FP&A in Manufacturing: Building a strategy for a changing landscape

Kaitlin Suggs
Hello, my name is Kaitlin Suggs. I'm pleased to welcome you to today's webinar, FP&A in Manufacturing, Building a Successful Strategy for a Rapidly Evolving Landscape. Today we will discuss how manufacturers can effectively navigate industry macro trends, mitigate risk, and drive growth by leveraging technology best practices. If you have any questions for our team as you listen to the webinar, please don't hesitate to send us a message using the webinar chat functionality, or you can drop us a note at marketingna at wolterskluwer.com. Without further ado, I'd like to welcome today's presenter, Kyle Treanor, senior pre-sales engineer at Wolters Kluwer CCH Tagetik and our resident manufacturing expert. Kyle, over to you.

Kyle Trainor
Thank you, Kaitlin, and I will welcome everyone again to our webinar today. Let's talk briefly about our agenda. So I want to kick things off by giving a bit more detail to the current macro trends that I think we're all seeing at the moment. I do want to give a bit more color into how each of these areas may be impacting your business. We'll then walk through some FP&A best practices, some key areas that I've really seen success from my network. Next, we'll highlight how to start building a strategy for growth. And then we'll also walk through developing a three to five year plan if that's something that maybe isn't quite yet in place or still a work in progress for your organization. So let's talk a bit about the macroeconomic landscape. And we hear a lot about these factors. I mean, I think we all watch our local news stations. But these are all very important developments in respect to how organizations like your own should really be preparing for the possibilities that are to come. So I do want to try to double click into each of these. And let's start with inflation. I mean, gosh, I can admit that the inflation narrative, it's gotten a bit stale. We could say inflation is so last year, but I think the reality behind inflation, especially as we look backwards, is it has remained fairly sticky. And while I think your organization may have been accustomed to these sticky rates, the current rates that are out there at the moment, you also want to keep in mind your end consumers as well. Inflation rates, they're key factors to consider. It's really a great jumping off point. to understand how these trends may be affecting your sales year over year. They might be affecting your labor costs, your other expenses. So for me, from a technology point of view, I actually love to embed regression type analysis tools to understand inflation as it pertains to these different areas of your organization. And if we do hopefully see interest rates come down, I think it would also be beneficial to understand that side of the coin and how maybe consumer spending is going to change, how your organization's borrowing techniques may shift your plans. So I still think inflation should really be at the forefront of our minds. This is still quite a hot topic that is really probably going to change within the coming months a year. Okay, so let's move on to tariffs. I'm not here to get political with anyone. But this is really the reality domestically. Here in the US, there has been a lot of talks of tariffs. These tariffs have the potential to span across the global supply chain. If you look last year, the US imported $1.2 trillion worth of materials. And they did that just from China, Mexico, and Canada alone. So if these tariffs do come into play, we've heard the 25% tariffs coming to Canada or to Mexico. These are going to increase costs of raw materials. It is going to increase costs of your intermediate goods. And this is going to affect a wide range of industries, especially within the manufacturing vertical. Higher costs, they're going to squeeze your profit margins. The quick answer may be to pass these prices to the consumers. It's probably what your end consumers are thinking of already. But again, keep in mind that point on inflation, I mean, we just discussed this, how the end consumers perceive that in their own spending habits. So maybe a revision of profit margins may be more beneficial if you're thinking more about customer satisfaction. and overall sales rather than maintaining margins and potentially having competition creep in from a pricing perspective. Other alternatives that I think we'll get to a little bit later on is maybe just search for new suppliers for intermediate or for some raw materials. But I do think the golden question here is, are you going to be ready when the competition's there and prices are fluctuating in your profit margins are changing quite drastically, this is really a key area where businesses like to pounce. So it's really important to be resilient and to understand where that risk really is. Let's move on to exchange rates. The US dollar, I think it's at a 55-year high right now. The appreciation of the dollar, it pushes up the price of goods as well, made domestically. to your export markets. This is definitely a key driver when you should be looking at your overall sales, especially as they pertain to your buyers that are overseas. They might not see the price tag as attractive as it was in past years. So that's a trend that I definitely like to focus in on for people who definitely have some international relations with some of their end consumers. You also want to keep, again, your competitive landscape in mind here. Local currency profits for foreign producers in the US, this is just another area where they're likely able to reduce their prices and that they're charging overall and they can actually draw your customers away by having a more attractive price because at the end of the day, they're able to recognize that profit in their own currencies. The last piece here, I kind of like to think actually kind of molds all of these factors together. It's kind of a little bit more broad. It has some weighted scales to it, but your producer and your consumer price indices, right? If we look at our inflation, potential tariffs, exchange rates, right, we can mold these effects into these types of indices. And these, frankly, these really come in handy. They do bring this weighted aggregation technique. You don't have to go sift through all of the lower levels of detail though. Sometimes that actually is a really great thing to be doing within your organization. I like to think of your PPIs and your CPIs as really great macro factors that you can bet into some of your overall plans, leveraging artificial intelligence to really help you model some of those things out. So the effects on some of these to your business and kind of just a different lens to some of the areas that we just focused on. I mean, businesses that excel in their overall margin planning, can they actually, they navigate market fluctuations better than the next? They're able to optimize their operations. They can they can still drive source sustainable growth. So I do think each of these areas are really key focuses that people need to be keeping in mind. Product and customer profitability, of course, again, we just spoke about some of those macroeconomic factors, how they're going to affect your overall profitability, what your customer's perception as well, your price and cost of goods and your strategies around those. There's lots of suppliers out there. There's lots of different ways on how to purchase product. So I think looking at those overall strategies is another way to optimize. And your indirect costs optimization as well. I think these are definitely key areas that can play crucial roles to a company that really wants to try and survive a market that is shifting quite drastically. And we'll talk about some techniques on how to really mitigate some of those risks. So looking at, let's say, product and customer profitability, just to kick things off, we want to analyze what products and customer segments, probably the combination of both, contribute the most to your bottom line, right? I mean, typically that's where businesses are making the most informed decisions on where to invest the resources. This is where all of your detailed profitability, your cost to serve evaluations. Look at your high margin products. Look at where your valuable customers are and prioritize those efforts to continue to yield those returns. and making sure that those dollars that are being spent align with the profitability goals, understanding that you're going to have some factors that are going to come into play through the coming months. Talking a bit more about pricing and cost of good strategies, this is just another area where we can really look at maintaining healthy margins. dynamic pricing models is something that, of course, a lot of organizations probably already have in place today. It's a great way to stay competitive. It's a great way to try and maximize your revenue. You know, this is really a way, it's a way to potentially even reduce your production costs, enhance your overall profitability. This can be an art form sometimes, especially with some of these customers that are your long-term top dogs, if you will, that you really want to maintain that relationship, but also understand that there could be a balancing act here from a pricing and costs perspective. Indirect costs as well, just to kind of cap off this slide. overhead, administrative expenses, utilities. I mean, gosh, we think about the energy prices that have been going up as of recently. All of this is going to impact your overall profitability. Looking at activity-based costing techniques, continuous improvement programs, looking at ways where you can allocate these indirect costs a little bit more accurately can help identify opportunities on where to reduce costs. Oftentimes the reality is that some companies are still trying to uncover where some of these hidden costs are. And oftentimes it can come from this indirect bucket, if you will. So streamlining operations, reducing waste, there can be a lot to unpack for some of our complex manufacturing organizations. So this is just another area where we can really start to try to manage some of those growth trends that I know we're all striving for. Okay, let's move on into best practices with NFP&A. I have a top seven list here. These are really some areas that come up time and time again when I'm talking with my network. And I think this really provides some great insights into different areas that have really allowed a lot of our organizations to be successful. Kicking that off with data-driven decision making. Honestly, this This might be my favorite one as #1. Data, data, data. I always like to say data is king. Maybe that's just the data nerd in me, but I think we all know that data is really a crucial, a foundational aspect to our organizations. Data is only becoming more complex. It is only increasing in the amount of volume and the amount of data that we're actually looking at. It really speaks to how advanced analytics, how artificial intelligence can really bring a lot of success in our organizations. It can help us save time. It can provide insights that we're not able to see with our naked eyes. AI can provide such a strong foundation for your organization. if it's implemented properly, if it's used properly, not only from a data-driven area, but also from a data management frame of mind. Also utilizing this data in real time, whether you're leveraging dashboards and you're bringing in all of these different sets of data, sometimes it's that right here, right now situation that is going to able to shift your production line around so you're not wasting hours with labor and machine downtimes. Those are some of those key areas where you really want to focus in to try to cut those corners and those costs as much as possible. Driver-based planning, one of my favorites, this is something I do a lot with my customers. This is really a great way to level up your traditional budget, your traditional forecasts. Bring in some drivers, bring in some of those macro trends, see how it's actually going to shift your plans around, bring a more hybrid approach to some of your plans as well. And maybe in a little bit I can actually show you a quick demo on how to bring in some of those tools to light. Second area, comprehensive scenario planning. And hopefully everyone here, your organizations do some level of scenario planning today. I think it is an extremely important aspect for our FP&A organizations to leverage scenario planning. Best case, worst case, doing that what if analysis to analyze how inflation might be changing things, how a profit margin increase is going to affect your overall bottom lines. These are just simple examples of scenario planning. When I talk with my network, I really like to see some of these scenario plans get pushed out into other areas, trying to see how some of these numbers are actually going to play a part more operationally with your other cross-functional teams. I know we'll talk more about that in just a little bit. And last but not least here, I mean, conduct that sensitivity analysis. If that best case or that worst case does happen, okay, I can see it from the numbers, but what is next? You always have to be thinking about that next step. Next area, agile financial planning. Guys, this is moving beyond your annual budgets. It's that more real-time effect that we just talked about from our data-driven area. With technology, this is a great way where we can begin to continuously forecast. We don't need to have that one budget. We don't need to re-forecast once a quarter. And guys, you can see these trends update, can leverage our artificial intelligence, again, as an example, to analyze your data and really have a more robust forecasting process. And again, integrating this in with other business functions, bringing their different data-driven insights to the table as well, really bringing together this hybrid approach to planning where, again, FP&A, the way you look at your data is different than how your operational manufacturing lines in a specific plant in a specific region looks at their data. But it's extremely important that is the same set of data and that everyone is on the same page at the end of the day. Speaking of on the same page, strategic alignment. Our corporate objectives sometimes can be a little, let's say corporate, a little high level, and it's not really something that we're really looking at. Sometimes we just take a look at that overall budget and we're trying to stay on target, but there probably are some overall corporate objectives that also need to be focused in on. What are the financial impacts? How do we align resources? How do we How do we plan initiatives across our different plants to really get to that objective, whether that is a specific KPI, a specific metric? And we're going to talk about some of these points as well as we're talking about growth strategies and a three to five year plan. Risk management, I think risk is maybe a word I haven't used quite yet, but is really a byproduct of a lot of our conversations today. At the end of the day, when we are talking about these macro trends, when we're looking at these different types of scenarios that we need to be modeling out, we are trying to mitigate risk. It's got to be one of the most important pieces of our FP&A groups. we need to not only identify and assess the situations, but again, it's that spider web out of, okay, what are my other teams going to be doing? How is this going to affect cross-departmentally everyone else within the organization? It might be nice to see that one number, that one set of metrics at a top level, but if your teams aren't seeing that down at their level and giving you back their input, It's really pointless at the end of the day just to have that top level number. So being able to look at that risk and bring it down to lower levels as well as look at that as a full cycle of planning is very, very important. And backup plans, of course, and I think everyone hopefully always has some flavor of a plan B as well. But again, it's having this area of risk mitigation in place to hopefully make sure that you're still meeting those overall goals in some fashion. Cross-functional collaboration. This is another one that I like to say is near and dear to my heart. Key stakeholders in your planning process are going to be spread across teams. So your FP&A group, you got to be talking cross-functionally. It is such a crucial piece to really having a more robust planning cycle. We need to be promoting this collaboration across departments, across manufacturing sites. Oftentimes I see too many times just it's siloed, everything is siloed. The cross-functional piece is just a really another crucial aspect that I'm sure everyone wants to get to, but this is an area where technology can really provide flexibility for teams to be able to plan to look at their data in different ways, but bring it all together in a single platform and analyze it the way they need to, keeping FP&A, keeping the corporate governance at the top as well to be that governing body as we're looking at the overall numbers. And guys, I've kind of harped on this one throughout, but technology integration. AI is here to stay. I know it can be a bit daunting, but you know, the train's leaving and I don't want anyone to be left behind. We've seen so much success with artificial intelligence across my own network of customers, leveraging, you know, natural language processing, leveraging predictive analysis tools within our platform, it's really bolstered the way that our customers are able to plan. And again, when we think about artificial intelligence, again, it's automating these routine tasks. How can I even free up time to begin looking at items one through 6 that we just went to? Artificial intelligence is a great way to have these low-level redundant tasks that you find yourselves doing time and time again. I'm sure everyone here on this call has that one Excel sheet that they always go into. They always have to upload their data to. They have to run some VBA macro that someone put in years and years ago. They don't know how it works. This is an area where we can really start automating that in an even better fashion and freeing up our time here. Let's move to building a strategy for growth. And here I have six different areas I want to talk through. And first, again, we've touched on it a bit, but really achieving data transformation, leveraging a cloud-based solution. with, I mean, AI powered predictive analytics. Again, I think it's a very crucial point. I'll say in this day and age where having an AI powered platform that can really enhance and elevate and continue to grow with you is super important as data is becoming such an important part to that. So while this might not seem like a direct focus for you in terms of profitability margins for specific products, being able to analyze your data and understand your market at a more granular, detailed level is in turn going to help you with that trajectory for growth. Second piece here is to really analyze that data to find potential attractive markets for expansion. This is something that a lot of organizations are always looking for areas that they can sort of dip into. Maybe when you're analyzing, oh gosh, the lumber costs. So you're seeing a specific customer segment starting to buy more manufactured, engineered wood. There might be opportunities where you can start catering specific production plants to build new product lines based off of certain resources that you have, or maybe you have certain suppliers that are already in network that might be able to help you along the way. So you're able to really analyze these different sets of data and bring them all together as you're working through some of those strategic initiatives of growth. Third item here, develop strategies to really capitalize on nearshoring and reshoring trends. Really a fancy way to say, hey, look, your supplier network might need to be reviewed, especially when I come back to some of those macroeconomic trends with potential tariffs coming into play, with potential inflation risks coming into play. This is an area where maybe looking at where some of these goods are coming from could help with your overall growth from a profitability perspective and really where those costs are going. Next here is utilizing SKU rationalization, which we've touched on earlier today. making sure that you're reviewing your product portfolio, streamlining product offerings within your product portfolio, making sure that, especially from a manufacturing frame of mind, you're having all of those raw materials on hand. You're making sure that your segmentations that you have in place, your A items, let's say, are always in stock, are always being manufactured and produced. and making sure that maybe some of your SKUs that are maybe towards the end of their life cycles are being managed accordingly. Fifth item here, collaborate with your technology partners to really accelerate innovation. Everyone's accelerating innovation at this point when we're looking at technology. And oftentimes it's really important that you build a really important, a really great relationship with that partner. So your needs are kept in their minds as they're going in and building the best product out there for you. they're keeping your interests in mind. And I think that's a really super important part is really collaborating with your partners. Next, optimizing your cost structures, process improvements, technology adoption like we just touched on, trying to find where those indirect costs are through some cost optimization tools, analyzing data at the end of the day here is another area where you can in turn build out some of those growths by looking at areas of optimizing costs. Looking at developing a quick three to five year manufacturing plan, and again, kind of bringing a lot of these different areas together here. Of course, we want to set specific goals. We've talked about corporate objectives, business objectives. Those might be changing a little bit through, let's say, a five-year horizon. But typically in a three-year, those are pretty static. They're measurable goals, typically around profit, typically around revenues. And oftentimes at corporate levels, really looking for groups like F&P&A to really put some of these objectives into play. We've talked about market analysis. understanding what that looks like, taking into consideration those key trends that we focused on amongst others that may be unique to your business or your vertical, and building those into these to really understand how can I leverage these to my advantage or where do I need to look at potential risk as we're doing an overall market analysis? We want to outline our plans for process optimization and efficiency improvements. I think this is super, super important before we go into the next step on a digital transformation journey, which a lot of my network is going through. Finding an AI-powered planning solution is great. You really need to have your plans in place. You really need to understand, well, where are those areas that I can really have technology enable some of my processes? AI is really going to help, but it's not necessarily a plug and play in a lot of situations. So you really need to have your overarching goals in mind. Once you have that in play, we can really then start using the power of a platform, developing strategies for risk mitigation, taking these different sets of data, running through different levels of scenarios to, at the end of the day, try to mitigate risk. trying to create detailed financial forecasts for the next three to five years as well. Again, these are something that we really like to be done on a more continuous basis, really analyzing and looking at these rather than having these forecasts stay a bit static in nature. Looking at cost optimization, resource allocation, breaking down your overall plans into annual quarterly objectives, maybe even down to a monthly level depending on your vertical. And then you really want to be able to review this. You want to be able to recreate and reproduce this process. And of course, there's going to be adjustments along the way. But having a system in place to help you build out that process, build out that governance while still maintaining flexibility that your teams need is going to be a crucial part to this. I think we're, gosh, I think we're a little bit coming up to time here, but I really love to actually pop into our solution real quick just to highlight some areas that we've talked about today. I'll try to keep it super high level for the group here. Here's just a simple workflow, looking through my production plan. I could come through to look at my production planning input, whether I'm doing this within CCH Tagetik or I'm uploading this from another system. And here I can see across respective plants, product lines for my current year's budget. I have a very simple way where I can actually start modeling out inflation updates based off of the production plan across my sets of products. Let's say, right, looking at a specific scenario, what if inflation does spike up a little bit? What is that actually going to do to my production costs? And I can actually run through different calculators here and process my data extremely fast within a platform So now I can look at these products. I can understand their production and their total costs. But when we're looking at our products down into a raw material level, and I can see that respective inflation rate that we've implemented in, we can understand what this is going to look at a P&L level. But you can see here, we're down at an operational. We're looking at the individual raw materials while we already came in and focused on a finished good that we've been made in our manufacturing environment. Even looking a bit further on, we talked about some of our driver-based plans, some of our data-driven decision making that we really want to put into place. when we're looking at some of our product quantities and we want to be able to compare these against other data sets, whether those are internal data sets or external data sets, that could be your price, it could be marketing campaigns within the business, it could be like PPI that we've talked about here. But right here at the surface, leveraging a platform, I'm able to review and correlate, well, how are these data sets actually going to correspond to my actuals across the past X amount of years here? So as we're reviewing and we're analyzing our data here, I just scroll over a bit to my revenue mix here, I can actually see the impact analysis of my actuals against all of these different drivers that I've embedded in here. And as I scroll over and I look at my legend here, we can actually get a sense right from our bar chart. Some of our data sets here, our drivers are actually positive in nature. They're helping the business. And of course, things like inflation or things that maybe are yet to be figured out are actually negatively contributing to our overall plans. And with that, I'm going to pass it back over to Caitlin. Super appreciate everyone's time today. Thanks so much. 

Kaitlin Suggs
Thank you, Kyle. Again, if you have any questions or would like to reach out to a member of our team, please don't hesitate to send us a note at [email protected] or via the chat functionality. On behalf of the CCH Togetic team, thank you and have a wonderful day.