Finding Common Ground Between CFO and COO–Part 5

[Continuation]

A New Management Paradigm

Toyota’s success—despite Japan’s own significant recession in recent years—is attributable to management paradigms that differ significantly from traditional management practices in the U.S. Some of these are likely recognizable to you in the following table:

	Traditional Paradigm	New Paradigm
Customer requirements	Quantity	Quality – improved experience and results
Quality [1] improvement	Generally costly and tend to reduce productivity	Saves money while increasing throughput
Internal competition (through reward systems)	Produces conflict – a few win, but many lose	System-thinking eliminates internal competition leading to improved performance
Cooperation	Too frequently leads to reduced competitiveness	Brings improvement where many win – maybe, everybody wins
Management	Command and control	Creating a work environment that supports top performance of the system and ongoing improvement
Workers	Seek to satisfy or, at least, appease management	Work together with management to satisfy the customers’ demand for constantly improving quality
Worker evaluations and incentives [2]	Increases internal competition and produces little long-term improvement	Encourages better performance and ongoing improvement
Purchasing	Buy almost entirely based on cost metrics	Buy based on the system’s performance and build relationships with key vendors

Note: This table was adapted from work originally done by W. Edwards Deming.

[1] In the table above, we are employing the term “quality” just as it is described in the text [see Part 4]. However, the term “customer” may be an internal or an external customer. Work to improve quality coming from a vendor is an effort that improves the firm’s experience and results. Similarly, improving quality coming from operation ‘A', which hands off to operation ‘B’, improves the experience and the result of operation ‘B’ as the “customer” of operation ‘A’.

[2] With regard to “evaluations and incentives,” we are referencing the traditional individual performance metrics taken within silos of operations, rather than on the performance of the system as a whole.

All Profit Lies Outside Your Organization

Inside the four walls of your business, everything over which the CFO and COO have direct control can contribute nothing but cost or expense to the bottom-line. Every opportunity for making money lies outside the organization and, therefore, outside the direct control of management and executives.

You can make more money by buying smarter—raw materials, services, et cetera—thus reducing truly variable costs (TVC) and increasing throughput. And you can make more money tomorrow than you are making today by selling smarter to existing customers, new customers or both.

These actions can have other affects, as well. The affects are depicted in the figure below.

 

A side-affect of buying smarter—what you buy, from whom you buy, how (delivery terms) you buy, and when you buy—is reducing inventory. The wonderful side-affects of reducing inventories—when done wisely as a result of system-thinking—are improved profits, higher ROI, and faster cash velocity.

You probably recognize all of these factors as improvements—improvements you would like to see, perhaps.

The new management paradigm unifies the CFO and COO by turning the organization from it navel-gazing introspection to a recognition that the customer is the most important part of the production line. No matter how you fine-tune your company’s internals, if the internals are not focused on the externals as the only source of profits, you are far more likely to create internal friction and heat without actually lighting a fire that will produce increased throughput and profit.

One of the advantages of the accompanying figure is the systemic clarity—the inherent simplicity—it delivers. It helps CFO and COO begin easily translate financial goals (i.e., net profit, ROI, and cash flow) into day-to-day actions (i.e., increasing throughput, reducing inventories and reduce or hold the line on operating expenses while support significant growth in throughput). [Note: For organizations that don’t have to deal with inventories, per se, the “inventory” may be broadened into “investment” or demand for capital investment. For example, if it is possible to reduce, defer or eliminate the need for an investment in new office space, then that would qualify as a “reduction” in the demand for new investment.]

[To be continued…]

The New ERP – Part 25

Choosing a vendor or reseller

In the traditional Everything Replacement Project, there are several different paths that a firm may take to decide which reseller they wish to employ in the project. (Here I will use the term "vendor" or "reseller" interchangeably to some extent. There is real distinction, and I do not mean to minimize that difference. If your firm is choosing from among value-added resellers – "resellers" – then they have a greater opportunity to select the actual personalities that will be involved in the deployment. On the other hand, if you are dealing with a national or international vendor directly, it is quite likely that you will be "stuck" with whomever is assigned to your account by the vendor barring, of course, what could be a contest of wills over the personnel.)

The simplest and most straightforward approach is the one most often followed by small- to mid-sized firms. This one-step process may be flatly stated as: Decide which software you are going to buy, and then take whatever reseller happens to come along with that software. This simple, single-step process makes decision-making very easy, but it may not necessarily garner for your organization the best-qualified persons for achieving success in your Everything Replacement Project.

Other organizations recognize the risks inherent in not placing some kind of hurdle between themselves and a potential traditional ERP reseller. Therefore, either their management team or their hired consultant will create a vendor screening process. While the process itself takes various forms, it usually includes gathering seemingly important data about the potential field of resellers like:

• How long the reseller has been in business
  
• How many clients the reseller has
  
• How many times the reseller has implemented the software under consideration
  
• How financially stable the reseller is
  
• How many references the reseller can supply
  

Now, as important at these various aspects might be in selecting any vendor with which your firm wishes to do business, only one of these elements even approaches what might be important in helping you and your team achieve more of your goal of making more money today and in the future. Specifically, that would be the last point – client references.

Unfortunately, when most organizations get their hands on client references from a vendor or reseller, they squander the opportunity asking questions like these:

• "Was your project completed according to schedule?"
  
• "Was your project completed within budget?"
  
• "How were you treated by the reseller?"
  
• "How long did your project take to complete?"
  

Now, never mind that the differences between the project being considered by your company and the project undertaken by the reference company may be as different as night from day, what do these questions really tell you about the things you should actually be considering? Why are not there questions like the following included in the mix? Are not these the really important questions to be answered?

• "Before selling you the software, did the reseller really help you come to clear understanding of the very specific areas where improvement would lead to your firm's ability to make more money tomorrow than you are making today?"
  
• "Have you seen real and measurable improvements in your organization's ability to make more money since the reseller sold and implemented the technology in your business – over and above your preexisting growth trajectory?"
  
• "What is your calculated return on investment for the money you paid to this reseller?"
  

I am compelled to reiterate (see prior posts): Any traditional ERP effort – or any other kind of improvement project on which a firm spends its precious and irrecoverable time, energy and money – for which there is no measurable improvement in Throughput, Investment or Operating Expenses is a failure whether or not it was completed on-time, within the budget, or with huge self-congratulations.

The Toyota measure of quality

Toyota, a company that emerged from the rubble of post-World War II Japan to become the world's leading supplier of cars and light trucks, developed a very interesting concept regarding "quality." For Toyota, quality is not about defect rates or meeting specifications. Toyota's management agrees that there is only one measure of quality that counts, and that is the customer's measure.

Toyota's management principle is that the customer measures quality in two ways: the first metric is the customer's experience. Note that all of the questions in the traditional ERP's reference checking were related to the customer's experience. Toyota's second customer-centric measure of quality is the customer's results. Now, with a car or light truck for personal use, the results sought may be nothing more than ego-satisfaction (like the guy that goes out to buy a Titan pickup, or the ecology-centric individual that buys a new Prius. But, in business – in your enterprise – real results are not so ethereal.

Note that none of the questions in the traditional ERP's reference checking list of questions dealt with the vital results that drive business improvement. In my opinion, limiting reference-checking to such vain questions is only a waste of time for executives and their teams. Consider instead additional questions along these lines:

• Did the reseller demonstrate keen insight into the core business issues that are keeping you from making more money, causing inventories or demand for new investment too high, or creating undue upward pressure on operating expenses while your business is growing?
  
• Was the reseller able to work competently with your management team to unlock "tribal knowledge" so that both you and the reseller's team were able to easily comprehend what was working and not working in your organization?
  
• Did the reseller help you create a set of rational metrics by which to measure the success of your ongoing improvement efforts?
  
• Were the reseller's consultants able to help you focus your efforts and investment on the critical areas that could and would lead to making your firm more profitable in the near term, or did they replace everything and hope for the best?
  
• In short, do you feel like your organization is more profitable today – having engaged the reseller's team – than you were before?
  
• Did the reseller leave you with something truly valuable to your organization other than hardware and software?
  

Asking questions like these would surely bring to light differences between those resellers and consultants engaged in traditional Everything Replacement Projects from those delivering value-based approaches like the New ERP – Extended Readiness for Profit.

[To be continued]