ERP & Inventory Catch 22

About 12 months ago I wrote about the need for tighter inventory and capital control. I'd like to revisit this topic in light of recent economic changes. Specifically: 

• The RBA has dropped rates and is tipped to do so again.
• Bond yields, which reflect future growth and inflation expectations, are hitting all time lows. 
• There has been an actual inversion of the US Treasury yield curve. (An inverted yield curve is normally a reliable predictor of a recession, having predicted the last three in the US).
• The current trade war tensions between China and the US.

All this puts business owners in a quandary. There is substantial negativity around in the press recently and, locally, this is evidenced by the number of For Lease signs in retail shops and offices. Almost all of this bad press is focused on matters that an individual business owner has absolutely no control.

My dear departed Dad taught me many years ago, when I was working in our family business, that we should worry about and take action on the things we can control. If it was out of our control then we should stop worrying about it and do the best we could with what we had and knew. So what is it we know?

• Lower rates on the surface make holding inventory more attractive because it notionally appears to be cheaper and subsequently no issue if you are holding too much inventory.
• Lower rates are deployed as a policy measure to stimulate the economy, as such we are operating in an economy that could be doing better.
• Higher inventory levels in a slowing economy is not a good thing. Like blood in the human body, inventory best serves the business when it moves. A slower economy means it is moving at a slower pace with a greater percentage of the overall holding potentially not moving at all. 

So what do companies have control over? Executives can control:

• How much capital they have deployed in their business.
• How efficiently their business is operating.
• Efforts that identify and eliminate waste in their business processes.
• How effectively they use their investments in technology, particularly how they use their ERP system.

I was speaking to a US colleague of mine last night and she was telling me her clients are

all focusing on cash flow initiatives. Everyone is looking for where they can find cash. This reinforces my view of what tactics executives should be employing to best position themselves for the near and medium term challenges ahead.

So, what to do about all of this? As I mentioned twelve months ago I was advising companies to undertake inventory reduction projects in preparation for the inevitable downturn. I suspect many have not. This remains my view. By focusing on how capital is deployed in your business you will be ensuring the blood pumping through your company will be fresh and moving fast and often, a key tactic for dealing with both downturns and periods of growth. How you use your ERP system is a central tool to successfully employing this tactic.

For those companies thinking of following this advice and improve the use of their systems I believe you should undertake the following tasks first:

• Undertake a strategic review of your digital positioning including the role ERP plays in managing capital and cash.
• Have a robust discussion around how ERP supports the broader company strategy.
• How used functionality in your system may provide that next level of competitive advantage.

True independent advice can assist here by providing:

• An honest and independent point of view, free of corporate political pressure.
• Proven capability of facilitating the conversations needed to achieve the right result.
• A proven methodology for success with ERP.
• Support to executives so their risk is minimised.

The biggest challenge I have working as that independent advisor is getting involved in the conversation early enough. My experience is many of the biggest and most impactful mistakes are actually made in this early phase. As such, remediating these situations and resetting expectations amongst the key executive team is more painful than it needs to be. The earlier the right conversations are held, the better.

This is something I can help with, so if you or anyone you know is looking:

• To improve the way their business operates and make better use of their capital;
• To improve the way they leverage their current system;
• To replace their current system;

give me a call for a confidential discussion on the best way to achieve this.

Until next month ...

Sincerely,

David.

© David Ogilvie

Who has heard of ERP Strategy?

In my work as a consultant I am often asked to help devise strategy for businesses. Particularly the development of an ERP strategy to support the overall, business strategy. As regular readers of my newsletter will know, I believe one of the key reasons for ERP failure is the lack of alignment of the implementation project to the corporate strategy. 

Companies often undertake these projects with the wrong WHY. A common mistake I find is that many executives don't see these projects through a strategic lens, they see them as simply an IT project. This mindset results in insufficient effort being undertaken up front to clarify the business case for the project often resulting in the fact the underlying principles required to ensure a successful project are not considered or put in place.  In many cases, projects are undertaken because the current version of the software is no longer supported. This is particularly relevant now with the advent of cloud platforms and software vendors pushing customers onto their new subscription based platforms and business models.

A key challenge when running strategy development sessions is keeping executives focused on the distinction between strategy and tactics. All too often discussions in strategy development sessions runs off on tangents and generally these tangents are a deep dive into tactics. 

For example: the strategy might be to broaden the market in which the company will compete only for the discussion to turn into one of whether the company can deliver to those markets, whether a new manufacturing plant will be needed etc. I often find myself reminding the group of the distinction between strategy and tactics. In simple terms strategy looks at “Where” the company will be in 5 - 10 years (or whatever strategic horizon you work with). Tactics look at “How” we get there. The transportation network or manufacturing plant required discussions are tactics not strategy.

As a result, ERP is often dropped into the tactics bucket because a new system will help the company

develop the efficiencies required to service the new target markets, help produce the new products to be released or support the new competitive advantage the company is taking to market.

But within that, there is a strategic view or lens one can apply to ERP as well. This strategic view is often tagged with the new buzzword, digital transformation, and can encompass the use of AI, and other new technologies. This new technology certainly opens up new conversations around where the company wants to be in relation to customer service and operations. It opens up new opportunities for strategic thinking.

For those companies thinking of updating, upgrading or replacing their systems I believe a slight pause is called for, before you reach out to any software providers including your current provider, in order for you to undertake the following tasks first:

• Undertake a strategic review of your digital positioning including the role ERP plays.
• Have a robust discussion around how ERP supports the broader company strategy.
• Undertake a detailed and disciplined business case review and clearly articulate why the company needs to change systems.

True independent advice can assist here by providing:

• An honest and independent point of view, free of corporate political pressure.
• Proven capability of facilitating the conversations needed to achieve the right result.
• A proven methodology for success with ERP.
• Support to executives so their risk is minimised.

The biggest challenge I have working as that independent advisor is getting involved in the conversation early enough. My experience is many of the biggest and most impactful mistakes are actually made in this early phase. As such, remediating these situations and resetting expectations amongst the key executive team is more painful than it needs to be. The earlier the right conversations are held, the better. I strongly urge you if you are being told by your software vendor you need to migrate to the cloud version, then you need to start these conversations now - before you engage with software vendors.

This is something I can help with, so if you or anyone you know is looking;

• To improve the way their business operates;
• To improve the way they leverage their current system;
• To replace their current system;

give me a call for a confidential discussion on the best way to achieve this.

Until next month ...

Sincerely,

David

P.S. A big thank you for those readers who reached out to me this month to check in with me on the passing of my wonderful mum. Your efforts and thoughts were much appreciated.

© David Ogilvie

Selecting The Right Software Vendor/Partner

MAFS = Marriage at first sight or a marriage from hell!

Australian readers will be familiar with the recent, so called, reality TV series on Channel 9 called MAFS. While I didn’t watch the show, the advertisements for it made it very clear the show was full of drama, lies and unfaithfulness. Traits that one would wish to avoid in all relationships, especially in the relationship with your ERP vendor. Likewise in business your selection of ERP vendor/partner can be similarly risky.

After all the ERP space has a high failure rate. However, when it is done well, can provide the infrastructure to catapult your business up into the next level. Before you get married to your partner you want to know more about them than the participants of MAFS did with their partners.

As my regular readers will know, it is my view that having a software vendor that is culturally aligned with your own, is an important ingredient for a successful ERP project. The seeds of this success are planted during your selection process. Gaining an understanding of the different motivations that drive the different software vendors, is key to understanding their likely behaviour both during and after the sale process.

No two software vendors are alike. Understanding which delivery model they use can be insightful and help you predict the way in which they will work and interact with you. Each model has their own set of drivers, particularly financial drivers. Uncovering and understanding these drivers is, at times, not easy. However, with carefully crafted questions you can often uncover key information that will be useful to your decision making. Making no effort at all to understand these drivers usually equates to a poor relationship and poor implementation results.

Areas I feel you should question in detail are:

• Ask deeply probing questions of the sales person around their remuneration and most importantly what are their incentives based on? (You don’t need to know their exact salary but the percentage break up of salary vs commission is important.) You could also ask if the incentives are based on monthly, quarterly or yearly numbers. Knowing this can be useful in your discussions around timing.
• Ask how they, both themselves personally and the company, are tracking? Be prepared for them to be evasive or provide a standard positive response. I have found over the years those companies whose salespeople are open and up front about these things, are most often the best to deal with. 

If representatives of the company are cagey about this topic – they tend to be cagey about other things in the delivery as well. What you need is an open and honest relationship and this can be a leading indicator of the likelihood of a sound relationship being developed.

• Ask the executives of the different software vendors you are talking to about the incentive plans they are on from the head office. These vary depending on the delivery model used. If they are a reseller or partner model, ask about the percentage breakup of revenue by license and service fees. 

With the advent of cloud and subscription offerings, many resellers are now faced with traditional revenue streams being curtailed resulting in them having to find new revenue streams. Many are turning to an increase in consultancy or project management fees. This change is having a large impact on the behaviour of these organisations. Where once they may have freely provided information about the software and underlying technologies during a project they now may no longer do so and in fact now charge for such information.

• Ask about the strategic direction of their business, particularly around cloud adoption vs on-premises and the adoption of other technologies. How do they plan to leverage developing technologies such as AI, Industry 4.0, native language BI and IoT. Make sure you are both heading in the same direction and they have the capability to progress at the same rate you wish to.
• Ask about their view on who controls the project? If this is not clear you run a serious risk of two project managers clashing for supremacy. Regular readers of mine will know it is my view that the client must “own” the project. It is part of the secret sauce of success. Therefore, the role of the project manager from the vendor side can be reduced to one of being a project administrator. Thereby reducing the cost of this component of the project. This obviously assumes you, as the client, have an experienced and independent project manager working for you to achieve this.

Remember many executives have not done this before, or if you have the industry has changed. Having an experienced independent advisor helps you because:

• We have been through the dry gullies and have learnt the lessons. We can provide you a road map of how to avoid the pitfalls.
• We bring experience from a variety of industries to your specific challenges.
• We have no hidden agendas and are able to provide full and frank advice - You get an honest point of view.
• We bring a proven set of tools to your circumstance.
• Of what questions we ask and our ability to put the vendor under pressure to prove their statements of capability.
• Of our support to executives so their risk is minimised.

If you or anyone you know is looking;

• To improve the way their business operates 
• To improve the way they leverage their current software systems
• To replace their current system

Give me a call for a confidential discussion on the best way to achieve this.

Until next month ... I wish you and your family the very best for a safe and enjoyable Easter break.

Sincerely,

David.

© David Ogilvie

Boeing and ERP in the Clouds

I was reading an article the other day by a friend and associate of mine Linda Popky. She is a US based consultant who specialises in marketing. She made an interesting observation. “While it’s too soon to know the definitive cause of this latest disaster, it’s highly unusual for two brand new airplanes, flown by experienced pilots of airlines known to be safety conscious, to fall out of the sky like this. The odds of two brand new aircraft of the same make and model randomly crashing within five months of each other are something like 1 in 10 billion.”

While Boeing originally maintained the aircraft were safe, they have now grounded them after a plethora of countries, Australia included, grounded them. I, for one, would not have my backside sitting in one of those planes at the moment. However, what is known at this point of time is:

• There was an experienced and well thought of pilot at the controls of the Ethiopian fight – he had in excess of 8,000 hrs flight time.
• The airframe of the 737-Max is the same as the 737-100, but this is where the similarity between the two aircraft ends - they are similar in shape only.
• 737-Max requires sophisticated software and system controls to maintain the same flight characteristics as the other 737 airframes. One reason for this additional requirement is; the position of the engines has been moved further forward on the wing of the Max and this has changed the flight characteristics. Particularly at lower altitudes. Boeing fixed that issue through the use of software.
• Many 737 pilots are saying training materials for the new aircraft are very sparse compared to old manuals, due to the automation brought about by the software.
• Pilots can get a rating on 737’s without making a distinction on the model. It makes sense that the differences and failure modes (the software) of each model are going to digress at some point. Potentially resulting in pilots not knowing the full extent of the aircraft’s likely behaviour under differing circumstances.
• While there is no proof yet this is the cause of the two recent crashes, this supposed failure mode has to do with a sensor telling the system that the plane is about to stall. When in fact it is not. However, the software pitches the airplane down anyway, due to the software that compensates for the engine mass being further forward of other 737s.
• Boeing has been trying to get a major software fix out to the fleet for several months that may or may not fix this issue.

So, you may be asking what is the relevance of this to ERP flying in the cloud? The key points I see from these recent incidents are:

• As technology embeds itself in our daily lives more and more, we run the risk in assuming that every technology release is better than the last. When in fact this is not always the case. Technology for technology's sake is not necessarily a good thing. There have been many early adopters of cloud ERP with the promise of lowering costs, ever improving and seamless updates. I am not yet fully convinced this will always be in the customer’s interests.
• When you make a change, there is always an unexpected consequence. This is becoming more evident in Boeing’s case with the positional shift of the engines. It also seems to indicate Boeing is finding it difficult to test the software for every different possible scenario. So, when the software companies regularly release software updates with new functionality in their new cloud offerings, you need to fully understand what the impacts to your business will be. In my opinion companies will have to develop a completely new set of behaviours to effectively manage the regularity of the functional releases. I am not confident these new behaviours will be widely adopted, because there will be additional costs associated to these behaviours. These additional costs will be hard to justify when the shift to the cloud was sold on the basis it would provide a reduction in costs. The new behaviours I specifically refer to are:
  • Having a detailed understanding of your instance of the software. In the past, a company could engage a system integrator to implement the system into the business. That is essentially, “do it for us and teach us how to use it”. A common result of this approach is the people in the business do not understand the core configuration settings or the rationale of why a system behaves or performs in a particular manner. In my mind, this has been a core reason why ERP system implementation projects have such a high failure rate. If this understanding and capability is not built in your team from the beginning as you implemented the new cloud version of the system, then there will be a massive catch up when the update releases arrive – of such proportions some companies may not be able to actually catch up.
  • Having a new regime of regression testing all new software updates to ensure you fully understand what the potential impact will be on the business. The frequency of modern cloud based software updates may actually introduce a cost to the business that never existed before – that of a dedicated regression testing person/team. Otherwise, the impacts may not be fully known or understood – not dissimilar to those of the airlines and Boeings software releases.
  • Boeing is, reportedly, having difficulties pushing the software updates out to the various airlines, as the airlines are all handling these releases in a different fashion. The level of regression testing at Boeing and the two airlines that have experienced the crashes does not appear to have been complete. If they had, there is a high chance the issue would have been identified and preventive actions put in place before a plane crashed. The large software vendors will have similar issues I suspect. While there are a number of applications where this is working well, there are also some where it is not.
  • The consequences of not understanding your system and the impact updates are going to have – could be large. Software companies are promising that no existing code will be impacted and the future releases are enhancements and not changes to previously core code. Unfortunately I have been around software for a long time now and while this is a worthy goal, I will believe it when I see it. IN the meantime until this has been demonstrated though consistent practice, I will be advising clients to take precautionary steps and test to be certain. Hopefully impacts will not catastrophic as we saw with Boeing but ERP does have a reputation of having large impacts on a business. Both positive when done well and negatively when not.
  • Boeing’s reputation is at sever risk here and the financial impact has been substantial. At the time of writing this $28 Billion of the value of their stock has been lost. This could likewise be a window into the future for some of the software companies offering cloud offerings.

Don’t get me wrong, the new cloud era is not all doom and gloom. Many of the new cloud offerings have the potential to provide massive improvements in business performance when handled correctly. 

It is just the landscape has changed and a company’s approach needs to change as well. The ERP landscape has been full of unlearned lessons. The industry seems to keep making the same mistakes over and over again. I believe this is due to the fact that executives rarely undertake these projects and when they do, they don’t or won’t look back and review lessons learnt. Case in point, I am frequently having the same conversation about budget and the components needed to successfully implement, over and over again with new prospects. There is constant pressure to do it more cheaply rather than constant pressure to do it right. Counterintuitively doing it the right way is the cheapest!

Experienced and independent advice can help you set your ERP strategy up for success and assist you to keep it on track. If you are thinking of a shift to the cloud, if your current software vendor has indicated you are no longer supported and need to move – then give me a call for a confidential chat

Until next month ...

Sincerely,

David.

P.S. After writing this, the news has come through that the initial examinations of the black boxes are showing similarities in the behaviours of the Lion Air & Ethiopian aircraft.

© David Ogilvie

Hayne Royal Commission

I was reading Dean Robinson's newsletter recently. Dean has been a friend and associate of mine for quite a number of years now. In his regular newsletter he was commenting on how the royal commission will be impacting his market, that of small and medium family business, seeing he is The Family Business Transformer. (You can sign up for Dean's Newsletter here)

So each of his points got me thinking ...

He mentioned that borrowing will be more difficult to the point of a possible credit crunch. Banks will be making companies jump through previously unheard of hoops to get access to money. Well, for some businesses, that may not actually matter.

Because interest rates have been so low for so long, combined with the fact we have a number of generations of managers who have never been through a recession, many businesses are carrying way more inventory than they should or could. I heard a story the other day of a $12 mil revenue business carrying $4 mil of inventory. Right there, is a truck load of cash that would not have to be borrowed, if it could be released back into the business.

Strangely enough a well implemented ERP system, operating in a disciplined business can help you release that cash back into your business. It is an old school concept, and one that I feel will make a strong comeback soon, that inventory has a cost. Many executives, particularly those who have not managed in hard times, do not believe that inventory has a cost. This belief is often based purely on the fact there is no line item on their P&L called inventory carrying cost. During my 20 plus years of consulting, I have heard many business owners say, "inventory is cheap".

Well that is simply not right. The cost in reality can be between 12 and 20 percent of the value of the inventory being held. While there is no P&L line item, the cost is no less real, as it hides in each and every other line item on that P&L. At the very least the opportunity cost of the money and how else it could be deployed is an expense that is not being considered. So if you are finding it more difficult to get access to borrowings from your lender of choice - perhaps an investment in a inventory reduction and maintenance project and a redeployment of those bank fees you will be charged could be extremely beneficial.

Another two key points he made were; 1) underperforming loans will be pulled and poor financial performance will be penalised and 2) Owners need to know their operational numbers - daily.

Again a well implemented ERP can help here. A well crafted dashboard will be able to provide you will real time access to your key operational numbers, thereby allowing you to make better and more timely decisions. By making these correct decisions on a daily basis helps build your resiliency and thereby avoid being classified as poor performing.

The one thing I have learnt over my many years of consulting is, there is never a perfect time to undertake these projects. If this is your year for growth and/or your system and associated labyrinth of spreadsheets that you rely on to make your decisions is holding you back? There is no better time than now to set yourself up for future growth.

True independent advice can provide:

• An honest point of view
• A proven methodology
• Knowledge of what questions to ask  and an ability to put the vendor under pressure to prove their statements of capability
• Support to executives so their risk is minimised

If you or anyone you know is looking:

• To improve the way their business operates 
• To improve the way they leverage their current system
• To replace their current system

give me a call for a confidential discussion on the best way to achieve this, because many of the most expensive mistakes are made early in the process.

Until next month ...

Sincerely,

David.

© David Ogilvie

ERP Software Contracts

I have made the prediction that there is to be a significant increase in the the number of organisations changing their business systems over the next few years. Combined with this and the fact most will be considering cloud options for the very first time, now is a time when frank, independent advice will be needed more then ever.

The process of selecting the right ERP system for your business can be an exhausting one. I have seen selection processes take as much as 18 months to complete. Something that should never happen and when they take this long, it is a signal something is very, very wrong. It could be:

• You need an advisor to lead you through the process.
• You have the wrong advisor leading you through the process. It is often the case auditing or accounting firms believe they have the expertise to do this when they in fact they don't.
• You have an advisor that is wedded to their methodology and is creating a mountain out of a molehill. 

This process should not take any more than three to four months - tops. However when you do finally get to the point of being comfortable with the vendor of choice, there is one more critical step to take. A step that is often rushed and/or over looked completely because everyone wants to get started. That step is: Negotiating the clauses of your agreements.

The number and type of agreements vary from vendor to vendor. In essence you will be required to read, agree to and sign one or more of the following:

• Software license/subscription agreement
• Software service agreements
• Master services agreement
• Statement/s of Work

I advise my clients to get sound legal counsel on these agreements and I have one in particular I recommend. He has worked for software companies and has now starting working for himself. He understands the landscape. If you are interested you can listen to a podcast he and I recorded sometime ago before he started his own practice here.

Let me say at the outset I am not a legal expert but my comments below are a summary of the various conversations I have had with legal experts and what I have observed in my 20 plus years of doing this. (So as the adverts that want to limit their liability say, "Please do not take this as legal advice - seek a professional")

My thoughts and comments on this are:

• You want to negotiate with your software vendor in a reasonable manner ensuring you keep a productive tone to all your negotiations. We want a win-win for both sides of the transaction and agreement on obligations required by both parties during the course of the relationship. Of course you also want protection in case the worst happens.
• You want to build into your agreements incentives for the vendor to perform their obligations as agreed. If there is no incentive and you are on a times and materials contract, there is no incentive for the vendor to deliver quickly. In fact the opposite is true.
• One of the biggest mistakes I see is clients negotiating hard on the vendor's consultant charge out rates and on the cost of licensing/subscription. Remember they are in business to make a profit and you want them in business in future so they are able to support you. If push comes to shove and they have to make a determination between helping you or another client, I can assure you the client with the best margin will get the attention first. Your focus should be on ensuring they are capable of delivering high quality deliverables on time rather than on specific rate discounts. You will save significantly more by ensuring you are on time than you ever will by negotiating lower rates.
• Remember the documents your vendor will want you to sign will limit their risk and exposure. Signing their standard document is never in your best interests. You need to negotiate delivery obligations, terms, performance, conditions and consequences when these are not delivered as expected - not rates. The most aggressive document I have seen was one where the vendor agreed to all care and no responsibility and no negotiation whatsoever. Take it or leave it. Not the type of business relationship I would want to enter into and I certainly do not advise my clients to accept such an arrangement either.
• You need to be sure you fully understand what every term means. It is often not what is said that can become an issue, it is what is unsaid or inferred. Terms do not necessarily mean what you think they mean. Check them again and again.
• How the vendor approaches being challenged on their agreements will give you an insight to how they will perform in the implementation. There is always tension in an implementation - always. And understanding how they will behave under this stress gives insight to how they will perform for you.

Being a truly independent advisor I can provide:

• An honest point of view
• A track record of success
• A kit bag of tools to draw from 
• Knowledge of what questions to ask and an ability to put the vendor under pressure to prove their statements of capability
• Support to executives so their risk is minimised

Please feel free to reach out to me even if you would like a sounding board for a decision or issue you are currently facing, if you or anyone you know is looking -

• To improve the way their business operates 
• To improve the way they leverage their current system
• To replace their current system

Give me a call for a confidential discussion on the best way to achieve this.

Until next month ...

Sincerely,

David

© David Ogilvie