Corporate Performance Managementfor the Manufacturing Industry.Edwin Ecob, Cambashi, December 2003.

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GEAC Performance ManagementUnited Kingdom Division22 Chelsea Manor StreetLondon SW3 5RLwww.performance.geac.com

Cambashi Limited52 Mawson RoadCambridge CB1 2HY

www.cambashi.com

ForewordCorporate Performance Management (CPM) is “an umbrella

term that describes the methodologies, metrics, processes,

and systems used to monitor and manage the business

performance of an enterprise.” Gartner Group*

Key indicators of corporate performance cannot be found in

financial data alone. Quality, customer satisfaction, productivity,

market share and speed of delivery often reflect a company’s

position and prospects better than its reported earnings.

Therefore, it could be considered hazardous to base a

company’s future purely on its accounting data.

Manufacturing managers today expect their CPM systems

to track both non-financial and financial measures. It has

become incumbent on management to ensure that an

appropriate information architecture is developed and

technology is put in place to support it.

The emergence of databases such as Microsoft® SQL Server

with Analysis and Reporting Services have helped to facilitate

the collection and analysis of non-financial performance data.

New technologies such as Geac Performance Management

have converted data into meaningful information for effective

decision making.

Each manufacturing company has its own measures

and processes for collection and measurement in the belief

that ‘what gets measured gets attention,’ (Robert Eccles –

The Performance Measurement Manifesto).

The Cambashi white paper, ‘Corporate Performance

Management for the Manufacturing Industry,’ aims to uncover

some of the issues that technology developments can help

to address. Microsoft and Geac are working together with

many of the world’s largest manufacturing organisations to

provide cost effective, scalable solutions that integrate strategy,

tactics and reporting processes and help management make the

right decisions about their supply chain, sales and profitability.

We would appreciate your views and commentsregarding this white paper. Please feel free to call mepersonally (0207 349 6000) to discuss this and corporateperformance management in your organisation.

Mike Andrews

Managing Director, Direct Operations - EMEA

Geac Performance Management Division

* ‘Corporate Performance Management: BI Collides with ERP’ Gartner Research

note SPA-14-9281 by L. Geishecker and N. Rayner

01 | 02

Contents

Introduction 3

Business Drivers for CPM 4

At the ‘sharp end’ 5

Corporate Performance Management 7

Closed-loop system 8

Communication 8

Supply chain analysis 9

Sales analysis 10

Inventory management 10

TerminologyAny discussion on the application of IT to business

cannot avoid the use of acronyms. This paper is nodifferent. More recent acronyms, such as CPM, areintroduced. It is assumed the reader is familiar witholder acronyms such as CAD and ERP.

Business is multinational and for both brevity andclarity it has been necessary to standardise on namingconventions. For example, the senior financialexecutive in an organisation is referred to as the ChiefFinancial Officer (CFO).

Organisational structures are incredibly complex.In this paper independent operational units within theorganisation are referred to as business units which are,in turn, made up of a number of departments –manufacturing, procurement and so on.

IntroductionIn business, it is not enough to do things well. Doingthe wrong thing well is pointless. Companies need todo the right things, then do those well. Strategydetermines what the right things are; operationsensure that they are done well. This paper discusseshow Corporate Performance Management can bridgethe gap between strategy and operations, helpingsenior management set, communicate and monitorobjectives that are meaningful to everyone in theorganisation. It also examines how CorporatePerformance Management allows business unit anddepartment managers to fulfil the demands that thecorporate strategy places on them.

Strategy, Metrics and Information TechnologyIT is an essential component of almost every

aspect of a manufacturing company’s business –one without which the business could not function.Why is it, then, that the only area which IT typicallydoes not support is the most important – setting,communicating and managing corporate strategy?

In most organisations, strategic direction is set by executive

management – typically after consultation with operational

managers. This strategy is then communicated down through

the organisation via business units to individual departments

and employees. By contrast, IT applications have tended to be

implemented bottom-up, starting with personal productivity

and process efficiency improvements (CAD in the design office,

CNC on the shop floor), and moving on to solutions aimed at

business unit efficiency (ERP, CRM, SCM).

Business Intelligence (BI) solutions have been applied to

various aspects of an organisation’s business, typically at a

corporate or departmental level. For senior executives there

are applications which help with particular processes such as

planning, forecasting and budgeting. It is only recently that IT

applications have been developed for the purpose of assisting

with the coordinated and comprehensive management and

communication of the enterprise’s strategic initiatives.

Research by the American Management Association

indicated that ‘measurement managed’ companies

consistently outperformed their peers who had not

implemented a metric-based strategic methodology such as

Balanced Scorecard or Economic Value Add. Whichever

approach to defining metrics is used, the methodology is

called "performance management". This methodology is now

being supported by a new category of BI applications which go

under a variety of names, including Business Performance

Management (BPM), Enterprise Performance Management

(EPM), Strategic Enterprise Management (SEM) and Corporate

Performance Management (CPM), depending on the vendor.

CPM is the acronym used in this paper. It has been defined by

Gartner as “an umbrella term that describes the methodologies,

metrics, processes and systems used to monitor and manage

the business performance of an enterprise”.1

Whether “measurement-managed” or not, the task of

consolidating and reporting the various metrics used to

manage the business has traditionally fallen to the senior

financial executive, typically the CFO. It is natural, then, that

the corporate focus of performance management, and the

target for vendors of CPM solutions, is the CFO. It is important,

however, that operational managers are fully involved in the

process of implementing and using the CPM system. Not only

will it provide them with a way to provide top management

with the information they need to manage the business overall,

but it will also give the operational managers a tool which they

can use to manage their own local strategies and metrics.

1 ’Corporate Performance Management: BI Collides with ERP’– Gartner Research Note SPA-14-9281 by L. Geishecker and N. Rayner

03 | 04

CFO’s reportTraditionally, the role of a CFO in a manufacturing

company has been to oversee the transactional systems and

report on the company’s operational performance to the

board. The CFO is expected to ensure that the organisation’s

resources – people, plant and equipment - are used effectively.

He needs to ensure that a balance is maintained between

demand, production levels, inventory and supplies, whilst

addressing the almost universal mantra to “cut costs”.

However, this role has gradually changed as senior

management has realised that the CFO is in an excellent

position to suggest, assess, and provide feedback on the

impact of various strategies on corporate performance.

The CFO is now an active participant in the strategic planning

process. Along with managing operational performance and

cash flow, the CFO is now often responsible for monitoring

corporate performance against the strategic goals and metrics.

For the financial executive, performance management

consists of a number of activities and processes such as

planning, budgeting, financial consolidation, forecasting and

ongoing management reporting and analysis against identified

criteria. Typically, each process is isolated from the others and

often supported by different technology. Information comes

from a variety of sources in different formats and in ever-

increasing quantities. Existing systems, geared to handling

transactional processes within the organisation, are

ill-equipped to provide the necessary support for managing

strategic performance.

Finance departments in manufacturing companies are

usually small. Time is spent acquiring and reconciling data

from different systems rather than analysing the information.

Most companies still consolidate the data onto spreadsheets to

manage financial performance. The frequency with which this

exercise has to be undertaken is increasing; quarterly rather than

annual budgeting is the norm; rolling forecasts are replacing

static, monthly or quarterly forecasts. Notwithstanding checks

which can be built into a spreadsheet-based process, this activity

is time consuming and still prone to error.

Pressure for improvements in the performance

management process is not just internal. Recent experiences

with Enron and WorldCom in the US, and the subsequent

Sarbanes-Oxley Act of 2002, mean that executives are

increasingly liable for the accuracy of their company’s financial

statements. Whilst this initiative is US-based, it is a situation

with which anyone holding financial authority anywhere in the

world can empathise, and be concerned about. Few Financial

Directors in the UK will be confident signing off financial

statements resulting from a spreadsheet-based process, if the

penalty for inaccuracy becomes as great as it is in the US.

Perhaps unsurprisingly, much of the research into the issues

driving finance departments’ requirements is conducted in

the US 2 but the findings are equally applicable in the UK.

For example, a report by CFO Research Services in the US , based

on a survey of 259 senior financial executives, indicated that the

main reasons for those executives seeking change to their

existing methods of managing corporate performance were:

Business Drivers for CPM

A company’s strategy can only be effective if everyone in

the company understands how the job they do, and the

metrics against which they are measured, fit with that strategy.

Operational managers are faced with their own set of issues

and concerns. They need to be confident that the decisions

they are taking – perhaps on a day-to-day basis – are

consistent with the corporate strategy. This requires that the

strategy is documented, communicated, and that a way exists

of monitoring their performance against that strategy.

Planning, budgeting and producing management reports

are often unwelcome additions to the operational managers’

activities. This is often because these requests for information

which, while important, are not part of day-to-day operations.

How much better it would be if, via the operational systems

they use on a daily basis, they could provide the information

needed by the finance team in an appropriate format.

One of the major tasks for operational managers is the

identification of a local strategy in support of corporate

strategy. Metrics defining the corporate strategy need to be

translated to reflect the business unit or department.

The operational manager needs a way to manage against these.

They also need help in assessing the impact of various

initiatives, especially where there are implications for other

business units or departments. For example, Production may

need to assess whether it is more cost effective to relocate a

factory to a lower-wage economy. However this assessment

goes beyond production. Procurement needs to identify

whether there are appropriate suppliers; Logistics needs to

consider the inbound and outbound movement of materials

and finished goods; HR will be involved in recruitment and

local labour laws and so on. The requirement is for a system

that can integrate these varying demands and help the

various stakeholders decide which approach best helps the

organisation achieve the goals it has set.

At the ‘sharp end’

● to improve visibility into current results and

better understand future performance trends

● tighter management of cash-flow in a poor

economic climate

● to cope with rate of change in the industry

● to conform to regulatory changes, in particular

Sarbanes-Oxley

So, from the CFO’s perspective, the primary need is for

a system which can integrate the various processes and

technologies involved in performance management and then

communicate the results to the rest of the organisation.

05 | 06

2 ’What CFOs want from Performance Management’– CFO Publishing Corp and Comshare, Incorporated, March 2003

Put briefly, CPM combines technology and best business

practice to help executives formulate and implement corporate

strategy. It includes a methodology, such as scorecards, metrics

to be used in the methodology and processes which the

organisation uses to manage the performance. This paper

does not consider the relative merits of Balanced Scorecards,

Economic Value Add or Activity-Based Management as

approaches to defining corporate strategy. CPM assumes that

a methodology is being used. Within any performance-

managed organisation there is a two-way information flow –

metrics defining the strategy flow down through the

organisation, data to manage the strategy flows up through

the organisation. This is shown in Figure 1.

CPM largely automates this process. Metrics defined

during strategic planning are made available to everyone in

the organisation and are used to communicate the company’s

progress towards achieving its goals. CPM also assists the

business unit manager by helping them provide information

‘up the line’ for planning, budgeting, etc. and in the production

of appropriate management reports.

Following implementation at the corporate level, CPM can

also be implemented locally at each point along the

information supply chain to help managers set their local

strategy, define metrics consistent with the overall corporate

strategy and measure against them.

Corporate Performance Management

Strategy P

lans M

etrics Info

rmat

ion

Executives

Business UnitManagers

DepartmentalManagers

End Users

RoleInformation

Source

KPIs

ManagementReports

ProductionReports

TransactionalSystems

● Figure 1

Before looking at CPM in detail it is necessary to make

some observations on the metrics used to define the

corporate strategy. Economist and Management Consultant

Peter Drucker is credited with inventing the phrase “You can’t

manage what you can’t measure”. This can be re-phrased as

“If you can measure it you can manage it”. But, just because

you can measure it doesn’t mean you should manage it!

Choosing appropriate metrics is one of the keys to

implementing Performance Management. The people setting

the company’s strategy have to know which metrics to use and

how many to use – too few will not accurately define the

strategy, too many and there is every likelihood of information

overload and lack of focus. Technology has allowed us to track

and measure to levels of detail previously unimagined.

The challenge is to move beyond “available” to “key”

measurements. The metrics chosen should be ones which can

affect the way the company is run. For instance, ‘increase in

market share’ and ‘stock price’ can both be measured and

tracked. However these should be seen as metrics resulting

from successful implementation of corporate strategy,

rather than defining it, as they are dependent on a number of

external factors outside the company’s control.

Usually, both financial and non-financial metrics are used to

define the strategy. Clear and understandable financial metrics

can be used to manage business activity expense and increase

profitability. Non-financial metrics ensure that internal behaviours

support the achievement of measurable goals.

Choosing metrics

A major telecommunication provider determinedthat being appreciably superior in customer servicewas one element of its customer-driven strategy.Banners were hung in call centres throughoutthe country with slogans like “Customers First” and“Service Matters”. But customer service levelsremained at the same abysmal levels.

Why? The call centre employees were measuredbased on the number of calls that they could processin an hour. This measure drove them to hang up ondifficult problems to handle simpler ones, drivingcustomers crazy. After implementing the BalancedScorecard, they changed their metric to “% ofproblems handled with one call.” This completelychanged the atmosphere of the call centre,and allowed the employees to focus on solvingproblems increasing morale, customer satisfaction,and eventually profits.

Extract from “Executing Strategy withthe Balanced Scorecard” Dylan Miyake.

07 | 08

CommunicationInformation about corporate targets and performance

against these targets should be available in an appropriate

form to everyone who needs it. Given the nature and structure

of most companies, this requirement implies that the user is

provided with a web-based interface which can be customised

to the individual user’s requirements. This is already happening

in related areas such as project management, where desktop

tools are being augmented by enterprise-wide tools, accessed

via a web interface.

Data from the CPM system can be extracted into more

familiar tools such as Excel for the production of ad-hoc reports.

Alignment, transparency and ‘single truth’Identifying appropriate metrics is a necessary first step to

implementing a CPM system. The information provided by the

system needs to be aligned with the corporate strategy which

the metrics describe. This ensures that the system contains the

information which allows senior management to monitor the

strategic plan and modify it where necessary.

The information needs to be transparent. It must be

possible to drill down into the underlying data to discover why

particular metrics are what they are. Users must have the

ability to further analyse the business information to

understand what is driving trends and to identify anomalies.

It follows that the information provided by the CPM system

should be available to everyone who needs it. Conversely,

business units should be able to feed the operational data they

use to run their part of the business directly into the CPM

system, making the managers part of the planning and

forecasting process.

Decisions taken by management at different levels, and in

different units in the organisation, need to be based on the

same information. This can only occur if the data and

information on which the decisions are made is up to date

and consistent across the organisation and available to

everyone who needs it. This forces a requirement for what is

becoming known as a single view of the truth. Whoever in

the organisation analyses last month’s productivity, profitability

or supplier performance should be using the same data.

This applies equally to planning ongoing initiatives.

For example, Procurement and Manufacturing would need to

be aware of a promotional campaign being run by Sales to see

if there would be any potential shortfalls in materials inventory

or finished product.

Closed-loop systemCPM gives organisations the opportunity to continuously

monitor and revise their strategy and plans. Availability of

information on an ‘as needed’ basis means that managers

can assess the impact of plans based on performance against

defined metrics and modify the plans (and even the strategy)

accordingly. Business intelligence tools with CPM allow

‘what-if ‘analysis to evaluate various courses of action.

Data AnalysisFigure 2 shows how relevant data – data to support the

metrics – are extracted from various operational systems into a

data store for further analysis. This will typically include data

about customers, suppliers, production, sales and so on.

Operational data is held in a number of different systems and

appropriate interfaces are needed to extract the data

automatically. One of the requirements for this data store is

that its structure allows different users to analyse the data in

different ways. This is similar to the approach taken by

companies utilising a data warehouse. However, for CPM, the

data store is typically much smaller and designed with the

specific objective of providing information on the metrics used

to run the business.

● Figure 2

Data Store

Application Tier

User Interface

SCMGeneral Ledger SalesERP

09 | 10

Talking to vendors of CPM technology – and these include Enterprise Application vendors,Business Intelligence vendors and Infrastructure vendors – their focus for CPM is clearly seniormanagement, and particularly senior financial management. However, moving CPM down through theorganisation, using it to address local strategies, can also make sense.

The focus of CPM is not just internal. The approach also gives forward-looking companies theopportunity to involve other (external) members of the extended value chain who can, in turn,monitor their performance within the value chain against an agreed set of metrics.

Applying CPM

Supply chain analysisIn the context of a manufacturing company a critical

success factor is the performance of the extended supply chain

from procurement of materials and components, through

manufacturing, to distribution. Management of this supply

chain involves multiple business processes in multiple

organisational units. There are a multitude of data sources,

both internal and external, relating to customers, suppliers,

manufacturing processes, testing, quality and so on. This is just

the situation that CPM technology can address, bringing these

disparate data sources together for analysis.

Procurement analysisWithin manufacturing companies there is constant pressure

to reduce costs. Different departments address this challenge

in different ways. Procurement will focus on suppliers.

Managing suppliers is not about beating them down on price,

though this is still the major focus of many procurement

departments, particularly for indirect goods. For strategic

suppliers it is about developing a business relationship, which

is beneficial to both parties. It’s about giving them accurate

demand forecasts and helping them achieve quality targets.

Managing suppliers takes time and this equates to cost over

and above the cost of materials. There are transaction costs,

costs of managing contracts and costs associated with

managing supplier performance to ensure quality and delivery

metrics are identified and met.

To do all this effectively, the procurement department

needs to establish appropriate metrics, such as fulfilment rates

and defect rates, and manage against these. This is where

another feature of CPM adds value. As the system is providing

continuous management of key metrics, using data extracted

from operational systems, it can issue an alert when

predetermined criteria are not being met. If overall quality of

supplied components is falling, procurement can be alerted

and then drill down into the data to find which component(s)

from which supplier(s) are causing the problem. If delivery

schedules are not being met, the suppliers or logistics

companies can be identified and corrective action taken.

Sales analysisA general manager of an operating unit wants to know

about the sales of all product lines for that unit. A product

manager wants to look at sales of one product line across

all operating units. CPM is designed to handle the

multidimensional nature of the underlying data and allow users

to interrogate data in a way that is relevant to them.

Customer analysisImproving customer profitability is an area where data

from multiple sources has to be aggregated and analysed.

Sales costs, support costs, perhaps design and engineering

costs, production costs, material costs all have to be weighed

against revenue in order to establish profitability.

Inventory managementOptimising inventory levels of potentially thousands of

stock keeping units (SKUs) across the supply chain requires

accurate balancing of customer demand, supplier deliveries

and production. This is particularly important in industries such

as high tech or clothing, where customer demand can fluctuate

rapidly and excess inventory remains just that. CPM facilitates

this by allowing an organisation to forecast customer demand

based on past performance using a range of statistical

techniques. Where a fall in demand is perceived, CPM enables

management to react quickly by modelling scenarios in order

to help them best match resources to demand.

11 | 12

Conclusions

13 | 14

CPM applies familiar technology to the task of

bringing together data from disparate sources for the

purpose of bridging the gap between strategy and

operations. Analytical tools, web-based interface and

use of alerts allow managers to monitor key metrics

via a portal, focusing their activity on management

rather than data acquisition and consolidation.

For a company’s top management, CPM provides

visibility of operational data in a way that supports

evaluation of potential strategies. It helps monitor the

metrics essential to the achievement of chosen

corporate strategies. It enables the CFO to integrate

planning, forecasting, and budgeting processes and gain

buy-in from operational units. It allows the operational

units to manage their local strategies and provide data

against which senior management define and monitor

corporate performance.

Whilst this paper has looked at CPM in a

manufacturing context, the approach and underlying

capabilities apply equally to other industries. The key

capabilities of data extraction and data analysis, coupled

with a performance management methodology such as

balanced scorecard, can be applied equally well in a

financial services or retail organisation.

And how do you know if you have buy-in from the

employees? William Schiemann, chairman and CEO

of management consulting firm Metrus Group Inc. and

co-author of “Bullseye! Hitting Your Strategic Targets

Through High-Impact Measurement”, suggests that you

ask them.

“If you can ask a person on the

shop floor or a person programming

code, and they can tell you three to

four of their objectives, how those tie

in to the company’s performance and

what the measures of achieving those

objectives are, you’ve got it.”