New Performance Management Strategies for the Post-crisis Economy

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New Performance Management Strategies for the Post-crisis Economy

  1. 1. New Performance Management Strategies for the Post-crisis Economy 2010 PMI Great Lakes Chapter Symposium Sterling Heights, Michigan April 28, 2010 Newport Consulting Group, LLC This document is confidential and is intended solely for the use and information of the client to whom it is addressed.
  2. 2. Welcome and Introductions Effective Strategies for the New Normal Managing Risk for Enterprise Performance Reducing Cost and Increase Profit for the emerging upswing Methods to Manage Spend in the Organization Methods to Optimize the Supply Chain Summary and Special Offer Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
  3. 3. About Our Firm  Newport Consulting Group is an independent consulting firm founded by several leading consultants from DMR Consulting Group and strategy firm Booz & Company  Our clients enjoy working with our experienced professionals who deliver large firm capabilities in the context of a boutique firm culture  We function as top-end, high-touch advisors to our clients, unencumbered by large overhead cost models or downstream deployment agendas Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 2
  4. 4. About Our Services Newport’s Services Model (“SORT”) allows our Clients to benefit from a broad, holistic perspective on key business issues and challenges, while focusing on deep experience in one or more critical areas.  What market and business strategies do I need to address post-crisis scenarios? What KPIs govern my initiatives and what do I do when KPIs are “out of bounds”? Strategy  How do create a culture of sustainability?  How do I strategically manage intellectual property?  How do I fit my organization to improve existing or introduce new operating models? Operations  How do I structure the functions, people, and resources in my organization to drive strategic initiatives?  What approaches do I use to structure and prioritize initiatives inside my organization? Risk &  How do I manage and mitigate risk across my business Program Management operations?  How do I drive maximum value from my portfolio of initiatives?  Based on my operations and existing technology investments to date, how do I select and implement the best technology Technology solutions to support my business?  How do I manage that process from planning to go live? Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 3
  5. 5. Welcome and Introductions Effective Strategies for the New Normal Managing Risk for Enterprise Performance Reducing Cost and Increase Profit for the emerging upswing Methods to Manage Spend in the Organization Methods to Optimize the Supply Chain Summary and Special Offer Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
  6. 6. Since last year … Programs started in 2010 … still looking … Programs started in 2009 Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 5
  7. 7. And into this year … We ended 2009 with an early steady-state trend, inventories continued to shrink and production and new orders expanded, savings was constant. Since then inventories have grown as has production. Production versus Consumption Potential ISM Key Index Levels / Personal Savings Rates Index Level % ISM Levels < 50 65 65 indicate 10.0 contraction, levels > 61 60 60 50 indicate 62 9.0 55 expansion 8.0 50 47 45 41 7.0 40 6.0 35 4.7 5.0 30 Inventory 3.9 25 Production 4.0 20 New Orders 3.0 Savings Historical 40-year 15 average of 2.0 10 personal savings rate of +/- 10% 1.0 5 0.0 0 0.0 Feb-08 Apr-08 Jun-08 Aug-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Source: ISM Manufacturing Index Report, 2008-2010; Bureau of Economic Analysis, US Department of Commerce Report, March, 2008-2010. Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 6
  8. 8. Where is the focus? The Post-crisis economy requires new as well as very traditional business thinking, taking into account long-term sustainable growth. Short-term profit taking of the “Roaring 2000s” is a thing of the past. Focus on Sustainability Programs Percentage of Respondents focusing on Area (by Position) Maintaining a good corporate reputation and/or brand equity 75 79 79 Attracting, motivating, and retaining talented employees 52 55 61 Meeting society’s expectations for good corporate behavior 43 30 39 Improving operational efficiency and/or decreasing costs 29 39 42 Improving new growth opportunities 35 24 36 Improving risk management 24 18 24 Strengthening competitive positioning 14 27 CFOs 24 Investment Professionals Improving access to capital 3 CSR Professionals 2 9 Source: Valuing Corporate Social Responsibility, The McKinsey Quarterly, February 2009 Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 7
  9. 9. How do we get there? Strategic planning, aligned with sustainable thinking, is top of mind for business leaders. Addressing the “strategy gap” between the board room and the plant floor is critical to achieve results. Do you have a strategy gap? Ask yourself these questions:  Are we too busy creating more and more efficiency in the organization in the absence of effectiveness?  Are we performing at high levels in one area of the organization at the expense of Strategy other areas of the same organization? Operations  Is it difficult to determine which suppliers are working in different parts of the organization?  Is it common to use cost allocations to determine total contributions of functions and operating units? Production Reporting and and planning monitoring  Is there a common governance model? Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 8
  10. 10. Addressing the Strategy Gap A closed-loop Enterprise Performance Management (EPM) model provides a framework Translate Develop for the development, alignment, and execution of 2 the Strategy 1 the Strategy strategy in the organization, leveraging outcomes for future strategy cycles based on actual results. Align the Test 3 Organization 6 and Adapt Six Stages of the Closed-loop EPM Model Strategic Plan  Develop the Strategy – this involves applying tools, processes, and concepts, such as mission, vision, and value statements  Translate the Strategy – using other tools and processes, including strategy maps and balanced scorecards Plan Monitor  Align the Organization – both the business units and 4 5 and Learn Operations shared services units to the corporate strategy and the business processes Operating/Financial Plan  Plan Operations – translate the strategic objectives into rolling forecasts, activity-based costing, resource and capacity planning, dynamic budgeting  Monitor and Learn – with managers continually reviewing internal operational data and external data on competitors and the business environment  Test and Adapt – updating it when they learn that the assumptions underlying it are obsolete or faulty, which starts another loop around the system Source: “Understanding SAP BOBJ Enterprise Performance Management,” 2010. Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 9
  11. 11. Today’s Take-aways Based on these new realities, decision makers are challenged to consider more integrated and holistic approaches to managing portfolios of activities, both inside the company and throughout the value chain. Rationale for Decision Makers 1 Look at risk through a • What is the “big picture” risk? Learning to broaden awareness of risk events. new lens • When a risk event occurs having contingency plans and a playbook fosters business continuity. 2 Know what your profit • Allocate the key cost contributions and focus on truly profitable customers and products model is and work to maximize it • Forecast your models based on anticipated as well as realistic business scenarios 3 Understand who is • Avoid “maverick spend” in the organization working for you, and • Treat each member in the value chain with an “aggregate view” how they add value • Understand your supply chain member positions both economically and mechanically 4 View your organization • Effective versus efficient execution across all business operations holistically for greater effectiveness • Aggregate KPIs at the corporate level as well as for the business operations Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 10
  12. 12. Welcome and Introductions Effective Strategies for the New Normal Managing Risk for Enterprise Performance Reducing Cost and Increase Profit for the emerging upswing Methods to Manage Spend in the Organization Methods to Optimize the Supply Chain Summary and Special Offer Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
  13. 13. A Post-crisis View of Risk Conventional risk has been the practice for years, the recent economic crisis has shown that “extraordinary risk” -- with low probability and high impact -- create “fat tails” difficult to predict. Extraordinary Risk vs. Ordinary Risk Impacts of Low Probability - High Impact Risk Extraordinary Risk Geopolitical $ Impact on Business per Occurrence Terrorist Event Social Uprisings Classic Porter 5-forces Modeling Liquidity Market Collapse Monte Carlo Analysis Production Scheduling Supplier Shipments Conventional Financial Analysis Ordinary Risk Profile % Probability of Occurrence “Our risk analysis is at best a look in the rear view mirror. It would be very advantageous for our business to be able to rely on innovative solutions that would provide real-time dashboards of our global operations” - Fortune 100 Risk Manager Source: The Fat Tail, Ian Bremmer (as modified by Newport Consulting Group) Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 12
  14. 14. Risk as Viewed through Different Lenses While Risk Managers may be responsible for risk identification and mitigation, executives and operations managers have responsibility for performance of the organization. This can create conflict. Risk is in the “Eye of the Beholder” When roles and perceptions of risk vary What is the status Am I on track to Will we meet analyst / of our top risks? reach my goals? market expectations? What risks don’t we Another assessment to What are our know about? fill out? top 10 risks? Brainstorm Ask for one-off response additional possibilities input Send out Siloed risk MS Excels thinking Workshop after Focus only on workshop negative risks Risk Lines of Directors & Managers Business Executives Source: SAP BusinessObjects (as modified by Newport Consulting Group) Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 13
  15. 15. Sources of Risk (you may be surprised) A recent study of risk indicates that while financial and operational segments have received the greatest attention in the recent Crisis, in a steady state they account for only 13% of all risk events. Legal & Compliance Operational • Fraud Material risk events • Hurricane Katrina • Product liability claims encountered in the past three • Data center outage • Missed time line for legal changes years (for enterprises over • Delivery risk • Embezzlement of parts • Blast furnace cold run US$5 billion in revenue). • Safety of goods or products • ERP application crash • Plant disaster causing production stoppage Strategic • Industry consolidation and globalization Environmental / Health • Error-filled release of software upgrade • West Nile Virus • Change in core product demand • Safety crisis • Cancellation of major customer contracts • Compliance with environmental standards • Performance standards and service quality • Food sanitary management problem • Climate change • Environment pollution Political/Geopolitical Financial • Change of government – and minority governments • Currency exchange rates • Grants and budget changes • Interest issue and increasing reserves • Constant change of ministers • Accuracy of realistic balance sheet reporting • Federal Accountability Act • Ability to manage cash • Terrorism • Non-transparent markets • Economic recession • Energy and commodity costs Source: IBM Global Business Services, The Global CFO Study, 2005. Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 14
  16. 16. Managing Risk for Performance “Best of breed” organizations view risk as a critical part of the performance management process. Risk managers are drivers of business change, creating an environment for effective operations. Everyone “Plays Position” When roles and perceptions of risk are embedded and common  Risk in context of corporate strategy and performance  Understand true exposure resulting Rundown Role Primary Resource Program Compliance Manager from risk correlation Secondary Resource Program Administrator  Achieve proactive transparency A history of requirements review suggests the need for strong product configuration management. Program Summary management presence is the single most critical factor in the successful delivery of compliance program at ABC. Key Process Key Activities Playbook - Role Responsibilities Area 1. Refine and develop the project plan 2. Maintain the project plan 3. Monitor progress against baselines (scope, schedule, cost) and targets using EVM metrics 4. Craft and manage communications plan Program 5. Conduct Project Status Meetings with Key Stakeholders Management 6. Brief leadership on Project Progress 7. …  Embedded in existing  Automatic risk processes monitoring  Reapply best practice  End-to-end risk mitigations processes across the value chain  Enable performance (and risk) innovation  Become a driver of business change Lines of Risk Business Managers Source: SAP BusinessObjects (as modified by Newport Consulting Group) Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 15
  17. 17. Welcome and Introductions Effective Strategies for the New Normal Managing Risk for Enterprise Performance Reducing Cost and Increase Profit for the emerging upswing Methods to Manage Spend in the Organization Methods to Optimize the Supply Chain Summary and Special Offer Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
  18. 18. Internal Spend Rising A recent survey of executives by McKinsey & Company indicates growth in funded initiatives, with significant increases in areas such as hiring and new product introduction in just two months. Growth in Funded Initiatives Survey of executives, February versus April results Source: McKinsey Quarterly - Economic Snapshot, April 2010. Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 17
  19. 19. Emerging need for Focused Growth As companies grow and increase internal spend, a resurgence in activity-based costing approaches suggest the true cost of doing business, while understanding which customers are profitable. Customer Profit & Loss Customer Profit & Loss Based on Apportioned Overheads Based on Activity-Based Costing Customer Customer Customer Customer A B A B Revenue $10,000 $11,000 Revenue $10,000 $11,000 Cost of Sales $7,000 $7,000 Cost of Sales $7,000 $7,000 Contribution $3,000 $4,000 Contribution $3,000 $4,000 Sales Calls @ $50 $300 (6) $600 (12) Overhead $2,100 $2,100 Order Processing @ $10 $120 (12) $520 (52) (30% Cost of Sales) Profit/Loss $900 $1,900 Pick and Pack @ $15 $180 (12) $780 (52) Shipping @ $40 $480 (12) $2,080 (52) What is the best use Credit Control Calls @ $25 $0 (0) $300 (12) of scarce resources to maximize profit? Cost to Serve $1,080 $4,280 Profit/Loss $1,920 ($280) Source: SAP BusinessObjects (as modified by Newport Consulting Group) Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 18
  20. 20. Position for effective Profit Reporting Depending upon the nature of the business, activity-based costing approaches can illustrate an error in profit reporting up to 500% compared to allocated cost approaches, leading to internal risk. 500 ABC costs as % a % of traditional apportioned costs 250 % “Cost Gap” Potential Under Costed 0 Over Costed High Volume Product folio offered Low Volume Low Complexity High Complexity to customers Low Maintenance High Maintenance Source: “Understanding SAP BOBJ Enterprise Performance Management,” 2010. Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 19
  21. 21. Welcome and Introductions Effective Strategies for the New Normal Managing Risk for Enterprise Performance Reducing Cost and Increase Profit for the emerging upswing Methods to Manage Spend in the Organization Methods to Optimize the Supply Chain Summary and Special Offer Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
  22. 22. The Spend Management Challenge A recent survey of Chief Procurement Officers considered the causes that organization look at spend management and analysis. The key recurring theme is to (1) increase visibility and (2) reduce costs. Top Pressures to Cause Organizations to Look at Spend Analysis Survey of Chief Procurement Officers Identify Savings within Spend 54% Categories Indentify Top Spend 41% Categories Improve Negotiation 40% Leverage Place More Spend under 38% Management Track Off-contract 28% Spend Source: Aberdeen Group, Spend Analytics - Pulling Back the Cover on Savings (2008). Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 21
  23. 23. Spend Rationalization - Then and Now The 1980s saw broad cutting of supply base -- in some cases 20-30% of suppliers eliminated for reasons other than performance and strategic fit. Today “pruning” is more effective than “clear cuts.” “Reduce supplier spend where needed, increase spend where it helps us to grow.” Supplier Rationalization - >2000s style “selective pruning” Supplier Cutting - 1980s style “clear cut” “Reduce supplier spend 20% across the board.” Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 22
  24. 24. Rationalizing Spend by Adding Suppliers For areas of strategic importance, or for areas of the portfolio expected to be high growth potential, suppliers may be added to provide a balanced portfolio of the value chain. Planned Supply Chain Actions Plans before and after Supply Base Rationalization Efforts 54% May lead to this …. … or may lead to this. 43% Larger effective Increase in total decrease in total supply base after supply base after rationalization. rationalization. Baseline Plan 12-24 Months 21% Planned since supply base 19% rationalization began 17% 18% 11% 6% 3% 4% 3% 1% Increase No Change Decrease up to 20% Decrease 21-40% Decrease 41-60% Decrease 61% or More Source: Spend Analysis and Supply Chain Rationalization, Institute of Supply Management (2005). Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 23
  25. 25. Welcome and Introductions Effective Strategies for the New Normal Managing Risk for Enterprise Performance Reducing Cost and Increase Profit for the emerging upswing Methods to Manage Spend in the Organization Methods to Optimize the Supply Chain Summary and Special Offer Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
  26. 26. Today’s Supply Chain Global organizations face many challenges both internal and external, creating communication and execution divergences in day-to-day operations. This creates the possibility of risk events, capital shortages, and materiel disturbances in the supply chain. Misaligned goals Daily surprises, Risk Management focused Implications and fire fighting • Lack of collaboration on financial risk only Implications • Frequent break-downs Implications • Loss in • Incomplete view of risk revenue • No understanding of • Customer operational drivers dissatisfaction Suppliers and Customers CUSTOMER DISTRIBUTION CENTER 3PL’s SUPPLIER Sourcing CRO CFO 3PL’s Receiving Fulfillment COO Manufacturing Material events noticed too late, risks under-estimated Lack of visibility Implications Costs moved around, departments • Non-compliance into processes “passing the buck” • Loss of trust Implications Implications • Overburdened IT • Uncontrolled supply chain cost • Ineffective decision making Source: SAP, as modified by Newport Consulting Group • Working capital tied up Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 25
  27. 27. Proactive Event Management Increased performance management demands a proactive event management. No longer can organizations operate as if they were “driving forward looking out the rear view window.” Proactive vs. Reactive Supply Chain Effectiveness Approaches to Strategy Monitoring activities Proactive Path Real-time operational data flow KPI Tracking ✓ Pre-configured event mitigations Executive Boardroom Company Operations Supplier Shipments Supplier Operations Supplier Labor Disruption ✗ Time-lagged operational data flow Reactive Path KPI Tracking Unanticipated event mitigations Operation Reports Source: Understanding SAP BusinessObjects Enterprise Performance Management, 2010. Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 26
  28. 28. Holistic Approach to Operation Performance The result of strategic plans aligned to corresponding tactical plans address common efficiency problems in the organization. More importantly, the organization behaves more effectively – doing the right things rather than executing in a non-aligned manner more rapidly. This may yield many benefits. Bottlenecks identified and Streamlined supply chain tackled proactively operations Reduced supply chain risk, and no surprises Suppliers and Customers CUSTOMER DISTRIBUTION CENTER 3PL’s SUPPLIER CFO Sourcing CRO 3PL’s Receiving Fulfillment COO Manufacturing Improved financial compliance & control Reduced supply chain cost, Full visibility into Optimized cash flow business processes Source: SAP, as modified by Newport Consulting Group Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 27
  29. 29. Welcome and Introductions Effective Strategies for the New Normal Managing Risk for Enterprise Performance Reducing Cost and Increase Profit for the emerging upswing Methods to Manage Spend in the Organization Methods to Optimize the Supply Chain Summary and Special Offer Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
  30. 30. Today’s Take-aways Based on these new realities, decision makers are challenged to consider more integrated and holistic approaches to managing portfolios of activities, both inside the company and throughout the value chain. Rationale for Decision Makers 1 Look at risk through a • What is the “big picture” risk? Learning to broaden awareness of risk events. new lens • When a risk event occurs having contingency plans and a playbook fosters business continuity. 2 Know what your profit • Allocate the key cost contributions and focus on truly profitable customers and products model is and work to maximize it • Forecast your models based on anticipated as well as realistic business scenarios 3 Understand who is • Avoid “maverick spend” in the organization working for you, and • Treat each member in the value chain with an “aggregate view” how they add value • Understand your supply chain member positions both economically and mechanically 4 View your organization • Effective versus efficient execution across all business operations holistically for greater effectiveness • Aggregate KPIs at the corporate level as well as for the business operations Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 29
  31. 31. Special Offer Order your advanced copy of SAP Press “Understanding SAP BusinessObjects Enterprise Performance Management” during the symposium and receive 10% off the cover price! Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 30
  32. 32. Contact Newport Consulting Group, LLC William Newman, CMC Managing Principal wnewman@newportconsgroup.com 7286 North Village Drive O 248-978-2000 Clarkston, MI 48346 USA M 248-635-9902 Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 31

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