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ARC Forum Highlights RPM as an Enabler to Optimized Business Performance
 

ARC Forum Highlights RPM as an Enabler to Optimized Business Performance

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ARC Forum Highlights RPM as an Enabler to Optimized Business Performance ...

ARC Forum Highlights RPM as an Enabler to Optimized Business Performance
Executives from all over the world gathered to discuss Real Time Performance
Management (RPM) at last week’s ARC forum in Boston,
Massachusetts. RPM drives enterprises toward an environment that supports
innovation and creates new value, not just reduced costs, as dynamic
performance targets reflect current corporate objectives
to ensure actions taken by employees
optimize plant performance. Implementing RPM
requires management commitment along with a
culture change as this philosophy requires tearing
down the silo mentality in order for all stakeholders
to benefit. Above all, this new culture
needs accurate information to instill confidence
and promote proper application as everyone is
now a decision maker.
Economic necessity is driving the adoption
of RPM as an integral part of today’s
corporate philosophy. Real time costing
underlies many of the concepts that seek
optimal performance while adapting to
changing market conditions. An effective
RPM implementation makes every worker
a business manager by aligning
everyone’s actions to the overall business
strategy.

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    ARC Forum Highlights RPM as an Enabler to Optimized Business Performance ARC Forum Highlights RPM as an Enabler to Optimized Business Performance Document Transcript

    • THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN ARC INSIGHTS By Tom Fiske and Sal Spada INSIGHT# 2003-24M JULY 2, 2003 Economic necessity is driving the adoption of RPM as an integral part of today’s corporate philosophy. Real time costing underlies many of the concepts that seek optimal performance while adapting to changing market conditions. An effective RPM implementation makes every worker a business manager by aligning everyone’s actions to the overall business strategy. ARC Forum Highlights RPM as an Enabler to Optimized Business Performance Keywords Real Time Performance Management (RPM), Operational Excellence (OpX), Collaborative Manufacturing Management (CMM) Summary Executives from all over the world gathered to discuss Real Time Perform- ance Management (RPM) at last week’s ARC forum in Boston, Massachusetts. RPM drives enterprises toward an environment that sup- ports innovation and creates new value, not just reduced costs, as dynamic performance targets reflect current corporate ob- jectives to ensure actions taken by employees optimize plant performance. Implementing RPM requires management commitment along with a culture change as this philosophy requires tearing down the silo mentality in order for all stake- holders to benefit. Above all, this new culture needs accurate information to instill confidence and promote proper application as everyone is now a decision maker. Analysis ARC’s Forum brought together leading automation suppliers and manufac- turing companies to discuss RPM. The increasing need for RPM throughout the entire enterprise is fueled by the inability of traditional fi- nancial performance measures to support operational decision-making in a rapidly changing business climate. Problems associated with traditional accounting include lack of timeliness in reporting, improper cost allocation, and the creation of internal rivalries to obtain budgets and meet targets. The underlying philosophy of RPM involves improving performance by combining historical data with real-time monitoring and feedback of inter- nal operations, market requirements, and competitors’ activities. While OpX drives a company towards “Consistently doing the Right Things
    • ARC Insights, Page 2 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com Well”, RPM extends OpX by helping companies optimize performance in an era where “the Right Things” and “Well” are always changing. By inte- grating dynamic KPIs (determined by a balanced scorecard), operationally relevant cost allocation, event monitoring, real-time visibility, and predic- tive capability into the performance management system the enterprise remains on course by empowering individuals throughout the organization with common information that is consistent with strategic goals. RPM is vital for reducing cost, improving performance, and value creation. CMM Business Processes, Architecture, & Relationships OpX Operations Best Practices, Continuous Improvement RPM Perf. Measurement Dynamic KPIs Optimum Potential Strategy Execution Results CFOCFO Real-time Accounting System Real-time Accounting System COOCOO Dynamic KPIs Real-time Costs Operations Data Sources Operations Data Sources Source Make Deliver CFOCFO Real-time Accounting System Real-time Accounting System COOCOO Dynamic KPIs Real-time Costs Operations Data Sources Operations Data Sources Source Make DeliverSource Make Deliver CPAS/CDAS ARC Business Improvement Concepts Survival of the Fittest Nicole Parent of Banc America suggested “survival in today’s market de- mands organizational efficiency both in capital and human resources in conjunction with increasing operating margins by lowering operational costs and meeting customer needs.” The productivity gains of the 1990’s resulted in excess manufacturing capacity; there is insufficient demand or anticipated growth to ensure survival for marginal players. It is no longer possible to “save yourself to prosperity through cost reduction programs” as only players with innovative strategies will remain. She suggested that the most profitable and innovative companies will embrace RPM. Aligning Execution with Corporate Strategy Operational Efficiency primarily focuses on cost reduction while the OpX model facilitates innovation as it drives a common strategy throughout all stakeholders. Professor Dhebar of Babson College emphasized that optimum performance requires a holistic optimization strategy as local optimization results in suboptimal performance. Achieving this requires relevant information and accurate KPIs throughout the entire value net-
    • ARC Insights, Page 3 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com work to assure that decision makers at every level are solving the right problem in the current business conditions. OpX and RPM deliver funda- mentally different value to achieve optimum potential. Nearly every manufacturer uses a plethora of KPIs, but most are static in nature and do not necessarily reflect current corporate objectives. Using the right KPIs and basing these metrics on real time information drives optimum po- tential, which can reveal hidden assets or unused capacity. Performance targets are ex- tremely important for successful execution of enterprise objectives, but if production KPIs are limited to historical measures or are not dy- namic enough to reflect changes in objectives it results in less than optimum performance. In- corporating an RPM philosophy makes every worker a business manager by linking every- one’s actions to the overall business strategy. Breaking the Constraints of Traditional Accounting Organizations need to take advantage of the wealth of information con- tained in automation systems by employing methods such as real-time activity based accounting to generate more granular and timely information to derive dynamic production costs. OCI Chemical, confronting a death spiral in their business, needed to improve operational performance be- cause of increasing labor costs, lower prices, shrinking margins, and global competition. They needed to invest in plant and equipment but were con- strained by a shortage of capital. By developing a gain sharing agreement, OCI and Invensys were able to share in the risk and rewards of implement- ing an RPM strategy in their plant. An RPM system is a natural fit to a gain sharing approach because of its very nature of measuring performance. Opportunity cost and maximum profitability was highlighted by extruded aluminum components manufacturer Indalex, which has about 20 plants in North America. The cost of manufacturing product varies by each plant, customer and individual order types. The notion that a plant is a Profit & Loss center rather than a cost center formed the basis of their corporate strategy. By first establishing base line metrics and KPIs for each plant they Performance Measures Attributes Cost Operating Cost Asset Utilization Inventory Carrying Quality Yield Defects Compliance Effectiveness Cycle Time Throughput Ramp to Volume Agility Business Customer Satisfaction Profitability Shareholder Value Supplier Network Take Time to Define Metrics
    • ARC Insights, Page 4 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com Take advantage of the wealth of information contained in automation systems by employing methods such as real-time activity based accounting to generate more granular and timely information and derive dynamic production costs. were able to utilize scenario analysis for business performance optimiza- tion. The Profitability Dashboard from pVelocity allowed Indalex to create an accurate model of each plant and perform “what if” scenarios. Indalex reinforced the notion of holistic optimization by incorporating collaboration between sales, finance, and operations. Indalex has now radically im- proved their understanding of costs, customers, and product profitability using an alternative perspective that traditional accounting systems lack. In the same respect, US Steel desired to make a combination of products at a price and volume that generates the highest cash contribution over a certain time period. Traditional financial sys- tems are based upon units such as tons and not time. Profitability analysis is limited to standard margin per ton, which does not provide the in- formation sought to optimization profitability. US Steel enlisted Maxager Technology to develop a methodology to under- stand cash generation per minute by product, customer, and market. Within the first quarter, the profit per minute information enabled US Steel to make changes that increased cash flow by millions of dollars. More im- portantly, the sales and production teams are more aligned toward a common metric of cash contribution and are capturing market share with the “hidden winners” products that generate the highest cash flow. Recommendations • In order to implement RPM you have to change the way your organiza- tion thinks about operations, financials, and customers. • To achieve global optimization requires breaking down the silo mental- ity. This empowers individuals to make decisions at every level and achieve continuous improvement in business performance. Please help us improve our deliverables to you – take our survey linked to this transmittal e-mail or at www.arcweb.com/myarc in the Client Area. For further information, contact your account manager or the author at tfiske@arcweb.com or sals@arcweb.com . Recommended circulation: All MAS clients. ARC Insights are published and copyrighted by ARC Advisory Group. The information is proprietary to ARC and no part of it may be re- produced without prior permission from ARC.