Turning 'Gee-Whiz' Into R.O.I.

Sage ERP X3 becomes Oracle Database Ready

2012-01-26T07:00:00.001-06:00

Business software vendor, Sage Business Solutions’ ERP X3 solution has been granted Oracle Database Ready status through the Oracle Partner Network (OPN).

The announcement means that Sage has tested and supports ERP X3 on Oracle Database 11g Release 2, and at extension, Oracle Database Appliance. Results demonstrated smooth installation of ERP X3 application databases on Database Appliance.

The Oracle Database 11g Release 2 offers Sage industry leading performance, reliability, and scalability to power business critical applications.

Customer benefits of the solution are cost-effectiveness by lowering storage usage, reduced administration tasks, and enabling consolidation onto secure private database cloud environments.

Sage ERP X3 V6.3 is available on Oracle Database 11g Release 2.

As reported at ARNet.

Consider the possibilities (especially now, in these challenging times)

2012-01-25T06:47:00.001-06:00

A recent survey of published results by manufacturing and service companies[1] that have applied constraint management methods effectively shows:

A mean reduction in lead time of 70%

A mean reduction in manufacturing cycle times of 65%

A mean improvement in due-date performance of 44%

Mean inventory reductions of 49%

A mean combined financial improvement (revenue, throughput, profit) of 76%

[1] Mabin, Victoria J. and Steven J. Balderstone, The World of the Theory of Constraints: A Review of the International Literature, St. Lucie Press, Boca Raton, FL, 2000

[Excerpt from Schragenheim, Eli and H. William Dettmer, Manufacturing at Warp Speed – Optimizing Supply Chain Financial Performance, St. Lucie Press, Boca Raton, FL, 2001]

If you would like help getting started with apply constrain management to your business for rapid ROI and ongoing improvement, please contact me. Find me on LinkedIn.

What’s wrong with EOQ?

2011-12-29T17:35:00.000-06:00

Economic Order Quantity (EOQ) EOQ is essentially an accounting formula that determines the point at which the combination of replenishment costs and inventory carrying costs are the least. The goal being to minimize both the ongoing costs of carrying inventory and the expenses involved with replenishing inventory.

The basic EOQ formula looks like this:

As you can see, this formula attempts to balance (simultaneously) the following factors related to the business expense linked to holding and replenishing inventory:

Usage rates – how many are sold or consumed over a period of time (one year in the basic formula)
Cost of replenishment – how much it costs the firm to replenish a single inventory item (SKU) from the point of recognizing the need for replenishment through putting the quantities back on the shelf
Carrying costs – all of the costs and expenses related to storing and handling of the inventory quantities held

Let us take a look at how these factors interact in a practical example:

In our example, we have an item that has a cost of $25 per unit, and the average daily demand is five (5) units. For this firm, the cost of replenishment is slightly above average—sitting at $30 per PO line processed for inventoried goods.

Observe what happens to the EOQ on this item as the cost of carrying inventory moves through the range from five percent (5%) to 40 percent.

When inventory carrying costs are very low compared to the cost of replenishment (five percent and $30, respectively), EOQ recommends big orders. In this case, each order would support more than 75 days of average demand.

On the other end of the spectrum, when carrying costs are quite high (40 percent) relative to the cost of replenishment, EOQ suggests smaller inventories (as the result of smaller orders) and the order cycle is slashed to almost one-third its former value (now, just over 26 days).

Underlying assumptions

The assumption being made in the construction of the EOQ formula is that the cost of carrying inventory is linear. That, at a five percent rate, a one dollar decrease in inventory on-hand will lead to a five cent reduction in carrying costs to the firm. Similarly, at a 40 percent carrying cost rate, a one dollar decrease in inventory on-hand will lead to a 40 cent decline in carrying costs.

Unfortunately, the linear relationship assumed by the EOQ formula simply does not exist.

When calculating the cost of carrying inventory, a large number of factors are generally considered:

Warehouse space rental (or equivalent)
Utilities expense
Property tax expense
Maintenance expenses on the warehouse and warehouse equipment
Inventory write-offs/write-downs
Other inventory shrinkage
Financing expenses for the warehouse, the equipment, and the inventory itself
Insurance expenses on the warehouse and the inventory
Labor expenses related to warehouse operations

When inventory is reduced $1,000 in a warehouse with a calculated 25 percent carrying cost, what are the likely real impacts on expenses for carrying inventory?

Warehouse space rental (or equivalent) – no change
Utilities expense – no change
Property tax expense – no change
Maintenance expenses - no change
Inventory write-offs/write-downs – possibly some change, but not necessarily at the same “average” rate
Other inventory shrinkage – same as above
Financing expenses for the warehouse, et al - no change
Financing expense on the value of the inventory – some change possible
Insurance expenses on the warehouse, et al – no change
Insurance expenses on inventory – some change
Labor expenses – no change

In short, only three of the nine items involved in calculating the cost of carrying inventory would likely change based on $1,000 reduction in inventory. That’s because increases or decreases in the volume and dollar amount of inventory held in a warehouse operations produce relatively large but non-linear changes operating expenses.

As inventory grows, changes like adding a second shift in the warehouse, acquiring additional warehouse space, or adding manpower to handle increased volumes happen incrementally. The EOQ formula has no way to account for these non-linear changes to operating expenses. Therefore, your EOQ decision-making my be entirely off the mark for success and increased profits.

What’s the answer?

To manage your inventory quantities, I would highly recommend the application of Dynamic Buffer Management. [Click on the link and read the article there.]

To deal with non-linear changes in your enterprise—decisions that may lead to major changes in inventories (increases or decreases)—you need a broader formula that considers your system (your enterprise) as a whole. That would be this one:

Where,

ROI = Return on Investment

delta-T = Change in Throughput

delta-OE = Change in Operating Expenses

delta-I = Change in Inventory or demand for other Investment

This formula would cover changes like adding a second shift (change in Operating Expenses) or building a new warehouse (change in Investment).

Think about. Contact me if you need further clarifications.

Getting started in Business Intelligence (BI) on a budget

2011-12-29T07:17:00.000-06:00

This is a simple demonstration as to how you and your firm can get started turning the data that you already have into the information you desperately need using tools you already own. The task of turning data into information for decision-making is the essence of business intelligence (BI).

So, here we go.

Everybody has data

Everybody has data. Many companies are wallowing in data. What they are lacking is “information.”

Read my posts here and here for more about the differences between data, information and knowledge.

Quick! Take five or ten minutes to peruse the following table of data and write down everything that you see in these data to help make decisions about the firm’s future.

I will give you one hint: the column identified as ‘ARPAC’ is “Average Revenues per Active Customer.”

Okay. Times up.

Hold on to your list.

Turning data into information—simply, easily, cheaply

In order to produce what follows, I used only Microsoft® Excel™ and its native ability to access databases to fetch and refresh data.

Here’s the first graph I produced:

This is nothing more than a simple bar graph of column “SOSales” (Sales Order Sales, as opposed to Invoiced Sales, for example) shown in the data above. I used Microsoft’s native capabilities to add a “trend line.”

By looking at this simple graph, several questions might come to mind that would bear further investigation:

Why have our monthly sales dropped from just over $8 million a month to an average of about $6 million per month over these 29 months?
Why or how were able to produce about $11 million in sales in July of 2008? What did we do differently? How can we build on what we learned in that experience?
Is my drop in sales related to lost customers?

The next graph that I produced looked like this:

This graph answered my question number three above—at least partially. Month-to-month our firm has stayed pretty steady in terms of the number of active customers served. The firm is hovering right in the 250-customers-per-month range.

On the one hand, that is good. It means the firm is steady in this regard, but it does provoke other questions that would need to be answered through further digging:

We are serving about 250 customer per month, but is the same 250 customers, or do I have high turnover rates for customers?
Are we constantly having to spend precious marketing resources to capture new customers, or do we have a high volume of repeat business?

But wait! If we are not loosing customers (at least in numbers), but our sales are falling off (in aggregate), what is that telling us?

The third graph I produced was “Average Sales per Active Customer” (month-to-month). This graph clearly shows that between January 2008 and May 2010, the firm’s average sale per active customer fell from about $32,000 per customer to under $25,000 per customer.

Here again, this graph immediately provides clues worthy of further, more detailed, investigation:

Are these different customers buying less product? Or, are we serving pretty much the same customers, but they are just buying less from us?
Either way, we should figure out why: Are they buying similar quantities, but our prices (and, perhaps, margins) have shrunk over this period? Or, are they buying smaller quantities of merchandise or services from us?
Either way, we should find out why: If they are buying smaller quantities, is some of that business going to our competitors?

Next steps

As you can see, turning the data into information allows our mind to quickly digest it and move toward decision-making. In some cases—perhaps many cases, when you first start—the process will lead to further information gathering.

On the other hand, you will sometimes discover that tribal knowledge already present in your organization will help you take immediate steps to begin making more money tomorrow than you are making today. Frequently, those steps involve no investment at all. Sometimes all it take is understanding better what is happening. Other times, a simple policy change permits significant increases in Throughput and profits.

After all, isn’t that really what you want to do—not spending six-figures on a new business intelligence “solution”?

Read more here about unlocking “tribal knowledge.”

How I did it step-by-step

Identify the data
Build a SQL Server view or query
Connect Microsoft Excel to the data
Build the graphs

Total time: about 2 to 2.5 hours

Business Intelligence for the coming year

2011-12-28T07:21:00.000-06:00

Recently I was asked by a business writer for my recommendations for “BI New Year’s Resolutions.” I doubt my response was what the writer had hoped for, since many business blogs and publications garner support from advertisers. And, when you are doing that for a living, you really want to write things that are supportive of the kinds of products your advertisers supply. These days, since business intelligence (BI) is all the rage, there are a lot of dollars being proffered for advertising of upscale business intelligence solutions.

For better or worse, I don’t have to worry about that. (Of course, my income is smaller as a result.) But, here’s what I wrote—along with some other advice to round it out.

BI New Year’s Resolution

RESOVED – I will never, ever, ever again undertake a BI project just because someone in my organization thinks “it might pay-off.” Instead, I will faithfully resolve to calculate—in advance—the expected ROI (return on investment) for the project.

I have learned my lesson: BI is not like an engine oil additive: departments can’t just “pour it in and expect the company to run smoother, faster, longer and get higher mileage” through some mystical power brought to them by the BI fairy.

In calculating the ROI, I will also remember that “approximately right” is fart better than “precisely wrong,” so will not waste my firm’s precious resources trying to hone a number to perfection before taking action—especially in this tough economy.

The second question to which this writer asked me to reply regard “top BI trends” for 2012. Once again, I’m pretty sure I let her down. Here’s what I wrote:

BI Trends for 2012

In 2012, an increasing number of small-to-mid-sized firms will discover that, to get started in BI, they do not need to make six-figure investment. In fact, they may not even need to make a five-figure investment.

If they can unlock “tribal knowledge” and begin to understand what to measure in order to make a real difference in the Throughput of their system (i.e., the whole firm), chances are they can make use of tools they already have like Microsoft® Excel™ to capture data from their ERP system directly via ODBC (open database connectivity) or OLEDB (object linking and embedding for databases). This may lead to insights, and those insights may lead them to market segmentation or other innovative profit-improvers. They do not need expensive software to build a simple, yet valuable, dashboard so they can start making more money sooner—rather than later.

In the next post, I will provide a concrete example of how simple BI can be done using tools your firm probably already owns.

Technology Wars 2: The Search for More Profits

2011-12-19T15:41:00.001-06:00

Almost a year ago I wrote an article entitled, “What does ‘demand-driven’ really mean?” in which I outlined a view of a supply chain driven end-to-end by real-time (or near real-time) demand feedback. My recollection of this writing was triggered today by an article that appeared today on the Financial Times website: “Technology: Smarter software helps minimise discounting.”

In the FT (Financial Times) article, Claer Barrett writes:

“As retailers grapple with falling consumer spending and rising costs, the smart use of technology is proving a valuable weapon.

“Creating a point-of-sale linked supply chain is the latest tactic that larger retailers are employing in order to manage inventories and minimise discounting.”

Among other things, Barrett discusses how the entire supply chain—from the retail all the way back to the manufacturer—is being forced to cope with greater and greater uncertainty. At the same time, Barrett correctly points out that today’s “consumer is more empowered than ever before” via online shopping and price-comparison options.

Barrett’s discussion of the matter leads directly to another topic on which I have written here a number of times—namely, market segmentation. [Click here for more.] Retailers everywhere are learning to collect and leverage high volumes of point-of-sale data, mostly through the proliferation of loyalty programs. [Note: I just checked my pockets. I must be a member a more than dozen loyalty programs ranging from pet supply stores to gas stations and more.]

Between a rock and hard place

Even with improved ability to segment the market and identify buying trends and patterns, the whole supply chain is still caught between the “opposing problems of excess inventory and stock shortages,” as Barrett puts it. Barrett, however, is far too gentle, I think. The horns of the dilemma should really be stated as

excess inventory versus stock-outs.

Almost everyone who has had responsibility for managing inventories of any kind knows exactly what I’m talking about. Being short on stock (low inventories) does not on whit of damage. But being out-of-stock means

Lost sales of the out-of-stock goods
Lost sales on other goods that may have been purchased by customers seeking the out-of-stock item(s)
Potentially, customers lost temporarily or even permanently to competitors

As I have stated elsewhere, the value of losses resulting from out-of-stock conditions—if calculated at all—is almost always vastly understated.

However, on the other end of the spectrum, even though the supply chain suffered out-of-stocks on (almost always) the most popular items, they are almost never able recoup the profits on those items for which they are overstocked.

No.

In fact, chances are they will have to liquidate their overstocked item at or below the price they paid for them. Hence, Barrett’s reference to finding ways to “minimise discounting.”

The key to creating more profits is a “demand-driven” supply chain

My article on a demand-driven supply chain suggests technology that is within the reach of almost every retailer today—not just the big-box merchants. But it requires management to seek two things that they are presently overlooking in far too great a degree;

The true cost of out-of-stocks to their operations and to the entire supply chain
The return-on-investment available to them for building a truly connected and collaborative supply chain

If you are a mid-market retailer, distributor, wholesaler or manufacturer, do not delay in pursuing the discovery of ways to create for yourself a sustainable competitive advantage even in a very challenging economy.

Further reading: Dynamic Buffer Management (DBM)

Richard D. Cushing is a senior solution architect at RKL eSolutions in Lancaster, PA.

Finding Common Ground Between CFO and COO–Part 10

2011-11-16T17:58:00.000-06:00

[Continuation…]

Some key factors in creating Irrefusable Offers

What are some of the key elements that should be considered by the CFO and COO when creating “Mafia Offers”?

Well, if the CFO and COO have come to properly understand their market and market segmentation through analytics (simple is better), the next step is to unlock “tribal knowledge” within the organization so the customer’s experience and customer’s desired results are clearly understood for each market segment. If necessary, that may mean identifying a market segment constituted of only one customer.

Make the offer learning, anticipating or filtering

The irrefusable offer must be one that lightens the burden felt by the customer, improves the customer’s experience, and produces better results for the customer. Offers that are learning, anticipating and filtering are such offers.

Take a look at the offer give in Example 1 in Part 8 of this series. This offer lightened the burden on the customer by reducing the customer’s need to store and handle large quantities of inventory month after month. The billing method, in turn, improved the cash flow for the customer, as well.

The offer was, in fact, anticipating the customer’s needs and filtering the volume down to the quantities actually required while still providing the prices to which the customer was accustomed under the previous ordering practices.

This offer, however, could have been made even more learning, anticipating and filtering. Suppose they had offered to simply replace the quantity actually consumed each month, rather than a flat 50,000 units per month. This may have been even more appealing to the customer.

Make the offer customizable

Buyers ranging from individuals buying one-offs via the Internet to professionals buying for big-box merchants today are influenced by customizable offers. Sometimes it is the actual product that is customized (e.g., made to specification, personalized, color or style options). However, even typical commodity offers can be customized.

When the product itself cannot or is not offered as customized, that does prevent the offer itself from being customized. Offers may be customized around several parameters:

Delivery method – online, next-day, same-day, free-freight, in-person, vendor-managed and so forth
Delivery quantities – incremental deliveries, truck-load, on-demand quantities
Payment terms – credit card, 90-days same as cash, consumption-based invoicing

The goal, of course, in any customization in the offer is to improve the customer’s experience and results.

Make the offer upgradable

Without renegotiating the whole deal, an upgradable offer allows the customer to add-on, extend, or improve upon an existing trading agreement. This is especially valuable where the market may be subject to significant changes—as are most markets today. I think most CFOs and COOs would agree that they would much rather keep a customer through an upgradable offer than to risk losing the customer because the customer feels that they must renegotiate “the whole deal” anyway.

Again, looking back to the offer give in Example 1 in Part 8 of this series, you can easily see that this offer was, indeed, upgradable. The offer could be extended to buy more of the same product, or additional products could be purchased under the same plan.

Make the offer online, interactive or one that provides near real-time feedback

Offers that lead to or involve sharing information in real-time or near real-time are also generally more able to be learning, anticipating and filtering. The close contact created by interaction between seller and buyer may also lead to valuable insights that could lead to more customized or upgradable offers.

Some time ago I had opportunity to discuss a new software purchase with the CFO a rapidly growing $350 million enterprise. I asked him what he thought about the software, but when he replied, he did not really talk about “the software,” at all. He said:

“The company has this great approach to support. They offer an online knowledgebase that is searchable and provides a wealth of helpful information. But what’s even better is that they monitor activity on the support site 24-hours a day. If it seems you are not finding the answer to your question after a couple of attempts, a dialog box pops-up and a live support person proactively offers to help you resolve your issue right then and there.”

Clearly, this buyer of “software” was far more impressed with online, interactive, real-time feedback from support than the software itself. This CFO has purchased “software,” but what he got was a better experience and improved results from his purchase.

Accompany the offer with anytime access and response

In a world where the typical customer is empowered by Internet access to so many options, providing an offer that includes anytime access or response is likely to improve the customer’s experience and results. This is proven by the previous example where the CFO mentioned the fact that the support site was proactively monitored “24-hours a day.”

In fact, I personally find that my clients feel much more “connected” with me when I give them my cellular phone number and assure that they are free to call me (literally) 24-hours a day if they need my assistance.

[To be continued…]

Finding Common Ground Between CFO and COO–Part 9

2011-11-14T11:17:00.001-06:00

[Continuation]

So, what are the keys to constructing irrefusable offers (Mafia offers)?

Market segmentation

The CFO and COO must come to understand the key components that go into their trading partners’ experience and what their trading partners view as improved results. More importantly, they must begin to see that different trading partners or different market segments have different experiences and seek different improved results.

In order to get a better understanding of how to segment your market, the CFO and COO should employ a combination of market analytics (business intelligence) and tools to unlock “tribal knowledge” from within the organization itself.

As the figure above suggests, different target markets will find value in differing aspects of “the offer.” Some will find the value in a product’s ability to be customized or adapted to their specific application. Others will find greater value in how the product is delivered (speed or online). Still others will find greater value in intangibles such as VMI (vendor-managed inventory) or the ability to receive small, more frequent shipments,while achieving the same price-breaks as larger orders. It is impossible to know until the CFO and COO take time to analyze and understand how and why they sell—or fail to sell—into various markets.

Capabilities

Another factor concerning which the CFO and COO must come to agreement regards the firm’s capabilities. What can be done within the firm’s capabilities to supply an improved customer experience for various segments of the market? In addition, what can be done—still within the firm’s capabilities—to help assure that the customers in various market segments are getting better results than the competition is delivering?

Understand that, until the firm’s various market segments are understood clearly, it is impossible to even formulate the right questions around “capabilities” and how to apply them toward the creation of irrefusable offers.

Creating an operating partnership with your customers

The really great and long-lasting irrefusable offers stand above the rest because they create a durable competitive advantage for both the vendor and the customer. The offer brings your firm and your customer’s firm into an operating “partnership” that produces better—and improving—results for your customers while increasing your own firm’s Throughput and profits. This combination makes three very happy parties—the CFO, the COO and the customer(s) involved.

This may mean the such irrefusable offers may sometimes need to be tendered to the customer at a higher level than the typical “buyer.” Creating and presenting the offer may involve the CFO and COO in joint discussions with their counterparts in the customer’s organization, where the value of the irrefusable offer may be more fully understood and appreciated.

Establishing these offers and resulting agreements at higher levels knits the customer’s management team with you—the vendor’s management team—in a way that makes it increasingly difficult to dislodge the vendor from the customer’s new way of doing business. Customer loyalty becomes a strong factor at this point, and the number of “touches” between the customer and the vendor tend to increase over time.

[To be continued…]

Finding Common Ground Between CFO and COO–Part 8

2011-11-09T10:19:00.000-06:00

[Continuation…]

Creating Irrefusable Offers: Example No. 1

A relatively small manufacturer had several large accounts in its market. However, due to the firm’s smaller size, the large accounts were quite reluctant to buy from it. Apparently, the buyers were afraid that the smaller manufacturer would not have the capacity to deliver the large quantity orders on time.

By setting about to understand its customers and its market better, this small manufacturer was able to discover that, while the larger accounts bought in large quantities—in order to get the price-breaks associated with such large quantity purchases—the firms did not actually consume the large quantities immediately. Instead, they ended up warehousing them for some period of time.

Here is the customizable/upgradeable offer that got the smaller manufacturer in the door with these big accounts:

“Agree to buy from us in the same quantities you have been buying from our competitors (e.g., 250,000 units at a time). We will match the competitors’ prices for these items during an introductory period—so you can gain assurance that we can deliver and you are fully satisfied with the quality. However, since you generally consume these at a rate of about 50,000 units a month, that is how we will deliver them to you and invoice you for them.

“In this way, we will save you the costs and headaches related to storing and handling the excess inventory. Additionally, you may customize your delivery rate—up to double—for any given month with just an email or a phone call to (XXX) XXX-XXXX and seven (7) days’ notice.

“Once you are fully satisfied with our service and quality, you may upgrade this plan by a) adding more products to the purchase agreement, and/or b) increasing your purchase volume on any product at special rates.”

This offer turned out to be a win-win. It helped the customers improve their results while allowing the small manufacturer to do business with the larger accounts without having to make additional investments in production facilities. (It was hard for the small manufacturer to produce 250,000 units at once, but they could easily produce and deliver 50,000 to 100,000 units a month without fail.)

This offer provided additional benefits for the large manufacturers: By taking delivery and being invoiced for the smaller quantities on a monthly basis, the large manufacturers actually experience improved cash-flow.

Creating Irrefusable Offers: Example No. 2

A pasta-maker wanted to take over a supermarket chain’s ordering process by employing vendor-managed inventory (VMI). When the chain’s management balked at the idea, the pasta company developed its own irrefusable offer. The pasta-maker said that they would park a truckload of pasta on the lot of the chain’s distribution center. If, at any time, the pasta-maker failed to deliver on-time what the chain needed, the chain could take whatever was short from the truck free of charge.

This irrefusable offer gave the chain’s management and buyers the assurances they needed to move ahead with the VMI plan. The pasta-maker, however, was so capable that the truck did not have to remain in the chain’s parking lot for long.

Here, again, we see the irrefusable offer being constructed around Toyota’s definition of quality—the customer’s measure of the experience and improved results. Also note that this irrefusable offer was targeted at a market of one with a consciousness of the customer’s specific needs and concerns.

[To be continued…]

Finding Common Ground Between CFO and COO–Part 7

2011-11-08T17:16:00.000-06:00

[Continuation]

In Part 1 and Part 2 of this series, we introduced the following two diagrams as a pair:

This first is a generic statement of dimensions as “effectiveness” and “differentiation.” The second diagram restates these dimensions in terms familiar to anyone who has seriously touched upon constraints management or the Theory of Constraints. Here the dimensions are “Increasing Throughput” and “Breadth of Market through Irrefusable Offers.”

The concept was first introduced by Dr. Eliyahu Goldratt in his book It’s Not Luck. Later he clarified by saying, that a Mafia offer is “an offer [your trading partner] can’t refuse.”

But what, exactly, is an “irrefusable offer” (aka: “unrefusable offer” or “Mafia offer”)?

Irrefusable Offers

The concept behind the “Mafia offer” or the irrefusable offer is that it is an “offer you make to your market—your prospects and [or] customers—to make them desire your products or [and] services” [Theory of Constraints Handbook, p.604] so much that they simply cannot refuse to do business with you. And, to be effective, the offer must be one that your competition cannot or will not easily copy.

Rephrasing that statement using Toyota’s definition of quality, it means making an offer where the customer anticipates an experience and results that far excel anything else in the marketplace. Getting to this point requires the CFO and COO to understand the various market segments that they serve in fresh, new ways.

A good starting point to is to ask: “What is some part of my market or industry has a unique need—or a unique combination of needs—that is not being met by any of our competitors?” In order to gain this insight, the CFO and COO should begin to see how they can blur products into services and services into products.

Between you and your target markets sit several “customizable” options—the augmented product. For example, your market may be office supplies—rather generic. But the way you deal with that generic market can become a dramatic differentiator and lead to the creation of irrefusable offers.

Product - Consider the selection, quality and variety of your product offerings.
Connection – Consider that the experience of doing business with a sales representative in person is different from doing so over the phone; a paper catalog is a different experience than buying on-line; even the quality of the on-line experience can make a difference (e.g., What does your Web store remember about your customers’ preferences in products, delivery methods, and so forth?)
Speed – Buying a product that is delivered same-day is different that buying a product that is delivered tomorrow or next week
Other intangibles – Taking credit cards for payment is a different experience than custom billing; Offering payment terms on major purchases is different from a one-size fits all policy on payments; Personalizing products—colors, sizes, quantities, imprinting, etc.—all change the customers’ experiences and results; ad infinitum

Beyond those augmented product options, today’s sophisticated trading partners are looking for even more, and rather than seeing these as insurmountable challenges, the CFO and COO should be joining forces to find ways to make some or all of these things happen.

Customizable – More and more products and services are being made customizable to the customers’ specifications and desires.
Upgradeable – Customers almost always see more value in products where the life-cycle is extended through built-in or optional upgrades. Consider, for example, smartphones and other mobile devices where the operating systems are automatically upgraded with little or no user intervention. Consider those products now being offered with guaranteed trade-in values at the end of a normal lifecycle. Consider those products that a modular, where the customer can start with the “basic” (lower cost) model and extend the product’s capabilities over time by purchasing add-on functionality.
Online – Even greeting card companies are now offering “smart” greeting cards that are interactive with online services. This drives the customer experience into completely different realms when compared to the simple card-and-envelope. Consider the ability to now offer interactive online training to accompany a product or service purchase. The training need not be limited to only how to use the product or leverage the service. Why not consider customized training about how to best apply the product/service in a particular industry (for example) to increase profits for your customers?
Anytime access and response – Firms are now offering online knowledgebases to help their customers get more out of the products and services their customers buy. But some have gone a step beyond. Some firms now proactively monitor their customers’ online activities on their website and, when it seems the customer may be having difficulty finding the solution to their problem, a remote agent offers interactive real-time customer support 24-hours a day, seven days a week.
Learning, anticipating and filtering – As your customers interact with your firm, your firm needs to be constantly learning so that your firm’s response will anticipate your customers’ future needs and filter out those elements that are clearly of little or no use (at present) to your customers. It is wonderful if a hotel chain places in the guests’ rooms a complementary snack for members of its rewards program. But it is even better if, over time, the hotel chain learns that a particular guest prefers chocolate chip cookies to peanut butter cookies and Perrier to spring water, so that no matter which hotel the guest visits, his or her favorite snack is always what is provided.

[To be continued…]

Finding Common Ground Between CFO and COO–Part 6

2011-11-07T17:04:00.000-06:00

[Continuation]

Now that we have laid the groundwork, let us begin our turn now to some specific strategies for uniting the CFO and the COO in common and practical actions. First, let us consider the proper priorities for action.

Priorities for Action

The CFO and COO should agree on the following general priorities for actions to be considered:

Efforts to Increase Throughput, including efforts to increase revenues and/or efforts to reduce Truly Variable Costs (TVCs)
Efforts to Reduce Inventories (or investments) or demands for new investments
Efforts to reduce Operating Expenses

“Why this order?” I hear you ask.

The Detrimental Effects Cost-World Thinking

Let me begin by saying that this order is based on the solid assumption that most companies—especially at this present time—have already trimmed away obvious waste in operating expenses. And, while most CFOs and COOs are focused on the “cost-cutting” as the road to higher profits, this is almost never the long-term result.

A study done some years ago regarding Fortune 500 companies found a trend: Among companies self-assessed themselves as being “cost-cutters,” nearly 40 percent of such companies were no longer in the Fortune 500 a decade or so later. Clearly, the focus on “cost-cutting” is wrong on the face of it.

Consider this: Any company can successfully reduce its “costs” and “operating expenses” to zero. It the easiest and simplest of maneuvers to be carried out jointly by the CFO and COO. All they have to do is close the doors to the business, fire everybody, liquidate everything, and go home. It’s done!

But, if you think I am being overly dramatic, consider the fact that cost-cutting is—by it’s very nature—an action driven inexorably by the law of diminishing returns. If the CFO and COO successfully collaborate to reduce costs and expenses by, say, ten percent in year one; then it will be very difficult to reduce costs and expenses by even five percent in year two while staying healthy. In year three it may be difficult to eek out a two-and-a-half percent reduction in costs and expenses. Each successive year, increasing profits through cost-cutting becomes more and more difficult.

Too soon, despite their very best efforts, the COO and CFO focused on cost-cutting are soon cutting away protective capacity and damaging the ability of the organization to recover from the occasional attacks of “Murphy” (Murphy’s Law). This, in turn, leads to reduced revenues and higher marketing costs as customer retention becomes that much more difficult over time.

For all of these reasons, we must agree to put efforts to reduce operating expenses at the bottom of the list. And because increasing throughput has no theoretical upper limit and is not affected by the law of diminishing returns, efforts to increase throughput should remain foremost in the thoughts of the CFO and COO seeking unified actions for ongoing improvement.

Clarifying Throughput

As a reminder, our working definition of Throughput is not some generic concept of increases in volume or output. It is carefully focused on a financial formula that the strategic CFO should readily accept:

Throughput = Revenue – Truly Variable Costs

Where Truly Variable Costs (TVCs) are restricted to those costs that vary directly (not through allocations or some estimated factors) with changes incremental revenues. Typically, TVCs would be found in raw materials, subcontract or other outside services paid for on a batch or per-unit basis, commissions, piece-rate pay for employees, and little else.

[To be continued…]

[Cross-posted at the Kinaxis Supply Chain Expert Community]

Finding Common Ground Between CFO and COO–Part 5

2011-11-01T18:57:00.001-05:00

[Continuation]

A New Management Paradigm

Toyota’s success—despite Japan’s own significant recession in recent years—is attributable to management paradigms that differ significantly from traditional management practices in the U.S. Some of these are likely recognizable to you in the following table:

	Traditional Paradigm	New Paradigm
Customer requirements	Quantity	Quality – improved experience and results
Quality [1] improvement	Generally costly and tend to reduce productivity	Saves money while increasing throughput
Internal competition (through reward systems)	Produces conflict – a few win, but many lose	System-thinking eliminates internal competition leading to improved performance
Cooperation	Too frequently leads to reduced competitiveness	Brings improvement where many win – maybe, everybody wins
Management	Command and control	Creating a work environment that supports top performance of the system and ongoing improvement
Workers	Seek to satisfy or, at least, appease management	Work together with management to satisfy the customers’ demand for constantly improving quality
Worker evaluations and incentives [2]	Increases internal competition and produces little long-term improvement	Encourages better performance and ongoing improvement
Purchasing	Buy almost entirely based on cost metrics	Buy based on the system’s performance and build relationships with key vendors

Note: This table was adapted from work originally done by W. Edwards Deming.

[1] In the table above, we are employing the term “quality” just as it is described in the text [see Part 4]. However, the term “customer” may be an internal or an external customer. Work to improve quality coming from a vendor is an effort that improves the firm’s experience and results. Similarly, improving quality coming from operation ‘A', which hands off to operation ‘B’, improves the experience and the result of operation ‘B’ as the “customer” of operation ‘A’.

[2] With regard to “evaluations and incentives,” we are referencing the traditional individual performance metrics taken within silos of operations, rather than on the performance of the system as a whole.

All Profit Lies Outside Your Organization

Inside the four walls of your business, everything over which the CFO and COO have direct control can contribute nothing but cost or expense to the bottom-line. Every opportunity for making money lies outside the organization and, therefore, outside the direct control of management and executives.

You can make more money by buying smarter—raw materials, services, et cetera—thus reducing truly variable costs (TVC) and increasing throughput. And you can make more money tomorrow than you are making today by selling smarter to existing customers, new customers or both.

These actions can have other affects, as well. The affects are depicted in the figure below.

A side-affect of buying smarter—what you buy, from whom you buy, how (delivery terms) you buy, and when you buy—is reducing inventory. The wonderful side-affects of reducing inventories—when done wisely as a result of system-thinking—are improved profits, higher ROI, and faster cash velocity.

You probably recognize all of these factors as improvements—improvements you would like to see, perhaps.

The new management paradigm unifies the CFO and COO by turning the organization from it navel-gazing introspection to a recognition that the customer is the most important part of the production line. No matter how you fine-tune your company’s internals, if the internals are not focused on the externals as the only source of profits, you are far more likely to create internal friction and heat without actually lighting a fire that will produce increased throughput and profit.

One of the advantages of the accompanying figure is the systemic clarity—the inherent simplicity—it delivers. It helps CFO and COO begin easily translate financial goals (i.e., net profit, ROI, and cash flow) into day-to-day actions (i.e., increasing throughput, reducing inventories and reduce or hold the line on operating expenses while support significant growth in throughput). [Note: For organizations that don’t have to deal with inventories, per se, the “inventory” may be broadened into “investment” or demand for capital investment. For example, if it is possible to reduce, defer or eliminate the need for an investment in new office space, then that would qualify as a “reduction” in the demand for new investment.]

[To be continued…]

Finding Common Ground Between the CFO and COO – Part 4

2011-10-31T21:12:00.001-05:00

[Continued from Part 3]

The Banking Trade

Our next example of how businesses might leverage business intelligence (BI) to segment their markets and thus allow them to increase throughput in significant ways comes from the banking industry. In this case, a bank creates a data bridge between a legacy database and databases maintained by its departments. The new application gives branch managers and other users access to business intelligence to determine who their most profitable customers were and which customers might be above-average targets for cross-selling new products.

Implementing these new tools liberated the IT staff from the task of generating special analytical reports for the departments and gave department personnel relatively autonomous access to a far richer source of customer-related data.

However, the bank need not stop with “cross-selling.” Consider that if the bank has information on “the most profitable customers,” they could dig deeper to determine the geographic and demographic corollaries among their “most profitable customers.” Uncovering and analyzing these corollaries employed in conjunction with a simultaneous thrust to unlock what the bank’s employees know—that is, tribal knowledge—might help the bank develop carefully targeted irrefusable offers. Such offers would undoubtedly allow the bank to

Sell more existing products and services to new customers
Create new offers that will attract new customers from the “most profitable” demographic and geographic market segments
Create new offers that may interest existing customers and make offers that may be even more profitable for the bank

Your Business

Regardless of your industry, it is highly likely that a joint effort made by the CFO and the COO to unlock and join two valuable sources of data will lead to many valuable ideas for increasing throughput. Those two sources of data are

What is available through (formal or informal) business intelligence about your customers

with
What is available—but probably undocumented and poorly understood—in the minds of your managers and employees in the form of tribal knowledge.

For this reason, I strongly suggest that for most SMEs (small-to-mid-sized business enterprises) the very first place to look at rapid ROI from business intelligence is to be found in market segmentation.

Understanding Your Customers’ World

One of the errors made by CFOs and COOs in most organizations use a definition of “quality” that is totally objective. After all, how else could or should the firm measure it? Most use a definition along the lines of “without defect” or “within tolerances” or “meeting or exceeding specifications.”

Toyota, however—the firm that came from behind to become a dominating automobile and light-truck manufacturer throughout the world—has learned and predicates it operations on an entirely different definition of quality. Toyota’s measure of quality is:

Does the product make the customer’s experience and results better or not?

Toyota’s concept of quality originated from concepts introduced to Japan in the 1950s by W. Edwards Deming. It was Deming who said:

“Constantly improve the design of product and service. This obligation never ceases. The consumer is the most important part of the production line.”

As a result, Toyota’s measure of quality takes into account, not just what the customer buys, but also:

Who buys the product: Because the who will lead to different expectations and different feelings about the experience and the results expectations.
When the product is purchased: Because the circumstances leading to the purchase of the vehicle will also contribute significantly to defining the experience and the results expectations of the buyer.
Why the product is selected: Because the why is another significant contributing factor to the buyer’s experience and to defining the buyer’s expected results.
Where the product is purchased: Sometimes product purchases are driven by regional factors (e.g., climate, urban versus rural or back-woods). These factors will affect the buyer’s experience and results expectations.
How the transaction is structured: The economic construct of the transaction may include multiple factors such as the duration of the warranty, the payment terms, the time of delivery or lead-time, and more. These factors also influence the buyer’s experience and the sense of results.

Segmenting the market requires the whole supply chain to understand the customer because, fact of the matter is, No one in the supply chain has made a sale until the end-user has made a purchase. This is why both the CFO and COO should seek first to understand their customers. Next they should seek to segment their market—because different customers buy under differing circumstances and for different reasons.

These actions should lead to a plan for the creation of irrefusable offers which should, in turn, lead to rapid ROI.

[To be continued…]

Finding Common Ground Between the CFO and COO–Part 3

2011-10-28T15:39:00.001-05:00

[Continued from Part 2]

The concept of market segmentation—segmented down to a single customer, if necessary—has been driven to a large extent by consumers empowered by the Internet. (Here I use the term “consumer” in the broadest sense. In a supply chain, the “consumer” may be a company or even a buyer within a company in the supply chain.)

Consumers no longer need to be satisfied with what is available to them locally, regionally or even nationally. Instead, a buyer has virtually direct access to a whole world of manufacturers, wholesalers, distributors, brokers and retailers offering a huge array of products, services, delivery methods and terms of service.

Many product offerings are configurable via the seller’s Web site to meet specific requirements or tastes. Too, frequently, the various sellers are willing to offer the products via custom-tailored terms, conditions, and delivery methods. We refer to this combination of product plus related delivery terms and options as the “augmented product” of the “offer.”

Employing Business Intelligence (BI) to Segment Your Market

Business intelligence—regardless of whether it is done with specific BI tools, or just by leveraging the native capabilities of Microsoft® Excel™—can help an business better understand who buys what from the firm, and why. Here are some examples:

Hospitality Industry

A hotel franchise uses BI analytical applications to compile statistics on average occupancy and average room rates to determine revenue generated per room. It also gathers statistics on market share and data from customer surveys from each hotel to determine its competitive position in various markets. Such trends can be analyzed year-by-year, month-by-month or day-by-day, thus giving the corporation a clearer picture of how each individual property is faring.

If these data were extended to include related matters such as

Business versus pleasure occupancies
Local event calendars by postal codes
Other potentially influencing factors

Then the hotel chain could begin to discover who uses their services under what circumstances and, perhaps, why their customers chose their hotels over the chain’s competitors. With this information in hand, the chain would be in an increasingly better position to construct “offers”—preferably irrefusable offers—to their clientele (or prospects) based on dates, reasons for travel, and more.

Take for example a hotel where the occupancy rate is typically below 50 percent on Sundays through Wednesdays. How much time would it take to discover businesses in the region that bring in folks regularly for training, small group conferences or other business purposes during the week.

Having identified these business organizations, making them customized offerings would make sense. For some businesses and business purposes, a discount of 35 percent off the nightly rate might be sufficient to garner the business. For others, a steeper discount might be necessary because the folks to attend their events are typically paying out of their own pockets. So, offer them a flat rate of $69 per night and throw in a free shuttle to and from the airport and to and from the conference sessions.

Since the hotels truly variable cost (TVC) for filling an additional room or ten rooms is very small, almost every additional dollar of revenue gained through such offers will fall directly to the bottom line of the business.

Let us assume that (to make the math easy) a hotel typically rents its rooms for $200 per night (annual average). This hotel’s business intelligence analysis shows that Sundays through Wednesdays during the months of January through April, they are going to have an average of 50 empty (in-service) rooms per night. If this hotel can construct a compelling offer that will fill just half of those rooms (25 rooms) at $70 per night, that would be about 1,733 nights at $70, or $121,310 in additional revenues annually.

If we assume that the truly variable cost (TVC) per additional room per night is $10, then we must subtract $17,330 from this figure to get our throughput of $103,980. That is more than $100,000 in increased annual revenues even though the rooms are being let at far below the “going rate” via the irrefusable offer.

[To be continued…]

Finding Common Ground Between the CFO and COO–Part 2

2011-10-24T14:59:00.001-05:00

[Continued from Part 1]

I do not believe there is any doubt about it. Cutting costs takes far less real and deep thinking than it takes to come to understand your marketplace better. Both the CFO and the COO can agree that cutting costs saved them money—even if the unspoken side-effect of the cost-cutting action was to also reduce revenues through lost sales, lost customers or both. (Of course, in really hard times, the CFO and COO can console themselves by saying, “Sales probably would be down anyway,” and thus ignore the damage done through cost-cutting.)

Making your move

Most firms—even with brilliant CFOs and COOs—are not going to make one giant step from “failing” to “leading.” It is far more likely that they will take incremental steps. So, let us now look at each of these quadrants in more detail.

Failing

The failing firms are those that are both ineffective at increasing Throughput and are also undifferentiated in the marketplace. These are the “also-ran” firms in which management has been unable to produce enough throughput to sustain profitability.

Throughput leads to profitability via this formula:

Profit = Throughput – Operating Expenses (OE)

Recalling the definition (see Part 1) of Throughput, and substituting, we get this:

Profit = Revenues – Truly Variable Costs (TVC) – Operating Expenses (OE)

Of course, the ineffectiveness in producing profits is also linked directly to management’s other failure: the failure to differentiate itself in the market. It is far more challenging to produce a profit when all you have to offer is a “commodity”—a product or service that is so generic as to make “price” the sole differentiator.

Risking

Risking firms are sometimes “bleeding-edge” companies. These firms have found ways to differentiate themselves, but have not yet discovered how to make a profit while doing so. Their differentiation leads to demand, but the demand just adds more risk because they are losing a bit on every unit while trying to make up the difference in volume.

Competing

The competing firms are also stuck dealing mostly with “commodities.” They find themselves competing based on price more than almost any other factor—due to their lack of differentiation in the marketplace. The good news is that their management has learned how to be effective at producing a profit, at least.

Some firms are very comfortable in this role. They do not seek market leadership. If they are, then all of their profit must be predicated on business volume. They are generally hurt by significant economic downturns that kill sales volume.

Leading

The largest rewards (on a per-unit basis) are reserved for “leading” firms. Companies in this quadrant have both differentiated themselves in their markets and their management has proven itself effective at producing and increasing throughput.

Even as overall markets shrink, it is possible for such leading firms to prevail by taking a larger and larger share of the shrinking market. While sinking or shrinking companies are giving up market share, prevailing or leading companies can grow by taking over what is surrendered by vanishing firms.

Increasing breadth of market

In 2006, Chris Anderson, a former journalist at The Economist and editor of Wired magazine, published a book entitled The Long Tail: Why the Future of Business is Selling Less of More. The term “the long tail” comes from the appearance of a sales graph where lots of products (x-axis) are sold in smaller quantities (y-axis) into lots of different market segments. This book talks about the why behind the product proliferation we are seeing in many, many markets.

Although I am not a smoker, when I was a young man a recall that there were only a couple dozen cigarette brands sold in the U.S. Today, the tobacco industry has proliferated cigarette branding to perhaps a hundred varieties or more. Similarly, when I was younger, there were a few dozen major soft drinks: Coke, Pepsi, Mountain Dew, and so forth. Today, that has exploded into almost a dozen varieties of Coca-cola, alone.

In the 1950s and into the early 1970s, automobile makers produced a fairly limited range of options available for U.S. made cars. Many cars were sold out of the showroom or out of dealer inventory simply because they had a model in stock with all the options a particular customer might want.

Today, however, the number and variety of options available for U.S. made cars has grown to the point that one automaker claims that “no two cars delivered” are identical—even if they are inventoried by the dealer and sold out of dealer stock. Choices in colors, sound systems, trim kits, accessory “packages,” engines, seating, and more have led to satisfying “markets of one.”

[To be continued…]

Finding Common Ground Between the CFO and COO–Part 1

2011-10-22T15:04:00.001-05:00

It seems as though many organizations are at war within. During boom-times, the war is more subdued, but is still there. But in tough—really tough—economic times the war is more evident than ever.

What is that war?

The war is that age-old dispute between meeting customer service level demands and holding inventory levels within reason. In really tough times, keeping inventory levels down becomes even more critical to the CFO—and the organization’s survival, perhaps—because cash held in inventory for long periods of time puts a real crunch in the vital cash-flow of the firm.

Now, it is likely that the COO will surrender in times like these. He or she will understand that (too frequently) it really is a matter of survival to maintain the cash-flow. So, the COO might say something like:

“Okay. I get it. I’ll reduce inventories as much as I can. But don’t blame me if we can ship orders or keep our customers happy.”

What are your options?

Some have put it this way: In tough economic times you firm is going to

Sink,
Shrink, or
Prevail.

I prefer to put that into four categories. Furthermore, I do not believe that those four categories are applicable only in tough times. I believe that they are fully applicable to every business enterprise all of the time. Here they are shown in the figure below: 1) failing, 2) risking, 3) competing or 4) leading.

I believe the determining factors in every business enterprise are inherently simple and are only two in number:

Effectiveness – The measure of how effectively the firm employs the monies invested and how effectively does it spends its working capital in the process of turning inventory (or services) into throughput? This is a measure of managements effectiveness in managing its internal workings and the inbound side of the supply chain.
Differentiation – This is the measure of effective management is in dealing externally in the outbound side of the supply chain. This measure covers everything from R&D (research and development) through to marketing, sales and customer service.

The problem with these two terms (i.e., effectiveness and differentiation) is not that they are hard to grasp. Everyone seems to know in a very general way that they need to manage the firm to be effective in using its resources and that, in order to be profitable, they need to differentiate themselves in the marketplace.The problem is that many people seem to have difficulty these two words into concrete and effective actions.

So, let me restate the same figure using a different set of terms.

Note that I have redefined the two factors as follows:

Effectiveness = Increasing Throughput

and
Differentiation = Breadth of Market through Irrefusable Offers

But, in dealing with my clients, I go beyond that. I use Eliyahu Goldratt’s definition of throughput:

Throughput (T) = Revenues – Truly Variable Costs (TVC)

Now, simplicity is at the root of this whole approach.

I know the CFO needs to do certain things to satisfy other executives, the bank, investors, and others. I know he needs to do some relatively complex allocations of operating expenses to costs for various reasons.

But, the COO needs to have a way to tell his people—from sales to shipping—how to easily differentiate good actions from bad actions. And, those fancy allocations just get in the way—muddying up the waters—when it comes to decision-making in operations.

We will take a look at that relatively simple equation for throughput again. But before we do, we need to define another term: TVC.

Truly Variable Costs (TVC) are limited to those costs that vary in an absolute way with incremental changes in revenues. Typically, TVCs are limited to a few categories:

Raw materials

Contract labor or outside services paid for on a piece-rate or batch-rate

Commissions

You will note that so-called “direct labor” is not a part of TVCs. Here’s why: If your company sells, on average, 100,000 widgets a month, does your labor actually vary if, in month one you sell only 80,000 widgets and in month two you sell 130,000 widgets? In month one was your labor bill on 80 percent of “average,” and was it 130 percent of “average” in month three?

Probably not. Labor is an operating expense that does not vary directly with changes in revenues.

Given that premise for TVCs and going back to our formula, there are really only three (3) ways to increase throughput:

Increase revenues
Decrease TVCs
Increase revenues and decrease TVCs

Meanwhile, back at the war…

One of the problems with (the many times unspoken) “war” between the CFO and the COO is that when they do reach common ground, it is all too often found only in “cost-cutting” rather than looking at ways to increase revenues.

The reason for this leap to common ground, of course, is made most clear by my first figure: typically, both the CFO and the COO feel more prepared and confident in dealing with the internal operations than with all the nebulous factors that lie outside the organization. So, dealing with internal effectiveness trumps trying to achieve higher levels of market differentiation—especially in challenging times.

[To be continued…]

Herding vendors, customers and the rest of your supply chain

2011-10-03T06:28:00.001-05:00

Not long ago I had an opportunity to watch Temple Grandin, a 2010 biopic directed by Mick Jackson and starring Claire Danes as Temple Grandin, a woman with autism who revolutionized practices for the humane handling of livestock on cattle ranches and slaughterhouses. This is an outstanding film that shows how one autistic woman, through loving support and sheer willpower, has brought much needed change to an industry.

But I think what Temple Grandin brought to cattle-handling has much broader implications. When pitching her revolutionary—and seemingly costly—design for cattle-handling facilities at the first slaughterhouse, she was roundly criticized because the managers and executives say only the cost of building the system. Only through her keen insight and persistence was she able to get them to see that every day they were pay higher costs by not using a system like the one she had designed.

It’s all about flow

Grandin’s vision was simple (see: inherent simplicity). She boldly suggested that the industry will make more money by understanding and working with the cattle than by failing to understand them and constantly struggling against them. Her facilities’ design simply leveraged the natural tendencies of the cattle themselves to keep them cool, calm and collected as they moved through the operations.

She properly pointed out how very costly it was to pay large numbers of cattle-handlers to be constantly poking and prodding the cattle through the chutes. Not to mention the lost time, lost productivity, and damage done when the anxious movements of the cattle led to backups, herd-busting breakouts, or animals with broken legs that required heavy equipment to get them out of the way.

Grandin was all about “flow” and how an unperturbed flow would increase both production and profitability.

Lessons learned

I don’t want to take anything away from the best reasons to watch this wonder film: Temple Grandin. The best reason to watch this film is, of course, because it is such a wonderful story about overcoming adversity and achieving something when it seems that all the odds are stacked against you.

Nevertheless, I think there is a huge message here for business—and the supply chain.

Why do we hire so many “cattle-handlers” and spend so much time, energy and money poking and prodding our customers, our vendors, and—yes—our employees trying to get them to move along a little faster? Why do we spend so much of our time, energy and resources trying to get the flow moving again when our vendors or employees just don’t seem to “act right”? Why is it our all too frequent first response to problems with our supply chain—from one end to the other—is, “We need to hire more ‘handlers’ to keep the flow moving”?

Don’t we have enough “handlers”? Don’t more “handlers” just keep adding to our operating expenses and make it just that much harder to turn a profit?

Isn’t it time that we took time to really understand what motivates, demotivates or even stampedes our customers, our vendors and our employees?

What we’re looking for is “flow” that doesn’t require so much poking and prodding. The way to get is to work with those who must contribute to the flow. Poking and prodding—and hiring more “handlers”—is just too costly. So, it’s time to redesign our flow in a way that leverages the participants’ natural motivations for productivity, profit and success.

What do you think?

Uncertainty: The Elephant in the Room–Part 2

2011-09-23T22:55:00.001-05:00

In a previous article on uncertainty, we talked about how uncertainty is viewed by the “customer” of IT versus how it is viewed by the information technologists (e.g., value-added reseller or VAR, IT department) themselves. We mentioned how the “buyer” or the “customer” may feel the only uncertainty for them is the questionable performance of the IT provider.

In this present article I hope to bring out some of the ways traditional methods of project management and corporate management may actually contribute to uncertainty rather than diminishing it. We will speak of this in the context of IT projects, but it actually holds true in almost any project environment (whether or not management recognizes that they have and manage “projects”.)

Pretending about numbers

In out business dealings we like to think that our dealings—both internally and externally—are driven by numbers and facts. What management almost always fails to acknowledge is that a great percentage of our dealings are as much driven by intuition as they by numbers. In fact, intuition frequently ends up driving the numbers.

Take for example the VAR who brings a prospective deal to his project managers (or equivalent) and asks them for an estimate for the services on a project that includes development, training, deployment and post-go live support. The project management (PM) team does its due diligence and comes back with an estimate: “We think it’s going to take $278,000 in services to get this done right.”

The sales managers and executives put their heads together and, purely out of intuition, say, “We can’t sell this project for that much money, but we really need the work right now.” Then, based on the sales department’s intuition and clout with the executives, the PM team is “encouraged” (read: “pressured”) to reconsider their estimate to see if they can’t get the project done for $232,000—which the salespeople believe is the number the prospect will “bite on.”

To make a long story short: the deal gets done and the client is quoted $232,000 in services for the project.

Now, even though the final number was not predicated on numeric calculations and numerical estimates—no, indeed, it was based almost entirely on intuition—there is nothing imprecise nor “intuitive” about the $232,000 figure that was written into the agreement.

The intuitive number now bears pretends to be a precise calculation—an “estimate” or a “project budget.”

In so doing, the reseller has just introduced at least $46,000 in uncertainty into the project. At a typical billing rate, let’s say 250 man-hours or about six-and-a-half man-weeks.

There are no “price complaints”

Several decades ago I had the privilege of working with the national sales manager of an organization with which I was doing considerable business. The gentleman told me something that I will never forget. He said, “There is no such as a ‘price complaint.’ There are only ‘value complaints.’”

I bring this up because the “pretending about numbers” scenario I mentioned above happens more frequently than most folks in the IT business care to admit. But, I don’t believe it has to happen.

Why is it that, most of the time, folks in the IT business never have any real discussions about the “value”—the hard ROI—that their solutions will deliver?

I believe that they do not have those discussions for a couple of very elementary reasons:

The customer doesn’t ask. Of course, one of the reasons the customer doesn’t ask is because they’ve heard all the typical “rules of thumb” benefits already. Another reason is because many executives and managers do not even believe in ROI from IT. They consider it a “cost center” and just throw money at it whenever they think it might help. These managers and executives frequently see adding new “IT stuff” or replacing their ERP systems akin to pouring an engine additive into their car. They expect if they do that their engine (their company) will run smoother, faster, longer and get better mileage, but they have no idea how to measure the benefits of “smoother,” “faster,” or “longer.”
The IT folks don’t know how to calculate it. No, I’m not saying that the executives and other folks in IT don’t know the formula for “ROI.” I’m saying that they are (generally) unwilling or unable to walk their clients or prospects through the process of developing the performance metrics by which the results of their combined (i.e., IT or VAR together with the firm or business unit affected) efforts will be measured.

If both parties—the customer and the IT service provider—are unwilling to confront the subject of real ROI from IT investments openly, objectively and with the aim of mutual agreement on the intended measurable results for the investment, then how can the VAR (or IT department) expect to build “value” in the mind of the buyer to support the “investment” required?

In my opinion, they can not. So, instead, they reduce their “estimates” and cut corners to make it fit into someone else’s “intuitive” budget constraint that is generally predicated entirely on “cost” and almost never on anything like a hard ROI.

Isn’t it time to stop doing business this way? It’s just adding more to the uncertainty in every project. No wonder there are so many IT project failures—or self-proclaim or assumed “successes” with no substantiation—all around us.

Let me know what you think.

Uncertainty: The Elephant in the Room

2011-09-22T20:59:00.001-05:00

Not long ago I was fortunate enough to have a conversation with two very fine gentlemen in the software business. They were part of an organization well-recognized for its leadership as a reseller and a developer providing an ERP (enterprise resource planning) solution for Tier 2 and upper-crust SMB firms.

As part of the conversation, I mentioned the fact that uncertainty is “the elephant in the room” throughout the IT (information technology) business.

What I meant by that is this: while the sales process is underway, it all too frequently happens that the two parties have differing views of the uncertainty involved in any project that might be undertaken as a result of their conversation. While they hold these differing views, however, they almost never speak openly and explicitly about the uncertainty itself.

My experience shows me that these two parties hold views of the uncertainty that take shape somewhat along these lines:

The Client or, more correctly, at this stage in the process, “the prospect” may believe that there is very little uncertainty about which to be concerned. After all, he and his organization have tried to be forthcoming with the reseller. They have answered all the questions the resellers’ folks have raised from the first day they met, and they have done so as directly as possible.

Because “the prospect” feels this way, the only “uncertainty” he may feel about any proposed agreement is whether the reseller is capable of delivering on all the promises he has made over the course of the negotiations.

Also, since “the prospect” will hold the checkbook during the project execution, he feels pretty sure that he can force the reseller into assuming whatever uncertainty might remain in the anticipated project.
The Reseller has been through this many, many times. He is well aware that every project is full of uncertainty. A short list of the uncertainties in the reseller’s mind might look like this:
- Have we asked enough questions?
- Have we asked the right questions?
- What don’t we know that we should know about this company and how it works?
- Can the modifications we anticipate be completed in the time we have estimated?
- Will the prospect’s company allow this project to proceed in the time we have estimated, or will their inefficiencies, indecision or other operational problems cause us to incur unanticipated time and expenses?

Accidentally induced uncertainties

W. Edwards Deming once summed up very succinctly the uncertainty included in all human communications. Following a meeting between two parties, as one party was exiting the room, Deming turned to the manager he was consulting and said, “We know what we told him, but we don’t know what he heard.”

Communications between two human beings are full of such foibles. The fact that the reseller’s salesperson does not believe that he has made any “promises” upon which the reseller cannot readily deliver does not mean that the prospect has not heard “promises” that are very different from what was intended by the salesperson.

Under such circumstances, there is—more likely than not—no intention by the reseller’s sales team to mislead the prospect. Neither, most likely, is there any intent by the prospect (now, client) to somehow misconstrue what was said in order to take undue advantage of the reseller.

Nevertheless, such accidentally induced uncertainties too frequently lead to cost overruns, hard feelings between the reseller and the client, and—sometimes—even to failed projects.

Why don’t we talk about it?

My question is simple: When it comes to IT projects (or any kind of projects, for that matter), and whether it is a relationship between an external IT provider or an internal customer relationship, why do we so often ignore “the elephant in the room”?

Why are both the customer and the supplier both so reluctant to speak explicitly about the uncertainties that almost inevitably affect a project of any significance or size?

Let me know your thoughts. Thanks.

Business Intelligence, CPM and the Middle-Market

2011-09-14T09:43:00.001-05:00

I want to take a moment to thank CFO Magazine for inviting me to be a part of the social media coverage for their 2011 Corporate Performance Management Conference in Dallas. It was, indeed, my pleasure and my privilege to be a part of this foray of theirs into social media connections with their audience, and I trust that they will continue to expand the application of social media in connection with their helpful events.

So, what did I learn while at this conference?

I learned much.

I learned that there is a broad and increasing array of tools available for businesses to leverage as they begin or expand the business intelligence and corporate performance management efforts in their organizations.
I learned that there is considerable confusion in the CPM (corporate performance management) marketplace over the application of various terms including “budgets” versus “forecasts”; the differences, similarities or where the line falls between “business intelligence” and “corporate performance management”; or even whether simply having a “budgeting” or “forecasting” system in place means that you are practicing “CPM”.
I learned that many, many organizations in the small-to-mid-sized enterprise marketplace are increasingly sensible to the need for improved visibility and insights regarding their own businesses, the industries in which they participate, and the broader economics that affect them, their customers and their suppliers. Managers and executives are, therefore, turning to “business intelligence” to aid them in finding the answers they think they need.
I learned that despite the tremendous interest in the middle-market for adventuring into business intelligence and CPM, most middle-market participants are still on the sidelines, mostly because they just don’t know where to start. At the same time, they are not yet convinced of an immediate ROI if they jump-in feet first.
I learned that many organizations feel that they can do BI and CPM with Microsoft® Excel™ and/or Access™ and save “a ton of money” while still reaping the ROI rewards.
I learned that most participants in major “forecast” and “budget” initiatives know that their processes are being undermined by “sandbagging” and “gaming,” but feel (more or less) helpless to stop these practices.
I learned that when mandates are handed down from on-high (say, a parent company or corporate HQ for a division) saying, “We need you to do X next year,” that even the financial executives in the subsidiary company or division will “game the system” to satisfy the mandate—whether or not the “gaming” reflects reality.
I learned that the vast majority of middle-market financial managers are still entrapped in cost-world thinking. Such executives and managers are far less likely to engage BI and CPM to discover ways to increase Throughput, and are far more likely to spend their time, energy and money in pursuit of the diminishing returns of cost-cutting.

Apart from the conference, my experience in working with an array of middle-market firms tells me that a great many executives and financial managers fall into one of two very large camps:

Those who feel they have no need for business intelligence or a comprehensive program of corporate performance management because they already know and understand all they need to know about their firm, how it operates, the industry(ies) in which they participate and the affects of the economy at large on their business.
Those who have set up some spreadsheets to analyze certain factors of their business and who, perhaps, actually create an annual budget. Many of these, therefore, feel like they are already doing “business intelligence” and “analytics” and “CPM.” Such folks generally have a sense that there is no significant ROI for them in doing more.

Given all of these different factors, I think it is good—an imperative, in fact—that organizations like CFO Magazine are sponsoring events and stimulating more conversation on these topics—especially in the middle market where most of the confusion appears to reside.

Let me hear your thoughts.

Implementing CPM in small business on a limited budget

2011-09-12T19:17:00.001-05:00

Eric Lundberg’s presentation at CFO Magazine’s 2011 Corporate Performance Management Conference today was refreshing. Lundberg brought things back down from the stratosphere for the large number of small-to-mid-sized business finance people in attendance.

My sense is that many of the presentations thus far have set forward concepts of such a broad scope and relative complexity that they are far, far beyond the pale of immediate consideration by many of the firms represented at the conference. Many of the attendees with whom I have spoken are mere “beginners” in corporate performance management (CPM).

Now, do not get me wrong: I have done no scientific—or even non-scientific—polling on this subject. I say what I say based solely on conversations I have had with a relatively small handful of conference attendees.

Nevertheless, I believe that many of the folks in attendance came here really trying to find out answers to pretty basic questions about CPM. And, given the fact that Julia Homer presented—that 63 percent of CFOs surveyed are more pessimistic about the coming year than they were about last year—I would further surmise that most of them are looking for ways to implement some kind of business analytics and CPM with the smallest possible drain on their corporate cash-flow.

That is precisely why I found Eric Lundberg’s presentation so very refreshing. Lundberg introduced his remarks by saying that he wanted to present “practical applications of tools” that he and his team put in place at ALM. He went on to tell the crowd that, as CFO in a firm held by private equity, he is not in a position to "go out and spend $100,000" or more on sophisticated analytics tools. Therefore, he and his team have implemented substantial business analytics built mostly around “home-grown” applications—not the kind purchased from analytics application vendors.

Lundberg went on to describe—in considerable detail—a number of the analytics in use at ALM. Using these effective but relatively low-cost tools, Lundberg and his team have gained considerable insight into what makes—and keeps—their company profitable. They have already implemented rolling forecasts and have the facility to re-forecast every month. They also do a complete bottom-up forecast fresh every quarter.

I really believe that Lundberg’s presentation put a light at the end of the tunnel for many CFOs struggling with the question: “How can we begin gaining the advantages of business intelligence and analytics without ‘big bucks’ to invest in making it a reality?”

This is real innovation, and it is clear that the analytics Lundberg and his team have put in place at ALM are already making the firm more successful, even in the midst of the present economic doldrums. Sixty-three percent of CFOs today may be more pessimistic about the coming year than the year just past, but Lundberg has leveraged limited resources in a way that will make his firm far more likely to survive and even thrive.

Congratulations, Eric Lundberg! And thanks for giving more small businesses hope for embracing new management metrics and analytics despite severely constricted funds.

Forecasting Mistake Number 1: Forecasting to the Wall

2011-09-11T22:23:00.001-05:00

In today’s session at CFO Magazine’s 2011 Corporate Performance Management Conference, speaker and author Steve Player, of The Player Group and North American Director of the Beyond Budgeting Round Table, brought out lots of valuable information about the need for organizations to move from a once-a-year, top-down “budgeting” process and into an ongoing process of rolling forecasts.

In doing so, he employed a striking analogy.

Player asked the attendees: Would you be happy with a new car, if, when you first bought it, the headlights gave you a good view of the road ahead—shining out maybe a 600 feet ahead of you. But after three months, the headlights only gave you visibility for 450 feet; and after owning for six months, the headlights only showed you 300 feet of the road before you?

Of course not! No one wants a car like that.

Nevertheless, that is precisely the kind of performance being actively supported with the function of traditional methods of budgeting and forecasting. First the company is looking forward a full twelve months. Three months later, the company is looking only nine months into the future. And, after another three months, their view into the future—their forecast or their budget—gives them only six months of guidance.

What is worse is the fact that the one-year forecast was likely put together from statistics collected and judgments made three to six months earlier. So, by the time the firm’s forward-looking view is obscured beyond six months, the six months they are seeing in the forecast is now nine to twelve months old and out-of-date.

Is it any wonder that such a firm’s “budget” is considered little more than a well-intentioned joke—or perhaps just something to satisfy the executives—by the workers who are all too frequently being measured against the budget?

Steve Player calls this approach “forecasting to the wall,” where no one has a clear vision beyond the 12-month “wall.” He also calls it, “Forecasting Mistake Number One.”

Forecasts, when used, ought be updated as often as necessary; and certainly every time there is a significant change in the mathematical, statistical or intuitive elements underlying the existing forecasts. Forecasts should also be rolled into the future far enough and frequently enough to allow the management changes they are intended to guide to take effect for driving ongoing improvement.

“Mistake Number One” – Think about it.

Heading to CFO Magazine’s 2011 Corporate Performance Management Conference

2011-09-10T17:26:00.001-05:00

As I write this I am winging my way to Dallas, Texas, and the Hotel Fairmont for CFO Magazine’s 2011 Corporate Performance Management (CPM) Conference. CFO Magazine has asked me—given me the honor—of providing blog coverage of the event.
Two other outstanding gentlemen have been invited by CFO Magazine to blog (and Tweet) live from CPM2011. One is blogger, author and founder of CFOwise®, Ken Kaufman, and the other is Gary Cokins, who—while being Principal of Global Business Advisors at SAS—is also an author and blogger. I am much looking forward to meeting these fine writers and, frankly, I find myself humbled to be in the company of such accomplished executives.

The Speakers

As always, CFO Magazine has gathered a stellar array of speakers for this conference:

Thomas H. Davenport – President’s Distinguished Professor of Information Technology and Management at Babson College and co-author of Competing on Analytics and Analytics at Work
Dr. Kasthuri Henry – Professor and president of KasHenry, Inc.; Assistant Professor at Southern Illinois University; and Adjunct Professor at North Park University
Eric Lundberg – Chief Financial Officer at ALM
Wayne Eckerson – President of BI Leader Consulting and author of Performance Dashboards: Measuring, Monitoring, and Managing Your Business
Christina Spade – Senior Vice-President of Affiliate Finance and Business Operations at Showtime Networks
Christopher Poinsatte – Executive Vice-President and CFO of Dallas-Fort Worth (DFW) International Airport
Roger Blanken – Director of Finance at International Flavors and Fragrances, Inc.
Curtis Neumann – Associated Director of FP&A at AT&T
Jay Thompson – Managing Director at Protiviti

Supplemental Workshops

102 Improved Performance Management through a Unique Analytical Scorecarding System presented by Forrest Breyfogle, President & CEO of Smarter Solutions Inc.
201 Aligning Resources through Integrated Business Planning presented by John O’Rourke, VP Product Marketing at Oracle Corporation
301 Beyond the Numbers: Improve Your Company’s Performance in 30 Days with Visual Analytics presented by Kurt Lueck, Practice Director at Analytics8
303 Driving CPM with BPM: Unlocking Critical Information through Business Process Management presented by Vince Tornillo, Global Solutions Consultant at Ricoh Solutions Group and Evan McDonnell, VP at Appian

As you can see, it should be a great few days and I will do my best to bring you the highlights and value of the information being presented at this great conference.
For those of you with a special interest in supply chain metrics, pay particular attention to Roger Blanken’s presentation. He’s going to be talking about applying corporate performance metrics in the extended supply chain. International Flavors and Fragrances buys product from almost every area of the world and is wholly reliant on an broad and greatly extended supply chain. It should be interesting to hear what he has to say on the matter.
Also, I have this sense that I will be the irreverent one here. I expect to ask some tough questions and seek real answers from the experts.
One of the things that has me curious, for example, is this:

Who’s guarding the hen-house? CPM initiatives can involve a huge investment in capital and lead to increased operating expenses on an ongoing basis. What are the metrics that tell an organization that making that investment will provide real ROI; and what are the metrics by which the CPM initiatives themselves are measured as to success or failure?

Stand by for the next report soon.

Avoiding a costly “metrics obsession”

2011-09-05T02:34:00.000-05:00

This year, 2011, is the centennial anniversary of the publication of Frederick Winslow Taylor’s autograph work, The Principles of Scientific Management. According to Taylor, almost every challenge management faced could be solved through the application of science. This view has become the staple of business schools for the better part of the last century, as a result.

Most small businesses—which, by the way, constitute the majority of all businesses in the U.S.—found the application of “scientific management” to be unduly burdensome. Many entrepreneurs lacked the training in the application of statistics or the time and energy to conduct “time and motion” studies when they knew—by the proverbial “seat of their pants”—that they could make a profit if they took this action or that one.

By the middle of the 20th century, another great voice in “scientific management,” W. Edwards Deming, was beginning to clear the air on the subject, a bit. While Deming certainly believed in gathering data and analyzing statistics in order to improve operations, he was also unequivocal about the limitations of “metrics” in achieving business success.

It was Deming who pointed out, for example, that “The most important figures for management of any organization are unknown and unknowable.” (Emphasis added.)

“The most important figures for management of any organization are unknown and unknowable.” – W. Edwards Deming

However, in the 1980s, along came the introduction of the “Personal Computer” (PC) and a plethora of software that enabled small businesses to collect, analyze, store and recall hundreds of thousands or even millions of data points. With the growth of computing power and falling costs of computer hardware and software, the collection of volumes of business data was soon within the reach of even the smallest of small businesses.

Even before the dominance of the Internet as a means for sharing data and collaborating across huge distances, many small-to-mid-sized business executives and managers had become enamored with the ability of computers to store and retrieve data. Even if they were entirely unaware of the pronouncements of Frederick Winslow Taylor, these executive and managers came to believe something along the lines of: “If we can collect and access enough data about our operations, we will be able to manage flawlessly.” The obsession with metrics had, indeed, come of age.

The mantra of the “Obsession with Metrics” crowd: “If we can collect and access enough data about our operations, we will be able to manage flawlessly.”

Another all too frequently heard proverb from the metrics-obsessed crowd is this: “You can’t manage what you can’t measure.” This, of course, has a tincture of truth to it, but is misconceived. There are all manner of things in which management is involved in “managing” in some way or other that are not not subject to objective quantification.

Here is a (non-exhaustive) list for your consideration:

Corporate culture
Customer relationships (we even have software that is supposed to do this!)
Employee relationships (we have both software—human resource management applications—and entire third-party firms that engage in this kind of “management”)
Customer loyalty (some companies even have “teams” or “departments” engaged in “managing” this aspect)
Creativity / innovation
Leadership
Ethics
Supply chains (especially the ‘relationships’ that really make them work; not just the inventory ins-and-outs)

Now, let me very clear here: I do not oppose the application of sound scientific principles to business when the application of such principles is done in an environment where cause-and-effect can be reliably demonstrated.

The correct statement is this one: “If you cannot define the ‘process’ and the theory underlying the cause-and-effect relationships in the ‘process,’ then you cannot manage it.” More importantly, if your theory is wrong, you will not get the results you expect.

“If you cannot define the ‘process’ and the theory underlying the cause-and-effect relationships within the ‘process,’ then you cannot manage it.”

This clear and correct statement explains why some companies actually see significant improvements in their business results after implementing new supply chain “management” (SCM), customer relationship “management” (CRM) or human resource “management (HRM) applications” while the vast majority of companies see little or no improvement.

Understanding your existing business processes (hint: it is likely they are NOT what you think they are) and tying them to a theory that will help you understand the cause-and-effect within your processes is not as hard as it seems. Nevertheless, most businesses fail to do so simply because they don’t know they need to do so! They think they already understand them—but do not.

That’s why no matter how many “metrics” they throw at the problem and—sadly—no matter how much money they throw at “fixing” things, they typically see little or no improvement in the things that really matter—like making more money!

There is a better way!

Misaiming about metrics

2011-09-02T10:45:00.001-05:00

In order to protect the guilty, my source for some the silly statements I read about business management will not be revealed. Recently, I read this statement in a book about business metrics.

“Measurement is the connecting fiber that can make all the parts work together [in a business or government enterprise]. Achieving this kind of coordination and alignment is impossible without exceptional performance measurement.”

Let’s consider the metaphor of a multi-movement mechanical watch. You know: the kind of watch that keeps time in minutes and seconds, tells you the day of the week, the day of the month, and the phases of moon.

Now, without a doubt, a huge number of measurements were made, formulas developed, and calculations made about the sizes of the gears, the number of teeth in each gear, their placement in relationship to one another and more. A watch is all about measurement. A watch’s whole purpose “measurement.” It only exists “to measure.”

Nevertheless, it is not the accuracy of the measurements that make the watch fulfill its functions properly. When you get right down to it, it is not even the accuracy of the calculations that went into the design of hundreds of moving parts. It is not the accuracy of its manufacture that—at the root—cause the timepiece to function as a “system” and do precisely what is expected of it.

It isn’t any of those things—at the root!

What, then, is at the root of a “system” that functions smoothly, efficiently and effectively? At the root of that highly effective watch’s ability to function is something entirely distinct from “measurement.”

What is that mysterious thing that all too frequently escapes the business intelligence fanatics? What lies at the very core, but is often overlooked by the “metrics maniacs”? What seems to conceal itself from those who seem to be convinced that if management could just get enough “information”—enough metrics—they could manage flawlessly?

The answer is—as W. Edwards Deming told us years ago—“theory.”

The people who designed all of the components of the multi-movement “watch” that does what it does so smoothly, efficiently and effectively had a “theory” about watchmaking long before they ever drew the first plans or began fabricating the first gear.

The business metrics book from which I got the quote at the opening of this article contained a diagram similar to that above. But this diagram is wrong in lots of ways. But, really, only two are critical.

Here’s what the diagram ought to look like:

The foundation of making a business that works—and stays working—is theory. And, more importantly, if the only “goal” of your “measurements” and “management” is a bunch of departments surrounded by a compensation system, then your business probably won’t last too long—except by “luck.”

The “goal” of your “system” should be—indeed, must be—profit. And, as W. Edwards Deming put it so well, “Information tells you nothing without theory.” Theory is the context by which information is interpreted and made the basis for action to change the outcomes.

[Cross-posted at Kinaxis Supply Chain Expert Community.]