Budgeting, Forecasting and Financial Planning: Critical Success Factors for your organization

An effective financial plan is the means by which an organization underlines their strategic business financial objectives. A well-thought and prepared financial budget creates the platform for effective decision-making during the performance period. And it also forms the basis for the forecast which enables organization to plan future goals based on recent actual performance. All best in class organizations today need to have the tools that provide highest visibility and maneuverability for balancing plans with real life. Just to measure, please ask questions to yourself:

• What is the overall budget accuracy level for your organization
• What is forecast accuracy level
• How much improvement, the organization achieved in profitability year over year
• How many times your budget was ready before next fiscal year
• What is the level of process standardization in the organization

These will give you a small idea on where are you placed currently. You will find that following actions will help you achieve Best-in-Class performance:

• Use technology to automate and assist in the budgeting process
• Have visibility into all factors and collaborate with all stakeholders
• Consider alternative scenarios and have the ability to change forecasts, plans, and budgets mid-stream

Cost controls have remained a significant driver of the financial planning and budgeting process throughout the past four years and have only intensified again this year. Efficiency of the process rounds out the top four challenges in spite of the fact that it typically happens only once a year. Yet it also happens at a time when the urgency of closing out a fiscal year is most intense. There is risk in focusing all the attention on the present at the expense of careful planning for the future.

Overall budget accuracy reflects the ratio of actual revenue and cost (bottom line) to budget, with 100% accuracy as the ideal. A budget which is 100% accurate is reflective of either an accurate prediction of revenue and costs, or good controls in place to manage against budget, or both. Because of the continued emphasis on the ability to respond to changing market conditions, forecast accuracy is also included in the Best-in-Class criteria, reflecting the rising importance placed on agility. Accuracy is tempered with improvement and / or preservation of profitability. While achieving budget and forecast accuracy is viewed as important, it cannot come at the expense of good business. An organization’s ability to finalize the budget prior to the beginning of the new fiscal period is indicative of the performance of the financial planning and budgeting process. The use of automation to assist in the planning process leads to an efficiency that is very hard to achieve only with manual processes and the ubiquitous spreadsheet. Automation of the process not only boosts efficiency, but also helps insure that standards, methodology and proper review cycles happen as planned. This automation is essential in analyzing driver based scenarios and providing "what if" analysis.

The steps to success as per us are:

• Use technology enablers to receive alerts triggered by internal and external events
• Increase the frequency with which forecasts are updated
• Perform "what-if" scenarios and change analysis before finalizing plans
• Use technology to be automatically guided through steps of the financial planning, budgeting, and forecasting process
• Establish enterprise-wide collaboration from the top-down and bottom-up as well as across departments
• Align sales forecasts with overall business revenue and cost forecasts

Go ahead and give them a try to check-out how much they benfit you.

What is your reason to go for eProcurement Initiative?

Successful technology management provides an opportunity for procurement departments to meet or even exceed established business targets by increasing spend and capturing savings generated through the innovation it provides. To attain procurement goals through technology in future, companies may look to expand, update, or even replace their current platforms. Yet to garner executive support for these investments, eProcurement initiatives will need to demonstrate continued measurable benefits. In a survey by InfoVerto, we intend to find out which are the top reasons or justifications that CIOs or CPOs have to go for eProcurement initiatives.



The top reasons as per InfoVerto are given below:

• Increase visibility into spend & its increase
• Simplify the buying experience for the end-user
• Measure compliance against negotiated contracts
• Incomplete coverage of spend types / catalog categories
• Confusion on policy and requirements for buying products or services Confusion on policy and requirements
• Employee reluctance to use the eProcurement system(s) currently in place
• Difficulty in understanding/leveraging information generated in the eProcurement system
• Increased operational cost of IT management for existing procurement solutions
• Difficulty in finding desired products or services in the eProcurement system's catalog(s)
• Set targets to improve the efficiency of the procurement
• Institute a change management program or internal marketing campaign for eProcurement
• Lower the capital cost of IT management (hardware, facilities, software licenses)

Let us know if there are other reasons or your reason is one of these in the above survey.

SCM Lean Strategy: Adopt the new framework model and re-invent Lean

I have written earlier about the importance of practicing Lean methodology in your organization, multiple times and have tried to highlight that whether it is manufacturing operations or deployment of your ERP system, Lean can be quite useful in all of them. Infact, the article on blending of Lean principles with ERP whether it is 5Ss or 8 wastes, was liked by corporate leaders, business analysts as well as ERP vendors alike. Lean is obviously not new, so you might ask an interesting question: why are we seeing an increasing focus on Lean, which is one of the top two strategies being deployed across manufacturing today? The answer, however, may not be too hard to discern, given what has happened in manufacturing industry across the world over the past decade. Multiple early users & pioneers of Lean, and even some that weren’t using it, experienced an unprecedented expansion in production and corporate profitability over much of the 2000’s. Accompanied with this growth, there was a new focus on maximizing throughput and a slow migration away from the principles of Lean, including demand driven manufacturing, a focus on eliminating waste, and strict controls on inventory explosion.

Such a scenario left many manufacturers vulnerable to the collapse or increased variability in demand for their goods. Even so, the immediate pain that many organizations felt for the most part subsided. Inventory levels have been reduced, waste has been cut out, head count was reduced, and even in the industries like automotive, many companies slowly returned to profitability. Now, however, demand has begun to return, production and inventory levels have begun to increase, and there is a need to not repeat the mistakes of the past.

 

InfoVerto recommends utilizing a new framework model of utilizing Lean in your organization which is built on 4 principles as below:

• EXTRACT: It does not whether you are already practicing Lean principles or want to start, there will always be room for improvement and this principle will make sure that you know those improvement areas to start implementing Lean in those. The Extract principle is all about extracting the ideas from your own workforce and bringing their innovation and knowledge about their own niche operations to fore. Not only your employees, but this needs to be extended to whole of the supply chain including your partners, suppliers and customers. Devise ways and means to get their ideas registered in system and implement a system to evaluate their ideas, reward the good & implementable ideas and encourage everyone to contribute
• MEASURE: Almost all organizations have well defined Key Performance Indicators which tell them how well, the organization is moving towards achieving their goals. Though measuring KPIs is already present in the system of organizations but the emphasis in this principle is to measure them consistently with the same standardized manner every-time so that an apple to apple comparison can be done. This measurement should be done across the enterprise and not locally by independent shops
• INFORM: Lean is not an activity that can be done by an independent. It is best done in teams and sometimes, the dependence on other teams activities makes it little more complex and here comes the importance of information quickness, consistency and clarity into fore. Whether it is an action that is pending on the other team or partner which can be communicated with the help of a workflow based tool or it is sharing of progress of the project which can be dome through the dash boards, information always play a key role in implementing Lean ideas. Also visibility into operations, orders and KPIs like supplier performance will make sure that requisite benchmarks are updated in time and by the time Lean is over, you are not already behind the benchmarks again
• IMPROVE & REPLICATE: As I said earlier, room for improvement is always there and it is upto us to find out that room and start working on it. This principles guide you to focus on Lean and Re-Lean activities and makes sure that after implementing Lean once, the workforce does not think that their job is over and they are best in class now. By the time, you are done, somebody else have started jumping one step ahead so keep on looking for improvement areas. Also, success of one Lean idea implementation needs to be replicated to other shops, business entities and at your partners as it is relatively much easier to replicate rather re-inventing wheel once again. Replication will be possible only if you have good knowledge management solutions in place so make sure that the knowledge of implementing the idea is getting captured and is available for re-use

As per me, these are four new principles of implementing Lean in your organization and please note that these compliment the already established principles of Lean and do not provide an alternative approach. Also, you would have noticed that technology has started playing a major role in implementing and keep practicing Lean and this should be seen as one of the key enablers in your Lean endeavors.

CASH is KING: Preserve cash and reduce working capital by improving supply chain

Though the case of Greece and now Hungary debt is different, but it underlines the fact that CASH is, and will remain as, KING for at least the foreseeable future. This makes all the more important for the organizations to preserve cash and increase cash flow and the primary metrics that every organization needs to focus on, are average cash conversion cycle (derivative of cash to cash cycle that I wrote some time back), return on working capital and perfect order fulfillment. If we can keep a tab on above 3 metrics and try to improve then, we will have much better availability of cash in the system. Small measures like establishing and early payments discount structure with all the suppliers and setting up an online visibility capability into financial chain events can help increase the flow of cash as per the planned benefits of the organization. For example, if you have the option of exercising the discount for an early payment of a supplier, then you can use it you’re your benefit based on the your evaluation of the situation if paying early is more beneficial at this point of time or preserving cash is more important. This gives you additional flexibility in managing your cash to cash cycle and hence improves return on working capital. I understand that this strategy is completely opposite of the more popular “days payable outstanding extension” strategy which is a part of larger strategy that have five pillars of reducing working capital in system, but since it does not rob you of exercising the option of extending DPO or pay early to get a discount, this makes more sense in current scenario.

I mentioned above about the five pillar actions for reducing working capital, so let me pen them down here for everyone’s benefit:

• Reduce Inventory – Infact, it should be optimize inventory as reduction of inventory impacts perfect order fulfillment too which is a key metric in preserving cash
• Reduce days sales outstanding
• Extend days payables outstanding
• Utilize short term financing often
• Short term cash investment

Similar to the strategy discussed above on DPO extension or availing discounts from suppliers, we also need to look at reducing the DSO by offering early payment discounts to the customers, which ofcourse is a popular action these days.

I talked about DSO and DPO and there is another very important that needs a mention here in little detail, which is optimization of inventory as stated above. The drivers to optimize the inventory are your forecast accuracy, optimization of routes of inventory whether it is coming from supplier or shipping to a customer, level of collaboration between you, supplier and customers (this in turn, will again impact the forecast accuracy) and status of implementation of lean and just in time principles. Also, there is a need to implement an inventory optimization tool that talks to your ERP and your business intelligence system provides real time suggestions to deflate inflated inventory, reduce obsolescence, reduce stock outs and increase perfect order fulfillment, all of which will improve the cash flow within the organization and will keep the health of the organization much better.

Strategy: Deploy ERP to improve globalization efficiency of your organization

With the advent of BRIC nations, especially India and China, every organization view globalization as an opportunity for growth. Some of them want to tap the economical resources from these countries to reduce the cost of operations and others want to tap the growing market demand and see most of their growth coming from these nations. While the organizations might have some IT systems to depend to fuel their growth at home but they still need something to hold all their international operations together so that not only expansion but continuously monitoring and improvement actualization is also a possibility. Organizations can not focus on gaining a competitive advantage if they struggle to integrate their own international operations. Their internal operations need to be integrated first to achieving interoperability on a global scale. Seamless integration is easier to manage governance, risk and compliance. It all means that if the core ERP is capable of dealing with issues like multi currency, multi site and multi-company transfer of inventory, consolidation, localization and translation, then it is much easier for the organization to globalize their operations and benefit from them.

 

ERP also plays a key role in the consolidation of global financials for an organization. The ability to support a multi national implementation from a single instance of ERP and global consolidation across multi site and multi database (yes, that’s correct) implementations are the kind of benefits that enable organizations in their globalization endeavors.

ERP also addresses largely the major challenges, companies face in the wake of globalization, like complex supply chains both in raw material and finished goods, the need to adapt to the rules & laws of foreign nations, lead times that inhibit the ability to respond to customer or market demands and most importantly end to end supply chain visibility.

 

Having talked about the features of ERP that helps in globalization, there are few limitations in almost all the ERP products that still need to be addressed by the providers so that it can become a complete package. Issues like inability to capture the export or shipping documentation, lack of translated versions of ERP or challenges in managing global de-centralized IT installation. All these, force the organizations to customize the product or add best of breed systems to flank the core ERP system so that all of their needs are addressed.

 

If we look at the Best in Class organizations today, we will know that ERP is already implemented at all their major operating sites and conforms to corporate standards worldwide. Reporting capabilities are fully utilized and assist the executives in taking the right decisions at right time. They have realized the potential of ERP for them, have you?

Strategy: Create Demand with Supply and Unlock Dollars

Yes, you got it right! I meant the same when I said "Create Demand with Supply". The economies have started looking up once again but still the level of demand, that was there two and a half years back, is still not there and organizations are working under capacity. In these times, you might think that creating more supply (and capacity) in market will only block working capital and will result in huge unused inventories. Well, in normal circumstances, this is right but have you looked at some of the scenarios where supply created demand on its own? Yes, there are so many examples in the world where we saw supply creating demand and not only companies but industries could turn around their performance levels riding on this. Why not, resort to one of the strategies of creating demand with supply and surge ahead of your competition? Let me discuss about some of the ways with which you can create demand...

Strategy: Marry Lean principles with ERP...Part 2

In my last post, I mentioned how 5Ss of Lean can be applied in ERP for larger benefits. Similar to 5Ss of Lean, we also have 8 wastes classified in Lean that can be applied in ERP scenario and when blended with already matured processes and IT management strategies in the organization, these acts as a cataylst to improved ROI of ERP investment. Let me articulate these 8 wastes in terms of ERP environment and how these can add value.

I will start with the first waste that is Overproduction. The definiion if overproduction in Lean is well understood but to apply this in ERP, it certainly means that do not eat database space with more modules installed than required, more functionalities deployed than needed as per IT strategy or with more custom components than ablolutely necessary. This not only eats costly database space (specially when on premise ERP implementation is still the most popular service and SaaS has just acquired less than 10% of market) but also creates confusion in users, leads to more unnecessary documentation, increases staff cost in non value added trainings and increases instability in system. In addition, this will reduce the scalability of ERP in some situations. So this waste is a perfect fit for ERP.

Moving to the next one, which is called as Waiting. We have seen in ERP like manufacturing, that many a times, users are waiting for their turn to take actions just because an activity is still happeneing in the system or another is taking time to complete a task in the system. This reduces efficiency of staff and is sure shot case of dollar leakage. The To-Be processes as we call in a typical ERP deployment project, needs to be designed keeping this in mind so that the waiting time can be reduced to minimum. Also, the custom components running time needs to fine tuned in the build phase so that they take minimum possible running time and no users have to wait for their completion to start their set of activities to take the process forward.

The 3rd waste is Stocks and Inventory. Lean advocates minimum stocks or inventory as same is true for ERP too. ERP is deployed by a large number of organizations just to reduce their stocking levels with sustained service levels so ERP understands the importance of this waste, to the maximum. But to comeback to the chain of thoughts on how to articulate this waste in terms of ERP scenario, we need to again tie this back to the first waste where we are keeping the modules, functionalities or custom components to the lowest possbile level. Also, this susggests that we need to move from the make to stock situtation to make to order situation by increasing forecast accuracy as well as reducing lead times - the processes mapped to ERP product needs to take care of these aspects accordingly.

Let me move to the 4th waste here, which is Transportation. Lean highlights that transportation of material should be minimum possible in an manufacturing scenario ans same is true for ERP also. Though most of the ERP products these days, are web cased and do not need to be installed on client machines, we still need to keep in mind that we do not select a product that is not enabled on web and hence can not be accessed from Web. Also, the integrations of ERP with 3rd party systems need to be seamless and real time so that no time is lost in data transportation from one system to another.

The next waste focuses on reducing the Motion in shop floor and in the cases of ERP it means that there should be minimum manual touch points or hand-offs in the system/process. The processes should be sufficiently automated in ERP so that minimum time goes in subjective decision taking and business logic incorporated in ERP takes care of automated decisions in most cases. For example, order scheduling for customers takes too much time and have high subjectivity but can be smoothened with the help of automated logic incorporation in ERP which will then automatically schedules orders and reduces motion in the process.

Processing is the next waste as per Lean and it has a direct impact on ERP as the system is supposed to take minimum processing time for the programs, integrations, custom components and information availability.

The next waste in Lean processes is Defects. Defects is something that applies almost everywhere - whether you are manufacturing, managing a supply chain or running an ERP system. Like the manufacturing defects, IT systems have their own defects or issues or bugs as they are popularly called and these are required to be minimum possible as these not only reduce the instability of the system and makes it vulnerable to outages and hence business disruptions but also reduces the efficiencies of staff and increase staff cost. Defects resolution is seen as one of the most nono value added activities after ERP goes live and shaves your revenue off due to maintenance of huge support teams to keep the system stable. We need to make sure that enough testing for each and every component that goes into ERP, is done during the ERP cycle so that these deadly post implementation defects can be kept at bay.

I will move to the last one that is called as Information. Genrating and communicating information is also seen as a waste in Lean and it too is valid in the case of ERP. Though ERP is seen as wealth of information and it is believed that it helps in informed decision making for the stakeholders but we need to make sure that we are keeping the reports to an optimum level as per our requirement as huge number of reports in different formates will not only create confusion in the eyes of ever changing users but will also increase load on the system. Focus should be on the flow of information from and to ERP from the 3rd party system and the accuracy of the data that resides in ERP.

I could summarize my thougths on how ERP can be blended with Lean Principles, whether they are the 5Ss or the 8 wastes. I am sure these can be utilized in an ERP scenario in much more ways as the list I higghlighted is no way closer to an exhaustive list. Keep thinking and evolving.

Strategy: Marry Lean principles with ERP

As I wrote in my last article about blending Lean and ERP while doing an ERP deployment for your organization, I thought of extending the whole thought and take it forward to usage of lean principles in ERP so that real benefits of this combination can be extracted. We all are aware about the 5Ss of Lean that are the basis of Lean application in any scenario in your organization, be it manufacturing or supply chain management or for that matter sales and operations management. Let us see how different and yet same, will be the interpretation of these 5Ss in both Lean and ERP and they guide us to similar benefits.

The first S stands for Sort: For Lean, it means to eliminate unnecessary tools, instructions, items etc. by tagging them red and disposing them off after final need disposition. If we apply this in ERP, we can articulate this like – Thoughtful usage of only those parts of the ERP that benefit the organization. The modules or functionalities need to be in sync with the overall business strategy and not just that it is to be used if it is part of the package or if it is coming as free with the package you just ordered. Also, eliminate the unnecessary and redundant processes, manual efforts for data entry, programs or reports as part of the Sort 5S execution in ERP.

Simplify is the 2nd S of Lean which suggests that there needs to be a place for everything and everything should be in its place. In ERP, this can be interpreted as straight forward business processes needs to be implemented as part of the ERP deployment and they need to be integrated with each other to enable automatic Lean methods like back-flushing. The customizations needs to be lowest and manual hand-offs should be minimum in the processes. Simplify also means that the code deployment for the custom components is as per established standards and it can be re-designed, de-bugged or modified easily in case of changed or expanded requirements.

The 3rd S for Lean is Shine, which simply means clean everything daily and in ERP also it has far reaching consequences if it is articulated correctly. ERP depends on data accuracy as much as Lean Manufacturing depends on cleanliness, hygiene and proper instructions. Applying Shine to ERP means that our data that goes into ERP or that stays in it or that goes outside ERP, needs to remain accurate, consistent and upto date. The duplicity or incompleteness in data will skew your results and as we know that one of the main functions of ERP is to help the top management take informed decisions – this function will get defeated because of inaccurate data and not only this, but this will have a cascading impact on other processes to create a chain reaction within the application. So shine your data regularly.

Next one in Lean Principles is Standardize which simply means in Lean to have documented instructions and rules to maintain the above Ss. It means to have same set of procedures for everybody for the same work so that the efficiency of the process can be consistent. This S in ERP is of biggest use as it goes with the whole purpose of ERP which is standardization of processes across the departments, countries, operations and distribution channels. Not only, we need to have a set of procedures (SOP) to run the ERP system from the users point of view but also the process mapping needs to be done as per the standard rules set by the implementation team. Any deflection in the process to accommodate exceptions in the processes will result in a sub optimal solution that caters more to exceptions and less to the major regular process activities. So standardize S can be used to make the most impact in an ERP environment.

The last S of Lean principles is Sustain and this means in Lean that the daily operations need to be carried out in a proper and pre-decided sequence, with utmost safety and minimizing waste in the process. Again, for ERP it holds maximum importance as after you implement an ERP, only after that you have a greater challenge to utilize it to the fullest to take out maximum advantages out of it and reach the level of target ROI sooner than later. It means for ERP we need to have a clear cut strategy after Go-Live of minimizing the waste means the system bugs, data issues, or training bugs that waste the organization’s time are at a minimum. This will help not only in eliminating waste but also in improving the operations and information system for instant organizational benefits as well as for future mergers and acquisitions.

So I tried to explain 5Ss of Lean and apply them in ERP scenario so that we can take the best out of both worlds. I am sure, these can still be expanded further and it is one area where good research can bring ERP and Lean together and can usher a new era in both the fields.

Strategy: Catalysts to achieve your Lean Objectives

Few weeks back, I wrote an article on the role of demand planning, forecasting and inventory optimization in achieving Lean Manufacturing. This article evoked a great response among readers and since the comments on this blog were not working for some time in between, I got maximum comments in my mail box or in the discussion I posted on one of the social media sites.

The responses were largely questions and expert opinions and I thought to share some of them here with the readers as these are highly rich in content and will be helpful for all of us to think about our strategies to achieve lean manufacturing with or without the help of planning.

Largely, there were two schools of thought on whether planning (forecasting and demand planning) helps in achieving lean manufacturing to an extent that the investments made in these areas are justified and are able to provide the returns accordingly. Thoughts were divided and one group was sure to say that forecasting is just a guess and will remain a guess so it is sheer time wastage to improve your guesses and hope that these will help you in your lean objectives whereas the other group was as sure as the first one on the fact that forecasting can surely help in achieving lean objectives as it reduces inventory and improves the service levels, which makes easier for the manufacturing operations to stick to a single product line for optimum period so that the manufacturing line efficiency improves.

To quote some of the responses, Wally Johnson (VP Supply Chain/Operations at EPIC Technologies LLC) said, “A forecast is nothing more than an educated guess. The better your guess, the closer you get to maximizing you revenue and minimizing the waste in either lost sales or excess inventory. As you reduce your lead times and your ability to respond, the forecast becomes less important. At the limit, planning is reduced to communicating needs to suppliers and aggregating immediate needs from customers. So, no planning doesn't help you get lean, but the less lean you are, the more you need it”. Another comment from Michael Pitcher (President, Operations Excellence LLC) is - “Forecasting can be used, at least initially, to size buffers and marketplaces. This is especially true for new products, cyclical/seasonal products, or short life-cycle products. Once buffers are established, actual pull must be used to recalculate and resize buffers and marketplaces. So, there can be value to demand planning and forecasting. On the other hand, it can be a huge waste of time and energy when over emphasized.”

We had quite an opposite viewpoint from Connie Wendzicki (COO at Griffin Technology), who says – “The demand planning is what you do to calculate the correct inventory levels when you implement the lean system. These inventory levels have to be revised frequently as the demand and supply patterns change. Even Toyota had an extensive planning department to accomplish this function. If you set-up lean without figuring out the right inventory levels you can be in for a few big surprises! On the other hand - analysis paraysis is not good either. Better to put the system in place with the best inventory levels you have vs. wait forever until you figure out what the "perfect" inventory levels and reorder points should be. There is some tolerance for error. You will at least see where the problems are (where inventory is piling up or where lines are starved for inventory) if you implement the system and you can tweak it then”. Connie is helped by the comment from Ron Golan (Director at XML Limited) who mentioned that, “…my experience taught me to believe in continuously trying to optimize demand planning and forecasting - you may not hit bulls-eye, but the closer you get, the more efficient you are in minimizing lost sales and excess inventory. And the build-to-order approach - that might work for Dell, but is completely unpractical for so many other companies. Plus, in many cases you'll just be passing the issue to your suppliers, and remember some of us may be on the receiving end of this”.

Carlos Moreno (Senior Logistics and Supply Chain Analyst with Medtronic) mentioned a third approach with his comment – “Lean is a tool for continuous improvement is a cycle that never ends. It may be applied to improve lead times, supplier performance, operations and supply chain processes just to give some examples. Forecast and demand planning are useful as strategic and long-term planning tools and also subject for continuous improvement. Since forecast and demand planning are estimated guesses based on crystal ball projections (marketing and sales forecast), I would see them as variables out of the control of the supply chain management processes for inventory control and customer order fulfillment”.

These were few of the responses and comments and the one thing that came out clearly and I replied to them in most of my replies is that alone forecasting or demand planning is not enough and the another part of our strategy here needs to include reduction in lead times so that the dependence of operations on accuracy of forecast reduces. Basically, if the supply chain responsiveness is fast (in other words lead times are low) then the organizations have more capability of responding faster to the changing demands and hence they can achieve leaner manufacturing processes as well as lower inventories with improved service levels.

I liked the idea of freeing up of operations with their dependence on forecast accuracy and as put up by Swaminathan Appu Iyer (DGM – Distribution & Logistics at Reliance Retail Limited), “The manufacturer whose efforts to effectively forecast and plan demand are being undermined by an increasingly complex business environment. Manufacturers large and small are struggling with the fact that demand forecasting and planning, never a simple process, are today being made much more difficult by trends such as globalization, shortened product lifecycles, and customer demand for more product variety. In fact, many manufacturers are finding that, despite what they thought were their best efforts, forecasting error rates are actually rising”. This shows that planning is something that most organizations are still struggling with.

All these comments and inputs lead me to think about a joint strategy that has to have a blend of both i.e. a focus in planning as well as supply chain responsiveness to achieve our lean objectives. I echo comments from Charles Stuart (Director at TGX Limited) who says that – “Puneesh, I would like to clarify my view - it is as you also approach it - a blend of both. A forecast is a forecast - a guess, a prediction etc. Good tools and good process will generally make a better forecast. But fewer businesses put the same kind of effort into LT reduction which can have responsiveness and an inventory benefit. I have worked in businesses that have done both approaches with significant benefits from each element. I suggest it should not be either/or but both”

Before I sign off, I would like to thank all the experts who shared their approaches and thoughts on the topic. I could not highlight comments or inputs from all contributors in this post due to similarity in thought communication in rest of them but tried to capture the essence of all so that readers get to know from who’s who of the corporate world on the future strategies on the topic and accordingly design the same for their organizations.

Spend Analysis to Manage Supplier Risk

Most procurement executives that do not use spend analysis tools today, sort their suppliers only by approximate spend with their companies. They focus their attention on the top 20% of suppliers that make up 80% of the spend. The policy is not altogether incorrect but as the presseure these days on the whole supply chain to improve the efficiency and reduce the costs, it becomes imperative to look at each and every supplier. Additionally, low-spend suppliers can also be a source of significant risk. For example, a cheap part in an expensive engine can cause the engine to fail. Data theft enabled by the poor security practices of a small IT provider can cause irreparable damage to a retailer's brand, and lead to lawsuits. Using spend analysis, procurement organizations can find the low-spend suppliers that pose risks like this.

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This post, though, will not talk about the technical failures due to parts supplied by low spend suppliers so let me come ot the main topic of spend analysis need in terms of supplier risk and the challenges in it. We already use spend analysis to minimise risks in the supply chain (by taking informed decisions with the help of spend analytics data) and to reduce the cost of procurement, but there's no measurable return from a supplier risk management initiative until the risk materializes and you can quantify the avoided loss. Until then, it's only possible to estimate the impact using a metric that takes the probability of the risk and the expected magnitude of the loss. In any event, even the most successful risk management programs cannot eliminate the risk, they can only reduce its impact and spend analysis can help in this endeavor. In addition of determining the supply chain risk, the information it provides can help procurement executives categorize suppliers by spend, commodity, industry and geography, which they can use to create a short list of target suppliers. It allows the procurement organization to enrich the supplier information with data from external sources and internal supplier performance metrics, so that they can perform a risk assessment of that short list. Investment in spend analysis is the starting point to a comprehensive supply risk management initiative.

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Spend analysis gives procurement executives answers to such questions so they can prioritize which suppliers to focus on, as well as identify opportunities for cost reduction such as rationalizing supply base, increasing contract compliance and reducing maverick spending.

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The major challenges that a spend analysis exectutiove will face are:

• Spend data sits within multiple systems that need to be aggregated in order to get visibility into overall spend
• Different codes are often used to describe the same supplier or commodity across these systems. Aggregated spend information from multiple systems may not be accurate.
• Item codes used by systems do not relate an item to an industry standard classification. Consequently, it becomes difficult to aggregate similar and equivalent data and identify opportunities to save money by combining spend across commodities, locations, suppliers and programs
• Systems rarely identify relationships between suppliers. Your system may not tell you that Lab Safety Inc. is a subsidiary of WW Grainger. You may be spending a lot more money with WW Grainger than you thought
• Minority status of suppliers, shipment performance and quality data from last 12 months or even D&B credit rating usually does not exist within these systems. Such information is critical to assessing risk

Due to these issues, it is impossible to do a comprehensive spend analysis simply by bringing data from all the systems into a spreadsheet or a business intelligence system. The data has to be cleansed to remove errors, normalized to ensure that suppliers are represented in a consistent manner, and finally enriched with commodity classification data, subsidiary relationships and supplier performance data. Only then can the data analysis be performed to get a picture of the overall spend.

ERP Strategy: Increase your ROI from ERP

Most Enterprise Resource Planning (ERP) purchase decisions are based on payback or Return on Investment (ROI)-based business cases. Business cases often use reduction in inventory and headcount as the primary ROI justifications. Since ERP software is also considered an infrastructure investment, it is natural to expect financial returns. Most organizations deploy ERP, and sit back to wait for returns. And when returns fail to come in, the ERP Strategy is regarded as a failure. It is important to understand that ROI comes from the process improvements supported by ERP—not from ERP software alone.

ROI does not come from ERP. ROI comes from what you do using ERP. ERP is a tool and it all depends on how well you use this tool. There are organizations that have got substantial benefits, which are many times their investment. And there are organizations that have not got the desired benefits. Realizing greater value from ERP systems is a matter of focusing attention on the effective use and alignment of people, process and technology. Additionally, I believe that today organizations are not able to quantify their ROI from ERP implementation because at the beginning of the project the KPIs (Key Performance Indicators) and measurement criteria were not defined; this makes it difficult to quantify the ROI at a later date. I divide the steps for getting the maximum ROI from your ERP in 3 broad categories which are Pre-Implementation Steps, During Implementation steps and Post implementation steps. Let me list down the steps under these categories, here:

Pre ERP Implementation:

• Identify the objective(s)
• Finalize the metrics or KPIs that are required to be improved upon ERP implementation
• Define their current value
• Audit the data quality of all key metrics and have a plan to improve it before you go live with new system
• Put in place the measurement system and method
• Freeze the targets for KPIs
• Identify the processes that impact those KPIs
• Make sure that the business initiatives are in place in these processes to achieve the identified KPIs
• Assess the organization's technical maturity level before project launch

During ERP Implementation:

• Stay focused on the KPIs improvement finalized in above steps
• Keep an eye on the cost and ensure no cost over-run as mentioned in my earlier post
• Go beyond basic project management and incorporate strategic alignment & tangible business improvement plans in addition of focusing on tasks & completion dates
• Use vendor resources wisely – use them only where you lack skills. For example, if you have excellent project managers, then use only the technical people from vendor
• Keep customizations to minimum
• Revisit KPIs and review them
• Plan change management strategy

Post ERP Implementation:

• Stop running parallel systems and the ERP should be the only source of truth
• Measure the KPIs only after 6 months of operations after Go-Live
• Keep on looking for improvement opportunities through benchmarking and assessment exercises
• Utilize ERP to the fullest as a tool for decision making and planning future initiatives
• Plan a strategy to counter post ERP challenges

These were some of the steps that will help organizations to improve their ROI from ERP. A more complete analysis of return can be made by looking at the overall payback that enterprise software can offer to a company. Enterprise software payback includes not only quantifiable improvements in bottom and top line functionality, but also more qualitative measures like new business opportunities, improved customer and partner relations, and improved time to market.

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Inventory Optimization: Where to Focus and How?

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Traditionally, it has been understood that to improve customer service you have to have high levels of inventory. This ensures that orders are filled quickly. But it also means that the value of your inventory is high, to the detriment of your organization as it ties up cash and warehouse space that could be put to other and better uses. Managing inventory can be a daunting task for an enterprise with tens of thousands of products that are located in hundreds of locations. The fact that different functions in the organizations have different objectives and often conflict of departmental or sub-business interest adds another hurdle in inventory reduction.

Typically, the sales & service head of the organization will want the order fill rate, customer service and the order fulfillment lead time to be the best. This person will never want to lose any sales or for that matter do not want to see customer satisfaction going down just because the organization either could not supply the new product or the service parts at right time. This department will want that the organization should:

• Keep enough inventory of all product models or variants at multiple locations so that there are no stock outs, minimum transit time for product shipping and no unit down (production stopped) cases for their customers
• Make manufacturing operations flexible enough to respond quickly to changing market demand for a particular product model or variant so that they do not lose sales of a single unit for want of timely supply
• Ensure that the procurement & sourcing functions have quick replenishment efficiency with low supplier lead times or procurement starting at high safety stock levels

All of the above will lead in increase of inventory and will contribute towards what I call as reverse optimization of inventory.

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Let us see now, what will a manufacturing leader want to make sure, so that the success KPIs for the shop-floor are met and the production team increase production efficiency in terms of producing more units in same time, less over time is required and rejection rates are at the lowest ebb. Simple logic suggests that if the same model or variant is produced for a longer time, the jigs and fixtures will not need to be changed; the operations sequence will remain same and transition between production shifts will take minimum time – all this contributes to better productivity or efficiency in the production line but at the same time, producing not based on demand but to stock so that the production efficiency targets are achieved, will inflate the inventory.

Both the above examples are not bad practices and in-fact these are seen as best practices in industry if we see them in isolation, as they deliver value for independent business functions. The negative impact of these practices is that they make the job of the inventory owner more difficult.

The inventory owner’s main objective is to reduce the inventory to the lowest possible level so that more working capital is available for operations. This objective, as we saw above, conflicts with the manufacturing and sales/service business function’s objectives and this is the reason why inventory optimization and not reduction is the activity where we should focus on.

If the inventory owner decides to reduce the inventory in isolation based on some fuzzy logic which might be the best, keeping in mind different demand variations and patterns, it is highly likely that it will hit the objectives of other business functions negatively and the whole purpose will be lost. But, if the focus is inventory optimization in such a way that there is a trade-off between service levels and inventory level, production efficiency and order fill rate and so on, only then we can it a real win-win situation where organization as a whole, can gain substantially.

It is not that compromise between different business functions is the only way to optimize inventory. There are more factors that drive this initiative and can substantially impact the result. These are:

• Forecast accuracy – More is the accuracy of forecast, better will be inventory planning vis-à-vis market demand. So with less inventory, you will be able to maintain or increase your order fill rate and service levels
• Supply Chain Visibility – If, it is known to all stakeholders that the required material is in the way and will reach in a day or two, it will help in correct promises to the customer and while customer satisfaction will improve with better delivery performance, the inventory will also get optimized as no unnecessary panic buying will happen for emergency orders. Also, supply chain visibility means visibility of goods in the distribution centers or warehouses and other channels so that fastest and most economical way of shipping can be achieved which will again make sure that double inventory is not being purchased for a product that is available in some other warehouse or distribution center
• Supplier Lead Times – Less time to get supplies from supplier means faster replenishment and less time an inventory will stay in the warehouse. This also means that you will need to keep lower safety stock levels and thus overall inventory will be reduced
• Inventory turns – More is the number of times you sell and replenish your inventory in a given period, more will be available working capital and less will be obsolescence. The inventory carrying cost will reduce as a result, which is a key KPI of Inventory optimization
• Inter warehouse transfer – An analysis of inventory movement across warehouses might tell you that there is some inventory lying in couple of the warehouses for long with no demand for them in last 6 months and very low forecast in next 6 months. If this process can be automated to do the analysis and transfer the slow moving or dead inventory from one warehouse to another where it can be consumed faster, the inventory can be optimized considerably
• Field returns process – Lot of field engineers get the inventory (mostly service parts) issued from warehouse to service customer(s) and at least 40% of the time all issued parts are not consumed at the location. These parts are either kept at customer location or in the service van of the field engineer and either becomes obsolete/expire or are not visible at all for supplying against other demands. This results in duplicate buying and hence more inventory than required. A proper process around this, can not only ensure lesser inventory but will also reduce scrap (obsolete) inventory
• Accuracy in Bills of Material – Incorrect bills of material often increase inventory. For example, after a design change a casing will need only 5 bolts instead of 7 earlier but since the BOM was not changed after design change was approved and implemented, it still shows 7 bolts and every-time 2 extra bolts are getting issued as part of the back-flush which results in excess unused inventory in WIP. The production in-charge will return the excess parts to inventory as and when the priorities allow and till that time, more procurement of same part will be done based on the available visibility which results in inflated inventory. Correcting the bills of material will help in controlling this inflation of inventory
• Lot Sizes Review – Since the safety stock, demand and lead times that impact the inventory level requirements, keep on changing, a regular review of the lot sizes of items for procurement will always help in making sure that the procurement is as per the finalized strategy of stocking and will in inventory optimization
• Inventory accuracy – Lastly, if we are optimizing something but do not know the exact picture, then it is obvious that where will we reach. We need to make sure that the physical inventory matches the inventory in system as all the calculations on service levels, order fill rate etc. will be based on it only.
  

So, we saw that while it is important to iron out the conflicting interests between different business functions by discussing and finalizing the service levels, production efficiency and other KPIs along-with the inventory levels so that all business functions work as a team on one strategy and with same objectives in mind, there are other ways too that can help you in achieving optimized inventory without impacting other functions operations.

Key Constituents of Supply Chain Performance Measurement

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I got multiple questions/comments in my mailbox and post related to my Supply Chain Metrics post where I talked about some metrics that we generally talk about, to improve the Supply Chain efficiency and to measure its maturity levels. One of the comments from a reader were, "...these metrics are fine but how will you relate these metrics like perfect order and cash to cash cycle time with real measurement of Supply Chain maturity level? Are they tied with  higher level attributes in the supply demand train and if yes, then what are those attributes. Lastly, how exactly we should proceed scientifically to do a status check on our Supply Chain?".

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I did not answer this question in mail and want to take a shot at it in this post. Though, I would not like to dwell into how can we scientifically do a status check of Supply Chain as there are mutliple ways to do it and in my view, no way is a panacea for all organizational SCM issues. This has to be a custom approach looking at the KPIs first and then tying them to multiple dynamic org specific factors. To learn about this, I will suggest reading book called Strategic Supply Chain Management which is the authoritative, all-in-one reference and guidebook for creating value and competitive advantage for each core supply chain process: plan, source, make, deliver, and return.

Coming to the broad attributes which define the performance of a supply chain, as defined in the SCOR (Supply Chain Operations Reference) model, these are:

• Supply Chain Reliability - This is the performance of the supply chain in delivering: the correct product, to the correct place and customer, at the correct time, in the correct condition and packaging, and with the correct quantity and documentation. The key metrics that measure reliability are:

1. Delivery Performance
2. Fill Rates
3. Perfect Order Fulfillment

I will not talk about these metrics in details as these were explained in earlier post.

• The next one is Supply Chain Responsiveness - It is the speed at which a supply chain provides products to the customer.  This attribute is totally govered by Order Fulfillment Lead Times only.

• Supply Chain Flexibility - Flexibility is the agility of a supply chain in responding to marketplace changes to gain or maintain competitive advantage. The key mtrics that we need to measure here, are: Supply Chain Reponse Time and Production Flexibility.

• Supply Chain Costs - These are the costs associated with operating the complete supply chain. These costs include metrics like cost of goods sold (COGS), inventory carrying costs, value added productivity and warranty and returns costs (including their processing costs). This SCM attribute is one of the biggest ones and need to be further broken into multiple level2 metrics to make sure we do not miss on any of the costs.

• Supply Chain Asset Management Efficiency - Finally, the effectiveness of an organization in managing assets to support demand satisfaction. This includes the management of all assets: fixed and working capital. Metrics like Cash to Cash Cycle Time, Inventory days of supply and assets (inventory) turns per annum are key to measure this attribute of supply chain management.

I hope, I am able to answer atleast the first part of his question and we saw that all those SCM Metrics that we discussed earlier is tied to one step higher attributes of SCM, which are the direct inputs to calculation of Supply Chain Performance. All these attributes are part of balanced scorecards that have the capability to convert the analytical problem to a numberical problem so that the numerical problem can be resolved fast (We are always good in fixing numbers). After the numerical problem is fixed with a numerical solution, it can be again converted to analytical solution and this process is used in multiple organizations to fix even the most complex of supply chains.

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ERP Strategy after Go-Live

We have all seen lot of material available all over the internet in vendor white papers, research articles and independent blogs about the best practices on improving the ERP implementation cycle in terms of cost, cycle time and return on investment. Most of these articles stop at Go-Live and do not capture the challenges and the opportunities after Go-Live so that the envisaged benefits from ERP can be realized.

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If you ask me, I would say that Going Live successfully with the application is the first milestone in the whole business transformation exercise and we still need to not only measure and benchmark the process efficiencies as well as automation levels at fixed intervals to continuously improve them, but also make sure that the changes that have been brought in the organization as a result of the ERP Application Implementation, have gone down well with the users and they also see long terms benefits in switching to this new ERP, leaving behind their favorite legacy systems.

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I have tried to capture few challenges and opportunities that we stumble upon after Going Live with ERP that we all should consider so as to reap the benefits to the maximum. Let me first start with the challenges:

1. The first and foremost challenge after Going Live is to stop running parallel systems. While few organizations have really matured on this part and wither switch off the entire legacy systems or those functionalities in them that are now available in the new ERP and users are expected to work on them only in ERP, but still a very large number of organizations still do not have a well charted process in this regard. This poses multiple issues, the biggest being division of data in 2 or more applications and the very objective of having one source of truth is defeated.
2. Transition of Project Managers. While, all ERP projects have dedicated project managers who go well beyond the go-live to post production support period and make sure that the Live system is stable from bugs perspective before they off board, but often, role and responsibility clarity after that phase, dissolves and there are multiple owners (or shall I say Managers) and very less number of contributors that are needed to take it to the next level of change management, ongoing trainings, user access process, upgrade or enhancement decision processes etc.
3. Over dependence on support teams for knowledge management. It is often seen that after setting up a vendor team for providing post production support, organizations depend totally on their teams for preparing and updating the user manuals and other soft training material for users and new employees. Though they claim to review the documents before releasing to the business teams but I have my doubts on the review process. Again, not only the ERP documentation but defining the complete process of knowledge management for the process improvements using the application is a challenge.
4. Independent customizations in multi country rollouts. One of my friends, is working in an European company and they implemented ERP in 1999 and never upgraded after that. The implementation was done in 23 countries across the globe and finally when they thought of upgrading the ERP this year, they came to know that their ERP system is not a standard system any more. Every country has got done some or more country specific customizations in the ERP, making this a bunch of disparate systems that do not offer a standard process. The pain that they are going through now for upgrading the ERP is enormous and it has increased their costs multifold. The challenge here is to keep the standard system, standard enough so that future upgrades are done with minimum costs
5. ERP is not a magic wand. As soon as we go live with ERP we start expecting it to take over the organization and transform it to a world class organization. We want to be Best in Class as soon as possible, being done so much hard work during the implementation period. Keeping the expectations of business users to realistic levels is another challenge that needs to be addressed.

Likewise there are more Post Go-Live challenges that we all need to consider while making a strategy to realize maximum benefits from your ERP. I do not want to paint a gloomy picture by just highlighting the challenges here. It is not that you only have challenges after Go-Live and ours lives will revolve around them forever. Successful ERP implementation offers multiple opportunities to business beyond the expected benefits. Some of them are:

1. Standard and predictable process lets you plan future initiatives as well as further improve the process efficiencies
2. Improve the KPIs. Now that the as-is values of the KPIs are known to you, it is easier to make desired KPI model by benchmakring with the Best in Class and charting a roadmap to reach there
3. Rationalize the staff. It provides you with an opportunity to relook at the staffing levels and use them in more productive areas as automation will free up some staffing hours/days
4. Flank it with Best in Breed Systems. ERP might not be there in its present role for eternity. While ERP will give a standard platform and one source of truth, there are chances that it is not the best system in all areas. It might be the best transaction system (or financial reporting system) but still might need to be complimented with best in breed systems for niche areas like service parts planning, demand driven supply chain planning, procurement auctions or product lifecycle management for that matter. Having an ERP system tells you where you are currently and what do you still miss to reach the pinnacle of success

I have not captured the direct benefits that an ERP will provide to an organization but I understand that these opportunities sometimes look like the benefits (due to a thin line difference between them) only but believe me, you will still need to do some good amount of work to explore these as against the direct benefits that you will get after implementing ERP successfully. Essentially, the challenges are required to be part of our overall Benefit Realization Strategy from ERP and opportunities are the areas which show the way for reaping the by product benefits from ERP.

Principles of Supply Chain Management

We talked about few Supply Chain Metrics in the last post and couple of my readers asked that other than metrics what are those other things that need to be kept in mind while approaching a supply chain problem. Do we need to go the textbook route or there are few practical tips that can help resolve or improve an SCM condition? Yes, why not. There are a lot of books, examples, and research data available on this widely discussed topic that can help them.

In addition of that, let us also discuss few basic principles that we should follow usually. These can be:

• Segmenting your customers based on service needs
• Customizing the logistics network
• Keep an ear to signals of market demand and plan accordingly
• Differentiate product closer to the customer
• Source strategically
• Develop a supply chain-wide technology strategy
• Adopt channel-spanning performance measures

Managers increasingly find themselves assigned the role of the rope in a very real tug of war—pulled one way by customers' mounting demands and the opposite way by the company's need for growth and profitability. Many have discovered that they can keep the rope from snapping and, in fact, achieve profitable growth by treating supply chain management as a strategic variable.
These savvy managers recognize two important things. First, they think about the supply chain as a whole—all the links involved in managing the flow of products, services, and information from their suppliers' suppliers to their customers' customers (that is, channel customers, such as distributors and retailers). Second, they pursue tangible outcomes—focused on revenue growth, asset utilization, and cost reduction.

Rejecting the traditional view of a company and its component parts as distinct functional entities, these managers realize that the real measure of success is how well activities coordinate across the supply chain to create value for customers, while increasing the profitability of every link in the chain. The successful initiatives that have contributed to profitable growth share several themes. They are typically broad efforts, combining both strategic and tactical change. They also reflect a holistic approach, viewing the supply chain from end to end and orchestrating efforts so that the whole improvement achieved—in revenue, costs, and asset utilization—is greater than the sum of its parts.

Unsuccessful efforts likewise have a consistent profile. They tend to be functionally defined and narrowly focused, and they lack sustaining infrastructure. Uncoordinated change activity erupts in every department and function and puts the company in grave danger of "dying the death of a thousand initiatives." The source of failure is seldom management's difficulty identifying what needs fixing. The issue is determining how to develop and execute a supply chain transformation plan that can move multiple, complex operating entities (both internal and external) in the same direction.

The above said principles will help developing and executing a successful supply chain transformation plan. I know that just looking at these principles will not make much sense to newbies in this area and a little bit explanation is required so that actually these can be practiced. So, in my next post, I will explain in short on what they mean and how to practice them…

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