Sep 9, 2020

Business Transformation - Sustaining with Digitisation



Business Transformation - Sustaining with Digitisation. 

Change is "constant" accelerating. Requiring Business Transformation or Turnaround.  It can also be defined as recalibrating the value proposition of business in line with changing ecology. There is a slight difference though, between Turnaround and Recalibration. While "Turnaround" means responding to the change, be it external or internal,  "Recalibration" is about anticipating the change and acting proactively. 

Any such need to recalibrate, is largely driven by a combination of factors. Internal factors can be; ignoring customer voice, severe working capital stress, either excess or under capacity, unserviceable loans, product quality, deterioration in industrial relations. Internal factors such as those listed earlier, cause more harm than external factors like competition, changing customer preferences, business cycle, tightening interest rates, liquidity in money markets, other structural factors, statutory or policy changes. 

External factors affect the entire industry and not just one or two businesses in isolation. Even while entire industry gets affected because of sweeping changes in external environment, there are still a few nimble ones who make it thru and emerge even stronger. Businesses with weak balance sheets are normally worse off. 

The internal factors that I mentioned above are merely the symptoms but the root causes are buried deep down.  Let us consider some of the most important internal factors.


Ignoring Customer Voice
This is one of the most critical causes of why a turnaround or recalibration is needed. Losing relevance to the customer is the fastest way to go downhill. Being complacent and refusing to innovate product or processes is a sure recipe of trouble. Partnering with customer is the only way to stay relevant to the customers. Partnering also means being truthful and upfront. Customers in the long run appreciate and value true partnership.  

Working Capital Stress
Major contributing factor for working capital stress is, cash blocked in unusually high inventory. Uncontrolled demand variation, inaccurate Bills of Material, wrong SKU codes, wrong lead times for procured parts, uncontrolled demand variation causing incoming pipeline breakdown, collapse of basic ERP system, production planning being done manually using excel spreadsheets; are the causes of excess inventory with high obsolescence. Low or delayed recovery of receivables also causes working capital stress. Continuous monitoring of inventory turns and benchmarking to industry data, is the best way to keep this under check.  

But there is a very silent and therefore serious factor. And that is "eroding margins".  If input costs are spiralling and customers keep pushing for price reductions, it will create a creep load on working capital. This stress builds up silently in the system. And working capital requirements grow disproportionate to revenue growth. If business is seeing revenue growth then it is even more risky, as this stress remains hidden till a breaking point. Monitoring of EBITDA margins and material costs as % of revenue (being more than 70% of total costs) will  create a timely alert.   

Over or Under Capacity
Both over or under capacity is highly risky. Definition of capacity includes installed capacity and manned capacity. In loose terms installed capacity is the capacity of machines installed. And installed capacity can be productive only when it is adequately manned. Beyond these loose terms however, capacity is a very dynamic phenomenon, because of multitude of variables. The product mix, demand variations, equipment uptime, material availability, quality yield, absenteeism. 

Installed capacity is a sunk cost. It can not be reduced. And addition to installed capacity has substantial lead time. However manned capacity can be adjusted to cyclical variations in demand, with much lesser lead time. While reduction in manned capacity can be achieved in relatively shorter lead time by reducing contract manpower, adding manpower can be a lengthy process due to learning curve of newly added headcount. And till the new hires achieve certain degree of expertise, they tend to imbalance entire line. Based on the product mix changes month over month, bottlenecks also keep moving. Capacity is a vast subject and I will dwell on it in a separate blog. However the point is, not knowing the existing capacity or when and how to reduce or increase the capacity, can be detrimental to survival.   

Recalibration

As discussed above, several of these internal factors affect business health and require transformation or recalibration. Any business transformation involves five key initiatives, namely  “listen to customer”, have a  “winning strategy”, implement the strategy using  “balanced score card”,  to eliminate waste “reengineer” critical workflow and strengthen “corporate governance”.  


But only that is not enough. Because all these initiatives have to be consistently sustained over long term. Need to ensure adherence to all reengineered processes and constant monitoring of balanced score card. Otherwise such initiatives have a tendency to fade off over a period of time. I also realised, from my past experience, that ERP Systems, especially for manufacturing workflows, have GAPs and do not cover several critical workflows, or if they do, implementation of these add-on modules is costly and tedious.  

 

We firmly believe sustainability is achieved thru digitisation. Digitization helps brings transparency, adherence and hence accountability. Another main purpose of digitisation is also to build a knowledge repository – a central knowledge gateway to freely draw upon by the organisation, rather than knowledge becoming proprietary to an individual.  Decintell Falco Knowledge Platform is a "single sign-on" seamless cloud platform, which hosts Knowledge Repository (KRè), KPI Measurement Dashboards, Digitised Workflows. (for more on Decintell Falco Knowledge Platform click Digitise with Decintell Falco Knowledge Platform) 


Other relevant topics decintellfalco.blogspot.com



Shantanu Joshi
Co-Founder
Decintell Tech Pvt. Ltd.

 

www.decintell.com 

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