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Profitiviti Business Operations Intelligence Article
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Profitiviti Business Operations Intelligence Article
1. Turning Data into Insight. Insight into Results. Business Operations Intelligence TM By Steve Raack SVP, Business Development firstname.lastname@example.org September 2009 In this turbulent economic environment, there is no better time than now to develop a comprehensive understanding of your business operations. Internal and external forces are wreaking havoc on businesses around the globe. Executives are reacting to data-intensive reports and gut feelings, rather than information-based guidance. And usually during turbulent economies, executives make quick, uninformed decisions to reduce costs, typically done at the expense of future flexibility — without a complete understanding of the potential risks to the business and/or the cost to “undo” these poor decisions. To be “great” companies must ensure a strong, collaborative infrastructure is in place, so that intelligence about business operations can be gathered as insight, then transformed into positive improvement results — Business Operations Intelligence™. Around the world, companies have amassed tons of data, but very little information. In an attempt to streamline this data and customize it for particular executives, organizations turned to Business Intelligence (BI) solutions. In the late 1990’s, these BI tools became widespread as a way to assist leaders in viewing data across multiple systems and platforms. However, over the years, BI applications have proven to be difficult to implement, require a great deal of capital dollars to fully deploy and typically need a “small army” of IT gurus sitting somewhere in the world to develop and support the technology. Even with all this effort and money, most of this data is only reviewed within departmental silos and is typically analyzed using lagging instead of leading indicators. Historical data rarely guides companies in ways to mitigate future risks and/or take advantage of future opportunities. Additionally, few companies are mature enough to use data to truly understand their cross functional efficiencies and deficiencies — and even fewer are set up to use data as a predictor of future operational performance. Since the 1990’s, companies evaluated BI solutions from a technology-centric viewpoint. Today, leading companies desire more integrated approaches that incorporate all aspects of their business. They want these approaches to be nimble and fully encompassing, with information readily available. Today, the key differentiator is a BI solution that is easy to execute, utilizes a forward-looking, repeatable methodology and is not constrained by IT resources. This article provides details on a powerful solution that meets those criteria, with a Case Study demonstrating real-life results. The methodology discussed herein analyzes the true cost to run a business, while also defining key opportunities to significantly improve profitability. At the heart of all companies are three main areas: leadership, strategy and business operations. This article will focus mainly on business operations and how it ties back to typical corporate objectives — alignment for growth, cost control and organizational sustainability. ©2009 Profitiviti. All Rights Reserved. 1
It’s important to understand what exactly is meant by the term “business operations.” For the Deﬁne and purposes of this article, it refers to how a company Reﬁne Processes functions internally, across all departments, divisions and regions. Business Operations is how Execute Rank for a company meets (and hopefully exceeds) the Results Processes expectations of its stakeholders — customers, shareholders, employees. Together it comprises of people, processes, projects, products and Business overall spend of an organization. Operations Deﬁne Intelligence TM Align People Profitiviti provides a powerful, proven and Improvements and Spend to Processes integrated solution which enables a simple framework for gathering Business Operations Intelligence™. With the insight gained from this, executives confidently pursue opportunities Understand Review and Analyze for both top and bottom line improvements, Information Products using the methodology over time for trending and continuous improvement. Define/Refine Processes Processes are the basis of our framework for analyzing business operations. We start with how processes are aligned and executed. To do this, it’s good to study the organizational structure and “politics”, as this directly relates to a company’s efficiency and spend. The vast majority of companies are organized in silos. These silos are sub-cultures within the overall organization. They have their own behaviors, priorities and opinions of how things should be run. The influence of each silo is directly proportional to its perceived hierarchical status within the company. In some companies Finance is the strongest group, whereas in others Marketing is untouchable. Understanding the hierarchical status of these “power silos” will help you better navigate your organization, while helping you know which battles to fight and which ones to leave alone. Although this structure is needed and can be valuable, it can also be a root cause of many problems in companies today. A major contributing factor of these problems is that companies are organized and incented to operate in silos. Cost center-based budgets reinforce silo behavior. Besides the typical executive compensation metric of Earnings Per Share (EPS), a metric that has little to no influence on the majority of the organization’s workforce, most bonus metrics revolve around functions. Very few incentive metrics are cross-functional to the point where bonuses are impacted by multi- departmental results. This drives deep-rooted departmental behavior, rather than company or customer- focused behavior. Two main side-effects of silo behavior are inefficient processes and inefficient business operations. In silo-centric companies, work is often “tossed over the fence.” One group completes its step(s) in the process, then tosses it over to another group, with little regard to ownership or the success of the overall process/deliverable. Another side-effect is a “tell me what you want me to do” culture — the “death gargle” of departmentalized, un-empowered resources with zero deliverable accountability. No Ownership = No Accountability = Inefficient Business Operations ©2009 Profitiviti. All Rights Reserved. 2
Improving business operations starts with structure, incentives and processes which empower resources. All businesses have two types of processes: departmental processes and enterprise processes. Departmental processes are conducted within a single silo (e.g., Manage IT Infrastructure, Perform Month-end Close). Enterprise processes are those that require resources from multiple departments to complete (e.g., Product Development, Order Fulfillment). Enterprise processes tend to be the most critical to the company and are typically the most complex. Given their complexity, issues can arise from various locations with differing levels of risk and impact to the organization. In the process world, we know that issues arise when communication and coordination requires a “hand-off” between two or more people. Problems compound significantly when these “hand-offs” cross departments (especially those with conflicting “power silos”) and even more significantly when they cross countries / regions. It’s important to understand how processes are impacted, however the main goal of this section of the methodology is to define a complete list of business processes, while determining which ones are considered enterprise processes. It’s recommended that companies start with a Process Inventory, as it’s very common to have several hundred business processes within their organization. Start with high- level Process Groupings (e.g., Manage Products, Manage Supply Chain, Manage Human Resources, etc.). These groupings tend to align with department silos and all contain many more detailed processes. For example, within the Manage Products grouping, several business processes exist (e.g., Manage Product Strategy, Manage Product Mix, Manage Product Development, Manage Product Pricing, etc.). Each of these processes must have a single, defined owner who is ultimately accountable for its execution and continuous improvement. The Process Inventory defined in this step will be further developed at different stages within the Business Operations Intelligence™ methodology. Rank Processes Understanding your processes while establishing accountability is important, but truly knowing how and whether those processes facilitate growth is essential. To do this it is valuable to utilize a two dimensional approach to ranking business processes. On a scale from 0 to 10, with 10 being the “most important”, we rank each process on Strategic Value (y-axis) and Contribution to Growth (x-axis). This is typically completed through a sequence of facilitated sessions with senior executives. “Strategic Value” is defined as something of relative importance to your company which impacts the execution and delivery of reaching your company’s goals. A process with a high Strategic Value ranking is one that helps satisfy your company’s mission, vision, values and brand promise. A process with a low ranking is one which is completed as a requirement of being in business, but has minimal direct impact on achieving the company’s strategic goals. “Contribution to Growth” is defined as something which assists your company in increasing top-line revenues or market share. A process with a high Contribution to Growth ranking is one that creates positive improvements to financial statements. A process with a low ranking is one which may be essential to the business but it is not something that will directly improve revenues. ©2009 Profitiviti. All Rights Reserved. 3
The data is further segmented, depending on the ranking values defined: • nabler — spend which supports the organization and “keeps the lights on” (e.g., facilities, E telecom, travel, supplies, etc.) • ore — spend which supports delivering value to your customers (e.g., warehouse operations, C order fulfillment, etc.) • rowth — investment in delivering high-value product and services to your customers (e.g., G product development, strategy, promotions, marketing, etc.) From an analysis standpoint, processes that contain low Strategic Value and low Contribution to Growth rankings are prime candidates for outsourcing or a shared services model, where the cost to do so is acceptable. In addition to Strategic Value & Contribution to Growth, there is one more critical attribute of a process that we also discuss and manage — Maturity. Again, a scale from 0-10 is used for segmentation, with 10 being the highest maturity level. For example: • High Maturity Level (scale: 7-10) — Process has a defined, accountable owner — Process is documented, automated, measured and managed for improvement during established timeframes — Process does not have any significant deficiencies — Process is institutionalized By assigning a Maturity ranking for each process, you will begin to identify which processes need the most improvement. If a process has been defined as “high” Strategic Value and “high” Contribution to Growth, then we know this is critical to the operations of the company. If that same process has a “low” Maturity rating, it presents itself as a prime candidate for a process definition or process improvement project. Align People & Spend to Processes With departmental and enterprise processes understood and ranked, it’s time to align them with people and spend (SG&A = Sales, General & Administrative and CAPEX = Capital Expenditures). Here it is important to understand who is working on your processes and how much you are spending to enable those processes — remember, processes are the backbone of how work gets done in your company and ultimately, how you meet the needs of your customers and shareholders. The first pass through the different spend areas is to identify Waste within the company. Waste is anything considered to be non-value added spend and avoidable. Waste can consist of entire GL Account values (e.g., late fees, re-stocking fees) or in some cases it may be a percentage of spend for certain accounts (e.g., expedited air freight fees, CAPEX projects that were stopped without valuable results). Regardless of where it resides, Waste must be eliminated immediately. For the next pass of the methodology, people are aligned to processes. Here salary + benefits are allocated to the processes along with talent ratings. This allows companies to see how many people it takes to execute their processes, what their talent levels are for those processes along with which departments, cities, countries, regions, etc. are enabling those processes. ©2009 Profitiviti. All Rights Reserved. 4
Finally, both SG&A & CAPEX dollars are allocated to processes. These two spend areas enable processes in different ways. For SG&A, a major focus area is Labor & Benefits and Professional Fees. People cost a lot of money, so controlling headcount is essential. Before adding or removing headcount, take a look at what your workforce is actually doing. Most of the time, you can remove low-value work from the organization and set project priorities instead of adding headcount. This will help focus efforts in the “right” areas. For CAPEX, it’s not uncommon to find Enabler investment ten times higher than Growth investment. This is due to expensive back-office IT systems and facility/plant improvements. It’s essential to understand these investments and balance the many trade-offs between supporting the business and growing the business. However, a low maturity process of allocating CAPEX budgets typically leads to a high-level of Enabler focused investments. This occurs as IT organizations are commonly aligned under the CFO — a business Enabler. For Growth opportunities to occur, business leaders must be intimately involved in the CAPEX decision-making and governance processes. Once the alignment of people and spend is complete, the result is a visualization of a company’s fully- costed business operations. • re your most talented resources (your “Game Changers”) working on your highest value efforts? A • Where is your lowest talent working (your “Show Stoppers”)? • What is your bench-strength for your key enterprise processes and critical customer touch points? • How much SG&A is being invested in Growth, Core and Enabler areas? • How much of your SG&A is considered Waste? • How much CAPEX is being invested in Growth, Core and Enabler areas? • What is the total cost of my critical processes? Review Products In addition to understanding your SG&A and CAPEX investments, the other major spend area for most companies is Cost of Goods Sold (COGS). To be clear, analyzing products does not utilize any of the previous outlined methodology frameworks. Product costs and performance analysis is conducted independently from resources, processes, talent, etc. With products, we look at two distinct areas: 1) Sales & Marketing metrics and 2) Supply Chain & Operations metrics. ©2009 Profitiviti. All Rights Reserved. 5
Sales and Marketing metrics provide the most typical product analysis figures for non- Supply Chain and Operations resources. Here, information around product sales, gross margin, contribution margin, penetration rates, re-order rates are reviewed. Supply Chain and Operations metrics provide insight into the difficulty, complexity and/or maturity of the supply chain. During this analysis, detailed information is reviewed around metrics such as, product stock outs, forecast accuracy, lead times, quality issues, manufacturing complexity. For both sets of product metrics, target thresholds are set to evaluate how many products fall above or below target (e.g., Contribution Margin > 22% and Product Sales > $1 Million and Stock Outs = 0 and Forecast Accuracy > 90%). This product performance information provides insight into gaps in your portfolio which leads to opportunities for product re-positioning, re-pricing and rationalization. Understand & Analyze Information Running your business without fully understanding its operations and integrations could be devastating. Reviewing processes, people, projects, products and overall spend through this framework aligns data from several systems which covers all departments of the company. Data by itself, without context, is relatively worthless. Data in a BI tool is an improvement. Data integrated in a BI tool with a focused methodology provides powerful insight and results. First, you must understand your entire business and how all the moving parts operate as a system — globally, by region, by country, by city and by department. Evaluating one department or GL Account at a time will only lead to “directionally correct” decision-making, at best. It is also important to understand how your processes deliver value and how you are investing in those processes. For your critical growth processes, know who is working on them, how you are enabling improvements through investments and what your talent/bench-strength is for the future. Additionally, you must understand your Waste areas because this is an immediate opportunity for cost control. This framework will also provide a clear picture on the performance of your products. Once you have a strong understanding, you can analyze the information. Now you can look at how you are organized along with how you invest and determine whether this is the best approach for growth, cost control and sustainability. This leads to conducting “What-if” analysis scenarios for re-allocation of spending and resource alignment. Here you can review the impacts of increasing or decreasing headcount along with investments in targeted areas. The key is to establish a baseline of your Business Operations Intelligence™. Moving forward, by repeating this approach on a periodic basis, you can use this baseline to monitor trends throughout the organization — understanding which improvements are actually impacting the top and bottom line and where to continuously improve your business operations through strategic adjustments. ©2009 Profitiviti. All Rights Reserved. 6
Define Improvements & Execute for Results Given this insight, you can now decide on where to make improvements and modifications. • What people changes are needed — adds, removals, development plans, reassignments? • Where do we need to build talented bench-strength? • Are location changes necessary to align for growth? • Which key processes need creation or improvement? • What solutions are needed to enable key processes? • ow does your product (or service) base need to change — new, re-positioned, re-pricing or H rationalized products? Tactically, companies need to define “change programs” as Quick Hit efforts (<30 days in duration), along with Short-Term (< 6 months) and Long-Term efforts (> 6 months). It’s imperative to define the pathways needed to take to achieve the future state. There will be a series of initiatives that must be prioritized because no organization can change every aspect of the company at the same time, while also trying to keep the business running on a day-to-day basis. For prioritization, it is usually effective to rank the “change programs” based on time, strategic priority, benefits, risk and cost. This provides a framework for the organization to sequence the programs for execution. Additionally, these “change programs” need to align with your corporate strategies. The journey to improve your company’s business operations will not complete in one or two months. Improvement is continuous, so developing tools, frameworks and skill sets that allow you to continually measure the critical areas of your business is essential. Competition is global, new innovations are created every day and companies must be adaptive and agile. By being proactive in your leadership and spending the time to understand your business, when internal or external forces require you to make key business changes, you will have the right information to make the right business decisions, right away. Case Study Revenue $1.9 Billion consumer products company SG&A $370 Million CAPEX $47.1 Million Employees 3,300+ Organization 47 countries grouped into 4 distinct regions Define/Refine Your Processes Process Inventory included a total of 371 processes. Below are some examples of enterprise processes. • Manage Product Development • Manage Direct Marketing Campaigns • Manage Country Operating Plans • Manage Hiring, Promoting & Retaining Talented Resources ©2009 Profitiviti. All Rights Reserved. 7
Rank Your Processes Developing the Process Rankings was a challenging exercise for this company – no one had ever participated in a discussion of this type before. However, at the end of the day, the company leaders now have a framework for evaluating their business processes and operations. Below are some examples of key processes within each category: Enabler • Manage IT Projects & Spend • Manage Month-end & Fiscal Year-end Accounting • Manage Employee Benefits Core • Manage Sales & Operations Planning • Manage Contract Manufacturers • Manage Order Fulfillment Growth • Manage Product Development • Manage Product Promotions • Manage New Country Openings Align People & Spend to Processes Waste Enabler Core Growth Headcount — 20% 68% 12% SG&A $14.9 M or 4% 26% 49% 21% CAPEX $.9 M or 2% 49% 46% 3% “Game Changer” Resources — 55% 37% 8% “Show Stopper” Resources — 31% 33% 36% Process Maturity 4% = High 32% = Medium 64% = Low This data shows a lot of Waste, which should be eliminated immediately. Another takeaway shows that most of the processes in this company “just happen” due to the low Maturity ratings. Also, the company does not have its talented “Game Changer” Resources working on Growth oriented processes and they are not investing much in Growth. It’s no shock, but the company has not seen an increase in revenues for the past 2 years – instead they spend much of their executive time trying to reduce costs, while investing in “back-office” systems. ©2009 Profitiviti. All Rights Reserved. 8
Review Your Products • 13% of SKUs provide more than 50% of Revenue • 42% of SKUs provide less than 5% of Revenue • 78% of SKUs met or exceeded the Gross Margin target • 81% of SKUs met or exceeded the Contribution Margin target • 4 product lines were candidates for re-pricing • 3 product lines were candidates for re-positioning • 67% of SKUs have a Forecast Accuracy of less than target • Average Supply Chain Lead Time is 11.2 weeks • ver 74,000 back orders occurred across 13 products, costing the company almost $296,000 in O additional delivery charges and over $190,000 in expedited freight charges Understand & Analyze Information At this point, the methodology brings all of the data together, providing insight into many aspects of the company. It’s impossible to display all of this information in summary format. However, the approach now turns to facilitating both strategic and tactical improvement discussions along with developing several “what-if” scenarios for consideration. Define Improvements & Execute for Results Top-Line Improvement • Create a transition plan to move more “Game Changer” Resourses to Growth areas • evelop teams to improve and establish ownership of three Growth aligned, Customer facing D processes, currently all with Low or Medium maturity levels and “Show Stopper” Resourses rated talent • e-price two product lines to become more competitive, giving up a couple points in margin to R gain a “material” increase in quantity movement/revenue • Re-price one product line to improve overall margins • Re-position one product line with more innovative science and improved packaging Bottom-Line Improvements • Established “quick-hit” teams to eliminate Waste • ake “work out” of Product Development pipeline and focus on delivering the right products, T with the right margins and the highest quality • evelop a team to review the highest cost, lowest value processes to streamline efficiencies or D look for out-sourcing opportunities where the cost is appropriate • Created a SKU Rationalization team to reduce products and costs ©2009 Profitiviti. All Rights Reserved. 9
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