A case history of financial and operational modeling in corporate planning

Abstract

Cities Service Company is a vertically integrated energy company, with mineral and chemical interests. Its businesses interface in many areas so that decisions in one business cannot be made independent of the others. They must all compete for limited capital. The company is structured into Strategic Planning Units, which are individual businesses each with its own identifiable products and markets. The planning is done at the Planning Unit level under corporate guidelines and approval. The use of financial and operating models has evolved with the planning system. The task of assembling the pieces and constructing the detailed corporate budget and pro forma income statement was the first to be computerized. Most of the business units have evolved stand-alone models to quantify their plans. These vary widely in size and sophistication. As part of the earlier strategic planning process, it was necessary to determine what business lines to dedicate the company's resources to for long-term profitability. A mixed integer linear programming model was developed to evaluate these strategic scenarios. A goal programming version of the same model has also been formulated. As the corporate objectives and directions solidified, the need grew for a tactical model to show the short-term effects of business decisions concerning prices, markets, and production levels. The evolution and experience in the use of these models is typical of the state of industry development.