The business landscape for manufacturing companies today is increasingly competitive and complex. Global markets have become more competitive and customer expectations are rising. Companies are faced with shorter product life cycles, expanding product ranges and pricing pressures. Moreover, businesses often must manage employees in multiple locations and countries. The need for manufacturing organizations to make the correct strategic, operational and financial decisions has never been greater.
Faced with these challenges, manufacturing executives are investing more and more in information technology (IT) systems, such as business performance management (BPM) and supply chain management (SCM) to address performance issues in different areas of their businesses. However, they have discovered that these systems do not provide the comprehensive information and analyses required to significantly increase performance. These systems cannot holistically model a business and its environment to enable companies to make the decisions that maximize financial performance.
There are two significant areas that have not been effectively addressed in the implementation of BPM and SCM systems:
Executive decision-making: Too often senior executives are unable to interact directly with Manufacturing, Logistics and Marketing and struggle to link these to strategic directives or financial based metrics. In addition, it is difficult for these executives to develop answers to financial objectives or interact with these systems to drive execution of financial strategy. As a result, executives often have to use spreadsheets with data from a combination of business intelligence, financial planning and supply chain management systems to make decisions.
Spreadsheets cannot provide a holistic, accurate understanding of the financial impact. They cannot help executives identify the scenarios with the biggest financial impact to the company. Decisions are therefore often made with incomplete data, resulting in significant loss of profit and cash flow opportunities to the company.
Linking tactical and operational plans with strategic decisions: The examples above also highlight the second limitation executives face in trying to execute their strategies in today’s increasingly competitive environment. Few businesses have developed the necessary interaction between strategy, tactics and operations in their corporate system world and are forced to make assumptions to drive their execution, including defining the right investments, adopting the appropriate KPIs & targets and establishing the right incentives.
The result of these disconnects is a decision support void at the very top of most manufacturing businesses and tactical and operational plans that often are not focused on the strategies that generate the biggest financial return to the company.
There is a real need to find a way of bridging the gap between strategic and operational decision-making, and identifying a structure where senior executives can identify the best decisions that they can make.
The Need for Holistic Modeling and Planning in Manufacturing
Although executives have for many years recognized the need for strategic, tactical and operational integration within their business planning and decision making systems, few, if any, examples exist of successful implementation of this objective.
Business modeling and planning must consider BOTH the financial and operational world equally. The concepts used by the newest technology available explore the need to drive operational execution with financially sound analysis and direction. The need to drive planning and execution systems with a predetermined calculation of what actions will deliver the optimal profitability, cash flow or return on capital can be seen to assist in the development of a single game plan for a business from which all key business decisions can be made. Such a model will be capable of providing executives with the control deck that they have been seeking to confidently drive their businesses into the future.
Holistic enterprise modeling technology enables manufacturing executives to identify, quantify, and chart a path to capture all available financial improvement opportunities without assumptions that distort real outcomes. Companies that implement a holistic modeling system will be able to quickly identify and quantify the decisions that have the greatest impact on their financial performance at the strategic, tactical and operational levels. In addition, they will be able to translate the insights into financial and operational requirements that lead to successful execution and measure performance over time.
Holistic modeling technology delivers value for manufacturers in two ways:
1) Enables better, faster decisions by:
• Creating a holistic view of the business through simulating the impact of a decision across the entire physical and financial network taking into account the relevant constraints and highlighting the real financial impact of a decision.
• Understanding the true financial impact of decisions before they are made – Companies should adopt technologies that can model both operations and financial together, and which represent costs, cash flow, and operational factors as they are incurred.
• Optimizing across multiple, interactive scenarios to yield insights that would not and could not have otherwise been considered – Enterprise optimization can be applied to all decisions affecting a manufacturing business.
2) Aligns execution and strategy by executing across business silos – A holistic, end-to-end enterprise optimization model that bridges operations and financials at the strategic, tactical and operational level, can translate the best scenarios into investment requirements, e.g., marketing, capital expenditures; financial goals, e.g., cash flow by product, plant; and operational targets, e.g., factory yields, inventory days.
A case example of a manufacturing company using holistic modeling technology is a $4.5 billion division in North America. The company wanted to address key questions, such as:
• How should we balance production across our manufacturing and distribution networks to maximize cash contribution?
• Which capital investment projects make the most sense and have the highest return? Which should we not do?
• How can we rationalize production capacity to increase cash flow?
The company collected data from 14 production facilities. Data sources included ERP, manufacturing, engineering, and general ledger systems. The consolidated data is fed into a modeling system consisting of interconnected databases with a holistic model lying at its core. The enterprise modeling system executes a scenario in just a few minutes, facilitating dozens of scenario analyses daily. Experimenting with many variations of each scenario leads to improved capital proposals and more nuanced marketing initiatives.
The results have been overwhelmingly positive, returning multiples of the investment in the holistic modeling system. In addition, the holistic modeling system contributes to aligned, fact-based decision-making for the company.
As groundbreaking technology, enterprise-wide use of holistic modeling allows manufacturing executives to take their companies’ financial performance to new higher levels and achieve unprecedented results. Further, holistic technology changes the ways in which manufacturing companies can compete in the global marketplace.