Metrics, Symptoms and Cash Flow

Metrics can tell us if we are moving in the right or wrong direction and that, in itself, is useful.  However, metrics by themselves do not help us assess our competitive position or aid us in prioritizing our efforts to improve.

To understand our competitive position, metrics need to be benchmarked against comparable peers. Benchmarking studies are available, some of them free.  They tell us where we stand relative to others in the industry, provided the study in question has sufficient other data points from your industry (or sub-industry segment).

Many times, getting relevant benchmarks proves challenging.  But once we have the benchmarks, then what?

Does it matter if we do not perform as well as the benchmark of a particular metric?  If that metric affects revenue growth, margins, return on assets, or available capital, it may matter significantly.

But, we are left to determine how to improve the metrics and with which metrics to start.  

Consider an alternative path.  Begin with the undesirable business symptoms that keep you up at night and give you that bad feeling in the pit of your stomach.

Relate business processes to symptoms and map potential root causes within each business process to undesirable business symptoms.

Multiple root causes in multiple business processes can relate to a single symptom.  On the other hand, a single root cause may be causing multiple undesirable symptoms.  Consequently, we must quantify and prioritize the root causes.

“Finding the Value in Your Value Network” outlines a straightforward, systematic approach to prioritizing and accelerating process improvements.  I hope you will take a look at that article and let me know your thoughts.

Thanks for having a read.  Remember that “You cannot do a kindness too soon, for you never know how soon it will be too late.”

Have a wonderful weekend!

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Leadership Is Not Just Telling Other People What to Do

When I was a young Marine lieutenant, I was taught that if it happened on your watch, it was your responsibility.  The fact that you didn’t know, or someone didn’t carry out your orders, was irrelevant.  Accepting that responsibility with integrity was a critical element of leadership.

In the world of corporation and bureaucracy, and even in the higher levels of the military, this notion seems all but forgotten. 

I recently talked with Dr. Jeannie Kahwajy, founder and CEO of Effective Interactions.  She reminded me that it simply is not good enough to develop the right analytical decision, to give clear direction, have a noble mission, or even to “get” people to do what you want them to do.

You must take responsibility for the end result.  To paraphrase Dr. Kahwajy, we need to take responsibility not only for what we say, but also for how others hear us.  Sound like “a bridge too far”?  According to Dr. Kahwajy, it is not too much to expect of ourselves.  Rather, it is absolutely mandatory and explicitly doable.

To take that kind of responsibility requires a level of humility that allows me to be open to the fact that I may not have 20/20, 360 degree vision at all times.

I might be missing something.  I have to be open to receive insight from others – not going through the motions open –  really open.  And that takes an understanding of my own vulnerabilities, unavoidable myopia, and limitations, together with an understanding of the truth that others can contribute to me as I can contribute to them.

Not too long ago, I wrote an article for the Journal of Enterprise Resource Management, entitled, “Don’t Manage a Supply Chain, Lead a Value Network”.  I was mostly trying to emphasize the fact that supply chains are dynamic and interconnected, and that as such, they require more insightful leadership than the more simplistic concept of a supply chain.  However, the contrast between management and leadership remains even more dramatic.

Leadership is not telling other people what to do. 

Leadership is not telling other people what to do.

(No, that’s not a typo.  It just seems like a hard concept for us to grasp.)

Leadership is humble, responsible and demonstrated through service.  An organization can cultivate leadership throughout its ranks, but it takes real leadership at the top.  I think that the fun and effectiveness quotients of that kind of an organization will blow away those without a culture (I know – way overused term) of leadership.

We can all be leaders.  More than that, we have an obligation to be leaders.

Dr. Kahwajy tells us that leadership and effective interaction are a science and you can be taught how to do it every time.  Her work and services are worth a look.

Let me apologize on the record for failing to properly articulate her ideas and their value.

Leadership is essential to integrated decision-making (think S&OP).  Integrated decision-making is about considering all the relevant tradeoffs and eliminating blind spots to any tradeoffs or risks.  Integrated decision-making requires integrated decision thinking and quality analytics.  Effective analytics, require the analyst to be a leader as well.  See related thoughts here and here.

For this weekend, I leave you with these words from Peter Drucker, “No institution can possibly survive if it needs geniuses or supermen to manage it.  It must be organized in such a way as to be able to get along under a leadership composed of average human beings.” (http://www.leadershipnow.com)

Have a wonderful weekend!

The Ten Sins of S&OP (Part 2)

There are lots of “experts” telling us about “best practices” in S&OP.  Most of the pundits say the same things with varying semantic schemes, and much of what they say is useful.  I thought I’d take a slightly different approach.

Hopefully, these “sins”, dealing with key attributes of an effective S&OP process, will be both instructive and practical, but through the literary gimmick of what NOT to do.  The first three were posted last week.  Here are “sins” 4 through 6 of “The Ten Sins of S&OP”.

4.  Ignore strategic questions, alternative decision sets (plans), and the relevant tradeoffs. 

Part of having solid feeder processes leading up to the executive S&OP meeting is unearthing the potential demand and supply scenarios with which your company might have to contend in the coming quarters.  (The current quarter, more or less, should be mostly about short-term planning and execution with given assets, suppliers and visible demand.)  You must know the range of demand possibilities and what is driving them, potential needs for incremental storage or manufacturing capacity, where the risk factors are and how sensitive the revenue and profit streams will be to those factors.  This is where your business acumen comes in.  This is all about making money with other people’s (investors’) money – how can you make the most money given the range of decisions that you have to make?  What decision set will give you the most profit?

5.  Assume that the sales goal and the demand plan are the same thing.  

This should not be hard to understand.  The annual sales plan, original or revised, is a financial goal.  The demand plan should be what you think is likely to reasonably happen.  They should be in-synch (based on common assumptions and context), but there will likely be differences. At the S&OP meetings, the variances and their reasons should be clearly understood.

6.  Focus only on a single number, not a range around your demand plan. (Revised for clarity based on great feedback from multiple smart friends.)

You definitely need one consensus plan to make the most money that represents an integrated decision set that has been developed out of an understanding of common assumptions, potential market eventualities, plans for resiliency, and evaluation of all relevant, interrelated tradeoffs.  But, don’t make the mistake of not going to the trouble to calculate and understand the range and potential distribution around your plan – in that sense, it is not just “one number” that matters.  The context is equally important.

Thanks for stopping by.

As you move into the weekend ahead of another work week, I hope that you think about your S&OP process and also this anonymous quotation,

“You cannot always have happiness, but you can always give happiness.”

– and maybe that is one of the secrets to being happy anyway.

Have a wonderful weekend!

Ten Sins of S&OP (Part 1)

There are lots of “experts” telling us about “best practices” and “biggest mistakes” in S&OP.  Most of the pundits say the same things with varying semantic schemes.

Few if any of the loudest voices are really giving any new practical insight.  I have been writing (e.g. When Cheaper, Faster, Better is Not EnoughSales and Operations Planning:   The Key to Continuous Demand Satisfaction), speaking, and working with manufacturers on S&OP for years now.  In this blog, I have written about an emerging best practice that I call a “forecast reality check” that I see manufacturers in consumer products and other industries embracing, although sometimes with different names (e.g. “forecastability [I know it isn’t a word] analysis”; “forecasting priorities analysis”; “demand curve analysis”, etc.).  Other companies are still struggling because they have not effectively addressed the challenge I have described last month in Supply Chain Action.

Here and in the next couple of posts, I am going to talk about key attributes of an effective S&OP process, but from the literary gimmick of what not to do.  A competent treatment will take a bit of effort to write and to read, so I’ll start with the first three of the Ten Sins of S&OP.

  1. Run an S&OP process without P&L ownership involved.  This isn’t news, but it is important enough to reiterate.  An S&OP process is about how you will run the business.  You can’t have a decision process about how to run the business without a decision-maker with P&L responsibility.  ‘Nuff said.
  2. Incent the stakeholders to act in conflict.  This point languishes in obscurity, but it remains absolutely essential, not only to integrated business decisions, but particularly to integrated business actions.  If sales leadership is incented only on revenue, while manufacturing is rewarded for overhead absorption and procurement is rewarded for reducing per unit purchase costs, then meaningful agreement on the business plan will stay out of reach.  Certainly, coordinated actions to meet a coordinated business plan will continue to elude you.  The stakeholders in the S&OP process must be held accountable for performance across metrics that drive business value – revenue, costs, and working capital.  More on S&OP metrics later.
  3. Express the S&OP plan only in dollars at an aggregate level.  The mantra that S&OP is people, process and technology is frequently repeated, and the technology contribution is minimized without being explained.  Let me bring that into sharp focus.  The principal contribution from software to the S&OP process is translation.  Stakeholders, including operations, sales, marketing, finance, and procurement, as well as the P&L owner, need to be able to simultaneously see the plan in their own terms.  When marketing plans to introduce a brand into a new region through a particular channel, manufacturing needs to understand this in terms of capacity utilization at a plant.  Finance needs to see the impact in terms of revenue, margin and working capital.  Whether you use an enterprise software application or Microsoft Excel to express the S&OP plan, it needs to be capable of instantly translating the impact of alternative actions in multiple dimensions (think a marketing hierarchy, product hierarchy, and geographical hierarchy) and in terms of both currency and units.

I’m not as generally thankful a person as I would like to be, but I am always grateful for and flattered by those who read any of my work.

As you head into the weekend, consider with me these words from Cicero, “A thankful heart is not only the greatest virtue, but the parent of all other virtues.

Have a wonderful weekend!

Sales, Supply and Operations Planning

If you read much on this topic, you have started to see an increasing number of articles, columns, and presentations about Sales, Inventory and Operations Planning, or SIOP for short.  This is particularly true if you read some of the collateral from some software firms, some consultancies (e.g. Accenture, I believe), and probably some of those self-declared omniscient ones, the industry analysts (I will leave the potential examples to your imagination).  For a moment, I would like to examine why that emphasis makes sense in a way that has not been adequately represented (as far as I know) to date.

Sales planning, broadly speaking, is about determining which customers to serve, through which channels, for what they will demand, at what price (strategic pricing strategy).  The execution of this plan results in revenue.  Operations planning, focused on making, storing and transporting product, determines where to place what manufacturing capacity, from where to distribute to where, and how to transport product in service to the sales plan.   The result is operational costs.  Sometimes missing from this equation is supply planning and management which determines how much stock to position where and when, for each level in the bill of material (or formula/recipe), as well as where and from whom to source, when and how to execute strategic purchases, and how to structure contracts for minimal risk and maximum flexibility.  The result of the supply plan directly affects cash because most manufacturing companies spend the majority of their cash flow on inventory, most of which, hopefully, is sold and appears on the income statement as the cost of goods sold.  What is not sold (always more than planned) appears as inventory on the balance sheet.  Inventory is one of the key drivers (along with cash, accounts payable, and accounts receivable) of working capital requirements.  If working capital requirements can be reduced, then cash flow can be spent on innovation, capital equipment, and other opportunities.  The supply plan also manages the risk from the supply base and creates opportunities for the business through strategic supply management.

So, then, S&OP is really more about Sales and Supply and Operations Planning (SS&OP anyone? . . . I know that sounds like an industry “analyst” making up another redundant acronym, but it sounds better and is more descriptive than SIOP).  Anyway, my point is supply planning, including planning for safety stock to account for uncertainties in both demand and supply, as well as how to minimize risks from the supply base and leverage opportunities with suppliers has a disproportionate impact on working capital, operational risk and flexibility within your value network.  Typical S&OP often omits these interdependent variables and decision sets and their huge potential impact on the value of the company.  This decision set which I am calling supply planning and management is interdependent with both sales planning and operations planning so that no one of these decision sets can be properly considered without incorporating the other two.

Find more of my thoughts on S&OP here:  http://www.apics.org.au/Default.asp?page=343 or here:  http://arnoldmarkwells.com/images/Sales_and_Operations_Planning_The_Key_to_Continuous_Demand_Satisfaction.pdf

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