They say hindsight is 20/20. Certainly, the current economic crisis hit many companies out of the blue. Was the writing on the wall simply obscured from our view, or were we just too blind to see it? And more importantly, has our vision cleared enough to recognize the signs next time, before it is too late?
This is a time of reflection for many companies pondering the could have, would have and should have. While we must all look to the past and learn from it, we must also look forward. Where do we go from here? What processes need to be in place to prevent this from happening again? These slower times provide opportunities for companies across all industries to review their processes in preparation for the upswing and learn how to identify future downturns more quickly.
Several companies have a major lag between the time they realize demand has slowed and the time it takes to adjust. Most commonly, I find this is due to disconnected and siloed information across the enterprise. The recent slowdown has led to the discovery of a breakdown in communication and data sharing between sales, production and finance. This lack of accurate and timely data sharing leads to delayed reactions and limits the flexibility to proactively respond.
The cause is a reliance on disparate systems of information across the enterprise that must be manually consolidated. Companies of all sizes are prone to this, and many still rely on what I call a time-lagged, stagnant collaboration, otherwise known as Microsoft Excel. This data is static, based on the moment in time it was pulled from the system. By the time it is passed from department to department, the information could be weeks old and full of errors from manually re-entering the information as it climbed the corporate chain.
Visibility Creates Foresight
Visibility is knowledge, and knowledge provides the power to act. A company that has evolved from simple spreadsheets to a centralized, enterprise-wide database that can access general ledger and sales information provides its managers with the real-time, detailed information they need to perform their job every day. The company is able to generate a sales budget, which seamlessly streams into the inventory budget and, in turn, flows into the warehouse and/or operations budget. As data in one department changes, it can be refreshed throughout the enterprise to provide a single version of the truth.
This visibility across various budgets and the impact of each on another provides the confidence needed to walk in to the board room and know your data is as current as five minutes ago, even though you worked on the presentation for several weeks. This is the power todays systems can deliver: clarity to provide insight into the management of activities and resources needed to achieve corporate goals. The result is that the actual, budget and forecast data are all integrated into a single application, allowing a company to perform side-by-side comparisons. This near real-time data can be used to evaluate whether to ramp up or scale back production, augment delivery times or adjust labor requirements.
The economic reality of the past 18 months has led many companies to drastic cost-cutting measures to stay afloat. While this can be an effective short-term tactic, the impact of dramatic workforce reductions, decreased production and increasing inventories has to be continually evaluated throughout the product or services lifecycle. If not, the company places itself at even greater risk when the economy begins to improve because it is not able to get up to speed as quickly as needed.
In one approach to cost cutting, a company might review sales and operations data for underperforming products or services and suggest currently unprofitable lines be terminated. The same can be said for low-margin customers. Such radical actions, although justified by the initial analysis, can have very expensive long-term consequences. Restarting production may be vastly more expensive than continuing production at lower run rates, not to mention the marketing investment required to communicate the cessation and then subsequent reinstatement of a given product. Unfortunately, without the insight to accurately understand the data your systems produce, you will not know what the right decision for your company is.
For example, a company may decide to scale back production due to a drop in demand, choosing instead to service customer demand through its warehouse inventory. Suddenly, as inventory levels bottom out, there is an uptick in orders. Unfortunately, sales is not privy to the low inventory levels and sold orders that could not be fulfilled. Now, the company is stuck working with suppliers and partners to quickly meet the demand, placing undue pressure on margins. Information silos are inherently subject to communication breakdowns and now have this company scrambling, forcing sales to pull back its efforts to attract new customers for fear of not meeting their expectations.
However, if a company approaches corporate planning as a moving cause-and-effect picture, the change can been seen and accommodated. Instead of silos of information across the enterprise that require data to go through five or six different systems before a customer-facing employee is notified of an issue, events like the example mentioned above trigger communications to each relevant party. As demand picks up, companies will have the ability to spot trends, develop a detailed, proactive, analysis-based strategy, and redirect processes to capitalize on new opportunities.
Quality Information Drives Quality Decision-Making
The adage, garbage in, garbage out, applies to your data. It is imperative that your data is accurate and timely. It does not matter how much data you have; one inaccuracy can derail your budget, plans and forecasts. Accurate insight into top- and bottom-line figures, and an understanding of the details behind each, is critical to moving forward.
Spreadsheets which contain inaccurate data can inhibit a companys ability to make real-time strategic decisions. While the initial data may be of a high quality, as the data is delivered to various departments, it becomes stagnant. In fact, a budget pulled in Berlin on Tuesday will not be based on the same data Atlanta pulled on Thursday. To truly succeed, an organization requires an integrated, cross-departmental view of the business and, more importantly, the ability to access that data at a moments notice to make the most informed decision given a particular business issue. Atlanta and Berlin need to be on the same page, with access to the same up-to-date information.
Optimizing Human Capital
Perhaps no one is more affected by the chaos that spreadsheets can create than the employees in finance departments. All too often, they are saddled with the burden of culling through endless piles of data and cobbling together individual worksheets into a single, inclusive document instead of analyzing and planning for the business the job they were initially hired to perform. Focusing on clerical tasks is a poor use of corporate resources and may lead to frustrated employees that can place a company at risk of knowledge flight when the economy improves.
Currently, employees are staying put and putting up with whatever they have to. However, as the tides turn, some companies may find their finance departments further downsized as employees pursue job opportunities that more correctly harness their skills.
Utilize the talent these employees bring and focus their energy on analyzing and sharing information to help the company remain flexible and take advantage of market conditions. Break down the silos, move away from the familiar Excel and do your company the favor of eliminating disparate databases. Moving to a single, secure database can significantly reduce the time required to compile and understand the workings of your business. The finance department will be more focused on strategic activities that relate directly back to corporate initiatives, and it will create an environment that capitalizes on employee talent and fosters good morale. In addition, more decision support responsibilities can be placed on the finance department as they now have the capacity to perform more strategic analysis.
Learning from the Past
It has been a rough road, and some dark days still loom on the horizon, but companies should stop second-guessing the decisions of the past. Most businesses have put as much empasis on cost-cutting efforts as they need to, and now is the time to focus on developing the processes that can help spur growth. If this recession has taught us anything, it is that we must be forever vigilant and that we cannot simply accept the information placed in front of us unless we understand how it was derived. Just because something works does not mean that it should be left alone or is more beneficial than another process. Status quo is not always best.
Stringently evaluating business processes and making the necessary changes in corporate strategy and behavior combined with investing in new technology, can help position companies to capitalize on new opportunities the eventual economic resurgence will bring. These changes can also help companies prepare for the next downturn. As we move through this period of reflection, take notice of the warning signs pertinent to your company. These signs are not the macro-indicators but the micro-effects of a forthcoming downturn specific to your company.
By gaining greater visibility across the enterprise, organizations can utilize data to accurately evaluate current performance and pinpoint the underlying factors that affect it. By aligning resources with corporate objectives, executives are in a position to act on this information, making real-time adjustments to actual, budget or forecasting processes given the existing market climate. Furthermore, companies benefit from enhanced financial and operational planning, flexible budgeting and realistic forecasting. When organizations can combine meaningful reporting with analysis, they are able to better monitor and control performance that leads to improved decision-making.
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