Friday, June 26, 2009

Small Companies Can Benefit from Strategic Planning

The online dictionary Wikipedia defines strategic planning as “an organization's process of defining its direction and making decisions on allocating its resources, including its capital and people. It is often times viewed as a process for determining where an organization is going over the next 3 to 5 years or more”. Strategic planning enables an organization to answer the following questions:
  • Who are we?
  • What can we do?
  • What are our strengths and weaknesses?
  • Which critical issues must we respond to?
  • What should our priorities be?
  • Where should we allocate our resources?
  • How do we want to grow?
  • Where do we want to be in the future?

Most large organizations have a significant process of strategic planning where overall directions are given to the organization. They need to do this since there are large amounts of resources at stake and many people and departments involved to manage these resources. However, few small organizations do strategic planning even though relative to their size, they too have large amounts of resources at stake and people involved to manage these resources. The reason for this absence of a strategic plan is usually due to the fact that top management of the organization is very tactically oriented and involved with the day-to-day operations. Just getting through the near term is the only thing on their collective mind. The problem with this is that within the organization, there is no overall plan that gives people direction as they make decisions which means that different parts of the organization can be going in different directions at the same time. In small volumes, this is not such a problem, but as the company grows, it can become very chaotic, frustrating and problematic and can lead to failure due to the conflicting priorities that will exist.

A strategic planning process does not have to be long, time consuming and drawn out, but it should involve the key personnel of the organization. With guidance from a facilitator familiar with the process, implementing a planning process can be fairly quick and simple and can be done without being a major intrusion to the operation. Benefits that can be realized include:

  • Clearly defined business strategies and supporting objectives for growth
  • Identification of business strengths and weaknesses
  • Quantified resource requirements and financial projections
  • Integrated operational plans for each area of the business
  • Clearly defined business performance measures
  • A focus on achieving and building advantages

Strategic plans are very different from operational plans. Operational plans are tactical and are concerned with “today”. Strategic plans are concerned with “tomorrow” and are effective in coordinating the tactical activities so that the future growth of the organization is effective and under control. Without some aspect of a strategic plan that is known to all, activities of the organization will be disjointed and counterproductive, even though everyone is doing what they think is best. Frustration will exist within the ranks and growth will be difficult which can lead to the overall failure of the organization. With a well conceived and communicated strategic plan, an owner or management team will likely get what they want in terms of organizational performance, but without one, they will most likely not and everyone in the organization will suffer to some extent.

What do you find as pros and cons of Strategic Planning? Do you have examples where it helped or hurt?

Friday, June 19, 2009

Total Success by using Both Lean and ERP

There are those who feel that if Lean tools and concepts are implemented, there is no need for ERP tools and vice versa, but in fact, the two need to be used together in order for an organization to get the most out of each. Aberdeen Research recently released an article titled “… Reducing Waste in the Supply Chain”. This is an interesting combination of terms since “Reducing Waste” is typically associated with Lean tools and concepts and “Supply Chain” is often times embroiled in non-lean ERP tools and concepts. The truth is that BOTH sets of tools and concepts need to be used and integrated in order for the organization to go from “Doing Lean” to “Being Lean”.

In the study that is the basis for the Aberdeen article, Best-in-Class companies were achieving:

  • 96% Perfect Order Delivery
  • 3% decrease in Inventory Carrying Costs
  • 2% decrease in Inventory Write-off
  • 4% decrease in Customer Lead Times
  • 4% decrease in Manufacturing Cycle Times
Unfortunately for the lazy reader, Aberdeen saved the best part for the end where they discuss actions to combine the two schools of thought. Some of the ideas they present include:

Develop standardized information flows from the supply chain managers to the operation managers. The Sales and Operations Planning (S&OP) functions should be connected to the tactical execution functions via regular, collaborative meetings so that customer demand requirements and company supply capabilities are discussed and matched.

Establish bi-directional information flow between the supply chain and manufacturing functions. There is a need to compare monthly and weekly plans from S&OP activities to the weekly schedules and daily results of the execution activities. With this connection, the needs of the customer can be translated to what the plant needs to do (i.e. takt time) which leads to an execution plan to achieve what needs to be done.

Determine appropriate inventory buffers throughout the supply chain. Instead of keeping excessive WIP inventory, it is likely more effective and cheaper to keep finished goods to meet changes in demand patterns. Where keeping finished goods is not practical, such as with an engineer-to-order product, working to a planned inventory of semi-finished components may be a viable alternative.

Incorporate demand and production variability, inventory levels and supplier lead times as part of the level plan creation. In Lean, the goal is to eliminate all of this variability, but in many cases, this is not possible. ERP is a process of managing these variables. Using the two together can provide a compromise that satisfies the requirements of the specific business.

Develop Lean and ERP techniques that support pull concepts for both internal operations and suppliers. By combining Lean visual concepts of Kanban and other pull concepts with ERP software solutions that support non-visual processes such as time-phased predictions and advanced warning/alert tools, those who live in the hour-to-hour mode of operating will not be bogged down with the functions of “the system” and those who must manage the variabilities external to the execution processes will be connected to what is really happening.

Many times the supply process is longer than the delivery lead time demanded by the customer, so the key is to manage the process such that a minimal investment is made while still being able to manage the variations that exist and are uncontrollable. Lean can be used to manage the tactical processes that result in reduced waste, reduced work-in-process inventory investment and improved flexibility. ERP can be used to manage the longer term variables that are not controllable by Lean techniques. The integration of the two is what allows the organization to be successful.

Are you Best-in-Class?

Monday, June 1, 2009

Effective Inventory Management Leads to Business Success

Aberdeen Research benchmarked the people, processes, technologies and metrics associated with inventory management and determined that Best-In-Class companies are able to continuously manage their inventory throughout their supply chain to improve customer service levels, forecast accuracies and perfect order metrics. They defined Best-In-Class as companies that had:
  • 97% Average Customer Service
  • 15 days Average Cash Conversion Cycle
  • 95% Perfect Order Performance
  • 87% Average Forecast Accuracy at the Product Family Level

These companies are able to continuously manage their inventory throughout their supply chain to improve what they deliver to the customer, which encompasses more than the specific product or service that they deliver. Other aspects of what is delivered that don’t show as specific items on the invoice, but are improved with effective inventory management, include total order lead time, product quality, ease of doing business and the ability to deliver changes to the product or service without having to go through major business changes.

Regarding inventory management, successful companies follow the principles of Closed Loop Inventory Management which include the ability to:

  • Determine safety stock targets for inventory at critical nodes in the supply chain.
  • Replenish inventory into distribution buffers based on customer demand.
  • View end-to-end inventory while providing available to promise inventory.
  • Respond quickly to market events while executing the inventory requirements.
  • Segment inventory based on customer service requirements.

Although most involved with business management will admit that the above impacts on delivering to the customer are reason enough to make inventory management improvements a priority, there are also internal benefits to the organization from becoming Best-in-Class that should be mentioned:

  • Best-in–class companies are 10 times more likely to have reduced their inventory carrying costs year after year.
  • Best-in–class companies are 7 times more likely to have reduced their warehouse labor costs year after year.
  • Best-in–class companies are 63% more likely to practice centralized transportation planning.

Whether it is via the successful pursuit of Lean Enterprise Performance or effective implementation of ERP or Supply Chain principles, improving the performance of inventory management will improve the organization’s total customer delivery performance.