By Sean Culey
In the last edition of The European Business Review, my article called ‘The 7 Keys to Unlocking Organisational Greatness’ was published, in which I identified seven key elements of a business that need to be aligned and integrated in order to create a foundation for success. The article also discussed the difficulties that organisations face when trying to move forwards without this ‘aligned integration’ and how the majority of these issues come from within the business, rather than outside it.
In this article, I would like to take this a step further and describe how leading organisations are actually making this happen, and offer advice and guidance as to how to create these ‘solid foundations’ so that they form a platform for growth and success. I will also use a fictitious company, Chaos Corp, to describe how incorrect development of the ‘4 M’s – Mindset, Money, Management and Metrics’, can create weak foundations which, when times get difficult as per the current economic crisis, can mean that they are not prepared or stable enough to survive unscathed; let alone thrive and prosper.
In the next edition I will finalise the trilogy of articles by showing how the 7 Keys can be used to help Chaos turn things around.
Organisations that follow the advice contained in the ‘7 Keys’ can make the conscious decision to (a) create alignment and functional integration in line with a shared goal and vision, and (b) adapt or control their responses to external factors, no matter how adverse they appear, to create competitive advantage.
Well consider the following.
I recently had the pleasure of listening to a presentation by Pier Luigi Sigimondi, Chief Supply Chain Officer at Unilever, where he explained how Unilever had aspirations for growth but had responded to the recent economic crisis by embarking on a ‘cost cutting’ exercise. However, in 2009, halfway through this exercise the management team decided to take time out to consider what they were doing. They realised that achieving growth at any cost is not an option. Growth without a strong foundation will create long-term chaos and a focus on short term chaos management.
Unilever made the ‘conscious choice’ to pause and look at what made them great, they confronted the ‘brutal facts’ of the current reality, and they looked long and hard at how they could serve their customers best, both now and in the future. Instead of focusing on simply reducing the ‘cost to serve’, they focused on first understanding how to become the best at ‘serving’ the customer – and then driving this throughout the end-to-end supply chain with rigorous and disciplined execution.
So from 2009 onwards, Pier Luigi explained, they stopped focusing on cost cutting and instead at the peak of the recession they started investing in developing and building strong foundations for the future. Their aspirations are that by 2013 they will have transformed their very competent supply chains into lean, sustainable, customer focused value chains. (Table 1)
The result of this shift speaks for itself. In 2010, Unilever recorded their highest growth in 30 years, and are on track to grow global revenue from 44bn to 80bn euros, with a lower cost model than when they were on a cost cutting drive, whilst dramatically reducing the environmental impact of their business.
As an example, one of their Latin American businesses has recorded the following improvements; • Stocks have reduced by 40% • Service losses reduced by 60% • Cash to Cash cycle times improved by 80 days • Forecast error reduced by 30% • Business ‘waste’ reduced by 85% • Growth – from single to double digit.
Other companies at this conference like Siemens, Boots Alliance and Syngenta reported that they too, were getting very similar results. Barbara Kux, Global Supply Chain Director of Siemens, stated that they are ‘always going for value, not only for cost’. She also reinforced how this approach was congruent with their culture by quoting the company’s founder, Weiner Von Siemens (1816 – 1892), “I won’t sell the future for a quick profit.”
In fact, the tag-line of the conference was ‘back to basics’ – something my company and I have been helping organisations to understand for many years.
One analogy I often use with our clients is this – ‘in order to build the best skyscraper in the world, what is the first thing you need to do?’ The answer?
Why? Because in order to support this great structure you first have to lay solid foundations on which you can build this growth. The concept here is establishing strong foundations of truth and trust.
That’s what the 7 keys are all about – 6 of the keys working together form the building blocks for greatness;
The main advice here is to not build growth on a bed of sand – which is exactly what most of the organisations who call us in to help have tried to do.
Chaos Corporation and Progression plc.
To explain these points better, I will use a fictitious company that is an amalgamation of a number of real situations I have come across over the years. Let’s call them ‘Chaos, Corp’.
Another fictitious company, called Progression plc, is similar in size and market, and is going through exactly the same economic reality. I will use Progression plc to represent how the winning organisations handle the same situations.
Chaos and Progression
Times have been good for Chaos over the last 25 years. Their focus has been on growth and they have acquired smaller companies in order to increase market share. Aggressive sales and a good quality product have allowed them to achieve market dominance. Within the organisation there are a number of different divisions; mostly remnants of these acquired companies. However although they share a single name now, deep down they still see themselves as separate businesses.
Functionally, the business has split into the traditional areas of HR, sales, marketing, finance, production, customer service, logistics and procurement, and there is a large management team in each area.
It is easy to assume that all is well as the business has been getting larger, but behind the scenes the seeds of their downfall have been sown. The main board of Chaos Corp are not in full control of the empire they are building.
The current economic crisis means that the market has changed; the economy has slowed and, since the government is a major customer, the austerity measures have slashed the budget for Chaos’ products. In the domestic and retail sectors people are also spending less so the CFO has demanded that the business cut its overheads and become more efficient.
However, over at comparison company Progression plc, things are somewhat different.
The last 20 years have seen a slow but steady growth in Progression’s turnover. They’ve worked diligently and with discipline, extending their product range gradually and offering value-added services that the customer appreciates. They have a good reputation, “At Progression, they always keep their promises.”
Although everyone belongs within a functional grouping, teams that support specific products and customers are physically located together. This means that any problems are usually fixed before they happen. On the rare occasion when things do go awry, they work together as a team to fix them. After the event, they analyse what went wrong – not to place the blame, but to figure out how they can prevent it happening again. Learning from experience and from each other is something that everyone does as a matter of course.
The current economic crisis simply makes them more determined to focus on those things that deliver real value to the customer. Yes, they’ll cut out some activities to save costs, but only where the customer decides they’re no longer a priority: and they’re in regular contact with their customers to ask what more they can do to improve.
The Impact of the 4 M’s: Mindset, Money, Management and Metrics
In my article in the last issue, I put significant focus on ‘Mindset’ – perhaps the most constraining aspect; or the most powerful – depending on whether the people in the organisation have a ‘fixed’ mindset or a ‘growth’ one.
The Mindset of Chaos Corp
The people at Chaos demonstrate ‘fixed’ mindset behaviours. Due to the fact that growth has been easy to Chaos, they haven’t seen the need to develop their internal capabilities beyond specialisation in each function. Overall the culture is one of ‘we are the best’ so the focus is simply on doing what they have always done. Learning and development is seen as ‘soft and fuzzy’ – the world of HR. People are not generally encouraged to read or develop their skills – as long as the business is growing, then they see no problem to be solved. Each department has its own budget, and as a result a large number of projects are constantly being initiated, but most fizzle out before any real change is embedded.
The Mindset of Progression plc
Over at Progression plc where the people have developed a ‘growth’ mindset, they see the current economic situation completely differently from companies like Chaos Corp. They see the global financial crisis as an opportunity, not a threat; a ‘burning platform’ used to create a sense of urgency throughout the organisation. They ‘choose’ to practice what Stephen Covey famously called ‘Habit 1’ – Be Proactive’. They choose to be ‘in control’ of events, how they respond to them, and in doing so grow their ‘circle of influence’ within the markets and getting hard, financial rewards as a result.
Money at Chaos Corp
In the past, through the fat times, Chaos Corp had a very lax approach to money. The business was initiative rich, but results poor – multiple projects were initiated based on business cases that no-one really tracked. An ERP system was implemented at enormous cost some time ago, and since go-live everyone has gone back to their old ways of working, using spreadsheets and off-line tools to manage the business. Multiple discussions take place about how the ERP system was a waste of money, and it is blamed for a whole host of issues and poor service, but no-one acts.
As the problem is spread across multiple functions, resolving it would involve effort and addressing uncomfortable issues such as culture, politics and management levels etc. If they do try to address issues, they keep the solution within their area of control – and tend towards solutions without developing true understanding of root cause. This has resulted in the procurement of numerous software products, bought as ‘silver-bullet’ solutions that proved to be just technical ‘sticking plasters’ that simply diverted attention from, rather than solved, the real issues slowly killing Chaos Corp.
Service levels have been good, achieved by holding extremely high inventory levels, both at a finished goods and component level. Waste and obsolescence is an issue, which no-one assumes responsibility for. There is a shocking lack of accountability in regards to processes that destroy value and waste money.
Now that sales are down, the CFO demands significant cost reduction. Chaos goes from being unconcerned about spending money, to stopping all spending – starting with the Learning and Development budget. As things get worse, employee numbers are cut and plants are closed. The CFO instructs the business to embark on a working capital reduction program which sees inventory levels cut across the board – this cause an almost immediate drop in customer service.
Despite the fact that huge amounts of cash have previously been wasted on ineffective and inefficient ways of working, they are now totally resistant to spending any money on trying to improve the situation. The inefficiencies at Chaos were highlighted by some, but were not addressed because at a group level the business was still winning work. This allowed the rot to go deep, to the point where it becomes almost unrecoverable. At Chaos, they quite simply ‘didn’t see the problem’ until it was too late.
Money at Progression plc.
Over at Progression plc they are always trying to optimise their operations in order to deliver more value – regardless of how well they are doing. Their attitude to money is driven by their growth mindset – they are totally intolerant of complacency and constantly striving to improve. They constantly invest in order to gain leadership and competitive advantage – compared to organisations like Chaos that are willing to tolerate large amounts of inefficiency as long as their bottom line looks OK.
They are investing – in innovation, talent and growth. They are focused on ‘value creation’ not ‘cost cutting’ – and are reaping the rewards. They understand that business cannot ‘shrink to greatness’; and standing still is the equivalent of going backwards. They are investing in understanding the best ways to generate value for the customer so that they are always the first choice, and optimise the costs of delivery whilst balancing and managing the risks. This is where mindset and money are intrinsically tied together – your mindset dictates your attitude to money.
The battle now is between people in Chaos who have the fixed mindset of ‘We can’t afford to spend any money – don’t you know we’re in a recession?’ versus Progression’s growth mindset of ‘If we don’t invest in growth and innovation we’re dead’.
Chaos is a very hierarchical business with a huge middle management team. The organisation is very inefficient, and things take a long time to happen – but no-one addressed the problem because revenue forecasts were solid and the stock value good.
As a result, Chaos has become management rich, leadership poor. They have, over the years, developed silos of managment with their own agendas, excessive, misaligned measures and an obsessive focus on the control of their people and communications. It’s not a case of “too many chiefs and not enough Indians” – it’s a case of ” too many people with the position of chief, and not enough actual ones”.
One of the other issues is the need for managers to have a feeling of self-worth, and the way to achieve this is through meetings. They spend most of their time in these meetings justifying their position and developing rules and regulations for their teams, and trackers and spreadsheets for them to fill in. Excessive, counter-productive management has resulted in a lack of trust – reducing the speed of operation whilst increasing the cost.
Internally functional ‘tribes’ have developed – where the values and security of the tribe outweigh the values of the larger organisation (brilliantly described by Ray Immelman in his book ‘Great Boss, Dead Boss’). This is where courageous leadership is required in order to put the organisational requirements first and foremost, with individual and functional needs second. Unfortunately at Chaos this strength of leadership is missing. There have been people in the organisation that have highlighted the issues and tried to create cross-process change, but the tribal mentality has allowed ‘internal terrorists’ to flourish and disable these initiatives so that they got what they wanted – for their world to remain unchanged.
Chaos was in denial to signals that highlighted the market downturn, and the lack of leadership and ‘tribal’ management has made it slow to react. At management meetings the blame for the current poor performance is put squarely at the door of the customers – a point of view that (unsurprisingly) the customer doesn’t share.
Politics and in-fighting between the functions is common. Everyone protects their own position and the divisions between the management of each department deepen. No decisions are made unless by consensus – which results in more meetings, and fewer decisions and well-thought action.
Each function looks to technology for a quick and easy solution and the IT department is more than happy to keep implementing new systems as it keeps their team busy and safe from redundancy.
Chaos has, as expected, reacted to the current situation by undertaking numerous organisational reshuffles to the point where people have lost track of what the company structure actually looks like. Motivation is at an all-time low and ‘presenteeism’ is rife – where people are physically ‘present’, but not really there in mind and spirit.
At Progression plc, however, they had already removed layers of management and organisational hierarchy and developed a structure built around ‘customer value teams’ – where the customer is at the heart of the model and the organisational structure is developed to support the strategy; and not vice versa.
They have the flexibility and agility to ‘sense’ issues before they hit, have the facts to hand and create rapid consensus as to the optimal response to the threat, turning it to their advantage. The teams meet regularly in open debate about how they can improve the performance of their value chain and service to the customer.
Over at Chaos it has always been ‘green light city’. Everyone knows better than to report bad news, so no-one does. Every department focuses on controlling communication – the bloated levels of management are used to spin the facts so that their department can be blameless.
Each department has its own KPI’s and measures them in its own way – mostly to make itself look good. Reports are sanitised before distribution and, because they are produced on Excel and not from the ERP system, no one can really check or disprove them. Each report is produced to align with the way the functional director wants their department run.
The current crisis has caused the functions to focus more than ever before on functional metrics. The sales team focus on hitting volume targets, offering massive discounts at the end of each month to customers to get them to take as much product as possible, creating abnormal demand spikes at lower profit.
The procurement team squeezed the suppliers, and started to look at off-shore options and cheaper sources of their components, regardless of supplier performance and quality.
The manufacturing team ignored the forecast and focused on productivity by running the easiest and most efficient product lines for longer, making products with little alignment to future demand.
All this has negatively impacted service levels, leading to the customer service team developing an adversely competitive culture. Some of the team now come in early to grab stock before their colleagues arrive meaning certain customers always get their orders fulfilled, whilst others are always shorted. Others have become creative and changed order dates and customer location information in the ERP system to ensure stock supply or to reduce the delivery time.
All this becomes somewhat irrelevant however, as customer service and logistics don’t operate to the same schedule. Logistics focus on their ‘truck fill’ metric, meaning they pick and despatch whatever open orders are on ERP for the same delivery region they are going to today, regardless of when the customer wanted it. This means that some orders will be delivered the same day that they are placed, whilst others wait ages. It also means that the stock in the warehouse rarely matches what ERP stated was available at order entry – meaning they fail at the picking stage.
The customer merchandising teams, measured on the number of stores they see in a day, often find that when they get to the customer, the goods they expected often weren’t there – or they were delivered days ago and are sitting in the stockroom whilst the competitor’s product is on the shelves.
All of this has resulted in unhappy customers, negative comments about service, and a spiral of decreasing sales and profit.
Over at Progression they don’t see metrics and measures as bad – quite the opposite – they recognise that ‘what gets measured gets managed’.
However, they have reduced the number of reported key metrics and ensured that these are aligned to the strategy, functionally integrated and accurate, and clear and honest in their calculation.
Companies like Progression are not afraid of bad news – in fact they welcome it because every issue is seen as an opportunity to improve. They focus on ensuring that they measure the right things, in the right way, and then let their team get on with delivering value. They set aspirational but realistic targets to drive progress and build team motivation.
They realise that one of the best ways you can build trust as a supplier is by being;
• Reliable (do what you say you are going to do)
• Truthful (tell me the current situation, and what you are going to do – honestly)
• Show high integrity of data (show me the detailed schedule)
Progression plc realise that customers are forgiving of delays and setbacks, as long as you communicate with them early and give realistic and accurate projections around dates – and then follow through.
Chaos is in trouble. The rot that set in years ago, through the complacency of having too much money too easily; of thinking that they were great simply due to the acquired growth, of assuming that their way was always the best way; of not trying to improve and invest in embedding a culture and mindset of continuous development; of not confronting the brutal facts, of hiding truths; and measuring behaviours and KPI’s pertinent to each function, but not the organisation as a whole – have come back to haunt them.
Customers become dissatisfied, orders dry up, contracts that they thought, nay expected to win, suddenly go elsewhere. The competition, previously dismissed as irrelevant, suddenly became the standard against which Chaos was measured and found wanting.
Shareholders, dismayed at the drop in stock value, demand action. The executive board, under pressure from ‘share-flippers’ who are demanding an immediate return on their investment, continues to cut staff and close plants.
Chaos is not lean, agile or in control, and has resorted to reactive ‘blunt edge’ emergency surgery without fully understanding the long-term impact, losing knowledge, talent and capability that will be difficult to regain. They are selling the future to save today.
Things look bleak.
But all is not lost. In the next edition I will go through how Chaos Corp can stop the rot by applying the ‘7 keys to unlocking organisational greatness’, and develop new, solid foundations of control that will not only see them through the current crisis, but allow them to compete and thrive in the future.
About the author
Sean Culey is a member of the European Leadership Team of the Supply Chain Council, the global, not-for-profit centre for Supply Chain Excellence, and founder of Aligned Integration Ltd. Previous to this he was CEO for SEVEN Collaborative Solutions, and Principal at Solving Efeso.
Sean has worked around the globe helping companies create dramatic increases in profitability and growth, breaking down their barriers to success through the alignment and integration of their people, processes, systems and data. He helps companies to navigate the journey from functional silos, creating foundations of control that enable continual improvement and innovation via his ‘Aligned & Integrated Organisations’ (AIO) approach designed to create end-to-end, integrated customer and profit focused Value Chain teams. This approach also helps companies align their Integrated Business Planning, Management and Execution processes. He also has 20 years’ experience of creating value from ERP investments such as SAP, and is an expert in helping companies to understand how to realise the value of these investments.
Sean is a frequent conference chair, speaker and author with many published articles on Organisational Greatness, Cultural Change, ERP and Value Chain excellence. His book ‘Becoming Great (by taking everyone with you) – Developing the Aligned and Integrated Organisation’ is due to be published late 2013.
He can be contacted via his company Aligned Integration at [email protected]