Crisis of global economy and alternative economic strategies
New Performance Management Strategies for the Post-crisis Economy
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New Performance Management Strategiesfor the Post-crisis Economy
2010 PMI Great Lakes Chapter Symposium
Sterling Heights, Michigan
April 28, 2010
Newport Consulting Group, LLC
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
Welcome and Introductions
Effective Strategies for the New Normal
Managing Risk for Enterprise Performance
Reducing Cost and Increase Profit for the emerging upswing
Methods to Manage Spend in the Organization
Methods to Optimize the Supply Chain
Summary and Special Offer
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 2
About Our Firm
Newport Consulting Group is an independent
consulting firm founded by several leading
consultants from DMR Consulting Group and
strategy firm Booz & Company
Our clients enjoy working with our experienced
professionals who deliver large firm capabilities
in the context of a boutique firm culture
We function as top-end, high-touch advisors
to our clients, unencumbered by large
overhead cost models or downstream
deployment agendas
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 3
About Our Services
Strategy
Operations
Risk &
Program Management
Technology
Newport’s Services Model (“SORT”) allows our Clients to benefit from a broad, holistic perspective on
key business issues and challenges, while focusing on deep experience in one or more critical areas.
What market and business strategies do I need to address post-crisis scenarios? What KPIs govern my initiatives and what do I do when KPIs are “out of bounds”?
How do create a culture of sustainability?
How do I strategically manage intellectual property?
How do I fit my organization to improve existing or introduce new operating models?
How do I structure the functions, people, and resources in my organization to drive strategic initiatives?
What approaches do I use to structure and prioritize initiatives inside my organization?
How do I manage and mitigate risk across my business operations?
How do I drive maximum value from my portfolio of initiatives?
Based on my operations and existing technology investments to date, how do I select and implement the best technology solutions to support my business?
How do I manage that process from planning to go live?
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
Welcome and Introductions
Effective Strategies for the New Normal
Managing Risk for Enterprise Performance
Reducing Cost and Increase Profit for the emerging upswing
Methods to Manage Spend in the Organization
Methods to Optimize the Supply Chain
Summary and Special Offer
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 5
Since last year …
Programs started in 2009
Programs started in 2010 …
still looking …
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 6
47
41
60
62
61
65
3.9
4.7
0
5
10
15
20
25
30
35
40
45
50
55
60
65
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Sep-09Jul-09May-09Mar-09Jan-09Nov-08Sep-08Aug-08
%Index Level
Jun-08Apr-08Feb-08
0.0
Nov-09
Production versus Consumption PotentialISM Key Index Levels / Personal Savings Rates
And into this year …
New Orders
Savings
Production
Inventory
Source: ISM Manufacturing Index Report, 2008-2010; Bureau of Economic Analysis, US Department of Commerce Report, March, 2008-2010.
ISM Levels < 50
indicate
contraction, levels >
50 indicate
expansion
Historical 40-year
average of
personal savings
rate of +/- 10%
We ended 2009 with an early steady-state trend, inventories continued to shrink and production and
new orders expanded, savings was constant. Since then inventories have grown as has production.
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 7
Focus on Sustainability ProgramsPercentage of Respondents focusing on Area (by Position)
Where is the focus?
The Post-crisis economy requires new as well as very traditional business thinking, taking into account
long-term sustainable growth. Short-term profit taking of the “Roaring 2000s” is a thing of the past.
Source: Valuing Corporate Social Responsibility, The McKinsey Quarterly, February 2009
3
24
35
39
43
52
79
27
24
36
9
24
42
39
61
79
Improving access to capital
2
Strengthening competitive positioning 14
Improving risk management
18
Improving new growth opportunities
24
Improving operational efficiency and/or decreasing costs29
Meeting society’s expectations for good corporate behavior30
Attracting, motivating, and retaining talented employees55
Maintaining a good corporate reputation and/or brand equity
75
CSR Professionals
Investment Professionals
CFOs
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 8
How do we get there?
Strategic planning, aligned with sustainable thinking, is top of mind for business leaders. Addressing
the “strategy gap” between the board room and the plant floor is critical to achieve results.
Do you have a strategy gap? Ask yourself
these questions:
Are we too busy creating more and more
efficiency in the organization in the
absence of effectiveness?
Are we performing at high levels in one
area of the organization at the expense of
other areas of the same organization?
Is it difficult to determine which suppliers
are working in different parts of the
organization?
Is it common to use cost allocations to
determine total contributions of functions
and operating units?
Is there a common governance model?
Operations
Strategy
Reporting and
monitoring
Production
and planning
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 9
Addressing the Strategy Gap
A closed-loop Enterprise Performance
Management (EPM) model provides a framework
for the development, alignment, and execution of
strategy in the organization, leveraging outcomes
for future strategy cycles based on actual results.
Strategic Plan
Operating/Financial Plan
Test
and Adapt
Align the
Organization
Monitor
and LearnPlan
Operations
3
4 5
6
Develop
the Strategy
Translate
the Strategy12
Six Stages of the Closed-loop EPM Model
Develop the Strategy – this involves applying tools, processes, and concepts, such as mission, vision, and value statements
Translate the Strategy – using other tools and processes, including strategy maps and balanced scorecards
Align the Organization – both the business units and shared services units to the corporate strategy and the business processes
Plan Operations – translate the strategic objectives into rolling forecasts, activity-based costing, resource and capacity planning, dynamic budgeting
Monitor and Learn – with managers continually reviewing internal operational data and external data on competitors and the business environment
Test and Adapt – updating it when they learn that the assumptions underlying it are obsolete or faulty, which starts another loop around the system
Source: “Understanding SAP BOBJ Enterprise Performance Management,” 2010.
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 10
Today’s Take-aways
Look at risk through a
new lens
Know what your profit
model is and work to
maximize it
1
2
Based on these new realities, decision makers are challenged to consider more integrated and holistic
approaches to managing portfolios of activities, both inside the company and throughout the value chain.
Rationale for Decision Makers
Understand who is
working for you, and
how they add value
3
• What is the “big picture” risk? Learning to broaden awareness of risk events.
• When a risk event occurs having contingency plans and a playbook fosters business continuity.
• Allocate the key cost contributions and focus on truly profitable customers and products
• Forecast your models based on anticipated as well as realistic business scenarios
• Avoid “maverick spend” in the organization
• Treat each member in the value chain with an “aggregate view”
• Understand your supply chain member positions both economically and mechanically
View your organization
holistically for greater
effectiveness
4
• Effective versus efficient execution across all business operations
• Aggregate KPIs at the corporate level as well as for the business operations
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
Welcome and Introductions
Effective Strategies for the New Normal
Managing Risk for Enterprise Performance
Reducing Cost and Increase Profit for the emerging upswing
Methods to Manage Spend in the Organization
Methods to Optimize the Supply Chain
Summary and Special Offer
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 12
A Post-crisis View of Risk
Source: The Fat Tail, Ian Bremmer (as modified by Newport Consulting Group)
“Our risk analysis is at best a look in the rear view mirror. It would be very advantageous for our business to be able to
rely on innovative solutions that would provide real-time dashboards of our global operations” - Fortune 100 Risk Manager
Conventional risk has been the practice for years, the recent economic crisis has shown that
“extraordinary risk” -- with low probability and high impact -- create “fat tails” difficult to predict.
Extraordinary Risk vs. Ordinary RiskImpacts of Low Probability - High Impact Risk
Extraordinary Risk
Ordinary Risk Profile
Geopolitical
Terrorist Event
Social Uprisings
Liquidity Market Collapse
% Probability of Occurrence
$ Im
pact
on
Bu
sin
ess p
er
Occu
rren
ce
Classic Porter 5-forces Modeling
Monte Carlo Analysis
Production Scheduling
Supplier Shipments
Conventional Financial Analysis
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 13
Risk as Viewed through Different Lenses
Source: SAP BusinessObjects (as modified by Newport Consulting Group)
While Risk Managers may be responsible for risk identification and mitigation, executives and
operations managers have responsibility for performance of the organization. This can create conflict.
Send out MS Excels
Workshop afterworkshop
Ask for additional
input
Brainstormone-off response
possibilities
Siloed risk thinking
Focus only onnegative risks
Risk
Managers
What is the status
of our top risks?
What risks don’t we
know about?
Am I on track to
reach my goals?
Another assessment to
fill out?
Lines of
Business
Directors &
Executives
Will we meet analyst /
market expectations?
What are our
top 10 risks?
Risk is in the “Eye of the Beholder”When roles and perceptions of risk vary
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 14
Sources of Risk (you may be surprised)
Source: IBM Global Business Services, The Global CFO Study, 2005.
A recent study of risk indicates that while financial and operational segments have received the
greatest attention in the recent Crisis, in a steady state they account for only 13% of all risk events.
Material risk events
encountered in the past three
years (for enterprises over
US$5 billion in revenue).
Financial• Currency exchange rates
• Interest issue and increasing reserves
• Accuracy of realistic balance sheet reporting
• Ability to manage cash
• Non-transparent markets
• Economic recession
• Energy and commodity costs
Political/Geopolitical• Change of government – and minority governments
• Grants and budget changes
• Constant change of ministers
• Federal Accountability Act
• Terrorism
Strategic• Industry consolidation and globalization
• Error-filled release of software upgrade
• Change in core product demand
• Cancellation of major customer contracts
• Performance standards and service quality
Environmental / Health• West Nile Virus
• Safety crisis
• Compliance with environmental standards
• Food sanitary management problem
• Climate change
• Environment pollution
Operational• Hurricane Katrina
• Data center outage
• Delivery risk
• Blast furnace cold run
• ERP application crash
• Plant disaster causing production stoppage
Legal & Compliance• Fraud
• Product liability claims
• Missed time line for legal changes
• Embezzlement of parts
• Safety of goods or products
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 15
Managing Risk for Performance
Source: SAP BusinessObjects (as modified by Newport Consulting Group)
“Best of breed” organizations view risk as a critical part of the performance management process.
Risk managers are drivers of business change, creating an environment for effective operations.
Everyone “Plays Position”When roles and perceptions of risk are embedded and common
Lines of
Business
Risk
Managers
Embedded in existing
processes
Reapply best practice
mitigations
Enable performance
(and risk) innovation
Risk in context of corporate strategy
and performance
Understand true exposure resulting
from risk correlation
Achieve proactive transparency
Automatic risk
monitoring
End-to-end risk
processes across the
value chain
Become a driver of
business change
Program
Management
Key Process
Area
1. Refine and develop the project plan
2. Maintain the project plan
3. Monitor progress against baselines (scope, schedule, cost) and targets using EVM metrics
4. Craft and manage communications plan
5. Conduct Project Status Meetings with Key Stakeholders
6. Brief leadership on Project Progress
7. …
Key Activities
Program
Management
Key Process
Area
1. Refine and develop the project plan
2. Maintain the project plan
3. Monitor progress against baselines (scope, schedule, cost) and targets using EVM metrics
4. Craft and manage communications plan
5. Conduct Project Status Meetings with Key Stakeholders
6. Brief leadership on Project Progress
7. …
Key Activities
A history of requirements review suggests the need for strong product configuration management. Program
management presence is the single most critical factor in the successful delivery of compliance program at ABC.Summary
Program Compliance ManagerRundown Role
Program AdministratorSecondary Resource
Primary Resource
A history of requirements review suggests the need for strong product configuration management. Program
management presence is the single most critical factor in the successful delivery of compliance program at ABC.Summary
Program Compliance ManagerRundown Role
Program AdministratorSecondary Resource
Primary Resource
Playbook - Role Responsibilities
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
Welcome and Introductions
Effective Strategies for the New Normal
Managing Risk for Enterprise Performance
Reducing Cost and Increase Profit for the emerging upswing
Methods to Manage Spend in the Organization
Methods to Optimize the Supply Chain
Summary and Special Offer
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 17
Internal Spend Rising
A recent survey of executives by McKinsey & Company indicates growth in funded initiatives, with
significant increases in areas such as hiring and new product introduction in just two months.
Source: McKinsey Quarterly - Economic Snapshot, April 2010.
Growth in Funded InitiativesSurvey of executives, February versus April results
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 18
Emerging need for Focused Growth
As companies grow and increase internal spend, a resurgence in activity-based costing approaches
suggest the true cost of doing business, while understanding which customers are profitable.
Customer Profit & Loss
Based on Apportioned Overheads
Customer
A
Customer
B
Revenue $10,000 $11,000
Cost of Sales $7,000 $7,000
Contribution $3,000 $4,000
Overhead
(30% Cost of Sales)$2,100 $2,100
Profit/Loss $900 $1,900
Customer Profit & Loss
Based on Activity-Based Costing
Customer
A
Customer
B
Revenue $10,000 $11,000
Cost of Sales $7,000 $7,000
Contribution $3,000 $4,000
Sales Calls @ $50 $300 (6) $600 (12)
Order Processing @ $10 $120 (12) $520 (52)
Pick and Pack @ $15 $180 (12) $780 (52)
Shipping @ $40 $480 (12) $2,080 (52)
Credit Control Calls @ $25 $0 (0) $300 (12)
Cost to Serve $1,080 $4,280
Profit/Loss $1,920 ($280)
What is the best use
of scarce resources
to maximize profit?
Source: SAP BusinessObjects (as modified by Newport Consulting Group)
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 19
Position for effective Profit Reporting
Depending upon the nature of the business, activity-based costing approaches can illustrate an error
in profit reporting up to 500% compared to allocated cost approaches, leading to internal risk.
Source: “Understanding SAP BOBJ Enterprise Performance Management,” 2010.
Under
Costed
500
%
250
%
0
ABC costs as
a % of
traditional
apportioned
costs
Product folio offered
to customers
High Volume
Low Complexity
Low Maintenance
Low Volume
High Complexity
High Maintenance
Over Costed
“Cost Gap”
Potential
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
Welcome and Introductions
Effective Strategies for the New Normal
Managing Risk for Enterprise Performance
Reducing Cost and Increase Profit for the emerging upswing
Methods to Manage Spend in the Organization
Methods to Optimize the Supply Chain
Summary and Special Offer
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 21
The Spend Management Challenge
A recent survey of Chief Procurement Officers considered the causes that organization look at spend
management and analysis. The key recurring theme is to (1) increase visibility and (2) reduce costs.
Source: Aberdeen Group, Spend Analytics - Pulling Back the Cover on Savings (2008).
Track Off-contract
Spend28%
Place More Spend under
Management38%
Improve Negotiation
Leverage40%
Indentify Top Spend
Categories41%
Identify Savings within Spend
Categories54%
Top Pressures to Cause Organizations to Look at Spend AnalysisSurvey of Chief Procurement Officers
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 22
Spend Rationalization - Then and Now
The 1980s saw broad cutting of supply base -- in some cases 20-30% of suppliers eliminated for
reasons other than performance and strategic fit. Today “pruning” is more effective than “clear cuts.”
Supplier Cutting - 1980s style “clear cut”
Supplier Rationalization -
>2000s style “selective pruning”
“Reduce supplier spend 20%
across the board.”
“Reduce supplier spend where
needed, increase spend where
it helps us to grow.”
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 23
Rationalizing Spend by Adding Suppliers
For areas of strategic importance, or for areas of the portfolio expected to be high growth potential,
suppliers may be added to provide a balanced portfolio of the value chain.
Planned Supply Chain ActionsPlans before and after Supply Base Rationalization Efforts
Planned since supply base
rationalization began
Baseline Plan 12-24 Months
18%
6%3%
No Change Decrease 21-40%
17%
Decrease 41-60%
4%
11%
54%
Decrease up to 20% Decrease
61% or More
1%
19%21%
Increase
43%
3%
Source: Spend Analysis and Supply Chain Rationalization, Institute of Supply Management (2005).
Increase in total
supply base after
rationalization.
Larger effective
decrease in total
supply base after
rationalization.
May lead to this …. … or may lead to this.
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
Welcome and Introductions
Effective Strategies for the New Normal
Managing Risk for Enterprise Performance
Reducing Cost and Increase Profit for the emerging upswing
Methods to Manage Spend in the Organization
Methods to Optimize the Supply Chain
Summary and Special Offer
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 25
Today’s Supply Chain
Global organizations face many challenges both internal and external, creating communication and
execution divergences in day-to-day operations. This creates the possibility of risk events, capital
shortages, and materiel disturbances in the supply chain.
Suppliers andCustomers
Manufacturing
CRO
Receiving Fulfillment
COO
SourcingCFO
DISTRIBUTIONCENTER
CUSTOMER
SUPPLIER
Implications
• Uncontrolled supply chain cost
• Working capital tied up
Costs moved around, departments
“passing the buck”Implications
• Overburdened IT
• Ineffective decision making
Lack of visibility
into processes
Daily surprises,
and fire fighting
Implications
• Loss in
revenue
• Customer
dissatisfaction
Risk Management focused
on financial risk only
Implications
• Non-compliance
• Loss of trust
Material events noticed too
late, risks under-estimated
Suppliers andCustomers
ManufacturingManufacturing
CROCRO
ReceivingReceiving FulfillmentFulfillment
COOCOO
SourcingSourcingCFOCFO
DISTRIBUTIONCENTER
DISTRIBUTIONCENTER
CUSTOMERCUSTOMER
SUPPLIERSUPPLIER
Implications
• Uncontrolled supply chain cost
• Working capital tied up
Costs moved around, departments
“passing the buck”Implications
• Overburdened IT
• Ineffective decision making
Lack of visibility
into processes
Lack of visibility
into processes
Daily surprises,
and fire fighting
Implications
• Loss in
revenue
• Customer
dissatisfaction
Risk Management focused
on financial risk only
Risk Management focused
on financial risk only
Implications
• Non-compliance
• Loss of trust
Material events noticed too
late, risks under-estimated
Misaligned goalsMisaligned goals
Implications
• Lack of collaboration
• Frequent break-downs
3PL’s3PL’s3PL’s
3PL’s3PL’s3PL’s
Implications
• Incomplete view of risk
• No understanding of
operational drivers
Source: SAP, as modified by Newport Consulting Group
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 26
Proactive Event Management
Proactive vs. Reactive Supply Chain EffectivenessApproaches to Strategy Monitoring activities
Executive Boardroom
Proactive Path
Reactive Path
Supplier Operations Supplier Labor DisruptionCompany Operations Supplier Shipments
✓Real-time operational data flow
Pre-configured event mitigations KPI Tracking
✗
KPI Tracking Time-lagged operational data flow
Unanticipated event mitigations
Operation
Reports
Increased performance management demands a proactive event management. No longer can
organizations operate as if they were “driving forward looking out the rear view window.”
Source: Understanding SAP BusinessObjects Enterprise Performance Management, 2010.
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 27
Holistic Approach to Operation Performance
The result of strategic plans aligned to corresponding tactical plans address common efficiency
problems in the organization. More importantly, the organization behaves more effectively – doing the
right things rather than executing in a non-aligned manner more rapidly. This may yield many benefits.
Suppliers andCustomers CUSTOMERCUSTOMER
Manufacturing
CRO
Receiving Fulfillment
COO
SourcingCFO
Streamlined supply chain
operations
Improved financial
compliance & control
Reduced supply chain cost,
Optimized cash flow
Reduced supply chain risk,
and no surprises
Bottlenecks identified and
tackled proactively
DISTRIBUTIONCENTER
DISTRIBUTIONCENTER
SUPPLIERSUPPLIER
3PL’s3PL’s3PL’s
3PL’s3PL’s3PL’s
Full visibility into
business processes
Source: SAP, as modified by Newport Consulting Group
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium
Welcome and Introductions
Effective Strategies for the New Normal
Managing Risk for Enterprise Performance
Reducing Cost and Increase Profit for the emerging upswing
Methods to Manage Spend in the Organization
Methods to Optimize the Supply Chain
Summary and Special Offer
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 29
Today’s Take-aways
Look at risk through a
new lens
Know what your profit
model is and work to
maximize it
1
2
Based on these new realities, decision makers are challenged to consider more integrated and holistic
approaches to managing portfolios of activities, both inside the company and throughout the value chain.
Rationale for Decision Makers
Understand who is
working for you, and
how they add value
3
• What is the “big picture” risk? Learning to broaden awareness of risk events.
• When a risk event occurs having contingency plans and a playbook fosters business continuity.
• Allocate the key cost contributions and focus on truly profitable customers and products
• Forecast your models based on anticipated as well as realistic business scenarios
• Avoid “maverick spend” in the organization
• Treat each member in the value chain with an “aggregate view”
• Understand your supply chain member positions both economically and mechanically
View your organization
holistically for greater
effectiveness
4
• Effective versus efficient execution across all business operations
• Aggregate KPIs at the corporate level as well as for the business operations
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 30
Special Offer
Order your advanced
copy of SAP Press
“Understanding SAP
BusinessObjects
Enterprise
Performance
Management” during
the symposium and
receive 10% off the
cover price!
Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 31
Contact
Newport Consulting Group, LLC
William Newman, CMC
Managing Principal
7286 North Village Drive O 248-978-2000
Clarkston, MI 48346 USA M 248-635-9902