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.
Tuesday, June 15, 2010
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
Thursday, February 11, 2010
The Puzzle of the Three-Legged Race
During school, most have seen and enjoyed the three-legged race...some of us would have actually experienced the fun as well. While for some, its a nightmare to even take a few steps, there are a few others who are running as fast as they would have run individually! Arms over shoulders, steps in synchronization and off they go towards the 'Finish' line to win the prize!
A complex puzzle for those who can't...and nothing so simple for those who can!
Organizational projects are no less of a three-legged race themselves, where:
Leg 1 = Customer
Leg 2 = Solution Provider
Leg 3 = The actual solution and the project itself where the Customer and the Solution Provider are tied together
Some of these project engagements struggle to identify the Leg 3 itself, while some others run off to finish the race in record time and reap immense business benefits. A clear understanding of dependencies of Leg 1, Leg 2 and Leg 3 followed with precise, continuous coordination between the three legs is perhaps all that's needed to solve the puzzle of the three-legged race!
A complex puzzle for those who can't...and nothing so simple for those who can!
Organizational projects are no less of a three-legged race themselves, where:
Leg 1 = Customer
Leg 2 = Solution Provider
Leg 3 = The actual solution and the project itself where the Customer and the Solution Provider are tied together
Some of these project engagements struggle to identify the Leg 3 itself, while some others run off to finish the race in record time and reap immense business benefits. A clear understanding of dependencies of Leg 1, Leg 2 and Leg 3 followed with precise, continuous coordination between the three legs is perhaps all that's needed to solve the puzzle of the three-legged race!
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.
Wednesday, December 16, 2009
Abstract Business Problems and BPM
The principles of Business Process Management (BPM) can lend themselves beautifully to solve abstract business problems. The methodical rigor it propounds can help in providing good objectivity and quantification to an abstract and subjective problem, provided. As an example, let us consider a case of a company having very low employee motivation resulting in high employee turnover and poor performance issues without having much clarity on the reasons for the low motivation. The essential method of applying BPM principles is briefly outlined here.
Step 1: Define the problem statement: Objectively address the problem of low employee motivation using the principles of BPM
Step 2: Identify the business processes impacting employee motivation. e.g.
As an example, if we consider the training and development process, its evaluation factors and their current state findings could be on the lines of something like:
Step 6: Study and synthesize the findings from each process area and take corrective action. Corrective action may also include designing improved / new processes.
The data collection can be easily done by asking the target employees to respond anonymously to a comprehensive questionaire and obtaining objective feedback on how well were the process and its activities followed for each of the evaluation factor. Modern IT tools are readily available to do the analytical number crunching part.
Thus, the focus on and use of business processes and activities helps to build objectivity in an otherwise subective area. The method may seem to be tedious, but can work very effectively in generating objective data. What remains upto the business manager is the initiative to conduct such an analysis and take appropriate corrective actions. :)
Step 1: Define the problem statement: Objectively address the problem of low employee motivation using the principles of BPM
Step 2: Identify the business processes impacting employee motivation. e.g.
- Training and development (adequate, timely, regular)
- Remuneration (as per industry standards, performance based)
- Career roadmap (clarity)
- Performance appraisal (transparent, interactive, fair)
As an example, if we consider the training and development process, its evaluation factors and their current state findings could be on the lines of something like:
- Regularity (irregular, no clarity in training program schedule)
- Appropriateness (lack of appropriate training that is relevant to job)
- Adequacy (Inadequate in both volume and expertise levels)
- Timeliness (Not conducted when required for the job)
- Formal / Informal (Informal trainings that lack professional expertise)
- Mentoring (lack of mentoring and guidance)
- Is there a formal updated process laid down for appropriate training and development of employees for each component?
- If no, it implies a high amount of arbitrary decisions being taken in that area. There is a starightforward need to define the organization wide processes
- If yes, then further investigate to what extent the process has been followed at an individual activity level.
- Identify each occurence of deviation versus adherence to the process, its individual activities and the roles and then aggregate the results. This would help in isolating that activity - role combination which is not performing as per the process standards.
- Collate the resulting data for further cause - effect analysis. Graphs, charts may be used for visual analysis as well.
- Applying proper weightages to each area can also help rate a process using a numerical score.
Step 6: Study and synthesize the findings from each process area and take corrective action. Corrective action may also include designing improved / new processes.
The data collection can be easily done by asking the target employees to respond anonymously to a comprehensive questionaire and obtaining objective feedback on how well were the process and its activities followed for each of the evaluation factor. Modern IT tools are readily available to do the analytical number crunching part.
Thus, the focus on and use of business processes and activities helps to build objectivity in an otherwise subective area. The method may seem to be tedious, but can work very effectively in generating objective data. What remains upto the business manager is the initiative to conduct such an analysis and take appropriate corrective actions. :)
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