Business Intelligence and Corporate Performance Management Strategy Theory Of Constraints

Transcription

1 HITACHI CONSULTING Business Intelligence and Corporate Performance Management Strategy Theory Of Constraints Prakash Jha, Hitachi Consulting 5/1/2008

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3 Contents 1. INTRODUCTION BUSINESS INTELLIGENCE & THE THEORY OF CONSTRAINTS THEORY OF CONSTRAINTS NEW BI PARADIGM APPROACH PROBLEM DEFINITION AND KEY BUSINESS VALUE FINDINGS IMPLICATION & ANALYSIS ANALYSIS USING THEORY OF CONSTRAINTS BENEFITS OF USING THEORY OF CONSTRAINTS DRIVE THE BUSINESS CONCLUSION... 9 Page: 3 of 9

4 How Enterprises Can Get More from Business Intelligence Practice A Theory of Constraints 1. Introduction Business Intelligence is more of and art than a science. In exploits of science one knows exactly what to expect in the end. In exploits of art one knows the end but the end could be different for different people with different experience, maturity, methodology, and technology. Business intelligence is more of an art than a science because everyone knows what they need in the end but how they achieve the end result depends on the experience of people in the organization, BI organizational maturity, methodology, and the technology. An organization that is primarily driven by sales of goods and services knows that the end result that they need is an increase in sales every year for them to be in a healthy business. But the way every organization achieves this depends on the various constraints that the organization has and how the intelligence to increase sales is derived. An organization grapples with various constraints. All these constraints when steered properly unlock several opportunities. Hence, the title, Theory of constraints. One of the organizations that I worked with utilized this theory of constraints to the letter of law and saw some tremendous business gains and effectiveness. 2. Business Intelligence & the Theory of Constraints Business intelligence consists to people, process, and technology to improve decision making by analyzing organization s information. Business intelligence utilizes all the complex organs of the organization and is not an IT project. Business Intelligence is a strategic initiative for an organization using which the organization can measure and drive business effectiveness and the organizational competitive strategy. To achieve this it uses all the resources of the organizations i.e. people, process, and technology. To take this one step further this initiative will require Resources (Technology resources) Leadership (Business & Technical) Sponsorship (Executive Leadership and Buy In) Each of the above mentioned organizational resources have to meet the current business needs and strive to meet or be in a position to satisfy the future needs. It is this constant struggle that creates the new opportunities and utilizes the theory of constraints. 3. Theory of Constraints New BI Paradigm Page: 4 of 9

5 Theory of constraints is an approach to managing complex organizations and processes. Processes that are highly inter dependent or highly interactive tends to be governed by this approach. The objective of theory of constraints is to grow the organizations capability to achieve more of its goal now and in future. The approach consists of dealing with complex processes by identifying and managing constraints which are often not based on the technical limitations of the process, but in the paradigms, practices, and policies of the people who are involved with them. The basic premise of Theory of Constraints is that the maximum organizational objective improvement comes from addressing the very few current constraints and looking forward to what and where the next constraint will arise. The Theory of Constraints for the Business Intelligence can be broken down into the below processes Identify the systems constraints Determine the strategy to exploit that constraint to the fullest capability Align all the processes to the decision made about the Goals and Objectives. Subordinate all other actions to that exploitation strategy (Drive out footshooting policies and activities -- Don't let other aspects of the system inhibit the throughput of the constraint). Elevate the constraint (typically by acquiring more constraint capability or offloading from it to another piece of the system) When the constraint is "broken," and another aspect of the system now becomes its limiting factor, go back to step Approach The approach of the paper is to take all the concepts of the Business Intelligence practice based on one of the client engagements. The paper presents all the concepts that were used to harness the maximum Business Intelligence effectiveness within a large corporation. This paper is the first in the series of papers that will look into all the components of the business intelligence and how theory of constraints was applied to deliver the organizations goals and objectives. This paper focuses on aligning the corporate strategy to the Business Intelligence strategy so that the Business Intelligence processes and systems can reflect and track the performance in an integrated approach. 5. Problem Definition and Key Business Value Findings This client is a big company with operations in US and worldwide. The company s product portfolio spans a wide variety of consumer products sold in US and worldwide. The client continues to gain and maintain a market leading position by focussing on global presence, strong brands, broad product range, and innovative adoption of technologies. The organization has a global shareholder and a global workforce. The organization of this size and breath is constantly focussed on improving the ability to manage information and data in order to better understand the customers, Page: 5 of 9

6 new product development, product demand, product sales, and the logistics of supply and demand. Following a series of meetings about the corporate strategy and vision below were some of the objectives that were put forward for the company to move to the new level. Improve overall profitability Reduce time to market Scalability of software systems to support growth of new products and growth into new markets Provide accurate and timely demand forecasting Proper product promotions planning Reduce procurement and distribution complexity Accurate demand production to avoid stock outs, oversupply, and safety expenses. 6. Implication & Analysis Each of the identified objectives for success was then analyzed by each of the different departments within the organization. For the sake of the paper we will focus on the one big constraint out of the many that came out of the detailed discussion and that was significance of the Business Intelligence within the organization. The big area that was found to be a bottleneck in achieving the company s objectives was Sales Planning 7. Analysis using Theory of Constraints Sales planning is one of the most vital arms of an organization. This enables an organization to concentrate on sales activities. It needs to identify the most profitable customers and the most profitable products that will result into highly profitable sales and improve the bottom line. Below is the diagram representing the sales planning wheel for make to forecast sales environment Page: 6 of 9

7 Forecast baseline Financials Sales Planning Wheel Demand Planning Target Profitability In, a make to forecast base environment, sales forecasting forms a very important starting point for the sales cycle. The forecast baseline will then need to be aligned to the customer demand. Customer demands will be driven by promotions and seasonality factors which determines product pricing. Product pricing will need to be aligned with corporate profitability guidelines. At the end of it, the sales target gets created for sales channels and leads. The actual sales revenue needs to be reflected in the corporate financials. Identify the systems constraints The diagram below is a matrix of sales process to the corporate objective used to identify if system constraints exist in the processes. This is a subjective assessment of the system constraints. Sales Process Objectives Increase Profitability Reduce Time to Market (New Product) Scalability of systems Accurate Demand Forecast Reduce Procurement Complexity Accurate Production Forecast Baseline Demand Planning Profitability Targets Financials Yes Yes Yes Yes Yes N/A Yes Yes N/A No Yes Yes Yes Yes Yes No Yes No Yes N/A No N/A No N/A N/A Yes Yes Yes Yes No This table identifies the corporate objectives have the highest risk of failure, e.g. Increase Profitability, Scalability of Systems. This is because all of the sales processes have some constraints that if not corrected will not allow for the objective to be meet. Page: 7 of 9

8 Determine strategy to exploit the constraints to the fullest capability Identify the System Constraints provided us with the answer of what we need to change and why we need to change. This step provides us with the detailed process of what do we need to change the processes to. This provides us with the answer of what changes need to be done for each of the sales processes. For example, we will take a deeper dive into the sales processes constraints for meeting the Increase Profitability objective. The bottleneck that the Forecast Baseline process has is that it is not utilizing the historical sales from ticketed sales historical data. As a result of this the forecast baseline numbers are on the high side which leads to several issues with inventory management and stales. Also, the historical data being used for creating the forecast baseline uses 5 years of data. The goal is to use at least 10 to 15 years of data. To increase profitability the demand planning process will need to look into seasonality demands and the price points adjusted to the seasonality and events. To increase profitability the yearly targets will need to be broken to weekly targets for the sales leaders. This target number will need to be stored for tracking purpose. This will provide a peek into any issues with meeting the yearly targets with sufficient time for adjustment. At the end the targets and the actual sales will need to be tied to the financial so that better financial planning and forecasting can be done. Chart below depicts the several constraints that currently exist in the sales processes to meet the Increase Profitability objective. Similar discussions were performed to identify the changes that need to be done to meet other objective. Align the process to meet the objective & elevate constraint level This step of theory of constraints articulates how the changes to the processes will be done. It also suggests that if we focus on the objective of improving the profitability first as this is the objective that has most likelihood of failure compared to all the others. Hence all the resources of the organization i.e. people, processes and technology is diverted to increase the constraint level of all the identified processes so that this objective can be meet. Next on the list is the scalability of the systems and so on and so forth. While the constraints to meet the increase profitability objective was being increased it was identified that the Accurate Production objective could be meet by just increasing the constraint level for Increased profitability objective. 8. Benefits of Using Theory of Constraints This system oriented process improvement methodology had a single goal in mind i.e. meeting the company s objectives that came out of the series of strategy meetings. However, each of these was composed of linked activities one or more of which acted as a constraint on meeting the corporate objective. Page: 8 of 9

9 One of the benefits of using this process was that it clearly identified that there were certain areas where there was excess e.g. Accurate Production. All the systems to meet this objective were in place. However, other activities had impact on it. This resulted in better utilization of plan capacity. One of the other benefits of using this was identifying the most significant constraint. It is this constraint that has the greatest impact on the corporate objective of the company. One of the indirect benefits of using this approach helped us identify that all the constraints were internal in nature and could be elevated internally. Scalability of the systems for sometime was identified as one of the major external constraints. However, the detailed analysis revealed that the IT systems and software had the required capability and that the changes were needed to be done in the application systems so that the BI strategy can reflect the corporate strategy. 9. Drive the Business Based on the above objectives and key business trends, KPI (Key Performance Indicators) scorecards were created or the existing ones were modified to reflect the new strategy. The KPI scorecards and the dashboards provide a coherent view of the business. Information was gathered, processed, and disseminated all across the organization. The KPI scorecards provided a process to perform forecast, proactively plan and manage the forecast, detect the problem and perform what if analysis so that the corporate objectives can be meet. 10. Conclusion By utilizing this approach, BI and CPM strategy provides high realization of business effectiveness, efficiency, and competiveness. Some of the reasons for success using this approach included: Implementing a strategy for monitoring success of the corporate objectives and growth initiatives Implementing improved access to relevant information to manage it in a timely manner Developing KPI scorecards that can be used to measure the performance and be used for benchmark to multiyear initiatives. Page: 9 of 9