In an age of rapid change, technology, innovation, and business challenges, it becomes even more important than ever that businesses operate under consistent and coordinated strategies. Many organizations govern their strategic initiatives by incorporating key performance indicators (KPIs) and metrics across multiple functions and/or lines of business. However, a critical, but often overlooked, element that can help organizations successfully execute on their tactical and strategic initiatives relates to the level of transparency within their enterprise.
The theory of organizational transparency is quite simple, but can be viewed from two very different perspectives. The first is that a business with greater transparency will have the ability to adapt to market conditions and customer demands more quickly, thus creating a competitive edge for the business. On the other hand, as a company becomes more transparent, organizations and their leaders tend to become more cautious of what they do and say in fear that everyone will see their actions and potential failures.
The latter perspective becomes less probable when the increased visibility into an organization’s decision-making is predicated on values such as integrity and partnership. If an organization can set up a structure built on trust and integrity they can minimize the fear of failure and encourage collaboration. This plays a vital role in an organization’s ability to sustain a culture that empowers its employees and provides a more productive workforce.
Lack of transparency within a business can negatively impact many areas of the organization, but it is especially relevant to working capital performance management and cost optimization initiatives. Healthy organizations require transparency together with effective governance, performance measures and a productive workforce to be successful.
Many areas of the business have an impact on cost competitiveness, such as lines of business / programs, Customer Service, Operations, Supply Chain, Engineering, Information Technology, and Finance & Accounting. Lack of visibility into core processes within these areas, coupled with conflicting metrics and suboptimal organizational structures, can result in individual groups maximizing efficiencies related only to their “piece of the pie” rather than the organization as a whole. Their reported gains are independent from other functions and can drive higher than needed asset and expense bases, as well as impaired internal and external service levels.
What leadership may not realize is that conflicting business practices are not always apparent and, in turn, do not see that the lack of transparency is limiting their profitability. The following example reveals how a lack of organizational transparency can lead to misleading performance.
A standard way of measuring a company’s performance is to view metrics around profitability and operational effectiveness. For instance, the following metrics apply directly to a company’s cash flow and working capital performance:
|Return on Sales (ROS)||Return on Equity (ROE)|
|Return on Net Assets (RONA)||Days Sales Outstanding (DSO)|
|Days Payable Outstanding (DPO)||Inventory Turns|
Determining how the above metrics impact business performance can be seen through an analysis performed against two internal organizations with differing objectives. The following analysis shows a comparison of metrics used by Operations and Procurement organizations impacting inventory turns and working capital performance
Early to PO*: Material receipts which arrive and are accepted prior to the purchase order need date
On-time to PO*: Material receipts which arrive and are accepted in line with purchase order need date
Late to PO*: Material receipts which arrive and are accepted after the purchase order need date
* – often includes a +/- 5 day offset to accommodate Business Operations
After evaluating the metrics above, it appears that both organizations are monitoring and improving their function’s performance. Specifically, Operations shows that as sales increase over time to approximately $5 million, the inventory levels are consistently increasing (as a percentage of sales) showing that inventory projections are appropriate. Procurement shows that over time material will not be received late, but rather much earlier than required, thus not impacting customer deliverables.
At the same time, on-hand inventory levels are growing, and a potential concern around warehouse space will become a costly expense if not planned for in advance. If inventory levels are increasing and warehouse space is currently readily available, less focus is now given to reducing these operational costs and driving an evaluation and disposition of any excess inventories.
In regards to material receipts, specifically for early ones, there is a negative impact from having cash outlay earlier than needed, and increasing carrying costs associated with the increase in inventory levels. Both of these factors not only impact the working capital performance of the business by negatively impacting cash flow, but business improvement opportunities will not be easily identified, as each organization shows their respective performance as improving over time based on their metric definitions. If both organizations align timing requirements with material receipts, thus normalizing inventory levels, additional cash would become available for reinvestment in other needed areas to support the business needs.
In order to effectively manage metrics supporting improvement initiatives and enterprise-level performance, transparent governance and operating model coupled with a meaningful sustainability dashboard are required. Companies can improve their organizational transparency by examining the following four key areas:
I. Corporate Governance
II. Organizational Structure
III. Metrics and KPIs
IV. Organizational Boundaries
I. Corporate Governance
The governance model and execution / communication of corporate governance objectives play a large role in the effectiveness of a company’s workforce. Governance models can provide direct lines of sight into critical corporate communications, key performance indicators and achieving-excellence plans. Through the use of executive committees and sponsorship, an effective model can not only provide consistent and timely performance feedback, but also governance over business performance initiatives taken on to improve the health of the company.
Although accountability is considered a practice by which a business may hold organizations or individuals responsible for poor decisions, it is not a proactive approach to ensuring that the effectiveness of these decisions is evaluated early on in the decision-making process. However, adopting a true corporate governance model increases transparency and in turn the decisions are discussed among key appointed executives. Thus, accountability lies across a body of governance, rather than an organization or individual. This also allows for all business units to understand the common goals and objectives, and enables improved deployment and success of cross-functional project teams.
II. Organizational Structure
Organizational structure decisions have a significant impact on creating an empowered and effective workforce and delivering a low cost base to remain competitive within a respective industry. When determining the organizational strategy and supporting structure, it is important to evaluate the business vision, supply chain roadmap and guiding principles prior to answering whether the structure should be functional versus process aligned, and decentralized versus centralized. In addition, identifying key individuals to lead by example, having a well-defined succession plan and promoting an active workforce will build a sense of camaraderie amongst the employees and drive a more transparent culture. As an example, when analyzing the current-state of companies within a given industry, results show that the majority of leading organizations are centrally structured; implementing a similar structure may bring benefits, but at the same time, if not correctly applied (taking into account specific business parameters) that same structure may result in detrimental changes. Taking on such an implementation challenge requires expertise around understanding an organization’s current-state cost base, comparator-operating models, leading practices and ingoing hypotheses to drive a prioritized action plan. Evaluating each element will guide the development of an operating model and transformation end-state that provides for a cost-effective, motivated and accountable organization.
III. Metrics and Key Performance Indicators
As discussed, corporate governance and accountability cannot be successful without consistent metrics supporting a company’s overall performance objectives. One successful way to resolve conflicting metrics is through the implementation of an enterprise performance dashboard that aligns with the organization’s goals and objectives.
Key benefits of sustainability or performance dashboards include real-time metric deployment, traceability rule setting and the ability to manage metrics at an enterprise-level and drill-down to functional supporting metrics. This increases the value of metrics as committees chartered to support corporate governance and performance have real-time information readily available, and also reduces conflicting metrics as all data supports the same set of key top-level performance indicators. In addition, this reduces the likelihood that multiple organizations will use portions of data in dissimilar ways to portray acceptable performance. Businesses that monitor product profitability, enterprise cost, quality and schedule through effective metrics will be well positioned to attain improved financial gains.
IV. Organizational Boundaries
As organizations are graded on performance, having a common group of executive leaders appointed to the corporate governance committee will act as a conduit to review and ensure that performance metrics are developed revealing the true health of the business. In addition, this structure allows organizational leaders to discuss, through common channels, their business strategic initiatives and potential conflicts. With a common set of metrics and objectives the organizational walls are lowered and all groups work alongside one another to achieve improved performance.
The lack of organizational transparency is prevalent in many organizations, and ignoring this issue can be costly. An analysis of a company’s goal deployment plans, operating models and the development of performance dashboards can provide a business with a holistic and more accurate view of organizational performance, which can lead to near- and long-term cost and working capital improvements.