Posts Tagged ‘Performance management’

What do you say when the CEO is asking whether the company will hit its revenue targets for the current reporting period? Can you tell the CEO instantly which customers may be facing late delivery, and which orders may not ship? Can you tell the CEO what is causing the late deliveries and how the company could get back on track?

Even if your company has an effective, integrated ERP system, chances are you won’t have a good answer. Because, even the ‘best of breed’ ERP systems don’t give the business stakeholders sufficient visibility into what’s actually happening to ensure performance improvements.  Are employees able to determine for themselves the future risk to the company? Are they able to test alternative decisions and evaluate the financial and operational impact quickly and effectively? They should, because that is where the business value lies.

Not too long ago companies suffered from having too little data with which to manage the company’s operations. The ERP age has brought in a different problem of too much data, but too little information. This is not unusual because transaction systems, such as ERP, are designed to capture data and make a record of a transaction, principally for accounting purposes. They were not designed to provide insight gained from analyzing many similar transactions.

It is a well-known fact that financial services and telecommunication companies have pioneered the use of business intelligence (BI) solutions to enable them to analyze massive amounts of data they have accumulated over the years. As a result, considerable insight was gained from data mining and data analysis and thus, the need for BI capabilities grew in the ‘80s and ‘90s in other industries as well. In the past 5+ years, the interest, and indeed the need, for real-time access to operational data has increased dramatically. The promise of real-time operational BI that goes beyond the capturing of static data snapshots and enables users to identify and analyze business trends and patterns, is of major interest to supply chain management (SCM) managers because they know that better information leads to better decisions and outcomes.

But despite being a hot topic, and one that has been written about extensively in the last 10 years by industry analyst firms under its many guises of business intelligence (BI), operational BI, and business performance management – there has been only mediocre results. Why? 

BI tools suffer from two major drawbacks that prevent them from providing greater value and therefore obtaining greater adoption: They cannot identify causality and, as a consequence, they cannot provide a prediction of future performance and risk.

In SCM, without the deep supply chain analytics required to identify causality, BI tools cannot identify future risk based upon the current state of the supply chain. For example, while the information that a receipt of a shipment indicates that 20% of the shipment is damaged is important; the real value comes from being able to identify the orders that are impacted and therefore, being able to evaluate the potential financial consequence. In other words, BI tools do not provide actionable information and therefore fail to address a critical aspect of the day-to-day lives of operational people: knowing what levers to pull to affect change.

What has been missing is the predictive analytics to connect changes to consequences, both operational and financial. There is little value in knowing about a problem after it has occurred (or just before it occurs when you do not have time to react.) And knowing that something has changed is also of little value. But knowing the operational and financial consequences or root causes of these changes, and therefore what to work on, has immediate value. And knowing what to do to overcome the risks that these changes present is of greatest value.

For example, there may be several orders that will be delayed because of a shortage of one component. This component could be a fairly small part of a company’s overall purchase costs so the shortage may be overlooked using traditional BI tools. But its impact on future finished goods availability may be quite large. Predictive analytics identifies future risks associated with current changes.  And once you know what future risks are faced by your company, the natural next step is to find ways of testing the effect or impact of choosing one course of action over another to mitigate these risks.

At the heart of evolving business intelligence into business value is having the right tools at your disposal to make intelligent decisions that affect the future performance of your company. This requires:

• knowing sooner of risks to the business,
• understanding the operational and financial impact of the risk,
• assessing the action alternatives (through “what-if” analysis), and
• taking correction action to avoid or minimize the impact.

The ‘rear-view mirror’ approach to BI has not produced the performance improvements desired and urgently required by today’s businesses. Predictive analytics that can clearly demonstrate cause-and-effect have been the critical missing piece in the BI value proposition to-date. To maintain and grow its place as a strategic enterprise tool, BI must be redefined to encompass and address the issue of real-time performance management.

There’s no dispute about the benefits obtainable through use of supply chain management. There’s also no question that during the economic downturn, companies relied on supply chain management to weather the storm. I must admit, however, that I am somewhat surprised by the results of a recent survey, in which respondents reported a drop in the amount of overall cost savings as well as lower increases to revenues as a result of supply chain management initiatives.

The survey, 2010 Global Survey of Supply Chain Progress, was jointly conducted by CSC, Supply Chain Management Review (SCMR), and Michigan State University, with assistance by the Council of Supply Chain Management Professionals (CSCMP) and Supply Chain Europe magazine. Twenty industries were represented in this year’s survey, and respondents included representatives from both large and mid-sized companies, with sales ranging from $250 million to over $1 billion.

One of the surprising—at least to me, anyway—findings was that when asked about the overall impact of supply chain initiatives on cost reduction over the past three years, the number of respondents answering “none” or “don’t know/not sure” grew from 13 percent in 2009 to 20 percent this year. And as a follow-up, when asked about the overall impact of supply chain initiatives on increasing revenue over the past three years, the percentage of respondents indicating “none” or “don’t know/not sure” rose from 30 percent in 2009 to 47 percent in 2010.  How should that be interpreted?  Is it actually a lack of impact, or a lack of direct measurement to understand the impact?

I am encouraged by other results (which, to a degree, are counter-intuitive to the stats above). For instance, supply chain management is largely held to be of considerable importance. In fact, 82 percent of the respondents replied that supply chain management is considered to be a core importance for their organization, and when asked how much influence supply chain management has on running the business, 52 percent replied “to a great degree”–while another 35 percent indicated a “moderate degree.” 

Supply chain management also is a logical operation for companies to use to battle the effects of the economy. Indeed, 78 percent of the participants indicated that their firms increased emphasis on supply chain management this year. Additionally, given the growing emphasis on supply chain management, it only stands to reason that S&OP is increasingly valued as well. For instance, 66 percent of the respondents reported a moderate to high degree of impact using S&OP to improve the company’s agility so it can better respond to changes in customer demand.

I believe this will be a trend that will continue for a long time to come.  SCM and S&OP are sure to grow in importance given that increasing levels of outsourcing, globalization of demand, requirements for product innovation and demand volatility combine to have a profound impact on companies’ business performance.  Supply chain is becoming known as the sweet spot for impacting competitive advantage and operational and financial success.

For me one of the pleasures of being on vacation, as I was last week, is to read different newspapers and learn a bit about the local economy and politics.  While not quite as “local” as I would have liked, I happened upon the Caribbean version of the Miami Herald and was fortunate enough to run into an op-ed piece by long-time columnists Thomas L. Friedman of the New York Times titled “Really unusually uncertain”.  Many of you will have heard of Tom Friedman in the context of his book “The World is Flat”.  I stumbled across Tom Friedman in the late 1980’s – I think – and have been reading him avidly since.  Clearly I have completely plagiarized the title of Tom’s article, which in turn refers to US Federal Reserve chairman Ben Bernacke’s use of the term “unusually uncertain” to describe the outlook for the US economy.

Of course this uncertainty is not restricted to the US economy, which is the point Tom Friedman makes by focusing on the German economy and how it relates to economic recovery in Europe.  In fact he points to three influences that will need to be reversed if the US and EU economies are to recover soon:

The first big structural problem is America’s. We’ve just ended more than a decade of debt-fueled growth during which we borrowed money from China to give ourselves a tax cut and more entitlements but did nothing to curtail spending or make long-term investments in new growth engines.

Second, America’s solvency inflection point is coinciding with a technological one. Thanks to Internet diffusion, the rise of cloud computing, social networking and the shift from laptops and desktops to hand-held iPads and iPhones, technology is destroying older, less skilled jobs that paid a decent wage at a faster pace than ever while spinning off more new skilled jobs that pay a decent wage but require more education than ever.

But the global economy needs a healthy Europe as well, and the third structural challenge we face is that the European Union, a huge market, is facing what the former U.S. ambassador to Germany, John Kornblum, calls its first “existential crisis.” For the first time, he noted, the E.U. “saw the possibility of collapse.” Germany has made clear that if the eurozone is to continue, it will be on the German work ethic not the Greek one. Will its euro-partners be able to raise their games? Uncertain.

Commenting on Bernacke’s statements, Jeannine Aversa of Associated Press writes that

Consumers have cut spending. Businesses, uncertain about the strength of their own sales or the economic recovery, are sitting on cash, reluctant to beef up hiring and expand operations. A stalled housing market, near double-digit unemployment and an edgy Wall Street shaken by Europe’s debt crisis are other factors playing into the economic slowdown.

OK, OK, so there is lots of economic uncertainty.  What do we do about it?  During my time as a management consultant I learned a fundamental truth: Analyzing a situation is fairly easy, defining a future state is a lot harder, but the really hard part is defining the path to achieve the future state. Not being an economist I can comment little on the efficacy of Tom Friedman’s suggestions for recovery, nor on Ben Bernacke’s for that matter.  My guess is that most of the readers of this blog fall into this category too.  Clearly we all want the same future state of a revived world economy and we are all too aware of the current state of the economy.  Of course we all have our opinions on the path to recovery, which we can express in elections, but for the most part actually pulling the levers of the economy is not something which is in our control.

Which leaves us all feeling “really unusually uncertain”.

While we may not be able to effect change to the national or global economy, we do have some level of control over the economic performance of the companies for which we work.  As I commented in a previous blog titled “Why S&OP? Why now?”, this is where I see sales and operations planning (S&OP) playing a big role.  But for S&OP to be effective it must provide ways for people to evaluate and understand uncertainty.  There are 4 fundamental capabilities that are required to achieve this:

1. Capture of assumptions made about the future state for knowledge sharing and control
2. Facilitated collaboration across functional boundaries to get buy-in and inputs from multiple parties
3. Super-fast “what-if” analytics that allow organizations to evaluate and compare multiple scenarios in order to maximize performance and to mitigate any identified risks
4. Continuous plan performance management so that deviations are detected early and course corrections can be made quickly

The last point about performance management is often overlooked.  The more uncertain the future, the less likely it is that your plans will be achieved.  It doesn’t help much if at the end of the month you determine that the plan wasn’t achieved.  In a more stable economy this might have been sufficient.  In today’s volatile economy (which is the root cause of our uncertainty) it is really important to monitor performance continuously and to course correct as quickly as possible when significant deviations are detected.

However, what makes this all possible is super-fast “what-if” analytics.  Uncertainty is risk.  Without a mechanism to evaluate many alternative scenarios, your ability to evaluate and understand risk is reduced greatly.  Do you think Excel is up to this?  Do you think this can be achieved without any technology?

Our very own John Sicard will be joining Angel Mendez, senior vice president, customer value chain management at Cisco Systems for a presentation on Next Generation Value Chain Best-Practices.

As part of the 2010 CSCO Summit, the free-to-attend virtual event taking place on June 15th and 16th, 2010, John and Angel will co-present the track entitled, “Creating the Next Generation Value Chain to Deliver Customer Value,” on June 15th, 2010 at 9:00 EST (14:00 GMT).

Attendees will learn about Cisco’s supply chain transformation from a cost-centre to a competitive advantage. In response to rapidly shifting business demands, Cisco has focused on integrating previously siloed back-to-front end operations into a single global operations group that covers the extended value network, from downstream suppliers through to upstream customers.  This session will provide critical insights on the lessons learned and the key focus areas to consider.

The CSCO Summit, a two-day event consisting of an agenda of 11 presentations, brings together an influential group of global supply chain, operations and procurement leaders to learn and share best practices around the critical factors driving strategic supply chain and operational agendas across multiple industry sectors. 

To register for this free event, please visit:
http://cscosummit.raptureworld.co.uk/register

Not too long ago companies suffered from having too little data with which to manage the company’s operations. The ERP age has brought in a different problem of too much data, but too little information. This is not unusual because transaction systems, such as ERP, are designed to capture data and make a record of a transaction, principally for accounting purposes. They were not designed to provide insight gained from analyzing many similar transactions.

Financial services and telecommunication companies have pioneered the use of business intelligence (BI) solutions to enable them to analyze massive amounts of data they have accumulated over the years. As a result, considerable insight was gained from data mining and data analysis and thus, the need for BI capabilities grew in the ’80s and ’90s in other industries as well. But despite being a topic explored and written about extensively, there has been only a moderate uptake and mediocre results. Why?

Pure business intelligence (BI) tools suffer from two major drawbacks that prevent them from providing greater value and therefore obtaining greater adoption: They cannot identify causality and, as a consequence, they cannot provide a prediction of future performance.

In the past 5 years, the interest, and indeed the need, for real-time access to operational data has increased dramatically. The promise of real-time operational BI that goes beyond the capturing of static data snapshots and enables users to identify and analyze risks and events, is of major interest to supply chain management (SCM) managers. Driven to improve operations performance, supply chain managers know that better information about their operations and processes lead to better decisions and better supply chain performance.

What do you say when the CEO is asking whether the company will hit its revenue targets for the current reporting period? Can you tell the CEO instantly which customers may be facing late delivery, and which orders may not ship and why? Can you tell the CEO what is causing the late deliveries and how the company could get back on track? You should, because it is in these answers where the business value lies.

We just posted a paper that highlights what’s at the heart of evolving business intelligence into business value. Download it today.

I participated recently on a Future Pharmaceuticals podcast titled “Responding to Change and Cycle Time Reduction” with Walter Kittl (Siegfried-USA), Philippe Cini (IBM Global Services), and Zach Pitluk (Proveris Scientific) which was hosted by Reid Graves (Merck).  One of the questions was: What should senior mgt within the pharmaceutical/biotech industry do differently to realize rapid improvements in managing their supply chains?  Is there enough collaboration, sharing of best practices, awareness, and education?

The key point I stressed in my answer was to bring in fresh ideas from other industries.  Drug companies, specifically the pharmaceutical companies, have enjoyed very high gross margins – often as high as 85% –  for many years based upon patent protection and good portfolios of new drugs coming to market.  This has led to the slow adoption of Lean principles and little focus on supply chain innovations and efficiency when compared to other industries, particularly high-tech/electronics or consumer packaged goods.  These industries experience much lower gross margin, sometimes as low is 10%, meaning that their supply chain operations have to be much more efficient.  Some key metrics, averaged over the last 4 quarters, that illustrate the differences are below.  Notice the considerably longer cash-to-cash cycle, largely due to much higher inventory levels.

Telling an industry that they need new ideas is not always the sure way to a long term future in that industry.

Thankfully, I came across an article in the Wall Street Journal about the new CEO at Novartis, one of the largest drug companies.  (A subscription may be required to read the full article.)  As per the WSJ, Joe Jimenez “has led Novartis’s largest division—its prescription-drug business—for the past two years, overseeing strong growth. He joined Novartis in 2007, having spent most of his career at HJ Heinz Co., Clorox Co. and ConAgra Foods Inc.”

These are all consumer packaged goods companies. To quote the WSJ, Mr. Jimenez called the food business a “leaner industry” that was better at responding to changes in the marketplace, including changing consumer preferences.  “Margins are lower and the time with which you have to move is quicker,” Mr. Jimenez said of the food business. “The pharmaceutical industry in the past has not been focused on taking out non-value-added cost because the growth has been very good,” he said.

So there might be a future for me in the pharmaceutical industry after all.

More seriously, the business drivers for the increased focus on supply chain efficiency are directly related to the product portfolio performance.  Many of the larger companies are reaching the end of the patent period on their stronger performing drugs and do not have drugs coming though the development stage that will replace the older drugs.  Another contributing factor to an increased awareness of the importance of greater supply chain efficiency is the debate over healthcare reform in the US.  In addition, there has an increase in the competition from drug companies in the so-called BRIC countries (Brazil, Russia, India, and China) especially in generics. Although these countries are less of a factor in the prescription drug business at the moment, they are likely to be a much bigger factor  in this part of the business over the next 5-10 years.

What do you think?  Will the pharmaceutical industry transform itself internally, or will “fresh blood” be needed?

Today we announced our free Supply Chain Performance Benchmarking service (more on that below), so it seems an apt time to discuss the issue of benchmarking.

I wrote a blog post recently about how to use supply chain KPI’s to assess, diagnose, and correct supply chain performance, and the importance of benchmarking against your competitors.  In my blog I referred to a post by John Westerveld in which he comments on visibility titled “Visibility in the supply chain: What you can’t see can hurt you”, making the point that visibility and performance management are tightly linked.

It is always good to get validation of one’s ideas.  Well, I listened to a webinar hosted by Supply Chain Standard in which the registrants were asked what visibility means to their organization.  Most of the respondents replied that it was to obtain “End-to-End supply chain performance against key performance indicators”.  A point made by Mawgan Wilkins of Cisco (Cisco is one of our customers) is that in today’s supply chain in which outsourced manufacturing is prevalent, most of this information does not exist in the organization, but rather external to the organization.  Yet so much of your supply chain performance is dependent on how your contract manufacturers perform.If you don’t measure it you can’t manage it.

Measuring performance is valuable in and of itself, but knowing how your performance compares with your competitors is crucial to determining where improvements are required.  Not knowing how you compare against your competition is a “fool’s paradise”.  There is no way to assess the health of your supply chain without knowing how you are doing against your competitors.  Being able to track the KPI’s over time and see how they are trending against your competitors is crucial to both determining when negative or positive trends are developing, and in being able to drill to more detailed metrics in order to diagnose the cause.

Correcting the issue requires an even deeper dive into operational KPI’s.  What I find interesting about the graph above is that the more operational aspects of visibility are given a lower priority.  I think this an issue of supply chain process maturity.  What I mean is that of course performance management is the most important aspect of visibility when you don’t have any visibility.  However, I contend that once companies are able to measure supply chain performance, their instinct is to improve, or correct, their performance, which is where the other elements of the survey become more important: global view of inventory, consolidated view of demand, etc.

We are proud to announce that we have developed a free benchmarking service that uses publically available data extracted from the submission of financial statements.  Clearly the KPI’s that we can generate based on the financial statements are focused on the “Assess” and “Diagnose” levels.  The operational KPI’s required at the “Correct” level typically use data that is not available from financial statements.

Since we focus on manufacturing industries, there is a graph available in the benchmarking service that compares companies on the elements of cash-to-cash (C2C) – days of sales outstanding (DSO), days of inventory (DOI), and days of purchasing outstanding (DPO) – and return on net assets (RONA).    The C2C elements are represented by inventory turns and the ratio of DPO/DSO.  Even though many companies have outsourced manufacturing RONA is still a good way of comparing companies on the presumption that a company that outsources a lot should have a higher RONA.  In the graph below we are averaging these value over the past 4 quarters.  As is usual with these types of graphs, top right is “good”, bottom left is “bad”, and big is better.

What is interesting is to compare how this changes over time.  The graph below shows the values for the previous quarter.

To view how these values have changed over longer periods, a different graph can be used.

Yet a different graph can be used to drill down in to the C2C components in order to start the Diagnose phase.  If we look at Eli Lilly as an example, clearly they should focus on inventory in order to reduce C2C.  On the other hand it is quite clear that GlaxoSmithKline has been able to negotiate much more advantageous payment terms with their suppliers giving GSK a clear competitive advantage.

We would really appreciate your feedback, so please go to our supply chain expert community to try it out.

In order to use the free benchmarking service, you will need to register as a community member.

Once you have registered, click on “Benchmark my Company” from the menu bar on the left.

When you click on the benchmarking service, you will be taken through the configuration of the benchmark groups of interest to you – Peers, Customers, and Suppliers are created for you by default – and select from the 30-odd KPI’s that are of specific interest to you.

With the holiday season upon us, many of us are concerned about making the numbers for the year. Most midmarket companies, whether they are public corporations or privately held enterprises, have revenue targets for each reporting period, usually by fiscal month, quarter and year. These revenue targets are obviously an important part of the financial plan and operational performance for the company.

With manufacturing enterprises, a variety of unforeseen events can occur on a daily basis related to customer demand and the supply of the manufactured goods, as well as the supply of required purchased components from vendors. Even with the best of plans going into a reporting period, actions need to be taken to adjust for these unplanned changes in demand and supply in order to meet the revenue target.

I read the recent report titled “Performance Management in the Midmarket“, by David Hatch and Max Gladstone, from the Aberdeen Group, dated November 2009. The thing that struck me is that based on data collected for the report, the top pressure related to performance management for both midmarket and large enterprises is “lag times and the inaccuracy of operational business decisions”. What is stated is that operational performance is negatively impacted when “the lag time for determining operation performance is greater than the decision window (the opportunity to affect performance based on taking or changing an action)”.

The report goes on to identify the major stumbling block is the identification of source data: “During a fiscal period review process, or within an operational performance review meeting, senior executives often ask for metrics and analyses that send their business managers and teams scurrying to find the data that supports the desired answer”. From my point of view, the problem is that data is not readily available to the decision makers. In addition, reports and analytics need to be available against the data for review and to enable effective operational responses. The data and reporting cannot just be looking at the past, but the analytics need to be forward looking to provide information to decision makers so that actions can be taken to meet the performance metrics.

The operational requirement to meet revenue goals for reporting periods is a common concern among midmarket enterprises and could also be viewed as a fairly standard process across entities. Also, given that the absence of source data and the required reporting and analytics is also common, there exists a real opportunity for a standard solution. Midmarket companies can increase their effectiveness at meeting revenue goals by implementing an out of the box solution. The best solution will have the following key attributes:

• Standard integrations with various MRP/ERP systems
• “Cloud computing” enabled – midmarket companies can subscribe to the software rather than having to stand up and manage the infrastructure and software
• Simple to use with little or no training required
• Easy to tailor and configure if needed

Of course, many other operational issues could be targeted other than revenue management and with today’s technology, many solutions that only large enterprises have the resources to invest in can be made available to the midmarket. What do you think?