By Gary Cokins, Founder of Analytics-Based Performance Management LLC
In my initial blog in this series related to integrated business planning (IBP) I described IBP as seamlessly integrating user interfaces and workflows. IBP links strategic, operational, and financial objectives and plans to improve employee alignment with the executive team’s strategy and financial performance. In my second and third blogs I discussed, respectively, how IBP is part of the solution for issues and needs related to strategy execution and next to product, channel, and customer profitability.
In this blog I will discuss issues, needs and solutions related to operations, processes, and productivity improvement and how IBP is part of the solution.
The strategic versus operational view
In commercial companies there are two levers to increase profits: (1) raise top line revenues and (2) reduce expenses. Although a company cannot continue to reduce costs forever to achieve prosperity, there are always opportunities to reduce waste, increase throughput cycle time, improve quality, and consequently improve processes. A top line revenue increase places more emphasis on a strategic view whereas expense reduction places more emphasis on an operational view.
The strategic view is primarily enterprise-wide and involves first “doing the right things.” That is, selling profitable products to customers that are profitable to conduct business with. As described in my prior blog the strategic view is about enhancing revenues and assuring higher profits based on the product’s or service’s value to draw good prices and the considering varying levels of demanding behavior of different types of customers. In contrast the operational view is not enterprise-wide, but rather addresses individual functions, departments, or business processes. It involves “doing the right things well.” Its intent is less about analyzing profit contribution margins, but rather focuses on improving processes, managing them more efficiently, and optimizing asset utilization all for which to better manage costs.
The operational view for productivity improvement
The pursuit of benefits from the operational view involves quality management, lean management with value stream mapping of processes, activity analysis, cost driver analysis, and scoring activity costs with attributes, such as for nonvalue-added costs. IBP supports all of these endeavors. Here are a few examples:
Quality management – In the 1960s Japanese manufacturers began to increase market share by providing higher quality products. Manufacturers in North America and Europe began to copy some of the Japanese practices. There came a point in time however when senior executives began to question the return on investment with quality initiatives, and this spawned interest in Six Sigma. Six Sigma is a set of techniques and tools for process improvement. It was initially developed at Motorola and soon embraced at General Electric. Six Sigma seeks to improve the quality output of processes by identifying and removing the causes of defects and errors and minimizing variability in processes. It uses a set of quality management methods, mainly statistical methods, and creates a special infrastructure of people within the organization (“Champions”, “Black Belts”, “Green Belts”, “Yellow Belts”, etc.) who are experts in these methods.
Lean management – In the 1990s lean management stemmed from a method used at Toyota in Japan called the Toyota Production System. Its premise is that by smoothing the flow of work then quality problems are exposed. As they are addressed, waste is reduced and throughput cycle time speed increases. A technique applied is value stream mapping. Lean management amplifies quality management techniques by placing attention on the value add of the steps and work activities belonging to processes.
Cost driver analysis and cost of quality (COQ) – The management accounting function eventually found ways to make a contribution to process improvement. As activity-based costing (ABC) has been embraced, based on cause-and-effect principles, companies benefit from visibility to the cost drivers of making products or delivering services. With accounting information as the operations work force can decrease the quantity, frequency, or intensity of a cost driver (e.g., the number of machine set-ups) then costs can decline. ABC also provided a way to score the work activities displayed in a value stream map as value-added or nonvalue-added (or as a spectrum of value-add) to enable focus based on the magnitude of costs. Progressive accountants recognized they could add another scoring method to classify activities as correct, prevention, appraisal, internal defect, or external defect. This is the basis for measuring the cost of quality (COQ). With repetitive COQ reporting companies can monitor the shift of their costs from the latter to the former of the five COQ classifications as well as reduction of the last four of them.
IBP for productivity improvement
IBP should be viewed as holistic where as an umbrella it covers strategic issues, as described in my three prior blogs in this blog series, as well as operational issues discussed in this blog.
There is some controversy. Just as there is organization chart silo behavior that becomes an obstacle for better integration of how employees should work together there can also be improvement method silos. Some advocates in the lean and quality management communities promote their methods (e.g., fish bone diagrams), as the primary ones to adopt. To their credit, their methods do educate employees on how to think. But IBP’s broader suite of methods aids managers and employees on where to think. As a result IBP provides focus to better address which improvement opportunities will lead to improved troubleshooting for corrective actions. This also includes the broader set of products available now to users to perform their analysis on the different silos of information. With In-Memory technology it’s easier to consume disparate sets of information into one source as well as analytical tools that provide easy visualization options the convergence of strategic and operational analysis comes together easier.
IBP is for enterprise wide improvement
As mentioned, integrated business planning (IBP) integrates financial, strategic, and operational information. It can help the enterprise integrate all their objectives and ensure synchronization.
In my next blog I will discuss integrated business planning for improved budgeting, rolling financial forecasts, and evaluating proposed business decisions.
About the Author: Gary Cokins, CPIM
Gary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) systems. He is the founder of Analytics-Based Performance Management LLC www.garycokins.com . He began his career in industry with a Fortune 100 company in CFO and operations roles. Then 15 years in consulting with Deloitte, KPMG, and EDS (now part of HP). From 1997 until 2013 Gary was a Principal Consultant with SAS, a business analytics software vendor. His most recent books are Performance Management: Integrating Strategy Execution, Methods, Risk, and Analytics and Predictive Business Analytics.