In many companies, a huge rift separates finance from sales and operations planning (S&OP), the companywide, cross-functional planning and decision-making process that helps organizations balance supply and demand for their products. Bridging that gap can greatly improve a company's ability to allocate its critical resources, according to Manoj K. Singh, associate partner in the supply chain strategy practice with IBM Global Business Services. Singh talked with Business Finance about best practices and technologies that can transform the S&OP process.

Business Finance: Do most companies have a formal process in place for sales and operations planning?

Manoj K. Singh: Unfortunately, no. It's a very ad hoc process that companies follow, and there's no fixed periodicity to it. Whenever there's a "fire" they get together in a meeting, but it may not include true representation of all the different stakeholders.

One of the reasons why the S&OP process has not been successful is because of organizational issues. Because it's one of those processes that is truly cross-functional in nature -- and not only cross-functional but also inclusive of trading and other partners -- there's no housing for S&OP in the organization, traditionally. There's no central planning or governing organization within companies that actually is responsible for orchestrating as well as enforcing this process.

BF: What kind of problems does that lead to?

MKS: One problem is that not all of the stakeholders get invited to the table for discussions; that can cause a lack of consensus. Second, even if some decisions come out of the process -- and they impact demand and supply, they impact marketing and sales, they impact your operations and suppliers -- there's no enforcement of those decisions.

There may be demand and supply mismatches leading to stock-outs or overstocking if there's no operational-level mapping. And on top of that, of course, you might do some financial projection at the beginning of the quarter which is not aligned with your operational constraints and operational plan, which means that as you get near to the end of the quarter you're scrambling to make your numbers -- but the bottom line is you can't, because you never had an aligned plan to start with.

BF: Are any best practices emerging to help companies tackle S&OP in a more orderly fashion?

MKS: Yes. First and foremost, companies are realizing that there's a need for a central organization -- call it an S&OP function -- to manage and orchestrate the whole process. They are realizing that they need certain processes, and potentially some sort of technology help, to reconcile their financial and operational slants in the beginning of the quarter or the fiscal year. That's the first step.

Second, they're embarking on collaborative processes and technology to help provide contextual collaboration between all the stakeholders, both within and outside of the organization.

Third, and very important, companies traditionally have done a lot of demand and supply balancing as part of their S&OP process, but they've done it without keeping in mind the financial implications of those operational decisions. That's the key: Every time you try to balance demand and supply, you need to keep in mind your financial objectives. It could be your revenue; it could be profitability or market share. That should dictate your operational decision-making. To do that, companies are turning to scenario-based planning and decision-making.

BF: So this is clearly something CFOs need to be involved in?

MKS: Exactly. The financial reconciliation is the starting point. An executive dashboard should be in front of CFOs and CXOs in general tracking the financial metrics, and that should drive all the decision-making throughout the S&OP hierarchy.

Starting with financial metrics and finishing with financial metrics is really something that's a new way of thinking about S&OP. So far, S&OP has been a very operational-level kind of process. It has to get a broader mandate within the organization, which means that CXOs have to drive the process by looking at the financial metrics and drilling down deeper into the root causes of problems. It's more of a top-down approach.

BF: What kind of technologies can help?

MKS: Collaboration, both internal and external, is an important aspect of S&OP, so clearly companies would need technology that can deliver that, but collaboration in a way that provides the right set of contexts to the individual stakeholders so that they can actually view and edit and provide information from their own point of view. And then the technology should be able to take those numbers and reconcile them across all the different multiple dimensions and hierarchies.

Then there's the whole area of events and exception management. When people are trying to make decisions and the technology is trying to reconcile all these different points of view, of course exceptions are bound to occur. They have to be raised and communicated, and exception-resolution mechanisms have to be provided by the tool.

Which leads to the third important aspect, which is an options generation capability in the tool. If there are exceptions that get flagged and people are notified -- let's say there's an exception between what the revenue target should be and what can be done from the operations standpoint -- the tool should be able to generate multiple options saying whether you have to increase your production capacity or your materials, what kind of costs that would entail, and whether that cost is commensurate with the revenue or profit that it would generate. Those are the kinds of what-if scenarios that the tool should be able to generate.