Managing Business Decisions Throughout the Supply Chain

You bought new enterprise apps to get more data about your supply chain and its processes, but now the data is piling up and you're at a loss as to what to do with it all. Here's a look at the enterprise performance management approach and how it could help you turn your data into actionable information

What's the difference between data and information?

Manufacturing, retail and distribution businesses today produce mountains of data through a dizzying array of enterprise processes and applications with much it coming out of disparate, unconnected systems. But how much of that data is actually leveraged into information that provides a competitive edge in the marketplace? Honestly, very little. That's because data alone cannot provide corporate executives and managers with the actionable information on the performance of their companies that they need to stay ahead of the competition.

An enterprise performance management (EPM) approach, using operational analytics, can change that. EPM provide a means for businesses to bridge the gap between raw data and actionable information. As a result, many manufacturers, distributors and retailers are adopting EPM to help them tie execution to strategy while controlling and managing the full lifecycle of business decision making.

The following is an overview of EPM, exploring the performance management issues specific to supply chain businesses, and describing how they can be overcome with EPM solutions.

Clouded Vision

During the technology boom, supply chain-reliant businesses held a vision of an all-encompassing information system that managed day-to-day business processes while providing the analytic insight necessary to make timely, informed, proactive decisions. Many implemented enterprise resource planning (ERP) applications to achieve that goal. However, these applications had little, if any, decision support.

The adoption of customer relationship management (CRM), supply chain management (SCM) and other applications added even more data to the mix, but again they had little impact on performance management. Individual departments continued to plan and analyze their own areas of the business, in silos, with no connection to each other. Often these plans conflicted, as when sales bases its plans on having a ready stock of products to meet peak customer demand and manufacturing bases its plans on a just-in-time (JIT) strategy. These applications also yielded little, if any, visibility to sell-through, stockouts, forecast variability, promotional waste and other business variables.

Business intelligence (or online data analysis) was the first attempt to convert data into information, and it remains a critical component of EPM. However, EPM extends BI's analytical value with business planning, forecasting, optimization and alerting capabilities to enable business performance management (e.g., having the ability to accurately forecast demand, sales and inventory levels and subsequently react to variances that may occur along the way).

EPM also crosses departmental boundaries to include supply chain, customer management and production-based performance management. It drives operational changes and performance improvements through business planning, real-time performance analysis against objectives (presenting performance indicators to managers in scorecards or dashboards), guidance on what should be done when performance variances occur, and continuous response to changing business conditions. These functions are driven from a corporate-wide repository of key business data that can be accessed and used by the entire organization.

The ultimate goal of EPM is better performance, such as higher returns on invested capital, lower product and overhead costs, better asset utilization, faster delivery, greater customer retention, higher perfect order rates, reduced working capital needs, faster product innovation, and greater sales and marketing productivity.

Trends Driving the Shift

There are several other trends that are propelling supply chain businesses to adopt EPM in order to drive better enterprise performance:

* Less predictable demand and supply — The often complex demand streams, different product life cycles, varied departmental business processes, multiple forecasts used throughout the business, and general inability by most businesses today to understand plan feasibility easily and early are major challenges that can severely impact the balance between supply and demand. Some companies have opted to use EPM's predictive forecasting, inventory management and operational analytics to bridge this gap, which helps reduce inventory investments while meeting high customer service (fill rate) levels.

* Business-driven reporting — Today's market forces have created the dynamic need to quickly get data out to business users and supply chain partners. As a result, performance analysis and reporting needs to be end-user driven in order to analyze and respond to market conditions in real-time fashion. Today's EPM solutions offer pre-built analytical views and reporting templates to decrease the resources and time typically required by an IT organization to support a company's analytical initiatives. This allows businesses to refocus IT on critical transaction processing areas related to both enterprise and supply chain performance management.

* Demonstrating product category and promotional performance knowledge — EPM plays a key role for businesses that must become "experts" at pinpointing consumer purchasing trends and needs so they can effectively price and promote their products with retailers and react quickly to changes in the competitive landscape. These capabilities have become even more important for manufacturers that need to prove their performance analysis and reporting capabilities when trying to get their products sold through the mass merchandise retail market, as well as for those businesses looking to retain and grow shelf positions with their current retail partners.

* New product classification and tracking standards — With new data standards such as radio frequency identification (RFID) and UCCnet, companies can use EPM to sift through the data produced as a result of these standards and take advantage of information to increase their return on investment. Some organizations even share related product performance information with their supply chain partners to help them improve their processes as well — an investment that pays dividends for the sharer as well as the sharee.

* Sarbanes-Oxley compliance — Getting management and workers the right information to identify and assess both operational and financial risk in the business and then act on mitigating that risk is a key part of Sarbanes-Oxley. EPM supports corporate governance initiatives by presenting — through scorecards, portals and management dashboards — metrics that monitor the health of the business in real time. EPM also supports Sarbanes-Oxley compliance requirements for monitoring and reporting on trade promotion practices.

EPM and the CFO

The Boston-based analyst firm AMR Research views enterprise performance management as a superset of applications and processes that cross the traditional departmental boundaries to manage the full lifecycle of business decision making across the organization. AMR said EPM software helps chief financial officers (CFOs) who realize that demand and supply are not precise, nor are they fixed, but are in fact based on probabilities that are subject to continuing change. EPM analytics quantify these probabilities and engage all the teams in the planning process.

An EPM approach recognizes that demand forecasting must be done in a collaborative way that supports multi-discipline forecasting (i.e. customers by sales, products by marketing and shipments by production). It provides an information infrastructure with standardized reference points so that all parties are looking at one picture when evaluating demand and supply. It also alerts business users to performance anomalies on a continuous basis so that corrective action to be taken before inventory or any other corporate asset — puts a strain on the financial performance of the business.

CFOs of supply chain businesses often observe that the amount of cash tied up in inventory creeps upward over time because of the way decision makers react to a variety of internal and external forces. Sales executives may forecast on the high side to avoid stock-outs that can lead to lost sales and adversely affect customer relationships. Marketing may have high hopes for new product launches and want to strike with an abundance of inventory while the iron is hot. Purchasing may know about the impending shortage of a key product component from a key supplier in the months ahead and determine that prudence dictates increasing stock levels.

All of these factors lead to the same conclusion: that it is not only permissible but advisable to carry more inventory than the forecast justifies. Often the different teams will raise their forecasts, or have inventory planners increase safety stock, to cover their expectations.

When various groups within a business start making these assumptions in parallel and modify the forecast accordingly (often using inconsistent data from their own systems as the basis for their assumptions), a series of cascading errors leads to a "perfect storm" variation of plan-versus-performance (variability). The net result is that inventory balloons exponentially. This not only affects the immediate financial situation, it effectively hinders CFOs from getting the truest picture of the supply chain in formulating budgets and projections for the current year, and may even affect the following year if the variations aren't noted. With carrying costs of such inventory often underestimated, this aggregate error can impose enormous costs on the organization, seriously damaging corporate profitability.

Why is all this so important to CFOs? All too often, CFOs rely only on the historical reporting capabilities of financial analytics, while not giving full weight to the capabilities offered by operational analytics to support demand forecasting, sales and operations planning, and the continuous tracking of performance throughout the supply chain enterprise. CFOs can therefore balance their financial analytics view with an operational analytics perspective that is available through EPM.

The Demand-Driven Supply Network and EPM

Demand-Driven Supply Networks (DDSNs) are recent phenomenons that have changed the rules for supply chain-dependent organizations. AMR Research identifies DDSN as a next-generation supply chain that build all supply chain processes, infrastructure and information flows to serve the downstream source of demand, rather than the upstream supply constraints of factories and distribution systems.

Why is this important? Early adopters are already saving 5 percent of top-line revenue compared to non-adopters, according to a 2004 AMR Research benchmark study.

So how does EPM fit into the DDSN picture? Let's take a look at three key EPM factors that have an impact on demand-driven supplier networks:

* Unit-level demand visibility — RFID, point of sale (POS), business-to-consumer (B2C) e-commerce: buzzwords, yes, but all represent demand at its most granular and therefore most precise. For some, this may be no different than bar codes marking the passage of inventory through the system. For others, the ability to leverage this data could be the critical ingredient to maximizing fleeting spikes in demand. The ability to use such data provides a view of the present rather than the past, giving key personnel the ability to act on information rather than merely analyze it after the fact.

* Demand management — Think about forecasting, price and revenue optimization, and promotions management. EPM tools can help users tap into demand variability as a resource, which is useful in weathering the storm of data from unit-level demand. EPM offers the analytics, sales and promotion (S&P), and collaboration tools to pinpoint demand variability.

* Executive dashboards — Benchmarking and balanced performance measurement is the ultimate expression of business judgment driving supply chain decisions. What data populates the dashboard and how it differs by role is a deceptively thorny, and potentially political, issue. With EPM, users receive key performance indicators (KPIs) in dashboard format for executives and decision makers according to predetermined rules specific to the organization.

EPM provides a way to let loose the power of previous technology investments while simplifying their output, turning data into useful, actionable information. For supply chain-oriented organizations, it also allows them to meet the challenges of the sea of change caused by demand-driven supply networks.

For more information on the challenges of enterprise performance management in the age of real-time data, read "The Reality of Real-time Performance Management," the Net Best Thing column in the October/November 2003 issue of Supply & Demand Chain Executive.

For a look at the challenges of expanding performance management to encompass the extended supply chain, read "Taking Performance Management Outside the Four Walls" in the April/May 2004 issue of Supply & Demand Chain Executive.

About the Author: Mike Hennel is the president of Silvon Software, an enterprise performance management firm headquartered in Chicago.

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