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!

Building Resiliency into Your Value Network

In June of 2005, Vinod Singhal from Georgia Tech and Kevin Hendricks of The University of Western Ontario published a paper entitled, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility.”  In this piece, Singhal and Hendricks quantified the negative impact of supply chain disruptions using empirical data.  They found that supply chain or value network disruptions impact both the value and profitability of the enterprise.  They specifically identified the following:

Firms suffering from supply chain disruptions experience between 33% to 40% lower stock returns relative to their benchmarks over a three year time period that starts one year before and ends two years after the disruption announcement date.

The average effect of disruptions in the year leading to the disruption announcement was a 107% drop in operating income, a 7% lower sales growth, and an 11% growth in cost.

Furthermore, they found that firms struggled to recover from supply chain disruptions.

In August of 2005, hurricane Katrina struck . . .

In September of 2005, Dr. Yossi Sheffi of MIT published his book, The Resilient Enterprise:  Overcoming Vulnerability for Competitive Advantage and simultaneously a related article in Sloan Management Review.

In the years since, the importance of supply chain risk management and of building resiliency into the value network has only become more apparent, most recently underscored by the earthquake, tsunami, and nuclear disaster in Japan, floods in Thailand, and other disruptions.

Both Sheffi and Singhal and Hendricks emphasized, among other points, the need for flexibility in the value network.  It is my observation that decisions related to flexibility are key drivers of enterprise value (“Don’t Manage a Supply Chain, Lead a Value Network”, The Journal of Enterprise Resource Management, Third Quarter, 2011), even without a serious disruption in the value network.

I will not recapitulate all of the advice from Sheffi and Singhal and Hendricks here, but I do want to make a couple of important points:

First, you need to plan to be resilient.  Planning to be resilient is a non-trivial exercise.  It should be very intentional and will require deep analytical expertise.  You will need to quantify the uncertainty, calculate a risk-adjusted total cost, identify alternative courses of action and select a primary best option (see the diagram below).  It may also be prudent to develop or acquire tools that will let you quickly asses challenges to your value network that you did not anticipate.   At the 2011 CSCMP Annual Global Conference, I heard Dow Chemical talk about how they apply analysis to understand the nuances of the tradeoffs along the frontier of profit and risk.  Don’t underestimate or short-change the analytical effort.

Second, you need to practice for how you will execute when (you cannot afford to think “if”) there is a disruption.  I have heard Kevin Harrington, Vice President, Global Business Operations, Customer Value Chain Management from Cisco Systems speak on how Cisco prepares and trains for the eventuality of a disruption.

We are only scratching the surface here.  You can, of course, get Dr. Sheffi’s book on Amazon.  I think that Dr. Singhal and Dr. Hendricks will be happy to provide you with their paper.  You can, and should, also get the support you will need to perform the analysis to support risk-adjusted decisions.  Finally, you should make an effort to rehearse or train on how you will handle various types of disruptions so that your people have at least minimal familiarity with the predetermined alternative courses of action or at least know where to find them.

I hope that this post has stimulated your thinking, and that it will motivate your action as well, helping your organization perform with a resilience that will serve its stakeholders well when “normal” operations are disrupted.

As you go into the weekend, remember these words of Leo Tolstoy, “Everybody thinks of changing humanity and nobody thinks of changing himself.”  Don’t be “everybody”.

Have a wonderful weekend!

Supply Chain or Value Network?

There are three basic functions in a typical business organization:  finance and accounting, sales and marketing, and production/operations, excluding support and infrastructure functions.  Stevenson describes all of the activities that are directly related to producing goods or providing services as part of operations.  He defines operations as activities that add value during the transformation process into which inputs are received and from which outputs are delivered.  Inputs and outputs can be products, services or information.  The people and assets involved in acquiring the inputs and performing and delivering the transformation make up the supply chain.  That a supply chain stretches beyond a lone enterprise has never been news to operations executives.  Organizations have always received inputs from a supplying entity and delivered outputs to a consuming organization or consumer.  Each organization provides an interdependent link in the value-adding transformation process, otherwise known as the supply chain.  This is seldom a single “strand” of activities, but rather an interdependent network comprised of many value-adding nodes, each of which receives many inputs and combines them in various ways in order to deliver numerous unique outputs for multiple consuming nodes.  Organizations that receive outputs (customers) pay for the value added in the transformation process.  The supply chain is more properly designated the value network through which many supply chains can be traced.  Material, money and data pulse among links in the value network, following the path of least resistance.

If each node in the value network makes decisions in isolation, the potential grows for the total value in one or more supply chain paths to be less than it could be.  In the best of all possible worlds, each node would eliminate activities that do not add value to its own transformation process such that it can reap the highest possible margin, subject to maximizing and maintaining the total value proposition for a supply chain.  This is the best way to ensure long-term profitability, assuming a minimum level of parity in bargaining position among trading partners and in advantage among competitors.

(This is an excerpt from my article to be published in the next edition of The Journal of Enterprise Resource Management.)

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