Unit4
Blog

Driver-Based Planning Step 1: Determine the purpose of the model(s)

Posted by  Michael Coveney

Driver-based plans are not a substitute for experience or management intuition but they can be an effective and efficient way to support the decision-making process.

  • When set up well they can answer questions such as:
  • What does the future look like based on our current mode of operation?
  • Are the forecasts on which our plans are based, realistic?
  • What would be the cost of resourcing the strategic plan and can we afford it?
  • What would happen if we changed direction or redistributed some of the budget to other areas?

In order to answer these and other questions, the first step is to determine the decisions the model is to support.  This will require an understanding of the factors on which the decisions will be made.  These factors can be broken down into 2 groups:

The first are the measures that provide a link between goals and the activities that support them along with their resource implications.  E.g. what does each of the organisation’s business activities (Sales, Production, Customer support, Product/service development and Administration) cost in terms of money, people and additional assets.

The second shows the interrelationship of departments, groups and activities that work together in achieving a goal.

If we go back to the first two questions posed at the start of this blog, the model needs to reflect the relationships between measures and structure, and how they change over time so that a prediction can be made.  With the last two questions the model would also need to handle the likely changes to be made to the model itself, such as fundamental changes on how departments maybe structured in the future.

As an example we will consider a typical commercial company selling products that it manufactures.  The questions initially to be supported include the first two questions mentioned as bullet points.  In order to predict the future and hence assess the accuracy of a forecast, we need to take the planned sales and costs and document what factors we believe affect them.  These factors will both be those that are internal to the company as well as external things that are outside of the organisation’s control.   Factors can be gauged through an analysis of previous actual results as well as asking those involved.  As each factor is identified, we need to identify what drives them.

For example, sales volume is driven from the number of sales opportunities, which itself is driven from sales enquiries.  The sales achieved from these enquiries is related to the number of on-line promotions placed by the marketing department and the price being asked compared with competitors. Profitability is driven by sales value less sales cost and cost of production.  Production costs are driven by volume produced which is a function of overheads, raw materials and staffing.  

In considering external factors, we could assume that sales volume is affected by competitor prices, and that the cost of raw materials is driven by inflation.

In each of these, we must break down the impact of each factor until we end up with a measure (known as a ‘driver’) that is not worth breaking down further as these items do not have a material effect on consolidated results.

With the third and fourth questions, the model would need to cater for new variables and possibly structural elements that would capture the cost of a project and its impact on current costs as well as projected sales. 

In this blog we can’t go into too much detail, but hopefully the concept is easily understood.  At this stage we are only documenting the variables and their associated ‘rules’ the model will need to hold, as well as the organisation structure.

We are not yet ready to build the model – that will come much later.

In the next blog I will look at defining the reports and analyses required as this will have an impact on the overall model design.

Michael Coveney

Michael Coveney spent 40+ years in the software analytic business with a focus on transforming the planning, budgeting, forecasting and reporting processes. He has considerable experience in the design and implementation of Business Analytic systems with major organisations throughout the world. He is a gifted conference speaker and author where his latest book ‘Budgeting, Forecasting and Planning In Uncertain Times’is published by J Wiley. His articles have also appeared on www.fpa-trends.com, that encourages innovation in FP&A departments.