pyke’s (2007) S&OP integration framework, that also has several stages, that an organization has to go through, before the finance function becomes fully implemented in the S&OP process.

5.4 The finance function’s influence in the horizontal alignment

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contrary, the finding is contradictory to academic literature, because literature says that the finance function should be involved in the S&OP process, and hence play a role in the horizontal alignment (e.g. Prokopets, 2012)

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6. Conclusion

When this multiple case study investigated the role of the finance function in the horizontal alignment within the S&OP process, several interesting findings were found. Out of all the cases that were investigated, the finance functions participation in the S&OP process varied across the cases. The participation varied from not participating in any of the meetings, even though the finance function was supposed to do so, to driving the entire S&OP process. One of the cases revealed, that they succeeded in making the finance function drive the S&OP process, the top management ordered them to do so.

Update of the financial forecast was found to be a standard task for the finance function in all of the cases. One of the cases revealed, that the use of simulation models, that can simulate instant scenarios, and show the financial impact of these allows the finance function to have the leading role in the horizontal alignment within the S&OP process, as these decisions will be made only based on financial ratios. However, a different case showed, that the usage of simulation models was not sufficient for the finance function to have a leading role, as this method does not take the strategic aspect in to account. In this case, the finance function will then have to share the leading role in the horizontal alignment, with a function that can bring the strategic aspect in to account.

This study contributes to literature, by finding and identifying that the finance function can take different roles within the horizontal alignment of the different functional goals in the S&OP process. The identified roles are: not involved, limited involved, involved and leading. Further, this study contributes to literature, by demonstrating that the finance function can be involved in the early meetings of the S&OP process, by making everything discussed in these meetings financial.

Managerial implications

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been mentioned, this thesis advices managers to develop tools, like the ABC classification tool, to help out the organization. However, this thesis strongly advices managers to not, replace the finance function’s presence in the S&OP meetings, with these tools. Managers are encouraged to enable their finance functions to calculate scenarios, as this seems to be an upcoming core task of the finance function. Lastly, managers are encouraged to order the finance function to drive the S&OP process, if the organization finds a financially driven S&OP process desirable. In terms of the finance function’s involvement in the horizontal alignment, this thesis advices managers to have their finance functions give advice on the optimal direction for the organization, based on scenario calculations. However, it is important that managers keep in mind, that there might be a strategic aspect, that these calculations do not take in to consideration.

Future research

One interesting finding, that this study was not able to fully explain, was that there are both different S&OP structures (case E) and different expected participation of the finance function along the S&OP process (case A and E) across countries, within the same organization. This could be a starting point for future research, to investigate if there are national/environmental factors, that makes organizations like case A and E have different S&OP structures, with different participation of the finance function, across countries, or if the different S&OP structures are triggered by a third factor.

Limitations

This thesis has been conducted under several limitations. As earlier stated, case E1, E2 and E3 were initially thought to be one case, consisting of 3 interviews, However, as the cases were split up, the analyses of case E1, E2 and E3 were all built on one single interview, and not on 3 interviews like the other cases, which was the intention. It can therefore not be ruled out, that relevant information was lost, as the interviews in general were one-sided.

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8. Appendix

8.1 Within-case analysis of case A

Case A started a S&OP process in 2012. Prior to the implementation of S&OP, case A “had different figures everywhere” (Interview 1, case A). For case A, the purpose of implementing S&OP, was to reach one agreed plan throughout all the functions, divisions, factories, etc. Case A has 5 meetings in their S&OP process: data gathering, demand planning, supply planning, pre S&OP meeting and exec S&OP meeting.

Within case A, the VP of finance is always participating in the exec S&OP meeting. Whether the finance function participates in the rest of the S&OP meetings, varies across levels and countries. In some countries, the finance function participates every month, in other countries, the finance function does not show up to the S&OP meetings, even though they are supposed to. ”If you ask me to rate, I would say probably about 50% of the time where finance should be involved. Or maybe 40%. 40-50%, through all the different step” (interview 1, case A). Interview 1 elaborates, by saying that the finance function in some cases does not want to participate: ”I have never really come to terms with it. And neither have my colleagues. We have never come to terms with why, the financial community has such a resistance to participate in S&OP” (Interview 1, case A). Hence, The role of the finance function varies internally in case A. Throughout the organization, the finance function has a more significant role in the fifth and last S&OP meeting, as the VP of the finance function always participates in this meeting, compared to the previous meetings.

The main task of the finance function in case A is to achieve alignment of figures. For instance to avoid situations where the finance function believes the organization will sell 100 products, and the S&OP plan indicates that 110 will be sold. The finance function participates in the S&OP process to understand and explain differences in the beforementioned numbers. ”Finance is more on the side line, and only interested in getting info, to align the financial forecast” (Interview, Case A 1).

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Interview 3 revealed, that the finance function’s impact on the S&OP process could be improved in situations, where decisions have to be made. For instance, by having simulations immediately showing the financial impact of various decisions. Currently in case A, they make decisions, which the finance function then afterwards does calculations on. Case A would like it to become a more proactive process, and base decisions on financial impact.

Hence, in case A, the finance function’s participation in the S&OP process varies across countries, but the finance function always participates in the last S&OP meeting. The finance function only contributes to achieving horizontal alignment when they are asked to. If the finance function is not explicitly asked to do anything, they will only participate in the S&OP process to be able to update the financial forecast. Further, the underlying motive in the S&OP process is not to optimize profits, but to secure supply to customers. Based on this analysis, this thesis characterize the role of the finance function in case A as being “limited involved”.

8.2 Within-case analysis of case B

For case B, the main goal of their S&OP process is to have balance between the total production volume and the sales volume, which for this case means to have the appropriate stock level to supply customers, at all times.

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account managers, “but it was always an aim to have the decision making more based on the financial calculations” (Case B, Interview 2). The exact financial impact of the decisions is first known after the meetings are over, because the finance function has to wait for the decisions to be made in the S&OP process, and then make calculations based on these decisions. This sometimes means, that the decisions are already in progress, and can not be changed, even if the financial impact is not optimal.

Now that the finance function is involved in the entire S&OP process, the idea is that the total costs, such as production cost and transportation cost can be taken in to account. If this had been implemented earlier, “A lot of decision making could probably be different” (Interviewee 1, case B). Hence, case B is switching focus from optimizing sales revenue to optimizing profits. Further, case B is in the process of developing capabilities to instantly create scenarios, in a situation where they have to decide between alternatives. This will give the finance function a bigger role in the S&OP process.

Considering the horizontal alignment in case B, the finance function has an important say in this aspect. For instance, the finance function can calculate objective optimal actions, based on financial impact, when the organization has to make decisions. However, the strategic element has to be implemented in the decision as well, as some customers might be more important than others. Further, interview 1 revealed that there have been several times in the past, where the decisions made in the S&OP were given to the finance function. The finance function then did calculations based on the decisions, and turned down the decisions, as they were not beneficial for the organization.

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8.3 Within-case analysis of case C

Case C has a weekly S&OP cycle. The organization used to have specific S&OP meetings, but they moved away from that, because they want to discuss their problems immediately, and not have to wait for a certain meeting. The weekly S&OP cycle consists of a demand review, a supply review and a S&OP review. Interview 2 revealed, that case C believes this cycle is sufficient, as pre-S&OP meetings and specific finance meetings can be covered in the current S&OP cycle that case C has.

In this S&OP cycle, the finance function participates in the demand review. The finance function works closely together with the sales function, to create a demand plan in euros. The primary task of the finance function is to align the financial forecast, with the S&OP numbers, and to adjust the financial forecast for risks and opportunities. The executives then have a monthly meeting, where they discuss the financial forecast. The finance function does not directly participate in the S&OP review, but can be asked to support the review by calculating the financial impact of different scenarios. According to case C, the ideal situation would be one, where the finance function is involved in all decisions made in the S&OP process. However, case C does not believe the finance function has to be further integrated in their S&OP cycle, because the finance function has developed an ABC classification, of all the products case C produces. In this classification, the products classified as an A product, are the products that are the most important, in terms of profit and/or strategic aspects. However, the organization does not update the ABC classification very often. For instance, interview 1 revealed one instance, where the classification was not updated for two years.

Whenever case C has conflicts of interests among its functions, the finance function does not get involved, unless the conflict is escalated to the management level, where the managing and financial director will handle it.

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8.4 Within-case analysis of case D

Case D started implementing a S&OP process in early 2019, due to suppliers long lead times and shortages in specific component markets. This led the organization to buy large amount of components, which led to very high stock levels, and high working capital. Further, case D had a desire to enhance the delivery performance. This convinced them that they needed to implement a S&OP process. Further, differences in working routines between the sales team and the operations team resulted in incorrect information being used in the demand forecasts. Hence, the goal of the S&OP process in case D is to reduce the working capital, and to create better insights for the sales, operations and management teams, so they know exactly what and how much they have on stock. The S&OP cycle in this organization consists of a single, monthly S&OP meeting, “it’s a very basic S&OP meeting” (Interview 1, case D).

In this case, the finance function is available to support the S&OP process, but does not necessarily participate in the process. Up until this point, it has not been necessary for case D to have the finance function participate in every step of the S&OP process. Currently, the finance function gives information about the financial budget, amount of stock, order intake, prices and margins, but “I can also give that information”, “Everybody can check it, we have a very open system” (Interview 1, case D). Furthermore, the lines of contact are very direct in case D: “If we want to know something about cost prices or margins, we ask the finance guys sitting at the table ahead” (Interview 1, case D). “the finance function does not give a lot of information” (Interview 1, case D). Hence, the finance function does not have any areas that solely they are responsible for in this organization, but they are trying to figure out, how the finance function can aid the S&OP process.

In situations where the organization has to choose between serving multiple customers, the organization will normally choose between the customers on a first come, first served principle. Only in special situations, where the organization has to choose between a key customer and a regular customer, will the organization include financial aspects, such as profit optimization, to make the decision.

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8.5 Within-case analysis of case E

In this organization, the different countries, all have their own S&OP process. They will therefore be treated, as three independent cases.

8.5.1 Within-case analysis of case E1

Case E1 started S&OP in March 2018. They have a supply chain driven, short term process, that is a reactive process, where problems are only dealt with once they become significant enough. The S&OP process in case E1 follows 5 steps: data gathering, demand planning, supply planning, pre S&OP meeting and exec S&OP meeting. The finance function is attending all the meetings of the S&OP process. After the meetings, the finance function calculates the financial impact of the decisions made in the process, and then reports them back to the executives.

Case E1 does currently not have a structured way of managing conflicts of interest, where the conflicts are solved in a factual or financial approach. “Basically the one who shouts the loudest” (Interview 1), is the way they are settling conflicts.

However, case E1 is currently changing their S&OP process, to a financially driven process, that gives insigths in the medium to long term, where the finance function can instantly create scenarios and calculate the financial impact of these scenarios, that the executives can base their decisions on. The new S&OP process that they are implementing will follow the same 5 meeting structure. Furthermore, it is important, that the finance function can deliver their insights immediately, so that once the meeting is over, all information is shared, and the process can move on to the next step.

The finance function will continue to attend all the meetings, but the finance function is going to be leading the 4th_{and 5}th_{meeting. For instance, in the 4}th_{meeting it is an important task}

to instantly create financial scenarios, and present these to the management in the 5th_step.

However, the finance function will also have a strong role in the other meetings, such as the demand review meeting, where the finance function will be responsible of transforming the focus from volumes to value, for instance, by taking the forecasted demand of 10.000 pieces and calculating it in to €100.000.

Investigating the role of the finance function in the horizontal S&OP alignment