Are you selecting the right strategic indicators? I

One of the key decisions of the CEOs and boards is to select the right key financial indicators to manage the company. Tipically, companies select EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), EVA (Economic Value Added), Enterprise Value, among others. Although companies do not select just one indicator, they tend to use one as the cornerstone for the management focus (and their respective bonuses!).

As always, making a selection has its consequences (and of course, also its advantages...). Most of the companies I have worked for use EBITDA and they have a strong focus in this indicator.

Let´s start understanding how EBITDA is calculated:

EBITDA = Revenue – Expenses (excluding interest, taxes, depreciation and amortization)

As represented in the formula, it is a measure of the current profitability of the company, not taking in account the effects of interest (from loans for example), taxes, depreciation (the decrease of value in assets) and amortization (the payment of debts, for example). In the following table, you can see the main pros and cons of using EBITDA as the main financial indicator:

So, what can happen if we choose this indicator as the reason for living? There are several things that may happen:

- Reduction of the Return on Assets (ROA) or Return on Invested Capital (ROIC) -or getting inflated in assets and working capital. Due that the fact you are focused on profitability, you may decide to use more assets (for example, buy plants) to produce more revenues, or to have more inventory (in order to have more things to sell). However, at the end, a shareholder can complain that the money he invested is not having the right margin, compared with other financial instruments.

- Because you are not taking in account the effects of depreciation and amortization, you may have a distorted vision of the cash generated by the company. Tax and amortization can erode the cash generated.

- For the shareholders, it is not enough to use EBITDA to make his/her investments decisions. It does not take a vision of the use of the assets or working capital, it does not show the company valuation or show a trend of the future of the company, so it is difficult  for him/her to decide if it is a good place to put the money in.

As a conclusion, even though is a very common indicator and is used widely to compare companies, it should not be used in isolation to manage the destiny of the company.

If you are not segmenting, you are not thinking.

 

Actually,it is a phrase stolen from a conversation with a client, but it is completely true. The problems we try to solve in business are not as simple to attack with a one silver bullet. Let me illustrate with several situations:





- If you are dealing with a inventory rationalization problem, you should segment the products that you would like to attack using a segmentation like this:

 

In this case, you shall define different solution strategy for every segment of this problem. You solution will be different for "Non-Productive Stock" to the "Excesive Coverage".

 

- If you are priotizing initiatives that you want to implement, you can use a matrix with two main variables (complexity and benefits) to help you clasify them and establish a different strategy for each quadrant, as shown:

 

 

 

There are innumerable methodologies to this "divide and conquer" approach. Some of them are well known, others not so much:

 

- The Boston Matrix (for deciding in which business units to invest)

- The Ansoff Matrix (to understand the risk of different options)

- The Kepner-Tregoe Matrix (a decision making aide based in the classification and prioritization of information)

... and so forth.

 

You can take a look to different segmentations tools in "The Decision Book": http://www.amazon.com/The-Decision-Book-Strategic-Thinking/dp/0393079619/ref=sr_1_1?ie=UTF8&qid=1376097474&sr=8-1&keywords=The+Decision+Book

 

However, you can create your own "matrix", "segmentation" or even "hiper-cube" to solve your complex problem. I would recommend the following steps to create them:

 

- Frame the problem. To achieve this, formulate a powerful and specific question that you want to solve. Work hard in defining the right question.

 

- Select the criteria of segmentation. Be careful in defining them. The criteria should be "orthogonal", it means, a criteria can not dependent one from the another.

 

- Map your problem. Locate the different options in your matrix. Analize and classify them. Do the analytics to locate them.

 

- Define a differentiated strategy for the solution of each quadrant (or cube).

 

Using this approach, you will find that the problem can be separated in pieces, and you will feel confident in defining a better solution for each case.





 

 

 

The Power of the Words in Business.

“Words are, of course, the most powerful drug used by mankind.” 
― Rudyard Kipling

I have seen a common problem in different businesses, and that problem is the lack of a common understanding of the terms used for the business strategy and execution, and in other cases, terms used in a wrong way. Although is not necessary that all employees have a thesaurus in their heads, it is important to select and have a common understanding of the key words for the business.

Key words are those that we have to guarantee that employees understand in the same way. These key words are important in the business strategy definition and in its implementation. Also, I have found that when a business uses properly a term and the variations of such term, tends to have a better framing of the opportunities they have.

I work mostly in Supply Chain and BPM projects, so we guarantee that everybody understand quite well what "inventory" and "process" mean, as an example. If we look for the definition of "inventory" we may find that is:

"The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale."(1)

However, if we look at the APICS dictionary, we may find 137 terms related to the word: safety stock, base stock, make-to-stock, pipeline stock, etc. We can get lost in this amount of terms, so in an initial stage, we need to have a selection of key words for the business.

We can face this problem in different ways. Some of the recommendations are:

- Use clear and unambiguos words in the Vision and Mission declaration statements. Make them short and easy to remember.

- Select the key words for your business. Link them to the business strategy and the key operations outcomes you want to achieve.

- When initiating a project, execute a training on basics and key concepts before starting the core work. Make sure everybody in the project understand the same. Use certification or exams to calibrate the understanding of the concepts.

- Use training as a tool to gain maturity. For example, Accenture has a set of on-line academies used extensively and massively to gain momentum in business concepts and practices.

- Measure maturity growth periodically.

More information:

http://www.accenture.com/us-en/Pages/service-accenture-academy.aspx
http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_Supply_Chain_Academy_height.pdf
http://newsroom.accenture.com/article_display.cfm?article_id=4182


Sources:(1) http://www.investopedia.com/terms/i/inventory.asp

So your company is starting a "Transformation Program"?

Transformation: In an organizational context, a process of profound and radical change that orients an organizationn in a new direction and takes it to an entirely different level of effectiveness. 

Source: http://www.businessdictionary.com/definition/transformation.html#ixzz2Yvvu4IG3


Due to the costants changes in the market, in the consumers, in the world in general, once a while companies start a "Transformation Program". It looks the right way to approach major changes, like we do when we have gained too much weight and start a diet, but not necesarilly we achieve (like with the diet...) the outcomes we expect.

Typically, a company starts a Transformation Program when some of this phenomena is taking place:

- Profitability is going south, or revenues are diminishing or cost are increasing (or all of them).
- After the acquisition of a company, to seize the opportunity to make long time postponed changes and achieve the expected sinergies.
- The implementation of a major enterprise system (i.e. an ERP) or a major application.
- A major change in the Operating Model (i.e. a transformation in the Supply Chain, the implementation of Shared Services, outsourcing initiatives, etc.)
- Standardization/armonization/homologation of different operations (i.e. a multicountry operation).
- Innovation and growth initiatives in the company.

In a study of Accenture, we found that most of the Transformation Programs are reactive and created to reduce costs, and not neccesarilly to strength the "Competitive Essence" of the company. Also, the proactive and innovative changes with an idea of a transformation culture are rare. On the other hand, the study shows that only 4% achieved ALLthe benefits expected for the Transformation Program, and 40% achieved the majority of them.

How to avoid these pitfalls?

There is no silver bullet because every Transformation Program has its own peculiarities. However, there are some recommendations that apply to most of them:

1) Start with a goal in mind. It implies taking your time to define clearly the objectives (including targets and time to achieve them), a compelling business case (with the commitment of the key actors) and a clear roadmap (a thought plan) to achieve the objectives.

2) Define "smart" KPIs. Again, with a baseline and target, and clear accountability of who is responsible to achieve it.

3) Align the objectives of the key actors. It means not only defining them, but also linking them to the pockets of the key actors.

4) Monitor the progress and the benefits, and adjust accordingly. Establish a clear Governance Model, and follow the journey till the end. Capture and show benefits, and seize the opportunity to identify new ones.

5) Identify and implement quick improvements. Show that the boat is moving and not stranded in the sea.

6) Sell the benefits, constantly. Like Moses in the dessert, if you don´t show benefits the crowd will desperate.

Collaboration: A New Paradigm.

Typically, we understand collaboration in the value chain as initiatives performed jointly between manufacturers and retailers, like CPFR (Collaborative Planning, Forecasting and Replenishment), EDI, VMI, etc. However, Collaboration goes beyond that. For us, Collaboration are all capabilities developed jointly with your partners in the value network (i.e. providers, manufacturers, retailers, and even clients) in order to conquer and satisfy the needs of the consumer. It means that the Collaboration should not have the old approach of "let´s work together and save some cost to share the money saved between us". This old approach lead us to lack of trust, absence of a win-win mentality and even losing focus on what is important: the consumer.

In a recent study we did for Mexico jointly with GS1 Mexico, ANTAD (Mexico´s retailer association) and CONMEXICO (Mexico´s manufacturers association), we wanted to understand the level of Collaboration´s culture, processes and technologies in order to understand the gap and defined required actions for the industry. For this analysis, we based the study in a very complete framework for Collaboration of Accenture, shown below:

In our study, we had the response to 266 surveys, covering almost every area in the consumer goods sector and almost all retailers formats. The study is quite detailed, but some of the main conclusions are:

. The Collaboration practices adoption in Mexico are in a consolidation stage (it means, most of the practices are in the "mainstream" area of the framework). Manufacturers show a better level of maturity compared with Retailers.
- Collaboration is considered important, however the level of adoption limites the execution.
- There is a partial understanding of Collaboration. For example, the win-win aspect of the Collaboration appears in sixth place.
- The knowledge about the Collaboration practices is correlated with the adoption. It may be obvious, but it implies that the industry should understand better what it is before implementing enabling technologies.
- Collaboration is perceived as a required capability to have a competitive advantage in the near future.

In the study, we have shown that implementing some practices of Collaboration, we may have a potential of 3.6 Billions USD to unlock, and they will represent an increase of 0.5 to 1 points in the net marging of both retailers and manufactures. As a result of the effort, the main industry associations are starting initiatives to develop Collaboration in Mexico.

You may find more detail (in spanish) in the following publication:

http://www.accenture.com/mx-es/Pages/insight-strategic-pulse-high-performance.aspx

Cross-functional Capabilities: Sales & Operations Planning (II).

The One-Plan objective.

The Sales and Operations Planning (S&OP) more than looking for one-plan, is aiming to have several consistents plans, or, in other words, one plan with different views. The secret is that the same numbers and decisions are managed by all functions involved.

How do you get this result? The answer is not easy. First of all, you have to have clear what is the Business Plan for the year. This Business Plan should have clear the monthly (or any other period) requirements in terms of sales and profitability. The Business Plan, after one year of exercise, should be mainly obtained from the S&OP created before the year ends. The Business Plan will be the "north Star" for the whole S&OP process.

Starting with the left side: the Demand Planning process.

Your S&OP planning must start always with the client (customer, consumer, user, etc.) in mind. So, the first step is to create a Demand Plan. We can summarize the Demand Planning components as shown in the following figure:

This diagram does not pretend to be exhaustive, however we can illustrate several aspects of the demand planning process:

- The outcome IS NOT the forecast. The forecast is an input for the whole process. It is located outside the boxes of Sales and Marketing, because it can be generated by them (or not), even it can be generated in another function or organization.
- Both Sales and Marketing should contribute to the Demand Plan. We have to consider at least the building blocks shown in the figure.
- The sales force should collaborate in the final Demand Plan. They should add any local or regional initiative, their own knowledge of the local market, any localized promotion, market sensibility, etc.

At the end of the process, we should have a Demand Plan agreed by both Sales and Marketing, as an input for the Supply Planning process. We should discuss the elements of this process in the next blog...

Cross-functional Capabilities: Sales & Operations Planning (I).

Sales and Operations Planning (known as "S&OP") is one of the key cross-functional capabilities that really make a difference in the market. However, the S&OP capability is like going to the gym: everybody has the membership but few really do exercises frequently. It means, when you ask if you do S&OP, almost invariable everybody responds: "we have a S&OP in place". The reality is that they may have some meetings, but not really a S&OP capability.

The S&OP is the capability (i.e. the right combination of process, people and technology to create a competitive advantage) that transform the Business Plan to the execution, through the balancing of the demand and supply in a profitable way. It involves several functions of the company. In the demand side: sales, marketing, new product development, key account managers, i.e. the part of the company that plan and execute the "generate demand" part of the business. In the supply side: manufacturing, supply chain, logistics, procurement, i.e. the part of the company that plan and execute the "satisfy demand" part of the company. Another key actor is the financial part of the company: they are the ones who will help to decide, based on the numbers: revenues, costs and profitability expected from a S&OP decision.

Based on an Abeerden Group research ("Sales and Operations Planning. Key Enabler for the Supply Chain Officer" August 2011) the top business pressures that leads the company to design and implement this capability are:

- Reduce supply chain costs - 54%
- Improve top line revenue - 46%
- Managament of increasing volatility - 43%
- Customer mandates for faster, more accurate and more unique fulfillment - 37%
- Need for better tighter integration between planning and execution - 34%


The paradigm of the S&OP is to generate "one plan" in the sense described in my previous blog (see http://bauzanotebook.blogspot.mx/2013/05/blog-post.html). The benefits that this capability will bring to the company are very important and tangible, and are tipically in:

- Improvements in on-time in-full delivery to the customers
- Rationalized inventory levels
- Less manufacturing downtime
- Better plant efficiency
- Lower transportation costs

In the soft side, the benefits are:

- Enhanced teamwork
- Better decisions
- Better financial plans
- Greater control
- Better visibility of what can happen in the future

In the following blog, I will explain in more detail how is the S&OP process and how to get these benefits.