Parameter based planning
What is parameter based planning and how to apply it in your business.
In this blog, I want to shed some light on what parameter based planning is and how it can be applied. Throughout the years, I have seen several companies not making full advantage of this type of planning. And that is a shame, parameter based planning is one of the pillars of scenario planning, for example.
So, what is parameter based planning? It is the capability to plan specific KPI’s (or measure, or parameters) which are part of a calculation. Simple example: sales price x quantities = revenue. In this case, sales price and quantities are the parameters, revenue is the product of the calculation. In a scenario, you can now change the sales price and/ or the quantities to see the impact on revenue. Still, many companies plan at (lump sum) revenue, leaving very limited room for scenario planning. The only option is to adjust the revenue with a (lump sum) amount or a percentage.
In the example above, revenue is used. But across companies, many metrics are planned using lump sum value. Think of all kinds of costs variables (cost of goods sold, overhead costs, headcount costs). Most of these costs variables are the derivative of an underlying calculation, which is ignored when planning lump sum. For example, costs of goods sold can be broken down to this (simplified) calculation: cost price x quantities = costs of goods sold. This allows us, as a planner, to build a scenario where we can alter the cost price and/ or the quantities to see the impact on bottom-line results.
Parameter based planning can be applied within all organisations: big – small, local – international, commercial – non-commercial. As soon as planning parameters can be broken down to an underlying calculation, we strongly recommend using the calculation in the setup of your planning process and tool, instead of planning at the lump sum level. More parameters in your planning process allows for more options and a better support of scenario planning.
Are all metrics suited for parameter based planning? No, there are examples where this is not possible. Think of very specific costs, like insurance costs. Adding one resource to the workforce will not have an effect on these costs. So, parameter based planning is difficult in this example. In that case, the lump sum can be added to the plan and corrected each year for the inflation figure (for example). Allocation can be used to allocate this lump sum figure across different costs centres, for example based on number of FTE, number of square meters used, etc.
How can you improve your planning process to introduce parameter based planning?
1. Find all lump sum values in your planning process
2. For each lump sum value, analyse if there is an underlying calculation (simple or complex) that produces the lump sum value
3. If there is no underlying calculation, keep using the lump sum method for that specific metric
4. If there is an underlying calculation, incorporate the additional metrics in your plan and make it a calculated metric
With these steps, you get more control over your plan, the ability to recalculate a scenario based on changed parameters and therefor a higher quality output of your plan.
With parameter based planning, you have more control over your planning process, and you have created the possibility to start scenario planning. Most organisations do have such a high maintenance planning process (and tools), that scenario planning is not even considered. More on scenario planning and how to implement that in your organisation in one of my next blog post. You are welcome to reach out if you have any comments, suggestions, or questions regarding parameter based planning.