S&OP vs. FP&A: Is this a competition, really?

Feb 13, 2024 | S&OP/ IBP

S&OP vs. FP&A Is this a competition, rally

It’s shocking to see how similar S&OP and FP&A are. To be more precise, demand planning in S&OP resembles FP&A the most. In fact, the skills required in FP&A matches those in demand planning. In this article, you will learn the following:

  • What’s FP&A?
  • What are the similarities with demand planning and with S&OP?
  • What are the differences with S&OP?
  • How can we go from “vs” to “and”?
  • What are the differences between IBP and XP&A?

What’s FP&A?

FP&A is a function within Corporate Finance. The FP&A acronym conveys the main activities that the team performs. They are Financial Planning and Analysis.

The focus is on the financial and strategic aspects in an organization. It involves developing a budget, annual operating plan, and the three-statement model forecast—P&L, balance sheet, and cash flow statement.

All these tools are forward-looking, and the goal is to provide sound strategic recommendations to Senior Leadership. The tables below show the definition, scope, period of time and examples of these tools.

What

Budget

Definition

It shows the resources that an organization has available.

Scope

Line-item detail of the P&L with the targeted dollar amounts.

Time Period

One year.

Example

The budget of a new product launch including estimated production cost, shipping cost, and marketing expenses, among others.

What

Annual Operating Plan

Definition

Comprehensive roadmap on the budget’s execution.

Scope

Granular and detailed explanations on how to use the annual budget.

Time Period

One year.

Example

For the marketing expenses budget of the new product launch, it details the allocation among ads, store samples, email marketing, social media, etc.

What

Forecast

Definition

A prediction or an estimate considering facts and probable assumptions.

Scope

It varies. The narrower the scope, the higher chances for inaccuracies.

Time Period

It varies too. The longer the period, the higher chances for inaccuracies. Think of the weather forecast.

Example

A sales forecast. If the forecast is by SKU, there will be higher chances for inaccuracies than by product family/ group.

Because of the advances in technology, the cloud, and Covid-19, FP&A has evolved into a top finance function. It has a strong accounting component, but the focus and objectives differ with accounting.

During my time as a full-time accountant before entering the supply chain world, my main activity was building the three financial statements—P&L, balance sheet, and cash flow statement—based on past transactions.

I needed to ensure that the financial statements were compliant. FP&A is more fun because it looks into the future and provides strategic advice, similar to what demand planning and S&OP do.

What are the similarities with demand planning and with S&OP?

The Hackett Group has put together an excellent diagram to show where demand planning, S&OP, and FP&A fits. Demand planning is a step in the S&OP process to balance demand against supply. This is shown at the bottom of the diagram.

Financial planning—FP&A—is the next level, translating the operational plans into financial plans which are linked to the strategic planning, at the top of the diagram.

Demand planning and financial planning share their focus on the future and on providing leadership with actionable insights. Both teams create forecasts and analyze variances in price, volume, and mix. Both teams work with marketing and sales as well.

integrated business planning

Demand planning, S&OP, and FP&A face the same challenges too. In an insightful article, Eric Wilson states that the demand planning and FP&A teams feel the same pressures to do more with less and the need to keep pace with the business of tomorrow.

Wilson encourages integration between demand planning and financial planning as the solution for better decision making.

The challenge is that in many organizations, S&OP has evolved separately from the financial planning that FP&A teams perform, as noted in a recent article from FP&A Trends.

When this happens, it is a dead-end street, as S&OP loses strength being perceived as a process within supply chain only.

What are the differences with S&OP?

Although both acronyms—S&OP and FP&A—refer to planning, they are different in the following aspects:

  • Scope: S&OP has its origin in supply chain and as its name denotes, it is about operational planning. FP&A, on the other hand, lives in finance and it is about financial planning. Another point related to scope is that S&OP has a strong application in manufacturing companies. FP&A applies to all companies.
  • Unit of measure: S&OP manages physical units with different unit of measure. FP&A uses monetary units or value.
  • Metrics: Naturally, S&OP uses supply chain metrics related to physical units and time while FP&A uses financial metrics.
  • Approach: S&OP uses a bottom-up approach—from the granular level to high level—while FP&A typically applies a top-down approach.
  • Planning Horizon: S&OP has a monthly cadence and S&OE, a weekly cadence. FP&A sometimes works with longer planning horizon such as quarters.

How can we go from “vs” to “and”?

“Vs” conveys competition between S&OP and FP&A. It doesn’t have to be that way. Let’s change it for “and”. Integration of both—operational and financial planning—linked to strategy is the answer. Instead of evolving independently, S&OP and FP&A merge in Integrated Business Planning (IBP) or Extended Planning and Analysis (XP&A).

To facilitate integration, there are two critical aspects:

  • S&OP and FP&A team members need to sit in each other’s meetings to then decide which meetings to keep. This exploratory phase will contribute to understand and help each other better. There are more similarities than differences!
  • All team members need to speak a common language that is the language of the business. This is finance and accounting.

Of course, both teams must be willing to collaborate to build a win-win relationship.

What are the differences between IBP and XP&A?

Both concepts—IBP and XP&A—refer to such a merge between operations and finance aligned with strategy. The difference is the origin: from S&OP to IBP; from FP&A to XP&A. IBP and XP&A represent the most advanced maturity in planning.

Along the same lines, Niels Van Hove explains that “xP&A and IBP have the same objective: tightly integrating strategic, financial, and operational plans with budgets.

They’re planning processes that have evolved from a separate functional origin. Both are eager to integrate further and provide better forward insights to facilitate better business decisions.”

To conclude, there are no fundamental differences between the IBP and XP&A concepts.

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