NINE MILEM a n a g e m e n t C o n s u l t i n g

Process Improvements in a Challenging Economy

Copyright © 2012. All Rights Reserved. The Nine Mile Management Consulting Group

Brar, H., Dhir, M., Elliott, G., & Tabak, P. October 2012

www.ninemileco.com

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Nine Mile Management Consulting Group October, 2012

Process Improvements in a Challenging Economy

Financial Crisis & Market Challenges Today’s economy faces challenging growth ahead – and in many respects, the Global Financial Crisis, the recession, stilted economic growth in many nations, and the subsequent European Economic Crisis have forever shaped the way companies do business. The Global Financial Stability Map

1 is an interesting

concept presented by the International Monetary Fund (IMF.org). It plots the stability of world markets against six different risk indicators: (1) Credit Risk, (2) Market & Liquidity Risk, (3) Risk Appetite, (4) Monetary & Financial, (5) Macroeconomic Risk, and (6) Emerging Markets Risk.

1 It indicates some very relevant features of

most global economies – market risks and macroeconomic risks which are outside the direct control of businesses have gone up while people’s appetite for risk has declined over time. Figure 1: Global Financial Stability Map Reproduced from: Global Financial Stability Report – The Quest for Lasting Stability (April 2012) – International Monetary Fund. Source: IMF staff estimates.

No longer is it expected that companies can continue to grow at a linear or progressive pace. Market corrections and downturns are not only becoming more frequent

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but their impacts are becoming more severe. In the future, those companies that can best adapt and react to changing market conditions will be the ones that ultimately do well. Everything these days points towards transient and

rapidly changing environments. Product development and speed-to-market is becoming critical. Furthermore, consumers are becoming more sensitive to economic conditions and their purchasing habits are directly affected. And lastly, the true power of communication, media, and the Internet is now being fully exploited to create social movements – capable of changing a business’ competitive landscape overnight.

Figure 2: The Non-Linear Rate of Progress

To first deal with change and uncertain business conditions – a company must look inward.

Businesses have had to adapt their business models in many respects – but there are also many examples of businesses operating in the framework of “business-as-usual.” The general consensus in business is: When times are tough, it’s best to focus on your core operations. In reality, strengthening a company’s core operations is nothing more than strengthening their foundation – yet so few businesses seem to focus on such a critical aspect.

How to Survive in an Economic Downturn

When the waters are calm, most businesses do not focus much on strategy – their focus is on day-to-day business operations. Then why during times of economic downturn do businesses not focus on their core operations and strengthen their foundation? In an article written by former US President Bill

Clinton for the Harvard Business Review, he states that, “Today, more [companies] are leveraging their core businesses to “do well by doing good.”

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In an IBM CIO White Paper describing how

businesses can be propelled through economic crises, it states that businesses will prosper by, “[C]utting discretionary spending, deploying resources for the highest return, bolstering core competencies and redefining relationships… Cut spending where it produces minimal return.”

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The Chartered Institute of Management Accountants

(CIMA) in Britain indicate that, “Most companies seem to be applying many aspects of a retrenchment approach to business strategy (e.g. reduced fixed costs, narrower product offerings, reduced staffing).”

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And lastly, in the paper Lessons from The Great

Recession for Operations Management, “Process improvement is clearly one of business’ most important skills, but we need to evolve.”

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Core Operations What constitutes a company’s core operations anyways? In the traditional academic sense, a business can be sub-divided into various “groupings” – using generic headings to piece together a company in its entirety. Out of these different “groupings,” a company’s core operations can be better ascertained. According to Michael Porter – the definitive authority on competitive strategy and Harvard Business School Professor – a company can be organized into Primary Activities and Secondary Activities (or support activities). In his book Competitive Advantage, he introduces a concept called the Value Chain

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sequence of activities that are found to be common of most companies. A company’s Primary Activities usually include the following groupings: inbound logistics, operations, outbound logistics, marketing and sales, and service. These Primary Activities are generally supported by the following Secondary Activities: infrastructure, human resource management, technology development, and procurement. While most companies usually perform more than one of these activities (and of course, should perform them well), a company’s core operations usually constitutes one of these general groupings.

Figure 3: Porter’s Value Chain Reproduced from: Michael E. Porter’s Competitive Advantage (1985).

However, even with all of this considered – the question of what constitutes core operations for a business still has not been answered. And to answer that question – comes another one. Where does a company generate its greatest value? The Concept of Value Value, worth, wealth generation, positive cash flows, return on investment, and benefits all mean nearly the same thing. A company that isn’t creating value, isn’t generating positive cash flows, and isn’t extracting a return on investment. Value as a concept, is an important one to understand. Value can be created and destroyed, it can evaluated in both tangible and intangible benefits, and the single pursuit of any company is the pursuit of creating value for its customers, clients, users, and ultimately for itself (i.e. owners, shareholders). So how is the concept of value and core operations linked? In the end, a company’s core operations will be those areas where it can potentially create the most value not only for itself, but for its consumers and clients. And the surprising thing is that many companies do not realize where their core operations lie - determining this is a challenging task that requires extensive insight and analysis.

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Therefore, in summary – those set of activities, resources, and capabilities within a company that generate the most value to clients and customers ultimately constitute a company’s core operations. The core operations of a few Fortune 500 (2012)

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companies is given to understand the differences between what others may view as a company’s core operations versus what actually are the company’s core operations: Wal-Mart (Rank 2)

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View from the outside? Every-Day-Low-Price Strategy Actual Core Operations? Efficient distribution and logistics system combined with exceptional supplier relationships and IT infrastructure allowing for up-to-the-second sales and inventory counts. Apple (Rank 17)

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View from the outside? Great products and innovative marketing. Actual Core Operations? Human Capital and Product Development Process. The Focus on Core Operations In an economic downtown, companies rely on a variety of different approaches and try to shift their focus in order to mitigate the impacts of the downturn. This might include trying to cut costs arbitrarily across the board, or creating a new marketing campaign, or developing a new product – all endeavours with the common goal of achieving greater financial margins, profits, and ultimately value for their clients and customers. However, it would also seem that some companies succeed in these variable times and some do not. Nine times out of ten, those companies that ultimately go on to succeed will be those that have a solid understanding of their core operations – i.e. “What do we as a company do better than the rest?” But the answer to such a simple question may not be obvious and usually its waiting to be uncovered in heaps of data from operations, sales, and financial statements – all giving clues and pointing towards where a company’s core

operations lie. But even with this information in hand, what should a company’s next plan of action be? How should they move forward given a challenging state of affairs? Opportunities to Strength Core Foundations in Challenging Economies Figure 4: Formulation of New Strategies Reproduced from: CIMA – The Impact of Economic Recession of Business Strategy Planning in UK Companies, Glynn Lowth, Malcolm Prowle, Michael Zhang, Nottingham Business School, Volume 6, Issue 9

Increased market volatility, changing conditions, and uncertainty can be used for a company not only to create new business and corporate level strategies, but also can be used in order to streamline and find greater efficiencies within their already existent core operations – ideally a two-prong approach. Figure 5: Two-Prong Approach to Market Challenges While adapting a company’s strategy is ideally dependent on the nature of challenges that are faced – there are generalizations that can be made about streamlining a business’ core operations – and shall be discussed next.

Intended Strategy

“Plan of Action”

Deliberate Strategy

Realized Strategy

“Patterns of Action”

Unrealized

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Emergent Strategy

Adapt Company

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Streamline Core

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Process Improvements A business can also be thought of as a series of processes. Every task, activity, and resource used requires some sort of transformation to turn it into some form of company-wide value adding function. And therefore, it can also be said that if a certain task, activity, and resource does not ultimately add value – its further use should be questioned. Businesses are nothing more than a transformative mechanism of change – taking inputs and transforming them into outputs that ultimately calls upon a customer’s willingness-to-pay. If a customer is willing-to-pay some form of monetary sum for your widget, gadget, or service, then the company has ultimately created value. Figure 6: Businesses: From Inputs to Outputs Process improvements can take many forms, yet the main issue lies in where to begin, and how to start. Many company’s simply do not tackle process improvements in their core operations for several reasons, some of them highlighted below

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“Existing business process boundaries are adequate.” “New processes should mimic existing practices.” “Business process re-design should be aligned with

existing lines of business” There is a lot of ambiguity present in changing the business activities and processes surrounding a company’s core operations – however, it is a necessary undertaking. Since core operations are central to a business, and ultimately generate the most value, it is changes to this area within a business that will have the most bottom-line impact. A New Approach to Tackling Business Process Improvements While a company can employ many ways to tackle improvements, this paper presents only one approach.

Tackling Waste “In any business big or small, private or public, and whatever the type of products or services and however complex or simple the business process, as much as 90% waste or non-value adding costs can exist in some of the activities and transactions within the business” – Nexus Consulting Group.

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The concept of waste, i.e. wasted resources, wasted dollars, wasted space, wasted efficiencies – is central to process improvements. If a company cannot correctly identify where there is waste – process improvements will matter very little. Waste can show itself in a variety of different ways

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1. Move: Unnecessary transport 2. Store: Unnecessary inventory 3. Rework: Unnecessary re-processing, re-

planning, changing decisions 4. Changeover: Unnecessary extra preparation

and setups from task-to-task 5. Count: Unnecessary recording of information 6. Sort: Unnecessary re-organizing due to lack of

planning 7. Document: Unnecessary information that

never gets used 8. Report: Unnecessary communications

Nine Mile Management Consulting The Nine Mile Management Consulting Group can help your company create process improvements and innovative solutions to deal with internal inefficiencies. A recent survey conducted by Nine Mile indicated that most companies do not seek out process improvement solutions because the task can be quite daunting. It not only involves pouring through a lot of data, reports, and financial statements, but it also requires an overall understanding of the company’s core operations. Ultimately, process improvements are not performed because of the lack of resources available. The Nine Mile Management Consulting Group believes in a unique level of consulting – providing your company with metrics, forecasts, and ultimately actionable results that can help your company Plan, Solve, and Grow. Visit www.ninemileco.com for further service information.

Business

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References

1 International Monetary Fund. (2012). Global Financial Stability Report: The Quest for Lasting Stability. World Economic & Financial Surveys. April 2012. Retrieved from http://www.imf.org/

2 Grouard, M.H., Levy, S., & Lubochinsky, C. (2003). Stock Market Volatility: From Empirical Data to Their Interpretation. Directorate General Economics & International Relations – Banque de France. Retrieved from http://www.banque-france.fr/

3 Clinton, B. (2009). Creating Value in an Economic Crisis. Harvard Businesss Review, Sept 2009. Retrieved from http://www.hbr.org/

4 IBM. (2009). From Fear to Value: CIO Strategies for Propelling Business through the Economic Crisis. CIO White Paper. Retrieved from http://www.majorcities.org/

5 Lowth, G., Prowle, M., & Zhang, M. (2010). The Impact of Economic Recession on Business Strategy Planning in UK Companies. Nottingham Business School & CIMA. Retrieved from http://www.cimaglobal.com/

6 Frohlich, M.T. (2010). Lessons from The Great Recession for Operations Management. Indiana University – Kelley School of Business. Retrieved from http://wpcarey.asu.edu/

7 Porter, M.E. (1985). Competitive Advantage. Free Press, New York, 1985.

8 CNN Money. (2012). Fortune 500 List. Retrieved from http://www.money.cnn.com/

9 Dubray, J.J. (2008). The Six Fallacies of Business Process Improvement. BPTrends, January 2008. Retrieved from http://www.bptrends.com/

10 Nexus Consulting Service. (2012). How to Improve the Operations of a Business – A 6 Step Approach. Retrieved from http://www.mmts.ca/