Show Me the Money, How to Find it

March 29, 2009

Show me the money, but where do you look?

If you are looking for areas to reduce cost, then analyze your data and find your own gold.  In order to keep focus, follow these simple dimensioning techniques and then dive into the details.

Dimension By

  • Relevance
  • Size of Benefit
  • Potential Penetration
  • Ease of Capture
  • Sustainability

When you add a dimension to your analysis either through a data warehouse, or through simple thought experiments you can quickly pinpoint the quick hits to that of the slow brew money makers.

When you look at the relevance you are exploring weather the opportunity ties to a key value driver, and when you look at the size of benefit you need to tie in the estimated saving potential time frame.  Likewise, will the potential penetration get you more than 50% of the value.  Remember, your resources are scarce so pay particular attention to the ease of capture dimension.  Lastly, will the cost saving initiative be sustainable or will it only be a quick hit that will quickly dissipate over time.

A visual analysis of this technique is shown below.  Hopefully some of this information will lead you through a  thought provoking analysis that will help you find your money quicker through a cost saving portfolio of projects.

Additional filters to apply to the analysis will be:

  • Your current organizational skills
  • Your current knowledge
  • Your prior initiatives and how closely they dovetail with your short list of opportunities

Enjoy and remember, Show me the money!

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Who Holds The “R”, The RACI Chart

March 26, 2009

Who Holds The R, Exploring the RACI model

The RACI model is a powerful tool utilized to define roles and responsibilities. In general, you match up roles and responsibilities with processes. The tool is extremely useful when rolling out a new change management program, or just uncovering the processes that make your organization function and identifying the participation in those processes. First let’s discuss what RACI stands for:

RACI Legend

RACI Legend

R–Responsible-The buck stops here. Whoever is responsible needs to make sure that the process works as planned. The R owns the process/problem or project.

A–Accountable-This is the person who is delegated the task of completing the Activity. They support the person who owns the R.

C–Consult-This person usually have in depth knowledge of the process in question and all major decisions need signed off by this individual.

I–Inform-The people who need informed of activity taken, but not necessarily consulted.

Each individual who is involved in a process is either identified as an R, A, C, or I. No two individuals in one process should both have the R.

RACI Chart

RACI Chart

Typical steps in designing a RACI process:

  1. Identify the process in question completely. Start from a top down approach viewing the large picture and map out the process in enough detail to support your requirements. You may only need the top level processes, but in order to define or accomplish the task at hand defining the sub processes, tasks, or steps may be required. Each program is unique. List the process steps horizontally down the left hand side.
  2. Identify the roles that will be impacted by the program/process, and those that will implement the program/process change and list these vertically across the top.
  3. Each role will have an owner. You can list the person here if you want, but in order to make the process timeless you should list the role and assign the role to an individual.
  4. No identify who has the R first and then complete the ownership of A, C, and I. Remember, no two people holds the R for a single process. The buck needs to stop somewhere….This is where the phrase who hold R comes from.
  5. Review any gaps in the process, make sure only one R is in each process, make sure each process has an owner. Sometimes when you have arguments of who holds the R for any given process, the resolution usually resides in looking into the process further, maybe you need to explore the sub-processes, the roles, or the tasks associated with the process. Once you get to a point that only one person holds the R you have dove deep enough into the process.
  6. One exception to multiple R’s in one process may entail the difference between who is responsible for the Initiative, and who is responsible for the Process. This at first seems like the difference between the Responsible and the accountable party here, but with the correct boundaries set up this can be a powerful concept especially when considering the interaction of a Program Management Office PMO with a large organization. I have included this as an example in the RACI chart view. Be careful with this concept!

An example of a RACI chart for the top view of a sales process is shown to help visualize the RACI diagram. Note how colors are used in the matrix, this makes it easier for others to quickly understand the relationship of the process. An excel template you can use to start you next project, or process improvement initiative is attached here.

One very important step in any project or improvement initiative is the understanding and mapping of the underlying process that support the program being implemented or enhanced. Check back soon for an installment of defining and implementing a process map.

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How to squeeze your Working Capital (GMROWC)

March 22, 2009

Gross Margin Return On Working capital is a great measurement used by companies to explore their inventory investment and the return on that investment in relationship to their Cash Conversion Cycle. Using GMROWC you will be able to determine the contribution each product, product mix, or division adds to the bottom line of your company; this analysis will depend on the granularity of your available data. You can also use GMROWC to help you obtain better terms with your suppliers so they understand the contribution they bring to the overall value stream. You will need the following measurements for this calculation:

Required Information

    Gross Margin Return On Working Capital, GMROWC

  • Product Sales for Month Annualized
  • Recorded Cost of Product for Month Annualized
  • Accounts Payable
  • Accounts Receivable
  • Inventory Value

See figure 1 for a visual depiction of the GMROWC. Click Here For Calculator

The calculations for determine your GMROWC on the surface may appear simple, but if you start exploring your GMROWC from a top down analysis it can start to get complicated. For instance, if you initially want to know the total GMROWC for your entire inventory portfolio, this is straight forward, but if you start exploring the GMROWC by product group, by product, or by vendor you need to make sure you data is granular enough for these calculations.

Example

Gross Margin Return On Working Capital, GMROWC

GMROWC Calculator "Click Here"

To gain an understanding of the power of this simple measurement I have created a snapshot of a distribution company which appears to be in distress. Let’s explore the GMROWC for a distribution company with the following characteristics:

  • Current Accounts Receivable=$17M
  • Yearly Sales=$80M
  • Current Inventory Value=$26M
  • Yearly Cost of Goods Sold COGS=$58M
  • Inventory Accounts Payable=$5.5M

Product GM%; ( Sales-Cost)/Sales, ($80M-$58M)/$80M)=28%

DSO=AR/(Year Sales/365), $17M/($80M/365)=78 Days

DIO=Inventory/(Year COGS/365), $26M/($58M/365)= 164 Days

DPO=Inventory AP/(Year COGS/365), $5.5M/($58M/365)=35 Days

Calculate Cash Conversion Cycle DSO+DIO-DPO=207 Days

Calculate Working Capital Turnover 365/207=1.77 Turnover

Calculate GMROWC=1.77 X GM%=49

A sampling of the observations you can make from these calculations are as follows:

  • This Distribution company is only making a 28% product Gross Margin, the marketplace must be competitive or the purchasing department is not cohesively tied together to take advantage of it’s buying power and not negotiated rates properly. A lot of action items can come out of this observation.
  • The days in inventory is too high at 164, their could be a lot of dead inventory, or the company could be holding too much inventory. This area is rich for analysis.
  • The DPO=35, the company may be paying it’s vendors too quickly or a couple vendors may be pulling this figure down. Look into obtaining better terms from the vendor.
  • With your receivables figure high at 78, collections may need a new strategy to allow for quicker turnaround on payments from customers.
  • Overall the cash conversion cycle is 207; working capital turnover is therefore 1.77. This figure needs reduced and by exploring the DPO, DSO, and DIO in more detail a plan will materialize to lower this figure.
  • The GMROWC is only 49, by pulling the different levers available to this distribution company from just a sampling of the available resolutions mentioned above the GMROWC metric can be tracked and improved upon.

This hypothetical company profile shows the power behind tracking a reliable metric and then making plans to attack areas that can be improved upon. The GMROWC should be explored from many angles, a few of which are:

  • By Division
  • By Warehouse
  • By Product
  • By Product Group
  • By Vendor
  • By Purchasing Manager
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5 Steps to help your next strategy succeed

March 17, 2009

How many times has a new strategy initiative not achieved the desired results in your organization?  There have been many books written on strategy and countless experts have weaved elaborate mechanisms to define and implement strategy.  Here are a few common sense approaches to follow to ensure your next strategic plan is implemented correctly.

  • Build your strategy from solid analysis
  • Align your processes to support your strategy
  • Develop metrics to measure you strategy
  • Communicate your strategy and ensure everyone knows how to support the strategy
  • Appoint a strategic owner to manage the initiative and refine the strategy through continuous improvement.

Each of these steps will be reviewed in detail and useful tools will be published to help you with your next strategic plan.  Check back soon.

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Free Tools

Explore these free tools which hopefully will make your life a little easier.