Friday, 14 September 2018

Is Your ERP an Asset?

I was having a discussion with a client recently. We were discussing the importance and value of getting a broad range of people, views and experiences involved in the software design sessions we were running at the time. He expressed some reservations about having so many people involved, and subsequently out of the business, at one time. I explained the reasoning and the benefits to him this way...

I understand that when you see the number of people sitting in the boardroom discussing
how the business currently operates and where improvements could be found, you do the quick calculation of their salaries multiplied by the number of people and by the number of hours we have them engaged in the discussion. I understand this can be a large number. I also understand that not everyone contributes to the discussion as deeply as some others. After doing the quick maths, you are wondering where is the value in incurring all this expense?

So I suggested the following story. When he purchases a new piece of equipment and deploys it in his business, he can quickly see, touch and feel this shiny new asset he has bought. He can quickly see how this asset is contributing to his revenue because there is a tangible link between something he can feel and see and the revenue he sees on his P&L.

However, unlike buying a new piece of equipment, when implementing a new software system appreciating the value is not quite so easy, particularly in the early stages of a software project. You certainly cannot touch and feel it as you can a piece of equipment. The ability of the people using the software system is not seen as such a benefit as seeing a driver sitting in the cabin of the machine when they are operating it. However, just because you cannot touch it, does not make the value of the asset you are building any less valuable to the business. In fact, done correctly, I would argue the asset can be more valuable than that piece of equipment.

The process of building this asset (your new ERP system) can make it more valuable because:
  • the large range of people from different areas of the business all get to see and fully understand the other parts of the business. Something that is often missing from a business operation. When sitting in workshops there is often a realisation of: 
    • what work others actually do.
    • how things actually connect. (You would think the staff of the business actually does know this – however, I am constantly surprised how little some areas of a business understand what other areas do.)
    • the impact of a job half done in one area has one another down the chain.
  • People genuinely see the end-to-end of the business and better understand what role they play in the customer experience.
  • The software often determines the business process you follow and therefore its use has a direct impact on the customer experience.
  • Your individual use of the system and the way in which you have it configured can provide you with a key element of your competitive advantage. Something that often stands the test of time, continues to bring benefits to the business in the long-term and does not depreciate like a piece of machinery does.
The real value of this asset is in a competitive advantage it creates for you through the deep understanding and skill of utilising the asset. Just like a more skilful driver can extract more from the performance of a piece of machinery than another. Essentially it is the same asset but a different skillset using it. So by applying this higher skill level to your software creates the true improvement in the value of your business. As a result of your competitive advantage, you can then often justify higher margins than your competitors.

So the more time you take to allow your staff to learn the working of this new tool, the deeper will be their understanding of the tool and the greater the reward when it is finally deployed and is running your business. Yes it is an investment and yes it can be expensive but when invested wisely, just like any other investment it can generate substantial rewards for your company.

In order to be able to ensure your investment is well placed, the addition of an experienced independent advisor is likewise a well-placed investment. As I noted in a LinkedIn post recently, my best clients are often those who have tried and failed to implement an ERP before or who have been involved in such a project. I have discovered that they fully appreciate the value I bring. Wouldn't it be nice if those doing it for the first time wouldn't make the same mistake first?

If you or anyone you know is looking -
  • to improve the way their business operates 
  • to improve the way they leverage their current ERP system
  • to replace their current ERP system
then give me a call for a confidential discussion on the best way to achieve this.

Wednesday, 8 August 2018

What Waste Exists in Your Supply Chain

The UK luxury brand Burberry was reported to have burned up to $50 million of unsold products in FY 2017/18 and up to $150 million over the past five years. It is doing this to protect their premium brand status rather than selling the products at discounted prices.

They believe by doing so maintains their reputation as a high-end brand because it reduces the number of their products being sold at discounted prices. Business Insider had an article the other day indicating that Under Armour beat second quarter expectations but, "is still sitting on a mountain of unsold inventory, which grew 11% to US$ 1.3 Billion in the most recent quarter". Yes, you read that right, with a B. Business Insider goes on to report that fashion houses, in general, have a troubling issue with unsold inventory naming companies such as; Gap, Ralph Lauren and of course they named Burberry. H&M reported it has UD$ 4.3 Billion worth of unsold inventory.

In responding to the criticism in the press recently, Burberry has responded by saying they have some great environmental initiatives within their supply chain. What I find of greater concern is if they have managed to instil environmental initiatives within the supply chain, why haven’t they inculcated better “Lean” initiatives?

It is clear that Burberry and these other fashion houses are manufacturing more goods than there is actual demand. Otherwise, they wouldn’t be in this position of having to destroy or sit on so many unsold products. In a press statement, a spokesperson for Burberry said the disposal was due to a one-off agreement with Coty for beauty products. However, the five-year write off numbers puts this statement in serious question.

Unfortunately, this practice of destroying products is common in the fashion industry. Cartier, for example, is quoted as having recently destroyed products worth €481 million.

So it surprises me that these companies do not have better systems in place. In this day and age when manufacturing systems and technologies are available to help overcome, or more importantly prevent, this exact problem of overproduction. Systems that will trigger manufacturing activities when a real demand signal is identified rather than generating overproduction as is clearly the case at the moment.

I am also surprised that the boards and company executives have allowed this situation to exist. Perhaps because their margins are at the premium end there has been less pressure to adopt lean practices than in other businesses. More likely, however, is the fact that many companies consider inventory to be cheap. Rarely do you see an organisation report a cost for holding inventory in the P&L. It is not until they have to make a financial write-off, then the real cost of holding this inventory actually surfaces. In my day to day work as a trusted advisor, I am consistently surprised how often I am having the debate with executives over the benefits of instilling good inventory practices into their business.

So many companies either rarely conduct stocktakes or when they do, it is because the auditor or end of year financials require one. The benefits of high inventory turns and accuracy in your inventory numbers is enormous. By simply using real-time data capture systems connected to your system of record, your ERP system, and performing well-structured cycle counting regimes you are 80% of the way to solving this issue.

If I was a shareholder in these companies I would be extremely annoyed to see such waste of resources and capital. These organisations clearly do not have a continual improvement culture. (I have used continual rather than continuous deliberately. If you are not sure why I have done this, call me and I will explain).

It is a common misconception, in my opinion, that lean principles and ERP do not work well together. I believe this to be false, they can work well together. In addition to benefiting from adopting lean manufacturing practices, organisations like these will reap significant benefits from leveraging the power of machine learning capabilities that are becoming available today to help improve their forecasting capabilities.

So with all this in mind, what are the potential lessons in this for you? My thoughts are not groundbreaking, but it is clear they are not widely adopted. The actions I feel you should take are: 

  • Don’t wait for market pressures to force you to review processes. By adopting a continual improvement culture in your company you are constantly looking for and adopting better ways. If this is not pervasive within your company, take steps to make it so. 
  • Fully understand the difference between value adding and non-value adding activities and then apply this understanding to your business processes. 
  • Take an honest review of your business and the process you have adopted and identify the non-value adding activities. Then take proactive action to remove them. 
  • Take steps now, because as the US interest rates position shows, money seems to be getting more expensive every day and will most likely continue to do so. Therefore your inventory won't be as cheap as it has been. 

© David Ogilvie