While sipping coffee in the cafeteria of an mid-sized organization I visited some time back, it was interesting to see the number of people out there. I observed the occupancy at different times of the day, excluding the lunch hours of 1200-1500 hrs, when of course most of the employees would be in the cafeteria. Nevertheless, it appeared that in the time period of 0900-1200 hrs and 1500-1800 hrs, at any given point in time, there were roughly around 400 people in the cafeteria and its surrounds. I could not resist the urge to do some back of the envelope calculations and ponder about some productivity issues that would be faced by organizations.
The annual time spent by the employees at the cafeteria would be:
400 persons x 6 hours/day x 250 days = 600000 person hours = 600000 / 8 = 75000 person days
Assuming that around 50% of this time is required for having food and general socializing, it translates into 75000 / 2 = 37500 person days not accounted for.
In other words, 37500 person days / 250 days per year = 150 persons per year were hired in a non-productive fashion. For a company size of about 3000 persons, it means about 5 percent of employees were hired for nothing.
Of course, numbers do not tell the whole story. But then, do they, at least point towards something more meaningful for appropriate management action?
The typical layman’s response could be that employee strength is re-evaluated and adjusted for this non-productive number. However, that would be catering to the symptom and not the cause. The important questions that need to be asked and answered are:
- How best can this free employee time be utilized in areas like training and development, internal projects that address current issues ?
- Why were these persons hired in the first place?
- What assumptions were made earlier that are not relevant now?
- Is it the result of the current organization structure and the processes followed?
- Does it require an assessment of the new business realities and responding to them in a holistic fashion, rather than a simple employee count reduction?
Showing posts with label Implementation. Show all posts
Showing posts with label Implementation. Show all posts
Tuesday, July 13, 2010
Tuesday, June 15, 2010
The Balancing Act
While we were discussing the business challenges of a medium sized, $60 million company making specialty polymers, a production planning executive highlighted the age old problem of performing the balancing act between the production/procurement plan with the ever fluctuating sales orders and the regular pains they had to undergo to try to achieve the balance between them. The essential facts of this classic case were as follows.
The company made and sold around 150 polymer grades manufactured out of some hundred odd ingredients. The production runs had to be of specific lot sizes and be planned based on a specific product sequence dependent on the individual polymer grades and their characteristics. The production run had to be scheduled at least three weeks in advance. The raw material procurement lead times could vary from 1 week to 12 weeks. Adding to the complexity, customer orders could come in with lead times of less than a week for out of stock materials and cause disturbance in the existing production schedule. The essential challenge was how to manage the dynamism inherent in the cumulative purchase and production lead times of 4 to 15 weeks versus the 1 week lead time of the unplanned orders.
We decided to further explore the issue by conducting an impact analysis on two fronts.
1. Loss of sales versus better production efficiencies:
A preliminary, but incisive, analysis of the situation brought out that most of the unplanned orders came in from C class customers who accounted for not more than 30% of total sales. The unplanned orders were typically made for some 40 polymer grades and accounted for around 5% of total company sales. The company had an operating profit margin of about 10%, the material cost was around 70% and cost of goods sold typically was 90% of the sale price.
We then asked the question “What if the unplanned orders were not catered to at all? What would be the fallout?” Some quick calculations showed that the real impact on business would be
= $60 million x 5% unplanned order revenue x 10% operating profit margin = $0.3 million.
But on the other side production runs would be smoother with waste reduction of say 1%. This implied a saving of
= $60 million x 70% material cost x 1% saving = $0.42 million
Thus just ignoring the unplanned orders could result in a net business benefit of $0.12 million.
2. Preserved sales versus higher inventory carrying costs:
We decided to push further. What if the safety stock levels of those relevant 40 grades were pushed up to a level that would help satisfy the unplanned orders? Assuming finance costs of 10%, the financial impact of that decision would be
= $60 million x 5% unplanned orders x 70% material cost x 10% finance cost = $0.21 million
Again this has a net savings of $0.09 million
Combine the two impacts, there would be no loss of sales, production efficiencies would be high and the total benefits would be
= $0.3 million (no loss of sale) + $0.42 million (better production efficiency) - $0.21 million (inventory carrying costs) = $0.51 million
Similar impact analysis can be done on the raw material lead times, production plan time fences, warehousing and other relevant aspects to identify potential business improvement opportunities.
Though the situation is much simplified in this example, it can serve as an effective method to further delve into the problem and arrive at relevant business solutions.
The company made and sold around 150 polymer grades manufactured out of some hundred odd ingredients. The production runs had to be of specific lot sizes and be planned based on a specific product sequence dependent on the individual polymer grades and their characteristics. The production run had to be scheduled at least three weeks in advance. The raw material procurement lead times could vary from 1 week to 12 weeks. Adding to the complexity, customer orders could come in with lead times of less than a week for out of stock materials and cause disturbance in the existing production schedule. The essential challenge was how to manage the dynamism inherent in the cumulative purchase and production lead times of 4 to 15 weeks versus the 1 week lead time of the unplanned orders.
We decided to further explore the issue by conducting an impact analysis on two fronts.
1. Loss of sales versus better production efficiencies:
A preliminary, but incisive, analysis of the situation brought out that most of the unplanned orders came in from C class customers who accounted for not more than 30% of total sales. The unplanned orders were typically made for some 40 polymer grades and accounted for around 5% of total company sales. The company had an operating profit margin of about 10%, the material cost was around 70% and cost of goods sold typically was 90% of the sale price.
We then asked the question “What if the unplanned orders were not catered to at all? What would be the fallout?” Some quick calculations showed that the real impact on business would be
= $60 million x 5% unplanned order revenue x 10% operating profit margin = $0.3 million.
But on the other side production runs would be smoother with waste reduction of say 1%. This implied a saving of
= $60 million x 70% material cost x 1% saving = $0.42 million
Thus just ignoring the unplanned orders could result in a net business benefit of $0.12 million.
2. Preserved sales versus higher inventory carrying costs:
We decided to push further. What if the safety stock levels of those relevant 40 grades were pushed up to a level that would help satisfy the unplanned orders? Assuming finance costs of 10%, the financial impact of that decision would be
= $60 million x 5% unplanned orders x 70% material cost x 10% finance cost = $0.21 million
Again this has a net savings of $0.09 million
Combine the two impacts, there would be no loss of sales, production efficiencies would be high and the total benefits would be
= $0.3 million (no loss of sale) + $0.42 million (better production efficiency) - $0.21 million (inventory carrying costs) = $0.51 million
Similar impact analysis can be done on the raw material lead times, production plan time fences, warehousing and other relevant aspects to identify potential business improvement opportunities.
Though the situation is much simplified in this example, it can serve as an effective method to further delve into the problem and arrive at relevant business solutions.
Monday, May 17, 2010
Tackling the Complexity Creep
Initial success leads most organizations to strive and repeat the success on a larger scale, in more complex situations. It implies higher turnover of existing assets plus addition of new assets. These assets could be in the primary areas of physical infrastructure, monetary resources, technology, systems, information and most importantly people. The route taken most often by organizations is to use a similar, if not the same success formula of combining the old and new resources to achieve further success.
Such actions imply that the earlier framework is now stretched to include new resources, tackle new operating situations and deliver expected results. This initial stretch though more complex, with some push delivers the results, albeit in a less efficient manner. As with any system, such stretches would be effective till a point; after which the operating framework would start to fail and result in a tangled mess. It is not too uncommon to see successful, high growth organizations having people across all levels working in ambiguity, isolation and exhaustion, simply because they are unable to comprehend the new complexity of working towards the expected results. Clarity is difficult to come by as it is in short supply. Confusion prevails as this complexity slowly increases over a period of time and past successes. Lets call this process as Complexity Creep.
How to tackle such a Complexity Creep?
A process centric, back to basics approach initiated by the top management can serve well to reduce the complexity creep. It involves asking a few simple questions, collectively answering those and following these with action. The primary aim is to change the existing way of working and simplify operations for higher effectiveness and efficiency.
The first and foremost thing to do is to build a clear understanding of the new organization objectives and the available resources, with their strengths and limitations. It would need to be supplemented by gaining better insight and acceptance of current operating problems. A multi team participation from all stakeholders is recommended to foster ownership and enhance teamwork.
At this stage, it is very helpful to rely on BPM methodologies and build various operating models like Strategy, Business Interactions, Communication, Process, Workflow, SIPOC, Roles, Metrics etc. to consolidate a common understanding of the mentioned activities. Such models necessitate the participants to have a common understanding and acceptance of the new operating framework. There are change management techniques available which help such teams to collectively arrive an accepted way if working.
Once this part is agreed upon, then the time comes to define the manner in which the new approach would be carried out. It can imply decisions regarding the scope of change i.e. product lines, projects, business units etc. and the manner in which such change would be effected. Once the scope is in place, timeframes need to be associated to the plan along with required resources. Metrics also need to be decided to measure organizational performance and arrive at benefits achieved. Finally, establish a clear methodology of implementing the plan and have change management chamions to drive the change.
To ensure the success of such initiatives, some thumb-rules seem to work very well. They are:
• Regular involvement of the organizational leaders and their proven commitment to change
• Ensuring high participation from the scarce pool of top performers
• Professional involvement to provide change management expertise and a third party view
Such actions imply that the earlier framework is now stretched to include new resources, tackle new operating situations and deliver expected results. This initial stretch though more complex, with some push delivers the results, albeit in a less efficient manner. As with any system, such stretches would be effective till a point; after which the operating framework would start to fail and result in a tangled mess. It is not too uncommon to see successful, high growth organizations having people across all levels working in ambiguity, isolation and exhaustion, simply because they are unable to comprehend the new complexity of working towards the expected results. Clarity is difficult to come by as it is in short supply. Confusion prevails as this complexity slowly increases over a period of time and past successes. Lets call this process as Complexity Creep.
How to tackle such a Complexity Creep?
A process centric, back to basics approach initiated by the top management can serve well to reduce the complexity creep. It involves asking a few simple questions, collectively answering those and following these with action. The primary aim is to change the existing way of working and simplify operations for higher effectiveness and efficiency.
The first and foremost thing to do is to build a clear understanding of the new organization objectives and the available resources, with their strengths and limitations. It would need to be supplemented by gaining better insight and acceptance of current operating problems. A multi team participation from all stakeholders is recommended to foster ownership and enhance teamwork.
At this stage, it is very helpful to rely on BPM methodologies and build various operating models like Strategy, Business Interactions, Communication, Process, Workflow, SIPOC, Roles, Metrics etc. to consolidate a common understanding of the mentioned activities. Such models necessitate the participants to have a common understanding and acceptance of the new operating framework. There are change management techniques available which help such teams to collectively arrive an accepted way if working.
Once this part is agreed upon, then the time comes to define the manner in which the new approach would be carried out. It can imply decisions regarding the scope of change i.e. product lines, projects, business units etc. and the manner in which such change would be effected. Once the scope is in place, timeframes need to be associated to the plan along with required resources. Metrics also need to be decided to measure organizational performance and arrive at benefits achieved. Finally, establish a clear methodology of implementing the plan and have change management chamions to drive the change.
To ensure the success of such initiatives, some thumb-rules seem to work very well. They are:
• Regular involvement of the organizational leaders and their proven commitment to change
• Ensuring high participation from the scarce pool of top performers
• Professional involvement to provide change management expertise and a third party view
Monday, February 1, 2010
When It's Not OK...
In an organization, multiple stakeholder teams contribute to the many facets of organizational activity. Modern management principles require that each stakeholder group be responsible for the area it contributes to and controls this contribution through well laid out Key Result Areas (KRAs) and Key Performance Indicators (KPIs).
The key assumption made in this type of framework is that each stakeholder is aware of not only its own, but also the roles, responsibilities and dependencies across other stakeholders. The decision makers have their task cut out to orchestrate the activities of individual stakeholders towards realization of organizational goals, both short term and long term. Implicit here is that along with the activities of each stakeholder, the benefits to each stakeholder also have to be balanced by the decision makers.
Invariably, however, balancing individual activities with organizational goals and stakeholder benefits is seldom a simple task. Rather than walking a straight-line tightrope, we usually find decisions and activities oscillating across the ideal balanced state of operations. The end result is that the organization's operations are rarely on the ideal, optimized path. Lack of appropriate and complete information, and uncontrollable external factors could be driving such situations. But sometimes differing importance assigned to each type stakeholders could be playing a sustained role in influencing the direction of these oscillations.
If we look at principle task of balancing the basic short term organizational survival with the long term stakeholder enrichment and growth, we do observe certain decisions that are sometimes taken to ensure short term continuity, and a long term strategic interest of some stakeholder is either sacrificed or foregone. Situations having short term focus would typically drive such decisions. In situations with longer term visibility, decisions can tend to forego overall short term benefits to ensure long term sustainability.
But in today's world of shortening business process lifecycles and dynamic situations, we do see an increased tendency towards short term rather than long term, with the result that some stakeholder interests are sacrificed over others. The impacted stakeholders need to bring this to the notice of the decision makers and good practices of management require that such imbalance be set right. Most of the times, even the stakeholders are fairly agreeable to such short term variations and its OK with them.
But there are times when there could be a deliberate, sustained sacrifice of some stakeholder benefits over some other stakeholder group benefits. Such situations, not only can strike at the very root of long term sustainability, but also at the immediate survival of the organization...then things are definitely not OK!
Though there is no definite solution to such problems, a willingness to take the raging bull by its horns is very often the best way out.
The key assumption made in this type of framework is that each stakeholder is aware of not only its own, but also the roles, responsibilities and dependencies across other stakeholders. The decision makers have their task cut out to orchestrate the activities of individual stakeholders towards realization of organizational goals, both short term and long term. Implicit here is that along with the activities of each stakeholder, the benefits to each stakeholder also have to be balanced by the decision makers.
Invariably, however, balancing individual activities with organizational goals and stakeholder benefits is seldom a simple task. Rather than walking a straight-line tightrope, we usually find decisions and activities oscillating across the ideal balanced state of operations. The end result is that the organization's operations are rarely on the ideal, optimized path. Lack of appropriate and complete information, and uncontrollable external factors could be driving such situations. But sometimes differing importance assigned to each type stakeholders could be playing a sustained role in influencing the direction of these oscillations.
If we look at principle task of balancing the basic short term organizational survival with the long term stakeholder enrichment and growth, we do observe certain decisions that are sometimes taken to ensure short term continuity, and a long term strategic interest of some stakeholder is either sacrificed or foregone. Situations having short term focus would typically drive such decisions. In situations with longer term visibility, decisions can tend to forego overall short term benefits to ensure long term sustainability.
But in today's world of shortening business process lifecycles and dynamic situations, we do see an increased tendency towards short term rather than long term, with the result that some stakeholder interests are sacrificed over others. The impacted stakeholders need to bring this to the notice of the decision makers and good practices of management require that such imbalance be set right. Most of the times, even the stakeholders are fairly agreeable to such short term variations and its OK with them.
But there are times when there could be a deliberate, sustained sacrifice of some stakeholder benefits over some other stakeholder group benefits. Such situations, not only can strike at the very root of long term sustainability, but also at the immediate survival of the organization...then things are definitely not OK!
Though there is no definite solution to such problems, a willingness to take the raging bull by its horns is very often the best way out.
Monday, November 9, 2009
ERP Implementation and Business Processes
There was a company where we were implementing an ERP solution. Streamlining of business processes across the organization was one of the primary objectives of the ERP implementation. During the initial business analysis, the typical sales versus production problem came up.
We were in the midst of deciding what the planning cycle should be for the company, based on which the Master Production Schedule (MPS) and Material Requirements Planning (MRP) engines were to be set up. The production department explained its operations for various product lines and and upon asking, mentioned that the ideal lead time for planning and scheduling production batches was about a week. The sales team, subsequently explained their processes and mentioned that there were many high volume customers who gave them orders with a lead time of only about a day or two. In case the orders were not fulfilled, they usually were lost. The imminent loss of sales prompted frequent changes in production schedules resulting in production inefficiency.
The management of the company asked us "How does your ERP solution take care of this unique business situation where both the departments stand justified?"
Though the question was targetted to us primarily as ERP consultants. It was evident that within the ERP system, it would be foolish to try and play with the parameters where both the departments' objectives would be fulfilled. Hence, we decided to take a holistic general management view to the problem.
We had detailed discussions with the Sales and Production teams to understand the dynamics of their operations and try identify room for business process improvement in line with the ERP solution implementation. We analyzed the production processes and concluded that a week's fixed time fence was indeed jsutified, considering the economics of the production processes. We next turned to the sales processes. Knowing the 80:20 rule, we asked the sales team to do a preliminary ABC analysis of their customers and the volume of business they gave as against the short order fulfillment lead times expected. This analysis gave interesting results.
There were essentially 3 categories of customers. The A class which constituted the bulk of regluar orders to the tune of 70-80 %; the B class which gave one off orders giving about 15 % volume and the C class which was made of opportunistic buyers giving 5 %. We decided to probe further. We asked the sales team to focus on the A class customers. We asked the team to approach the A class customers and explain to them the ERP implementation that was underway at the company and the need to have streamlined operations between sales and production. the customers were further requested "Will it be possible for your procurement team to place majority of the orders at least a week before expected delivery?" This approach worked wonders. Most of the A class customers agreed as a week's notice was fair to all concerned in return of good production efficiency and product quality. The company went ahead to report higher sales volumes and better production costs.
Thus, a simple change in the assumptions made in existing business processes resulted into highly streamlined operations between sales and production. ERP really had no role in it; apart from perhaps being a change catalyst, something which prompted that a change in the business process was warranted.
This incident taught me that a holistic approach always helps and many times the answer lies not in technology, but the way in which we communicate and execute things.
We were in the midst of deciding what the planning cycle should be for the company, based on which the Master Production Schedule (MPS) and Material Requirements Planning (MRP) engines were to be set up. The production department explained its operations for various product lines and and upon asking, mentioned that the ideal lead time for planning and scheduling production batches was about a week. The sales team, subsequently explained their processes and mentioned that there were many high volume customers who gave them orders with a lead time of only about a day or two. In case the orders were not fulfilled, they usually were lost. The imminent loss of sales prompted frequent changes in production schedules resulting in production inefficiency.
The management of the company asked us "How does your ERP solution take care of this unique business situation where both the departments stand justified?"
Though the question was targetted to us primarily as ERP consultants. It was evident that within the ERP system, it would be foolish to try and play with the parameters where both the departments' objectives would be fulfilled. Hence, we decided to take a holistic general management view to the problem.
We had detailed discussions with the Sales and Production teams to understand the dynamics of their operations and try identify room for business process improvement in line with the ERP solution implementation. We analyzed the production processes and concluded that a week's fixed time fence was indeed jsutified, considering the economics of the production processes. We next turned to the sales processes. Knowing the 80:20 rule, we asked the sales team to do a preliminary ABC analysis of their customers and the volume of business they gave as against the short order fulfillment lead times expected. This analysis gave interesting results.
There were essentially 3 categories of customers. The A class which constituted the bulk of regluar orders to the tune of 70-80 %; the B class which gave one off orders giving about 15 % volume and the C class which was made of opportunistic buyers giving 5 %. We decided to probe further. We asked the sales team to focus on the A class customers. We asked the team to approach the A class customers and explain to them the ERP implementation that was underway at the company and the need to have streamlined operations between sales and production. the customers were further requested "Will it be possible for your procurement team to place majority of the orders at least a week before expected delivery?" This approach worked wonders. Most of the A class customers agreed as a week's notice was fair to all concerned in return of good production efficiency and product quality. The company went ahead to report higher sales volumes and better production costs.
Thus, a simple change in the assumptions made in existing business processes resulted into highly streamlined operations between sales and production. ERP really had no role in it; apart from perhaps being a change catalyst, something which prompted that a change in the business process was warranted.
This incident taught me that a holistic approach always helps and many times the answer lies not in technology, but the way in which we communicate and execute things.
Wednesday, November 4, 2009
Disorganization...fine...but how to implement it?
As a consultant for about a decade and a half, I have been an avid reader of business management and have seen numerous references to how companies have restructured their businesses successfully. Its always a big question for me as to how did they actually go about implementing the change.
Take this example:
In his book ‘Crazy Times Call for Crazy Organizations’, Tom Peters talks “Beyond Decentralization … Disorganizing to Unleash Imagination”. He introduces us to the case of Oticon, a company manufacturing hearing aids. To regain its sagging market share, its president, Lars Kolind, dramatically did away with the existing organization structure (and everything related to it) and created a 100% project directed entity where the employees were expected to decide the tasks that needed to be done and physically organize themselves as they think fit to get those tasks done.
Interestingly, this radical move helped Oticon make record profits, regain lost market share and shorten its new product introduction lead-time by half. Kolind attributed this astounding turnaround to the new configuration of his organization.
As a consultant, this particular case raised several practical questions from an implementation perspective, the most important one being: "How would one manage such a disorganization and explain the source of its success?"
As major components to a possible comprehensive answer, I would like to evaluate these:
• People expertise remains irrespective of the organization structure
• Project driven matrix structure draws upon the necessary expertise from the profit centers (ensuring customer needs are met) and competency centers (ensuring delivery of expected customer needs) for achieving business results.
• Use of projects as the organizational building block.
• Realignment of HR framework to motivate people, enhance ownership, promote innovation and suitably reward the performers
• And most importantly, redefining the business process framework using a black box approach: move back from workflows to guiding principles
To summarize, I must say there is more to it than meets the eye!
Take this example:
In his book ‘Crazy Times Call for Crazy Organizations’, Tom Peters talks “Beyond Decentralization … Disorganizing to Unleash Imagination”. He introduces us to the case of Oticon, a company manufacturing hearing aids. To regain its sagging market share, its president, Lars Kolind, dramatically did away with the existing organization structure (and everything related to it) and created a 100% project directed entity where the employees were expected to decide the tasks that needed to be done and physically organize themselves as they think fit to get those tasks done.
Interestingly, this radical move helped Oticon make record profits, regain lost market share and shorten its new product introduction lead-time by half. Kolind attributed this astounding turnaround to the new configuration of his organization.
As a consultant, this particular case raised several practical questions from an implementation perspective, the most important one being: "How would one manage such a disorganization and explain the source of its success?"
As major components to a possible comprehensive answer, I would like to evaluate these:
• People expertise remains irrespective of the organization structure
• Project driven matrix structure draws upon the necessary expertise from the profit centers (ensuring customer needs are met) and competency centers (ensuring delivery of expected customer needs) for achieving business results.
• Use of projects as the organizational building block.
• Realignment of HR framework to motivate people, enhance ownership, promote innovation and suitably reward the performers
• And most importantly, redefining the business process framework using a black box approach: move back from workflows to guiding principles
To summarize, I must say there is more to it than meets the eye!
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