December 2008: A Note from Jeff Mack
The Bottom Line: Outperforming the Competition in a Challenged Economy

In today’s economic environment, the number one performance metric is reduction of operating costs. I recently reviewed a study of manufacturers by the Aberdeen Group that focused on this topic. I will share some of the findings which were very enlightening, timely and somewhat surprising. Even though this particular study focused on the manufacturing sector, many of the principles apply equally well to any organization that handles inventory.

A Quick Definition of Terms

• Best-in Class: Top 20% of aggregate performance scorers
• Industry Average: Middle 50% of aggregate performance scorers
• Laggard: Bottom 30% of aggregate performance scorers

What the Study Found
Reduction of operating costs was cited by 77% of manufacturers as a top market pressure. Improving competitive advantage was the second highest ranking market pressure, cited by 37% of the respondents. That’s a significant difference between 1st and 2nd. Some of the elements impacting costs in a manufacturing environment include reaction time, material costs, process variability, quality, human capital, shrinking product lifecycles, and compliance obligations. Many of these apply in a distribution environment as well.

In the manufacturing sector, three critical performance indicators are on time delivery, yield, and overall equipment effectiveness. Here’s how the three groups stack up in terms of operational performance.

Best-In-Class: Top 20%	97% On Time Delivery 98% Yield 91% Overall Equipment Effectiveness
Industry Average: Middle 50%	92% On Time Delivery 92% Yield 82% Overall Equipment Effectiveness
Laggard: Bottom 30%	78% On Time Delivery 76% Yield 70% Overall Equipment Effectiveness

Are there any surprises in the table below indicating financial performance?

Best-In-Class: Top 20%	25% Average Operating Margin
Industry Average: Middle 50%	19% Average Operating Margin
Laggard: Bottom 30%	18% Average Operating Margin

I don’t find it surprising that the Best-In-Class companies outperform the rest financially by 33%. I do find it surprising that the Industry Average barely outperform the Laggards. The Industry Average group significantly outperforms the Laggards in terms of operational performance, but that doesn’t seem to move the needle much in their financial performance.

So what are the Best-In-Class focused on to achieve their lofty status?
The top strategic action being taken by the Best-In-Class to address the top market pressure (reduction in cost) is reducing the variability in the production process. I suspect there are many strong correlations with distributors in this regard as well. That is to say, if the disruptive factors could be minimized in a distribution environment, operating performance would improve, and it would then follow that financial performance would improve.

How are the Best-In-Class beating the pack by 33%?
The reality is that both manufacturers and distributors, regardless of size, face a daunting task of effectively managing complex sets of data. However, if they can successfully overcome this challenge, great rewards await them. In a nutshell, they are getting on top of their data in a real time mode and ensuring visibility of key metrics in a role-managed way. What does that really mean? It means they are providing the relevant and necessary data, nothing more and nothing less, at the right time, in the right place, to the right people. By doing so, they can spot process variability immediately and react accordingly. The result is that the corrective action is more timely and appropriate, thus causing improved operations sooner.

Here’s a more granular view of specific actions being taken and the degree of involvement by each group.

	Best-In- Class	Industry Average	Laggards
Escalation procedures for non-conformance events standardized across the enterprise	52%	44%	29%
Measurement of operational Key Performance Indicators (KPSs) standardized across the enterprise	71%	52%	38%
Production optimization uses real time data from production processes and responds to process deviations	50%	28%	22%
Plant floor exceptions are monitored in real time	66%	38%	22%

If you believe that which gets measured gets improved, you need look no further for proof.

The Best-In-Class organizations have obviously made strategic investments in standardized scoreboards and benchmarks. They have found meaningful ways to extract and measure the data. And more importantly, they have found ways to link real-time operational data to financial performance. They have certainly used a good dose of technology to make the connections. In addition, they have used analytics, role-based perspectives, metrics and visibility, workflows, and a commitment to continuous improvement and reinvestment. And the culmination of that effort shows up handsomely in the bottom line. And of course, that is the bottom line.

Where can I find out more?
We have dozens of white papers on our website about ways to improve organizational performance. Enjoy - the exploration and the results.