Leading for Profit

My guess is that you may have already read the book, Islands of Profit in a Sea of Red Ink by Jonathan Byrnes.  He suspects that 40% of your business is unprofitable, but nobody knows because your metrics are aggregate and profitable transactions subsidize the rest.  Byrnes’ book is replete with insights for managing profitably, including:

 

 

  1. Identifying unprofitable business is job one. 
  2. The big question, then, is how to manage for profitability (or value) going forward. 
  3. In most companies, no one is responsible for managing the interaction of key tradeoffs to increase profitability to its full potential. 

Managing your company’s assets for increased profit is the essence of supply chain management.  To that end, product development, marketing and selling, forecasting, supply chain design, capacity and production planning, and sourcing must be orchestrated as interrelated processes.  This requires cross-functional coordination enabled by advanced analytics that explicitly and simultaneously evaluate many critical tradeoffs, giving you the head start you need to seize new areas of profitability.

I see three sequential priorities for transforming the supply chain management of an enterprise:

1)      Profitability profiling by product and customer, down even to the invoice level.  Combined with a pricing power/risk and margin leakage analysis, this identifies where prices can be immediately increased and where costs to serve some customers need to be slashed, yielding an immediate impact.

2)      Detailed analysis of the decisions that are driving the unprofitable or marginally profitable transactions

3)      Designing improved, integrated decision and planning processes as well as the tools to sustain the them, enabling the capture of new areas of profitability

For the weekend, I leave you to ponder this quote by Byrnes, “Middle management excellence is the key leverage point for great performance.”

Thanks for stopping by.  Have a wonderful weekend!

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Applying Systems Analysis Tools to Healthcare

To say that understanding and managing a large, disaggregated system such as the healthcare delivery system with its multitude of individual parts, including patients with various medical conditions, physicians, clinics, hospitals, pharmacies, rehabilitation services, home nurses and many more is a daunting task would be an understatement.  Like other service or manufacturing systems, different stakeholders have different performance measures.  Patients want safe, effective care with low insurance premiums.  Payers, usually not the patient, want low cost.  Health care providers want efficiency.

The Institute of Medicine has identified six quality aims for the twenty-first century healthcare system:  safety, effectiveness, timeliness, patient-centeredness, efficiency, and equity.  Achieving these goals in a complex system will require an holistic understanding of the needs and performance measures of all stakeholders and simultaneously optimizing the tradeoffs among them.

This, in turn, cannot be achieved without leveraging the tools that have been developed in other industries.  These are summarized in the table below.

While the bulk of the work and benefits derived from the application of these tools will lie at the organization level, these tools are well-developed concepts that can be applied directly to healthcare systems, beginning at the environmental level and working back left down to the patient, where indicated by the check marks.

Industrial engineers and operations researchers use systems analysis tools to understand how complex systems operate, how well they perform, and how they can be improved.  For example, mathematical analyses of system operations include queuing theory which can be used to understand the flow of patients through a system, the average time patients spend in a system, or bottlenecks in the system.  Discrete event simulation is another tool that can aid in a more detailed examination of system characteristics and sensitivity to inputs and changes in the system.  Economic and econometric models, based on data-driven analysis, help identify causal relationships among system variables.  Supply chain management tools help forecast demand for services and relate that demand to available resources.  Longer term mismatches can be minimized through sales and operations planning, while short-term challenges are addressed with capacity planning and scheduling.  A few examples of specific challenges that can be addressed through systems analysis tools include the following:

  1. Staff scheduling
  2. Improving patient flow through rooms and other resources and elimination of wait time and waste in work flow
  3. Capacity management in hospitals
  4. Evaluation of blood supply networks
  5. Optimal allocation of funding

Systems analysis techniques have been developed over many years and are based on a large body of knowledge.  These types of analytical approaches while very powerful, require appropriate tools and expertise in order to apply them efficiently and effectively.  Many healthcare delivery organizations are beginning to build staff who have at least some familiarity with a few of these tools, particularly Lean thinking in process design and six-sigma in supply chain management.  There also instances where some of the tools under “Optimizing Results” are being applied.  But, it is clear that much more remains to be done and many healthcare providers will initially need to depend on resources external to their own organizations in order to leverage many of these tools.

Two notes of caution as we move forward:

  1. In our efforts to consider end-to-end processes and their inherent tradeoffs, we must ensure that we do not enforce a complex structure to the detriment of disruptive innovations that will lead to more efficient and effective health care as described by Christensen et. al. in The Innovator’s Prescription.
  2. We must also take care not to base our data analysis and decision models on faulty cost data or inadequate outcome data.  In most cases, neither reimbursements nor charges reflect costs and the measurement of outcomes is significantly underdeveloped.  Some of the tools outlined above will be helpful in addressing these challenges.

Thanks again for stopping by Supply Chain Action.  I leave you with a thought from Mother Teresa, “We can do no great things – only small things with great love.”

Have a wonderful weekend!

When to Collaborate and with Whom?

I hear a lot about collaboration at conferences these days and there are books and articles to match.  The prevailing implication is that sharing information and collaboration, however defined, is categorically meritorious.  

 There is very little, if anything, however, written or said about when to collaborate and with whom. 

Before you commit your organization to sharing information with either suppliers or customers, you must answer at least two fundamental questions. 

First, how much value can be created through collaborative synergy between your organization and your trading partner? 

Second, of that value, how much do you need to capture? 

Answering these questions will likely require some rather rigorous analysis of the total costs of operating without collaboration as well as a detailed calculation of where the value or savings will come from and what you will need from your trading partner in order to realize your targeted share of that value. 

It is clear and has been demonstrated that when two organizations cooperate for a shared goal, then they achieve better results.  But, it’s important to analytically establish the parameters so that you can plan, negotiate and operate with full information.

Thanks for stopping by. 

As we move into another weekend, remember that “Logic will get you from A to B. Imagination will take you everywhere.” (Albert Einstein)

Have a wonderful weekend.

Building Resiliency into Your Value Network

In June of 2005, Vinod Singhal from Georgia Tech and Kevin Hendricks of The University of Western Ontario published a paper entitled, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility.”  In this piece, Singhal and Hendricks quantified the negative impact of supply chain disruptions using empirical data.  They found that supply chain or value network disruptions impact both the value and profitability of the enterprise.  They specifically identified the following:

Firms suffering from supply chain disruptions experience between 33% to 40% lower stock returns relative to their benchmarks over a three year time period that starts one year before and ends two years after the disruption announcement date.

The average effect of disruptions in the year leading to the disruption announcement was a 107% drop in operating income, a 7% lower sales growth, and an 11% growth in cost.

Furthermore, they found that firms struggled to recover from supply chain disruptions.

In August of 2005, hurricane Katrina struck . . .

In September of 2005, Dr. Yossi Sheffi of MIT published his book, The Resilient Enterprise:  Overcoming Vulnerability for Competitive Advantage and simultaneously a related article in Sloan Management Review.

In the years since, the importance of supply chain risk management and of building resiliency into the value network has only become more apparent, most recently underscored by the earthquake, tsunami, and nuclear disaster in Japan, floods in Thailand, and other disruptions.

Both Sheffi and Singhal and Hendricks emphasized, among other points, the need for flexibility in the value network.  It is my observation that decisions related to flexibility are key drivers of enterprise value (“Don’t Manage a Supply Chain, Lead a Value Network”, The Journal of Enterprise Resource Management, Third Quarter, 2011), even without a serious disruption in the value network.

I will not recapitulate all of the advice from Sheffi and Singhal and Hendricks here, but I do want to make a couple of important points:

First, you need to plan to be resilient.  Planning to be resilient is a non-trivial exercise.  It should be very intentional and will require deep analytical expertise.  You will need to quantify the uncertainty, calculate a risk-adjusted total cost, identify alternative courses of action and select a primary best option (see the diagram below).  It may also be prudent to develop or acquire tools that will let you quickly asses challenges to your value network that you did not anticipate.   At the 2011 CSCMP Annual Global Conference, I heard Dow Chemical talk about how they apply analysis to understand the nuances of the tradeoffs along the frontier of profit and risk.  Don’t underestimate or short-change the analytical effort.

Second, you need to practice for how you will execute when (you cannot afford to think “if”) there is a disruption.  I have heard Kevin Harrington, Vice President, Global Business Operations, Customer Value Chain Management from Cisco Systems speak on how Cisco prepares and trains for the eventuality of a disruption.

We are only scratching the surface here.  You can, of course, get Dr. Sheffi’s book on Amazon.  I think that Dr. Singhal and Dr. Hendricks will be happy to provide you with their paper.  You can, and should, also get the support you will need to perform the analysis to support risk-adjusted decisions.  Finally, you should make an effort to rehearse or train on how you will handle various types of disruptions so that your people have at least minimal familiarity with the predetermined alternative courses of action or at least know where to find them.

I hope that this post has stimulated your thinking, and that it will motivate your action as well, helping your organization perform with a resilience that will serve its stakeholders well when “normal” operations are disrupted.

As you go into the weekend, remember these words of Leo Tolstoy, “Everybody thinks of changing humanity and nobody thinks of changing himself.”  Don’t be “everybody”.

Have a wonderful weekend!

The Process/Value/Symptom Matrix

I’ve been working on a concept and paper for a few years now, off and on.  I’ve collaborated with manufacturing industry veteran, Mike Okey, and we’ve gathered input from other supply chain experts.  We have been fortuntate to have been published by Supply Chain Digest in their “Supply Chain Comment” section. 

Mike and I have devised a Process/Symptom/Value (PSV) Matrix that provides a useful perspective for proritizing process improvement efforts by relating business decision processes to undesirable business symptoms and their impact on the drivers of enterprise value.   

You can read the first installment of the article at the link below, and I hope that you will take a moment to do so.

http://www.scdigest.com/experts/guest_11-09-13-1_Finding_Value_In_Value_Chain.php?cid=4949

Supply Chain or Value Network?

There are three basic functions in a typical business organization:  finance and accounting, sales and marketing, and production/operations, excluding support and infrastructure functions.  Stevenson describes all of the activities that are directly related to producing goods or providing services as part of operations.  He defines operations as activities that add value during the transformation process into which inputs are received and from which outputs are delivered.  Inputs and outputs can be products, services or information.  The people and assets involved in acquiring the inputs and performing and delivering the transformation make up the supply chain.  That a supply chain stretches beyond a lone enterprise has never been news to operations executives.  Organizations have always received inputs from a supplying entity and delivered outputs to a consuming organization or consumer.  Each organization provides an interdependent link in the value-adding transformation process, otherwise known as the supply chain.  This is seldom a single “strand” of activities, but rather an interdependent network comprised of many value-adding nodes, each of which receives many inputs and combines them in various ways in order to deliver numerous unique outputs for multiple consuming nodes.  Organizations that receive outputs (customers) pay for the value added in the transformation process.  The supply chain is more properly designated the value network through which many supply chains can be traced.  Material, money and data pulse among links in the value network, following the path of least resistance.

If each node in the value network makes decisions in isolation, the potential grows for the total value in one or more supply chain paths to be less than it could be.  In the best of all possible worlds, each node would eliminate activities that do not add value to its own transformation process such that it can reap the highest possible margin, subject to maximizing and maintaining the total value proposition for a supply chain.  This is the best way to ensure long-term profitability, assuming a minimum level of parity in bargaining position among trading partners and in advantage among competitors.

(This is an excerpt from my article to be published in the next edition of The Journal of Enterprise Resource Management.)

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