Optimising operational performance
July 2013 | TALKINGPOINT | BOARDROOM INSIGHT
FW moderates a discussion on optimising operational performance between Reinhard Messenboeck, a partner at The Boston Consulting Group, and Simon Brew, Private Sector Industry Lead at Deloitte.
FW: What tools and techniques can firms utilise to track and report on corporate performance? In your opinion, are corporate boards taking advantage of the metrics available?
Messenboeck: Management can and should keep track of a variety of performance indicators to monitor the health of the organisation. Some of the most commonly used indicators are peer benchmarks such as cost or revenue or administrative cost or total cost, and internal benchmarks, such as year-over-year change in cost or revenue. Both of these types of benchmarks are widely used and are very effective at indicating when something is off, but what they don't explain is where and why performance is suffering. This should lead to the next conversation – is this due to poor cost allocation, demand of a higher service level from our customers, or true operational inefficiencies.
Brew: Tracking and reporting corporate performance in a clear and consistent manner is now taken for granted. This ‘rearview mirror’ element of reporting has a role to play, however leading organisations are taking advantage of seismic shifts in the power and functionality of the analytic toolsets now available, to drive enhance levels of performance. Due to the new technologies available, analytics which used to take days and weeks to undertake, now takes seconds, and disparate data sets can be grabbed, sliced and diced to provide critical insight into performance, and drive choices and decisions which enhance profitability. Organisations which embrace these new opportunities to interrogate datasets and identify value creation opportunities are enjoying superior performance. Are corporate boards are taking full advantage of the metrics available? No, generally not. Yet some are doing it well and can drill down real time on P&L. They are on a on a journey and getting to grips to getting the right data at the right time, and using analytics to deliver corporate hindsight, insight and foresight.
FW: In the process of optimising operations, how important is the board’s ability to communicate business objectives? Do boards understand the importance of shared goals and operational information, and are they, in your opinion, communicated effectively?
Messenboeck: Linking the need for change to a unified mission is a critical requirement for the board to generate momentum within an organisation. In our experience, failure in these efforts can be linked to two main reasons: management does not communicate clearly as they are, for example, fearful of being held accountable to the targets they set, or they are too ambitious and start the ball rolling before project fundamentals are established and clarified – which leads to ambiguity in implementation.
Brew: Whilst the communication of clear business objectives should be seen to be of paramount importance by boards, the greater challenge lies in aligning the organisation around these objectives. Many businesses still operate on a functional basis with performance metrics, measures and reward disconnected from the overall business goals and outcomes. Activities are undertaken to improve operational productivity improvement but lead to undesired consequences in the form of high inventory levels or the production of unwanted product. Sales teams chasing new customers take late orders for new or complex products that result in supply chain disruptions, waste, poor service levels and reduced profit. To address this it is imperative that boards not only clearly articulate and communicate the business objectives but establish shared goals and common performance metrics. This means valuing operational and sales information with equal importance.
FW: What are some of the key steps companies can take to introduce efficiencies into the supply chain? How can coordination between demand and supply planning maximise overall profitability?
Brew: Firstly, companies need to understand where and how they make their money, which can be done through a profitability analysis that provides insight into which products, customers, channels and markets provide the highest contribution margin and which are value eroding. Killing the non-value adding complexity associated with the latter, for example by discontinuing certain lines or harmonising product ranges, then allows companies to re-align their operating model and available resources to those products, services, geographies and customers who help maximise margin. This may mean outsourcing non-core or uncompetitive activities to further drive supply chain efficiency. The use of distributors in emerging markets serves as one such example. At a more operational level, an effective sales and operational process and excellent forecast accuracy will ensure synchronisation between supply and demand and thereby allow companies to reduce working capital and further eliminate waste. This is achieved because operations can ‘make to plan’ and thereby set production schedules that minimise change-overs and the associated waste, and eliminate the need for the unnecessary production of inventory ‘just in case’.
Messenboeck: The key is to understand which real operational value drivers need to be synced with the firm's competitive strategy – for example cost, speed, quality, or flexibility – and then align behaviours, targets and incentives on all sides of the of the supply chain accordingly. Too often, things are becoming a ‘low cost’ only game, where procurement departments are pressured to squeeze out the last dollar, foregoing quality or flexibility. This incentive can have a negative domino effect through the supply chain if it's not in alignment with the customer value proposition.
FW: High staff turnover can create unnecessary costs and destabilise firms. What steps can businesses take to minimise this? How can outsourcing help in this regard?
Brew: Firstly, companies need to be very clear about their talent strategy. In today’s environment this is not just about pay and reward but it is also about career opportunities. Research tells us that Generation Y in particular is interested in ‘experiences’ and wants each day to be a learning experience so it’s less about career ladders and more about career lattices. With talent looking for work in the growth markets and vice versa, HR needs to be international in its mind-set and move more quickly to give those experiences and opportunities that employees are looking for. Before outsourcing any roles, organisations need to be clear about the critical roles then need to build them. An option could be for non-critical and tactical roles to be outsourced, however, this should be based around processes and groups of activity rather than individually.
Messenboeck: In general, clear communication that certain contributions are important and valued is typically the best way to reduce staff turnover. But it is important to differentiate between activities that are transactional from those that are capability-based or core to the operations of the business. For the transactional activities, staff fluctuation is less of an issue as long as there is clear documentation and optimal processes in place to allow for standardisation. It is sometimes even desired to reduce legacy cost. Automation should also be utilised whenever possible to increase efficiency. Outsourcing can then be an effective next step to further reduce cost and increase quality, once processes are clearly defined.
FW: Do you believe boards place sufficient emphasis on the importance of contingency plans? How can firms recognise and address tomorrow’s operational problems today?
Messenboeck: It is very difficult for a board to prepare for specific issues and threats that might arise in the future. Even simply foreseeing operational problems and changes to industry landscapes is difficult, as we have witnessed with the downturns in the last 10 to 15 years. The best way to survive – or even profit from a downturn – is to be on the cutting edge of cost efficiency, have a wide scan on competitors, especially ones on the perimeter that could revolutionise the way business is currently done, and customer behaviours as well as putting oneself in a position to be able to act swiftly once an opportunity or threat is detected.
Brew: Boards are becoming more acutely aware of the need for strong risk management and contingency planning in the light of a number of ‘black swans’ events such as the Fukushima and Deepwater Horizon disasters that have shaken global supply chains and business performance. The increased adoption of extended supply chains that depend on greater numbers of suppliers also increases the need for robust risk management processes to ensure that quality and ethical standards are upheld and business continuity maintained. The adverse effects of revelations such as child labour exploitation can be significant and long lasting, particularly in an age where globalisation and social media combine to provide socially responsible consumers with considerable influence over the success of organisations. The effective management of all these converging factors requires boards to proactively anticipate, evaluate and address a wide variety of risks, and put in place plans to mitigate or safeguard against them. In this context risk management has moved from being purely an operational issue to one of strategic importance and non-executive directors can play an important role providing the necessary objectivity and challenge.
FW: Balancing global capabilities with local strategies is a major challenge for multinational firms. What steps can companies take to better align local and overseas operations?
Messenboeck: It is important to understand that the future demand structures are, in many industries, very different from the ones that lead to today's current structures and decision paths. In order to realise the needed changes in a non-crisis environment, a proactive approach is required. The first critical step is to draw a bold picture which outlays the future vision of the firm. Radical approaches such as moving the corporate headquarters to another part of the world should not be ruled out. Second, take steps towards upgrading local roles – for example, increasing decision power. This can be very effective at rebalancing the power across an organisation.
Brew: Many multinational companies have evolved over time – either organically or through acquisition. The consequence of this is that few have a well-defined operating model that optimises capabilities, processes and decision making throughout the organisation. Re-evaluating and re-defining this model for current and future business and market requirements is a significant undertaking but essentially boils down to outsourcing non-core or un-competitive sets of activities for example, payroll management, and differentiating between local market requirements and thus decision making and strategies – marketing campaigns and plans – versus activities that can be leveraged at a regional or ideally global level to drive maximum efficiency – sales and operations planning – to optimally manage a network of production facilities, or the establishment of shared services centres to support transactional processing. Generally, successful multinationals will often have a strong sales and marketing, and operational execution capability in local markets. These activities need to be overseen by leadership teams that have both the pre-requisite capability and autonomy to shape local strategy and drive value within a broader governance framework.
Dr Reinhard Messenboeck is a partner and managing director at The Boston Consulting Group. Dr Messenboeck joined BCG in the Frankfurt office in 2000 and now is head of the Berlin office. He is worldwide topic leader for ‘Cost & Efficiency’, and within this also leads the ‘Excellence in Support Function’ topic. Prior to joining BCG he worked in a consultancy specialised in continuous improvement. Dr Messenboeck can be contacted on +491703341244or by email: email@example.com.
Simon Brew is private sector industry lead at Deloitte. He has over 18 years experience in defining and delivering cost reduction and asset management projects to clients in Europe, Asia and the United States. Mr Brew has worked in a broad range of industries including Financial Services, FMCG, Automotive, Manufacturing and Aerospace. He has significant experience in M&A cost reduction environments and working with Private Equity organisations and their portfolio companies. Prior to joining Deloitte, Mr Brew held senior positions with the REL Consultancy Group, The Hackett Group and KPMG. He can be contacted on +44 (0)20 7007 8989or by email: firstname.lastname@example.org.
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