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Newsletter |
Achieving Sustainable Success
by Carol Ptak MBA CFPIM CIRM CDDP Jonah
by Carol Ptak MBA CFPIM CIRM CDDP Jonah
Over the past few years, I have been able to travel worldwide and have exactly this conversation with executives all around the world. The interesting answer is that there is a different answer between privately held companies and publicly held companies - and there shouldn’t be that difference. Success should be success – no matter the ownership structure. So why the difference?
The first part of the answer is that sustainable success is measured by overall ROI and cash flow. Any owner of a company knows this. When the managers are not owners then the answer seems to change. The bottom line on the P&L is secondary to the overall ROI and cash flow. ROI and cash flow are much better metrics to judge the overall effectiveness of the business and measures how well a company converts its cash outlay to cash inflow and leverages its assets. An owner knows this because the effect is directly in their pocketbook.
Recently at a conference in the UK, I listened to a story of a publicly held company that had the capability to dramatically reduce inventory quickly but was unwilling to do that because of the short term impact on the P&L. The project team was told to slow down the implementation because the inventory reduction with the improved customer service would adversely impact the P&L. No kidding! Crazy! The company was willing to forego real ROI, improved cash flow and a competitive advantage in the market because of the terrible conflict in which so many find themselves trapped - do I do what I know is best for the overall company performance, or do I do what is best for my personal metrics?
This company bypassed a potential competitive advantage because of the wrong metrics and stressed their employees in the process. I wish this was the only company and the only country where I have heard this story. The only common factor is a publicly held company with key performance indicators tied to the P&L. Privately held companies are much quicker to adopt the ROI and cash flow view because the owner sees the benefit in their pocket. The benefit for the company is aligned to the benefit for the owner.
In France, I personally witnessed a conversation between a company owner and a very bright academic where this exact issue was debated. The academic insisted that what mattered was the bottom line on the P&L – profit and reduction of inventory. The business owner agreed it was important but what was much more important was ROI and cash flow. His goal was to have his cash flow follow the flow of product demand to the market.
In Colombia, another company was paying taxes on the accounting profit and at the same time was in a cash crisis due to its high inventory. Companies do not typically go out of business because they don’t have customers or don’t have products that customers want - they go out of business because they don’t have cash.
Sustainable success is measured by ROI and cash flow. Not the performance of the profit and loss statement or inventory turns. The second part of the answer is that supply chains are not linear systems that can be broken down into individual pieces, optimized and then put back together. The whole is NOT the sum of its parts. Supply chains shift and adapt under pressure and do not stay in any given state for too long. If something changes, the supply chain will change and will not return to its previous state. Now if there is a creature that walks like a duck, quacks like a duck and swims like a duck, it is… most likely a duck!!
The reality is that supply chains are nonlinear complex adaptive systems – they are dynamic, impossible to predict for any length of time, and output is governed by a few critical points. The problem is that all our traditional planning tools are based on a linear model - a system where the output is proportional to its inputs, the definition is stable and predictable and it can be understood by studying individual components, as the whole is the sum of the parts. These are inherent flaws, but we believe they are just “the way things are done”.
To survive, we export data from our formal planning systems where we have spent a significant amount of investment and then use spreadsheets to actually do our planning. Spreadsheets are not scalable and are often usable only by one person. Planners are trapped in their jobs because the company fears that if they are promoted then chaos will ensue. If they leave the company, nobody understands that planner’s specific spreadsheet and the process starts over from scratch. The planning department quickly becomes the company’s witchdoctor.
Force fitting tools designed for a linear system on a complex adaptive system is a recipe for disaster. This disaster is witnessed daily in companies worldwide. Optimization tools like APO/APS take small changes and bullwhip these through the entire network in the blink of an eye with frequent recalculations. The result is an exacerbation of normal system nervousness, resulting in even more inventory while customer service falls. After a significant investment in time and money, companies are bewildered at not only the lack of results but also the damage that is experienced. This is a very visible example of trying to apply linear tools to a complex adaptive situation.
Sustainable success is having the ability to sense changes in customer demand then adapt planning and production while pulling from suppliers – in real time. Planners use real order data instead of forecasts to activate the resources of the company through an established model based on the business plan and strategy. Smart metrics align the organisation to this objective with scalable technology aligning strategy, planning and execution. This is truly common sense and the result is an alignment of company performance and individual performance – a win-win outcome that reduces stress levels and improves overall performance.
New tools are necessary to support this methodology, which mitigates variability (it can never be eliminated) and provides visibility to relevant materials and relevant information. These tools must be easy to use, intuitive and scalable across the company. As relevant visibility improves, then flow improves, which means the benefits of that improved flow are realized – sustainable supply chain success! This methodology has a name: Demand Driven Material Requirements Planning.
Carol Ptak is a co-founder of the Demand Driven Institute.
This article was first published in Logistics Business IT magazine and is reporduced with the author's permission.
For more information about how Demand Driven Material Requirements Planning can transform your business, contact Colin Seftel.