The role of the industrial Finance Director has changed in response to a once-in-a-generation transformation of process and systems. Some businesses have recognised this and acted accordingly. Many haven’t, and the clock is ticking.
In today’s ultra-competitive, data-driven industrial landscape, finance professionals are grappling with how best to take advantage of new approaches to investment and growth opportunities, risk management, innovation and digital technologies.
The impact of this transformation will be widespread, affecting every business unit and all stakeholders, both internal and external (employees, upstream/downstream suppliers, collaborative partners and customers).
Which strategy to adopt is determined by asking key questions such as:
- How do we account for risk across an increasingly complex supply chain?
- What impact will subscription pricing have on our CapEx and OpEx?
- Could new digital forecasting models augment and improve our traditional financial planning tools?
- What benefits could we gain from adopting advanced systems built on automation, artificial intelligence (AI) and big data analytics, and what would be the timeframe involved?
These were the issues explored at Manufacturing Finance Summit 2019, which took place at the world-class BMW Group MINI Plant Oxford Assembly (deserved winner of The Manufacturer MX Award 2018 for ‘Smart Factory’).
Attendees spent the day rotating between a series of 30-minute roundtable conversations, hosted by experts and a world-leading manufacturer.
This innovative format enabled attendees to share their experiences first-hand and network with their peers across a day of knowledge-sharing and growth-focused conversation.
Supporting these discussions were two keynote presentations by finance experts from AkzoNobel and Simon-Kucher & Partners, as well as an expert panel discussion. Overseeing the day’s proceedings was Neil Anderson – managing director of Caterpillar Skinningrove, located near Teesside.
Stopping pricing from costing your business everything
Proceedings kicked off with 15 minutes on making money (rather than saving it) from Dr Peter Colman, of global pricing strategy consultancy Simon-Kucher & Partners.
The pricing expert’s provocative keynote – Pricing: If you managed costs like this you’d be bankrupt! – may have a controversial title, but there is certainly an element of truth to it.
Pricing is a business’s strongest profit driver. A 5% improvement in variable cost, fixed cost and volume results in a typical increase in operating income of 13%, 15% and 20%, respectively. However, a 5% improvement in price leads to an average 33% increase in operating income.
Many businesses want to raise prices, yet almost all are unsuccessful. According to Simon-Kucher’s latest Global Pricing & Sales Survey, companies typically achieve little more than a third (37%) of their price increase target – essentially what they ‘get’ versus what they ‘set’.
There are three reasons why businesses struggle with pricing, said Colman: Goal misalignment, cost-plus mindsets, and bad guidance.
“Effective pricing execution comes down to three things,” Colman said, “Providing guidance through reports and tools; assuring competence through training and development; and aligning sales incentive schemes to reward a ‘margin mind-set’.”
Talking the talk
Another cause of poor pricing execution (among other impacts) is a lack understanding from non-finance employees at all levels of decision-making that has financial implications.
The issue’s prevalence was raised during the day’s panel discussion and is something that’s being compounded by the widespread belief that finance is a standalone business unit, rather than something that touches every stage of the end-to-end process.
Practical ways of changing that perception was the focus of Alex Sashenkov’s presentation, Finance for non-finance (FFNF) managers.
Sashenkov built his FFNF initiative within AkzoNobel upon three pillars: Learning the language of finance, understanding the voice of the customer, and realising the benefits of becoming more commercially aware.
This can be achieved through training (with an emphasis on interactive workshops and relatable examples), tools (such as automated and/or responsive digital interfaces), and offering a framework that balances empowerment with governance.
Roundtable discussions: Key takeaways
BUSINESS CONTINUITY PLANNING
– The development of a business continuity plan includes four steps: Conduct a business impact analysis to identify time-sensitive or critical business functions/processes and the resources that support them. Then identify, document and implement actions to recover them.
– This plan can’t be a ‘box-ticking’ exercise and sit gathering dust in a drawer. It needs to be regularly reviewed and updated to mirror the evolving risk environment.
– The key question is; How much is enough? Rather than scenario-planning for every event, focus on establishing a robust response plan for any event, covering the five ‘W’s’ (who, what, where, when, why).
– Risk management can’t be outsourced, nor can it be treated in isolation. Everyone, regardless of role and seniority, needs to be aware of it and how their actions affect it.
OPEX vs CAPEX: THE IMPACT OF SUBSCRIPTION PRICING
– OpEx accurately reflects the cost of doing business since no future benefits are gained. If the OpEx is too high, a company can easily lose money. Unlike CapEx, the debt of OpEx can’t be offset by any future benefits.
– IT spend has traditionally been allocated under CapEx, but with the rapid advancement of technology, IT infrastructure needs are becoming less predictable. This has made subscription pricing more desirable and makes more sense for it to be put into OpEx.
– Experience would suggest that customers are more willing to accept a price increase if you offer them a value-added service, rather than a standalone product. The focus of the transaction becomes collaboration and partnerships, rather than purely commodity-based.
ROI FROM AUTOMATION, AI & BIG DATA
– Many businesses have yet to see the payoff from their investments in big data. The learning curve was too steep, the tools were immature, they thought they could do a lot more with it and they faced considerable organisational challenges. It’s led to them rethinking their data strategy, just as the technology landscape matures and AI becomes more real and practical.
– Manufacturers understand the ROI for physical automation, but don’t have the tools to measure the less tangible value from digital investments, such as greater insights and faster decision-making. There are many factors contributing to bringing a new product to market faster, how do you correctly assesses what impact big data analytics played?
– Too often, digital technology conversations start with tools and systems. They should start with people and processes, and with question asked about what it is the business wants to achieve/overcome.
ADVANCED BUDGETING & FORECASTING
– Not enough employees within manufacturing businesses understand the relationship between what they do and the impact that has on cashflow.
– One factor holding businesses back from more accurate budgeting and forecasting is siloed working. Silos significantly impact collaboration and the speed of decision-making across an organisation, reducing competitiveness and responsiveness, and increase its vulnerability to disruption.
– Breaking down these silos by centralising data, processes and reporting allows different functions, teams and sites to collaborate more effectively, and provides the level of control, forecasting and planning the modern business environment demands. However, the time and complexity involved in successfully uniting previously separate business systems, processes, data structures, KPIs and reports shouldn’t be underestimated.