Extended Planning (xP&A): Mitigating operational and financial risks in the face of global disruptions
Global disruptions - whether caused by pandemics, climate change, political instability, or other factors, can significantly impact the operational and financial planning of organizations. These disruptions can lead to supply chain disruptions, demand fluctuations, financial uncertainty, and ultimately threaten the survival of an entire organization.
The recent pandemic has accelerated the adoption of extended planning, as businesses have realized the need to be more agile and resilient in the face of unforeseen events. To become so, they need to adopt Extended planning (xP&A). By taking a holistic approach to planning that integrates financial planning and analysis (FP&A) with operational planning (OP), xP&A provides businesses with a complete view of their operations and helps them make better decisions in a complex and uncertain world.
In this post I’ll unpack how these disruptions impact organizations - and the growing burden that internal teams face because of the uncertain nature of unexpected change. I’ll explain the importance of scenario planning, and the importance of initiating a collaborative working environment so that FP&A and Ops teams are able to prepare for disruptions more effectively by utilizing xP&A.
Impact on Financial and Operational Planning
Global disruptions can impact both financial and operational planning in several ways. Supply chains can be disrupted, leading to delays in product delivery and increased costs. Demand can fluctuate, leading to over or underproduction and inventory management issues. Financial planning can also be impacted by fluctuations in demand, changes in market conditions, and currency fluctuations.
The Growing Burden on Internal Teams
Internal teams, such as FP&A and Ops, face an increasing burden because of the uncertain nature of these disruptions. They must be prepared to respond quickly to changing conditions, develop contingency plans, and ensure business continuity. However, with limited resources and budgets, internal teams often struggle to keep up with the pace of change.
The Importance of Collaboration and Scenario Planning for Finance and Operations
Both financial and operational teams play a significant role in ensuring the business prepares for disruption. They must work together to identify potential risks and opportunities. Effective collaboration requires clear communication, alignment on goals, and a shared understanding of the business. The finance team can provide valuable insights into financial data and help identify areas for improvement, while the operations team can provide insight into supply chain and demand data. The key here is that both teams must trust that the other team is coming from a place of good intent.
Scenario planning involves developing multiple potential scenarios for disruptions and developing plans to address each scenario. By doing so, teams can be better prepared to respond quickly and effectively when a disruption occurs. Scenario planning can also help identify potential areas of weakness in the organization and enable teams to develop plans to address those weaknesses before they become a problem.
Implementing an xP&A Framework
To start preparing for disruptions, the Office of Finance can work with Operation teams and take the following steps:
- Establish a collaborative framework: Develop a framework for collaboration between the finance and operations teams. This can include regular meetings, shared communication channels, and cross-functional projects.
- Identify potential risks: Use historical data and insights from both teams and externally to identify potential threats to the business. This can include supply chain disruptions, demand fluctuations, and financial instability.
- Develop contingency plans: Use scenario planning to develop contingency plans for potential disruptions. This can include identifying alternative suppliers, optimizing production processes, and adjusting financial plans.
- Test scenarios: Stress test scenarios to determine the effectiveness of contingency plans and identify areas for improvement. This can be done through simulations or other planning exercises. (I’ll talk about using AI in a later post.)
- Monitor and adjust plans: Continuously monitor and adjust plans as new data and insights become available. This will help ensure the business is prepared for potential disruptions and can effectively manage them.
Extended planning can also be used to support tax (like Direct, Indirect and Global Minimum Tax) and sustainability initiatives. By integrating sustainability goals into the planning process, businesses can identify and implement opportunities to reduce their environmental impact and improve their social and economic performance.
Wrapping Things Up: Embracing xP&A
Extended planning is a powerful tool that can help businesses to thrive in a complex and uncertain world. By following the steps outlined above, FP&A and Ops teams can begin to prepare for and manage disruptions through effective scenario planning, identify potential risks and opportunities, develop contingency plans, test scenarios, and continuously monitor and adjust plans to goals.
Employing a planning strategy that embraces end-to-end planning like xP&A, combined with rock-solid collaboration between finance and operations teams is critical for managing operational and financial risks in the face of global, local, or even organizational disruptions.
It's time to embrace extended planning. In doing so, organizations take a proactive approach to planning for disruptions and mitigate the impact on their business.