Abstract

Today’s communication and information devices now give us the ability to connect instantly to our ERP and CRM business management systems. Anything we can do in the office we can do anywhere else using any web enabled phone, pad or home computer. Instant connectivity. That’s what we need or at least that’s what everyone seems to be saying. There’s another term for this: micromanagement. Maybe we are trying to do too much? Business conditions do not change on an hourly basis nor does any business need to be adjusted instantly. That’s just an indication that our business plans and actions are not organized for success.

Is Micromanagement Necessary?

The latest TV ads for 4G phones seem to be trying to convince us that getting calls, e-mails and other communications 30 seconds sooner is absolutely necessary. I would expand that question much further. Is it really necessary that we stay in touch constantly (or instantly) with our co-workers and business management system? The necessity for instant reaction to changing business conditions is a sign of weakness, not strength. If we have to micromanage our business, all we have done is make ourselves indispensable and that’s a very poor business habit.

Notice that I have not said anything about instant connectivity to prospects and clients. That’s a slightly different situation, but still with some similarities. We do want our prospects and clients to be able to connect with us quickly. We want to be able to show them by our actions that serving customers is job one. This doesn’t mean that we have to call them back in 30 seconds or less, but it does mean that we will connect with them within a reasonable length of time. That’s the key. Our reaction needs to be reasonable and our customers’ expectations need to be reasonable. Connectivity though is very important. We need to be able to access information that is important to our customers and in many cases this means having a reliable connectivity link.

Instant Connectivity is Disruptive to Business Excellence

Unless there is some form of unforeseen catastrophe, any business should be able to operate smoothly with little or no adjustments on a daily, weekly or even a monthly basis. Rather than having to react instantly to issues, the business should be structured so that serious issues are avoided or at least reduced. That’s why we need to practice what I call Business Excellence.

Excellent companies start with excellent owners and senior executives who create a people oriented management philosophy. They in turn recruit excellent line managers and supervisors. That’s the basic foundation, but it’s the regular people, the staff and line employees who will really make a difference. Regular everyday employees will make or break your organization. I know that seems contrary to the popular notion that excellence lies in technology and the management of the firm, but maybe I like to take a contrary viewpoint sometimes just to make a point. In this case I am speaking from the heart. Business Excellence is all about people. Business Excellence starts with the assumption that all people have the capacity to contribute to the success of the organization. Give people the tools they need to do their jobs well. Give them the encouragement to do their best. Give them a physical environment that supports efficiency. Give them a psychological environment which supports effectiveness. Give of yourself to each person in your organization and you stand a very good chance of becoming successful.

Having created an effective employee oriented structure, business managers need to then create an effective reporting system. Effective business decisions drive business profitability. These decisions need to be rooted in facts that can be brought to light instantaneously. People do not have the time to guess. They need to know where to place their attention. They also need to know whether the decisions they make are having the desired effect. If there is too much data, the underlying issues may remain clouded. If there is no way to compare actual results against targets, how can you ever know if you are where you want to be or need to be? Finally, people need to identify those Profit Drivers that have the most significant impact on their organization or on their specific area of responsibility. Adopt a proactive system that helps you track not just where you have been or where you are today, but where you could be tomorrow.

Having created a basic reporting system that gives people the information they need to make sound business decisions, you now need to give people snapshots that give them the ability to identify where their attention needs to be devoted. Truly effective business metrics give you a basis for comparison that either tells you where you are going and whether you are above or below expectations. 

I cringe every time I see bar charts and pie charts as representative of what information users can extract from an ERP system and display on their “dashboard”.  While these charts certainly look pleasant (particularly when displayed in color), in the end they are nothing more than status reports and as such do not (or should not) drive business decision making.  Why? Bar charts and pie charts do not (and never will) lead to any form of decision or action.  A pie chart that displays the percentage of revenue generated by a firm’s top ten customers tells you nothing.  There is no basis for comparison to tell whether this is good or bad.  It looks pretty, but it leads to nothing.

Now we finally reach the point where people can truly react to changing business conditions, but do so within a controlled environment that allows people to be proactive rather than reactive. Having to stay in constant contact with the business management system or co-workers is a reactive business methodology. The options listed above proactive. If you identify key business drivers and create an operational plan that maximizes the potential for these key business drivers, you don’t have to spend all of your time micromanaging your business. Now you can take this time and apply it to business process improvement, thus reducing the need to micromanage.

Most ERP systems can identify exceptions that should be brought to the attention of named users.  That’s what alert systems are all about.  If a tracked metric is above or below a specified target value, an alert is either posted on a user’s home page or sent to the user’s e-mail address.  Unfortunately that’s about as far as most systems have developed the concept in spite of the fact that Exception Management as a business methodology has been around for almost 30 years.  The user is notified, but all of their activities after that are for the most part manual exercises.

A fully proactive Exception Management system is not a Workflow Manager nor is it just a series of e-mails relating to a specific topic.  It is in fact a framework by which sound business decisions can be made.  While the ERP system would be the primary vehicle by which exceptions are identified (operating the same way present alert systems do), users would also have the ability to open their own exception topics. Once open, multiple users could be given access to the exception file.

Let the Business Run Without You

If someone needs to be in touch constantly and react instantly to what’s happening within their business unit, something’s wrong. There is no person within any organization who is that important. In fact the business should be structured so that it can run without the constant manipulation of any one person. Create an organization that gives people the atmosphere and the tools that foster success. Identify the profit drivers that need to be monitored and optimized. Give people the ability to communicate with each other and jointly address key issues. Structure your business for long term success and you won’t have to worry about staying connected 24/7.

Introduction

If you have reached that point where a critical mass of your employees have decided that your current ERP solution might need to be replaced, what’s your next step? Many firms just launch a search, assuming that at some point they will find the best suited ERP solution. Well….there’s just a tiny flaw in this approach. How can you search for a new ERP solution if you don’t know what you are looking for? If you were purchasing a sophisticated piece of machinery, you would need to define precisely the capabilities this machine would have to possess. You certainly would not call vendors and ask them to tell you what you need, but that seems to be the case when it comes to purchasing a new ERP software solution.

Rather than just calling ERP vendors as your first step, you need to determine not only what you require in terms of functionality, but also the outcome you require. A complex production machine needs to be able to produce a specified number of parts in a specified time frame at a cost that does not exceed a specified cost (cost per piece produced). This same rigorous cost analysis needs to be applied to the purchase of a new ERP software solution. What do you require (improvements) and how much is it going to cost to achieve this level of improvement?

Put very briefly you need to justify the cost of your new ERP business management solution. It really doesn’t matter whether you are going to spend $10,000 or $10,000,000. You need to determine exactly what you need in terms of functionality, by how much this functionality will improve or increase your operating costs, how much these improvements will cost, and finally of course the net return for this anticipated investment.

The question now becomes simple. How are you going to “find” the monetary gains that will be required to justify what could prove to be a sizeable investment?

Reduce Days Sales Outstanding

There are two sources of low-hanging fruit; reducing AR Days Sales Outstanding is probably the easiest target. If you sell on credit, it is very likely that your customers are not paying you on time. You might offer Net 30 days, but your customers might be paying you on average in 60 days, perhaps even more. If you can reduce your AR by just 5 days (seems like a very achievable target), you can generate $13,700 in cash flow for every $1 million in revenue (based on a 365 day year). This translates into $137,000 for a $10 million firm. Unlike operational improvements that can be counted on every year, an improvement in AR generated a one-time cash flow; substantial to be sure, but just once. Since a new ERP solution consists of a substantial one-time cost (purchase and implementation), this cash flow can be used to reduce your up-front investment.

While getting customers to pay you sooner, there are two additional opportunities for reducing AR. First, reduce the time it requires to actually generate an invoice. Time is quite literally money here and the sooner you submit an invoice to a customer the sooner you are going to be paid. Second, reduce invoice error rates. If you submit an incorrect invoice to a customer, it isn’t going to be paid until it’s correct.

Improve Inventory Management

The other substantial asset that can drive cash flow is inventory. If you can manage your inventory more effectively, you will be able to improve inventory turns and therefore generate a one-time cash flow just as I have suggested for Accounts Receivable.

Balancing inventory levels is a tricky business. While you can certainly reduce quantities on hand, this may lead to stock outs. You cannot sell what you do not have. In a manufacturing environment stock outs can bring the manufacturing process downstream to a halt. That’s why many large ERP solutions include sophisticated advanced planning applications. That’s also why lean manufacturing is becoming so important. Rather than having sufficient quantities on hand to avoid stock outs at all point in the manufacturing process, lean manufacturing extends the planning process out to suppliers as well as in-transit inventory.

Reduce the Cost of Purchasing

It’s amazing sometimes how expensive it is to purchase inventory. Take a close look at how many people are involved in the purchase process from initial vendor relationships to the point where purchased goods are received. Each time someone has to “touch” this process adds cost to the material being purchased. Given the sophistication of today’s ERP solutions, it should be possible to construct a process workflow that is based on the assumption that everything’s OK. Spend time (and therefore money) building a rock solid relationship with vendors whereby unit costs and delivery requirements are known and acceptable. Once the replenishment system has triggered a purchase notice, the resulting purchase order sets the best quantity (based on current forecasts and quantify price breaks). If the suggested order quantity falls within specified limits, the purchase order is sent to the vendor automatically with no touches from anyone in the purchasing department.

Once a purchase order has been issued, no human needs to become involved, unless the vendor submits a warning, or no advanced ship notice has been received. Only at that point should someone become involved. No reports need to be generated and reviewed at any point in the process.

Exception management should rule the purchasing process. The entire process should be based on the fact that a purchase order will be completed with no issues. If an issue is identified, users should be able to resolve the issue using the equivalent of an internal task management system.

Increase the Efficiency and Effectiveness of the Reporting System

Eliminate all printed reports, particularly those containing rows and columns. This is a soap box that I have jumped on for many years. My point is simple. Static reports are no more than a single picture in time. They give you no direction with respect to where conditions have been or where they might go in the future. Again I come back to the concept of exception management. Users need to be spending their time improving those critical operations that need to be improved. They don’t need to be wasting their time trying to figure out what needs to be improved.

Users waste precious (costly) time drilling down from static reports to underlying source data. Why not just start with the source data? Identify those lowest common denominator values that represent critical operations. It could be inventory turns or any other factor that represents those things that a company needs to do very well. If you need to drill down from what you consider to be a critical value, then you haven’t gone deep enough. Assuming that you correctly identify these critical values and concentrate on improving them, everything else in an income statement will take case of itself. Basically you don’t need an income statement except for those activities by a CFO that requires an income statement and balance sheet.

Having defined these critical values, track them over time (month to month or some other appropriate time frame). Use a line graph to track these values and a second line graph to specify where the values should be. Now you have a complete time-phased picture that you can use to identify where you need to spend your time. If the graph indicates no changes, a quick view is all you need and then you can go on to the next graph. I think a huge amount of time can be saved by not analyzing information that does not need to be analyzed. Conversely, you can spend more time improving those areas of the business that really need your attention.

Summary

Since this is a blog and not a formal article, I have but skimmed the surface. If you are contemplating the purchase of a new ERP solution, you have to specify precisely how you are going to be able to improve your business. Each of these improvements needs to have a monetary value attached to them. Your task at this point in time is defining a realistic transformation. What do you really want? How can you improve your business? What cost saving or revenue improvement can be associated with each improvement? If you don’t define what’s realistically possible, how can you possibly justify your investment in any ERP solution?

Why does one business prosper and another business in the same industry fail? Does the victor know something the loser doesn’t? Each may offer the same products or services. Each may have the same type of client base. Each may have the same level of expertise with respect to the mechanics of their products, services and industry. However, one may possess a jewel more precious than many people realize. That jewel is a well defined management philosophy.

“That set of rational principles which form the basis for guiding or controlling the operation or performance of a business activity“.

The key concept contained in the definition above is the identification of the rational principles and that’s our primary task. Our secondary task is the testing of each principle to insure that it’s applicable to all phases of business life and action.

After considerable thought and experience (What better way to test this definition than in the cold light of reality?), I would like to propose the following list of business or management principles. This isn’t an all inclusive list, but presents what I consider to be the leading candidates.

1. The objective of any business is the generation of profits: While some might dispute this statement as not being applicable for non-profit entities, I would counter that all must generate profits, for it’s only through profits that any business can sustain itself. We should not be afraid of being profitable. We should strive to be as profitable as possible without violating any of the other business principles. That’s the key concept.
2. The most important asset of a business is its employees: No business operates without employees. No business can achieve its potential unless each employee has the ability and the right to achieve their individual potential. Each employee must feel as though they are a part of the total organization. Each employee must feel as though they matter. It’s just that simple.
3. Customers are just as much a part of a business as employees: While this might seem to be an obvious statement, far too many businesses fail to recognize just how important their customers are. Products and service must meet the actual and perceived needs of the customer. Notice that I have used the plural form of the word “need“. The physical product or service is but one need. The process of selecting the initial supplier of a product or service, and the continuation of the relationship be­yond the first order, involves the identification and satisfaction of a whole host of needs. The only manner in which this can be accomplished is the inclusion of the customer into the daily life of the business. This is exactly the same goal the business should have with respect to its employees (and let’s not forget suppliers too).
4. Management gets paid to think: Consider for a moment the example of the business that fails and the business that succeeds. Consider also the examples everyone can cite of businesses that appear to place their management in a position of “doing” rather than “thinking“. Could it be that the management of the failing company chose by default the wrong fork in the road, simply because it was so busy taking care of business that it didn’t even rec­ognize that there was a fork in the road. I’m not suggesting management must live in an ivory tower, for to do so ignores the realities of the practical side of business life. What I am suggesting is that management must recognize subtle changes in the environment in which it competes, and alter the life of the business to reflect these changing circumstances. It can do so only if it has the ability and the time to think.
5. No business operates in a vacuum: Vacuums come in many forms, and each can be as dangerous as the other. The specific vacuum to which I am referring produces a form of insulation between the business and the outside world. Our world is changing rapidly. While management might con­sider itself to be very capable, nobody has all of the answers. Management needs contacts in the outside world to test its competency. It should hunger for knowledge, and welcome the testing of its principles against others. It cannot be afraid of this process, but should encourage it. Management cannot afford to be wrong, and should recognize that it might be wrong. That’s what this testing process is all about.
6. Business conditions are in a state of constant change: While everyone might agree with this statement, the successful business uses it as one of the cornerstones of growth and longevity. The successful business assumes it must change, and looks for opportunities to change. Change here isn’t change for the sake of change, but rather changes that will enable the business to become more efficient, move into new markets, take advantage of new technologies, or reduce the impact of downward movements in the economy.
7. Information is the key to the identification of strengths and weaknesses: This statement might be considered to be a corollary of the one dealing with operating in a vacuum. The former dealt with an outside vacuum, while this statement deals with the vacuum of inside information. The increasing importance of Business Metrics has led many companies down the path of excessive informa­tion, and ultimate strangulation in their own data. Information systems should be based on maximizing the effectiveness of the data generated. As I stressed in my blog post about Business Metrics (http://www.accountinglibrary.com/blog/business-metrics-creating-a-framework-for-success/), managers must define those “few” critical values that represent the driving forces that lead to success. If the information generated does not lead to some form of decision or reaction, then it has no meaning and should be discarded. If a business concentrates on its most important common denominators, then the income statement will take care of itself.
8. Organization must be taken to its lowest level: Each business function is important. Some may be identified as more important, but none is inconsequen­tial. Each person in a business is important. Each customer is important. The company must be structured so that each person or department has the tools it requires to achieve maximum effectiveness. The busi­ness is, in many respects, a living organism, and it’s the responsibility of management to insure that each cell or body part receives equal attention. Without this, that part could become diseased, and could drasti­cally affect other body parts.

Conclusion

Each business must go through the process of identifying its individual philosophy. Once these statements have been created and adopted fully at all levels of the organization, they must be reviewed regularly to insure that they are being followed. All other actions of the company must be rooted in this philosophy, and must be tested against it. The successful company will acknowl­edge that it requires a philosophy. The less than successful company will not recognize this need. While this might sound simple, it isn’t. Successful companies know they are not perfect, and will strive to identify their strengths and weaknesses. They are not afraid to measure themselves, for they know that in doing so, they move one step closer to their goal. Maybe you should consider if any of these statements can assist your company?

Introduction

Most ERP systems can identify exceptions that should be brought to the attention of named users.  That’s what alert systems are all about.  If a tracked metric is above or below a specified target value, an alert is either posted on a user’s home page or sent to the user’s e-mail address.  Unfortunately that’s about as far as most systems have developed the concept in spite of the fact that Exception Management as a business tool has been around for almost 30 years.  The user is notified, but all of their activities after that are for the most part manual exercises.

Start with Proactive Business Metrics

Any Exception Management systems must start with well designed Business Metrics for it is these numerical values that drive the alert system.  If you are going to improve business performance, you must start by identifying the key drivers that influence your bottom line.  These drivers or KPIs (Key Performance Indicators) must be as close as possible to what I might call a “lowest common denominator”.  It makes no sense to track a value that is in fact influenced by even more basic elements.

As we discussed in the article regarding Business Metrics, some KPIs do not lend themselves well to straight line tracking.  Some key drivers might be seasonal or display a curve-like history.  In this case setting a specific alert trigger value for any extended time period may lead to less control, not more.  In addition, the most effective tracking system might not be based on where a KPI is today, but where it might be tomorrow.  In this case the alert needs to be based on a forecast and whether the KPI is beginning to move into a danger area.  Remember, an effective alert system must be proactive, not reactive.

Software Driven Exception Management

A fully proactive Exception Management system is not a Workflow Manager nor is it just a series of e-mails relating to a specific topic.  It is in fact a framework by which sound business decisions can be made.  While the ERP system would be the primary vehicle by which exceptions are identified (operating the same way present alert systems do), users would also have the ability to open their own exception topics.  Once open, multiple users could be given access to the exception file.

Such systems do exist today. Discussion Boards (most widely used in on-line education classes where students are assigned to groups for projects or papers) give people the ability to participate in group projects (or operate individually), track all thoughts and comments regarding an issue, attach documents that further the discussion, and most importantly communicate with any other person participating in the discussion.

The objective of the Exception Management system could be improvement in named metrics (e.g. improve Inventory Turns for a specific product or product line) or controlling specific conditions such as an overdue Purchase Order or Sales Order.  It could also support tasks and projects that are not driven by the Exception Management system. 

One significant benefit may be more productive use of people’s time.  Rather than attending various forms of staff meetings to discuss issues, people are free to participate in the discussion board at their own pace. Rather than listening while one person (only) speaks, people can read recent posts (the person speaking) when it is convenient, consider everyone’s recent posts and then respond in an appropriate and well informed manner. I think that’s a much more effective use of any firm’s most precious resource: people’s time.

Key Elements

Rather than simply notifying users that an exception exists, the Exception Management system creates a hybrid task manager / contact manager that

• identifies the exception and posts it to an Exception Manager applet specific to a named user,
• allows users to recognize/define an exception manually and post it to their Exception Manager, Alternately they could create a task or project that needs to be managed using the same control elements,
• lets users describe the exception in as much detail as required,
• lets users collaborate with other people in the organization by giving them access to the exception file,
• drill down to specific information that relates to the exception,
• save links to reports and metrics that contribute to the discussion regarding the exception,
• record their thought processes,
• record specific steps that have been taken to alleviate the exception,
• record metrics that track their progress toward alleviating the exception,
• share their thoughts and activities with other people in the organization,
• send a notice (but not an e-mail) to one or more people participating in the discussion so they know they should read the most current update and/or perform an act requested by the sender and
• create a next action date that helps them know when they should revisit the exception.

Summary

Exception Management is not just about notification.  It is a system that allows users to address issues and record their thoughts and activities within a software driven framework rather than doing so in a manual environment.  It allows people to work more efficiently, collaborate in a logical manner with other people in their organization, and ultimately make better business decisions.