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AGILE ABC| TURNING DATA INTO INTELLIGENCE | CENTRE FOR PERFORMANCE MANAGEMENT |
| AGILE ABC IN THE PUBLIC SECTOR | AGILE ABC IN THE HEALTH SECTOR | SUPPY CHAIN AS A COMPETITIVE ADVANTAGE
| SUPPLY CHAIN RISK |
STAYING ON SONG: MAINTAINING A BALANCE BETWEEN COST AND PERFORMANCE
In the face of relentless competition, there is a need to retain ongoing vigilance of 'what is', whilst ensuring the implementation of 'to be', delivers adequate returns. Overall, there is a need to ensure the business remains stable in the longer term and retains its capacity for revitalisation, as detirmined by its strategic direction. There is therefore, a need to continually review financial and cost structures from both an operational and strategic perspective. Senior executives must understand:
Where costs can be reduced safely in the short term whilst building the ‘right’ longer term operating structure and strategy to reposition itself for future growth.
HCP Management Consultants (HCP) is able to assist with the resolution of this issue through the application of analytical/simulation financial models. Based on the Value Chain of the business, we construct a model in two steps.
- First, build an operational model (based on activity analysis, illustrated below) to determine how to accurately assign indirect costs to direct costs. Then determine the profitability of products, services and any other ‘outputs’ from the business, including internally focused ‘shared services’.
- Second, simulate business strategy, i.e. understand how transformational and/or differentiating activities are deployed to leverage resources (core competences) into markets in order to deliver a sustainable competitive advantage and targeted outcomes from strategy.
Value and Benefits, Operational: the typical cost model provides most value in complex business environments where it is difficult to: accurately assign indirect costs to those direct costs that are consumed in the production and delivery of goods and services; identify and estimate the extent of inefficiencies in processes; evaluate the full extent of unused capacity (manufacturing as well as administrative functions). A primary benefit from these financial models is an identification of areas where Quick Wins may be realised, measured in terms of cost reduction, improvements in efficiency and effectiveness and a corresponding increase in customer service levels. Another benefit is to assess the impact that pricing and product/customer rationalisation could have on overall profitability.
Value and Benefits, Strategic: HCP differentiates between long term and short term strategy. In the short term the financial analysis allows us to assess the financial impact of strategy implementation which is best conducted through a formal ‘Pathway to Implementation’, derived directly from a Strategy Map and Balanced Scorecard. In the longer term, we use financial models to simulate a Strategic Architecture (a model unique to HCP used to depict an organisations foundation strategy) to:
- Manage Resources and Core Competences: understand the impact of the financial commitment required to build/maintain organisational resources, especially core competencies (e.g. technical ‘know how’, continuous improvement, relationship management)
- Evaluate Value of Differentiating/Transformational Activities: understand the impact of these activities on the cost and financial structure of the business and the expected contribution to the desired outcomes from strategy
- Assess Market Positioning Strategies: evaluate the financial implications of maintaining market positions, such as sponsorship of sporting events and high profile sports people.
- Facilitate Strategic Analysis: conduct ad hoc analysis such as ‘what if’ scenario analysis reflecting assessments of changes in ‘constraints’ (e.g. market volumes, market share, internal cost structure) and the resources required to satisfy these constraints at varying operating levels
STRATEGICALLY ALIGNED ADVANCED COST MANAGEMENT PRACTICES OF RELEVANCE TO ALL INDUSTRIES
Traditional ‘standard’ costing has always been useful as a method of valuing inventory and calculating ‘variances’ against budget, but as a historical reporting mechanism only, it has been likened to running a business by ‘looking through a rear view mirror’. It is also a mechanism that is of great value to the manufacturing industry, but not much else. In the early 1990’s Activity Based Costing (ABC) was widely adopted by both manufacturing and service companies as a viable alternative to traditional cost accounting, offering a capability to deliver:
- Cost reduction: Short term Quick Wins in efficiency and effectiveness as well as input to longer term continuous improvement programs, in both service and manufacturing industries, and
- Increases in income and competitiveness: Evaluation of product and customer profitability and ‘cost to serve’ of internal functions such as shared service centers and other support areas.
Benefiting from many years of experience implementing ABC through global alliances and state of the art cost management practices, HCP Management Consultants (HCP) now uses a profoundly more powerful methodology than conventional ABC, that of Agile ABC. Agile ABC delivers the same benefits as the past, but is strategically focused, is highly flexible (operations and technology) and enables interrogative analysis to allow significantly more powerful decision making.
In offering this service, HCP is able to provide a solution that has transformed conventional ABC into a new dimension. Agile ABC requires minimal staff interviews and takes advantage of existing data and metrics in an organisation to deliver:
- facilitation of in depth strategic analysis incorporating the structure of strategy, i.e.; resources consumed, activities that leverage resources into market segments, return from market segments and assessment of financial and other stakeholder outcomes,
- enables ‘what if’ and scenario analysis to assess changes in ‘constraints’ (e.g. market volumes, market share, internal cost structure) and the resources required to satisfy these constraints at varying operating levels,
- an accurate assessment of asset and resource utilisation that takes into consideration readily measurable time driven metrics and the variability of direct and indirect costs to show areas where ‘excess capacity’ exists and areas where capacity can be reduced or redeployed,
- a business model that reflects the characteristics of the organisation, rather than a predefined “one size fits all” structure, and
- an open architecture which interfaces with familiar applications such as MS Excel, to generate standardised and one off, tailored report formats.
TURNING DATA INTO INTELLIGENCE
REDUCING COSTS, OPTIMISING PERFORMANCE
Enterprise Wide Information Systems have delivered ready access to a wealth of transaction reporting data and as a result, organisations are awash with information. HCP works with quantitative analytical specialist, SymboliX to successfully turn source data into high value, business solutions.
Case Study: In one recent client assignment HCP and SymboliX applied quantitative analytics techniques to deliver significant ($m+) savings annually, through the consolidation of three manufacturing facilities into two.
What did we do? At the request of our client, we set out to assess:
- Can we rationalise our three manufacturing facilities into two, whilst maintaining good customer
relationships and meet current contractual obligations? - If we can, what does the optimal consolidation look like and what are the benefits?
- Which assets ought to be moved and which sold?
Using an ‘Optimisation Modeling’ technique, HCP and SymboliX analysed the configuration of our clients three independent production facilities, located across Australia. The analysis considered constraints imposed by the relevant manufacturing facilities and associated production lines, transportation complexities and the expected impact on customer requirements. Developing scenarios for a number of alternative solutions, we were able to assess the impact of varying outcomes from each scenario (in real time) and estimate the risk of each new direction, as they were reviewed.
What did we deliver? In addition to savings we identified what an optimised resource set would look like (within established customer constraints) and delivered insight into the general operations of the business. Interestingly, this included the observation that whilst some assets were believed to be required for production needs, they were in fact not necessary. They only appeared to be necessary because of an inefficient asset utilisation tool that had been used in the past.
Bigger Picture: The above case study describes one benefit from Quantitative Analytics and Business Intelligence tools and techniques. Other Business Intelligence applications include:
In the absence of access to comprehensive SBI tools and software, businesses suffer from an inability to realise the benefits similar to those described above. Initially, basic software Microsoft Excel can be used to mine source data and conduct analytical research. In the longer term, comprehensive Strategic Business Intelligence software can be applied to support ongoing analysis and a mindset of transformation – from Gut Feel to Informed Decision Making.
CENTRE FOR PERFORMANCE MANAGEMENT
STRATEGICALLY ALIGNED, PERFORMANCE MANAGEMENT ENTERPRISE WIDEAutomated Business Intelligence (BI) tools are being used increasingly to facilitate Enterprise Performance Management (EPM) reporting capabilities that deliver content that is both:
- Historical in nature: offers intelligence that has a primary focus on traditional, primarily quantitative management information (Balance Sheet, Profit and Loss, Variance Analysis), as well as
- Strategically focused: information that is future oriented and translates into meaningful ‘BI’ either immediately or following simple and/or complex analysis and interpretation.
- traditional (historical) management information (referred to above), primarily generated through some form of interface between the General Ledger and a preferred BI tool,
- advanced applications that are strategically oriented and draw on various data sources to address:
- Strategy Evaluation: ‘testing’ of strategic plan using trend analysis, predictive analytics etc.,
- Strategy Execution: use of Strategy Maps and Balanced Score Card to implement strategy, and
- Operational analytics: BI in advanced formats such as forecasting, risk assessment, fraud detection and Benchmarking.
- Additional content that is derived from integration of the above with other:
- Performance Management Tools: e.g. Shareholder Value, Activity Based Costing (Agile ABC), Personnel/Employee Rewards and
Management, and - Other Strategic Tools: e.g. Competitive Intelligence, Scenario Analysis and War Games.
- Performance Management Tools: e.g. Shareholder Value, Activity Based Costing (Agile ABC), Personnel/Employee Rewards and
‘Good Governance’, professionalism, efficiency and effectiveness in an EPM enabled business are all enhanced through a Centre for Performance Management (CPM) whose role is described as follows:
HCP has observed numerous cases where organisations seeking to implement a BI solution have commenced with an independent Departmental project (e.g. Marketing, Research, Finance). In each case one department has purchased a BI tool to address their own specific need. The Operations Department for example may select a statistical analytical tool to assist with production optimisation capabilities whilst Marketing may select a different tool to conduct detailed data mining and customer trend analysis. The Centre for Performance Management is charged with effective management of BI across the business and provides one solution for all needs and purposes. Early implementations of EPM projects are rarely perfect. EPM represents a continual ‘journey’ that starts with a specific BI strategy, i.e. an understanding of what an organisation wants to get out of a BI solution, what resources will be required to manage it and most importantly, how it is going to be implemented in order to deliver the desired results. HCP works with clients to develop their BI strategy and to help with the introduction, development and refinement of a BI solution.
AGILE ABC IN THE HEALTH SECTOR
UNDERSTANDING THE TRUE COST OF SERVICES: AN INTERNATIONAL BENCHMARK IN HOSPITAL COST MANAGEMENT
Traditional ‘standard’ costing has always been useful as a method of valuing inventory and calculating ‘variances’ against budget, but as a historical reporting mechanism only, it has been likened to running a business by ‘looking through a rear view mirror’. It is also a mechanism that is of great value to the manufacturing industry, but not much else. In the early 1990’s Activity Based Costing (ABC) was widely adopted by both manufacturing and service companies as a viable alternative to traditional cost accounting, offering a capability to deliver:
- Cost per DRG: Understanding of resource costs and activities contributing to procedures and DRG’s
- Cost of procedures: Defined as department output and building stones for DRG costing
- Transparency in cost structures: Provides analysis of variable and fixed cost per procedure, gross and net margin
- Cost analytics: Calculation of newly negotiated or expected production volumes, measure effects on department capacity usage and measure effect on cost per procedure and DRG
Benefiting from many years of experience implementing ABC through global alliances and state of the art cost management practices, HCP Management Consultants (HCP) now uses a profoundly more powerful methodology than conventional ABC, that of Agile ABC. Agile ABC delivers the same benefits as the past, but is strategically focused, is highly flexible (operations and technology) and enables interrogative analysis to allow significantly more powerful decision making.
In offering this service, HCP has partnered with Cost Perform Australia to provide a solution that has transformed conventional ABC into a new dimension. Agile ABC requires minimal staff interviews and takes advantage of existing data and metrics in an organisation to deliver:
- facilitation of in depth strategic analysis incorporating the structure of strategy, i.e.; resources consumed, activities that leverage resources into market segments, return from market segments and assessment of financial and other stakeholder outcomes,
- enables ‘what if’ and scenario analysis to assess changes in ‘constraints’ (e.g. market volumes, market share, internal cost structure) and the resources required to satisfy these constraints at varying operating levels,
- an accurate assessment of asset and resource utilisation that takes into consideration readily measurable time driven metrics and the variability of direct and indirect costs to show areas where ‘excess capacity’ exists and areas where capacity can be reduced or redeployed,
- a business model that reflects the characteristics of the organisation, rather than a predefined “one size fits all” structure, and
- an open architecture which interfaces with familiar applications such as MS Excel, to generate standardised and one off, tailored report formats.
SUPPLY CHAIN AS A COMPETITIVE ADVANTAGE
BUILDING CORE COMPETENCIES IN THE SUPPLY CHAIN, DELIVERING A SUSTAINABLE COMPETITIVE ADVANTAGE
Just as vision and mission define an organisations business strategy, a customer’s perception of value is the key driver of supply chain strategy. Illustrated below, supply chain capability is delivered through the imperative of meeting customer needs and expectations, but in the context of the strategic goals and objectives of the business. Indeed, Dr Chris Dubelaar, from Bond University observed that a supply chain infrastructure based on firm strategy not ‘Best Practice’ alone, is a key contributor to a sustainable competitive advantage and creation of long term wealth. Illustrated below, effective Supply Chain Management is realised through solutions that are fully aligned with strategy, based on well defined market segments and enabling technologies that contribute to decision making.
HCP assists clients to build their Supply Chain competences, based on the principles:
- The Supply Chain is an integrated, sometimes intercompany process (extending from end customer to original supplier)
- The Supply Chain role has a process orientation across peer groups and external stakeholders
- The Supply Chain role is by necessity one of “balance” i.e. managing the conflicts that exist between the needs of Shareholders, Operations and Customers
- Relevant and meaningful KPI’s drive outcomes as does the “standardisation” of processes
- Supply Chain success is a matter of ‘balancing’ outcomes, especially the trade-offs between inventory level and iFoT, transaction cost and service levels
Enabling technology is a mandatory component of supply chain success. Illustrated below, our services provide for the inclusion of advanced technology solutions. An extreme example is GPS truck, container and inventory tracking technology incorporating a unique security solution that includes an ability to halt trucks remotely (and safely). Other Business Intelligence tools include plant and supply chain optimisation including cost and data analytics, forecasting and trend analysis.
ARE YOU PREPARED TO MANAGE THE RISK IN YOUR SUPPLY CHAIN?
We are all becoming more aware this is a dangerous world that we live in. Media coverage of events like Cyclones that wipe out whole cities or even more devastating Tsunami consistently capture prime airtime. Likewise the risks presented by terrorism and civil unrest are a major part of the Australian Government “Travel Advisories”. Firms are also taking a real interest in the impact of these types of event on their activities. Despite the sometimes dramatic events that surround us research seems to point to the mundane rather than the dramatic being the downfall of supply chains.
The main failing firms find is that they have not carefully considered the risks they face and in particular they don’t prioritise the risks in a logical and supportable way. Sometimes this can be because the impact of the event is underestimated. Recent research by Vinod Singhal and Kevin Hendricks highlight the fact that serious effects from risk events not only last three or more years but, versus the firm’s reference group the following performance outcomes occurred:
- 107% reduction in Operating Income
- 114% drop in Return On Sales
- 11% increase in Costs
- 14% growth in inventories
- 33% to 40% reduction in Shareholder value
- 13.5% greater share price volatility
The research was based on over 800 firms that experienced Supply Chain disruptions against a reference group of equivalent firms that did not suffer the same disruption. A report by the Aberdeen Group in the USA also supported the results gained by Singhal & Hendricks showing that 80% of their survey group had experienced Supply Chain disruptions in the last 12 months. More importantly the survey found that 75% of participants expected Supply Chain risk to increase significantly over the next three years. Aberdeen also reported that “Best Practices” such as Global Sourcing, Lean Practices and staff reductions had made Supply Chains more vulnerable to disruption than at any time in the past.
While it might seem that “best practices” increase risk is a counter intuitive notion, most practitioners would agree. So what is to be done? In addressing this issue it is important to use a rigorous process that talks the language of the boardroom. That is risk must be related to dollars rather than an esoteric risk factor number. It must also follow a logical and defined path as shown below:
Supply Chain Risk Assessment involves close scrutiny of each element of the Supply Chain and asking the questions:
- What could go wrong with this element?
- If this went wrong what would the impact be?
- How likely is this failure to occur?
- What controls do we have in place to prevent this failure and how effective are the controls?
To make sure that no areas are missed we use a model developed at Cranfield University that looks at the elements shown in the chart below:
This model recognises that risk can come from internal as well as external sources. It also does not overly focus on suppliers as the sole source of risk, to the detriment of consideration to the demand side of risk.
In assisting clients with the development of a robust Supply Chain Risk Management Plan we conduct a series of focused workshops on each of the risk areas. These involve stakeholders that are responsible and impacted by the risk area. It is not unusual to have suppliers or customers engaged in some of these events.
Using the “revenue at risk” approach we then prioritise the risk events and assist the client to develop the necessary mitigation, contingency and resilience plans to avoid, respond to or ride out the risk event.
Is your business ready to respond to the possible disruptions in your supply chain? We can undertake an initial survey and provide a brief snapshot of your current Supply Chain Risk Profile and your readiness to respond to risk events.------------------
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