Moving beyond the hidden factory: why a learning organization is crucial to business agility
Wasteful operations are not just part of the factory floor. Outdated, inefficient, or even undocumented business processes can do more damage to a company’s EBITDA than a force majeure over time. Foundational to a company’s ability to meet its operational excellence goals is the capability to learn; both in understanding how various forces of change are impacting execution of the business strategy and becoming agile enough to quickly react, if not anticipate, these forces, turning what might be a business crisis into a competitive advantage in the marketplace.
Plan to Change
Change can be from both external and internal sources. While common external factors such as economic cycles, technology, and market dynamics are highly visible and often attract an energetic leadership response, organizations often make tweaks to ineffective or outdated policies and processes (including unacknowledged abandonment), that are often minor and undocumented, and which often slip past management radar. These changes accumulate over time, creating a version of ‘death by a thousand cuts’, and ultimately present a serious drag to the organization in the classic ways: lack of coherency between functions, fire-fighting, too many spreadsheet patches to data transparency challenges, and disengagement of the workforce from the overall business mission.
Whether the change is internal or external, the greater the ability of a company to adapt to change and/or detect and adjust its supply chains to a new, sustainable mode of operation, the greater its external competitiveness will become. While this is an industry bromide, it remains all too prevalent: a quick survey of financial reports reveals a considerable number of Fortune 500 manufacturers over the last couple of years who have had to restructure their organizations, re-work their portfolios, and right-size their manufacturing assets.
A Hidden Business Cycle
As a long-time supply chain executive in the chemical industry, I experienced the full impact of business disharmony and saw what it could do to EBITDA. There is not enough of the right inventory, or it’s opposite: aging inventory that ultimately has to be written off. Manufacturing capacity utilization also suffers: resources are often overtaxed, leading to missed sales, or the opposite situation: these assets are under-utilized, leading to IME charges. Customer service suffers as well, with on time delivery percentages plummeting. Another serious consequence is sub-optimization of delivery cost, where express freight charges to meet delivery commitments and/or make up for inventory problems become all too frequent.
When the pain becomes too high, the normal organizational response is to muster an all-hands-on-deck flurry of remedial response, from SWAT teams to stop the hemorrhaging, six sigma projects, and often the hiring of expensive third-party consultants to come in and get the house back in order.
Figure 1 depicts the cycle of a business operating at the peak of operational excellence (e.g., ‘Entitlement Mode’). Inevitably, because the company isn’t managing the important change factors affecting its business, it sinks to the nadir of this cycle, or ‘Crisis Mode.’
Usually, given enough attention and resources, the problems are remediated for a short while, but then return with a vengeance, because the underlying factors that caused the sub-optimization in the first place were often incompletely addressed, if at all. Inevitably, the cycle, which I term here as the ‘MetaCycle,’ repeats itself endlessly unless a business takes overt steps to detect, manage, and subsequently install or optimize its operational excellence management system to stay in an execution Entitlement Mode more frequently, reducing the impact of change continuously over time as depicted in Figure 2.
How then, from a supply chain perspective, does a business begin to attack such a challenge, in order to understand all relevant factors that need to be first detected, then understood and measured, and finally mitigated and continuously improved? In this article we discuss two such actions.
1. Blueprint the Path to Operational Excellence
One key practice we recommend to start on the road to improved performance is illustrated in Figure 3. This is the supply chain execution pyramid, where the business strategy must be executed perfectly and faithfully across functions, execution processes, and daily transactions. As shown in the pyramid, with a myriad of linkages and hand-offs for detailed plans to navigate, the chances for dilution of message is high. It’s one big reason why almost two thirds of all C-Level Executives today are not satisfied with how their business strategy is being executed.
We’ve found that many businesses lack a governing document, shown in Figure 3 as a ‘Supply Chain Execution Blueprint.’ This is an evergreen, organizational learning document, assisting in defining important principles to execute the business strategy, which are subsequently communicated down through the organization intact, minimizing re-interpretation and hence confusion. These principles are revisited monthly as needed in the S&OP, which should serve as the Control Tower for supply chain execution. Changes can be proposed and made in this ritual, which is a decision-based meeting, keeping the organization course-corrected through time as changes warrant .
2. Move from Average to Exceptional Performance Management
The Control Tower function of S&OP is useless if the wrong performance metrics are the point of focus. This is another key area of weakness we find in businesses. Many times businesses will adopt the baseline performance metric standards as recommended by SCOR (Supply Chain Operations Reference), but go no further in metric development. While this is an essential action, it does not by any means present a complete performance management program. Figure 4 summarizes the key issues around establishing the right metrics for an S&OP Control Tower.
The ability to both detect and anticipate change is the desired outcome. No one can control what they don’t measure, and an integral component of a learning organization is to establish metrics in the Meta-Cycle Quadrant, which contains performance measurements that are both cross-functional and predictive.
George Santayana’s famous adage: “Those who cannot remember the past are condemned to repeat it,” is entirely appropriate for companies who lose their organizational memories due to restructuring and turnover. Unfortunately, these headwinds are increasingly prevalent and present significant challenges for many businesses today in their quest for operational excellence. Institutionalizing past corporate learnings into business processes specifically aimed to increase agility is an important best practice. Two activities are important first steps to mastering the MetaCycle and increasing business competitiveness.: 1) ritualizing the periodic review and refreshment of the supply chain execution blueprint; and 2) moving beyond cookie-cutter performance metrics and developing advanced metrics that are both cross-functional and predictive.