“How did I end up here” – Celena thought to herself as she rested her head on a pile of books, neatly placed on her desk. She had spent the better part of the morning being interviewed – no interrogated – by a young and a bit too eager detective. It had all started with that dead body she found in the broom closet. “Why did you wait so long calling it in?” he had asked accusingly. She had tried to explain she was preoccupied understanding the company’s Setpoint, but he just would not listen. Finally, back in her office, she could now focus on what mattered: finding ways of achieving the company’s working capital steady state.
We have in a series of articles discussed the concept of a working capital steady state, in which all underlying processes operate in harmony, impacting not only cash conversion, but also top-line and cost. We call this a company’s SETPOINT, the core of Nordstrom Advisory’s Lean Working Capital philosophy and approach.
Again, with this working capital I hear you say! Yes, because we really believe it is important. Working capital is not only a financial concern, but also a great indicator of a company’s operational health, agility, and growth potential, as deviations from a defined Setpoint are (often early) symptoms of underlying supply chain inefficiencies. This happens when informal safety mechanisms are allowed to materialize (intentionally or not) instead of fixing the root cause of the issues (read more on these safety mechanisms in our article: Incremental steps towards your SETPOINT).
Therefore a central part of Lean Working Capital approach is about supply chain optimization: making sure all processes operate in harmony – internally and with suppliers and customers alike – providing perfect value for the end-customer, with as little friction and waste as possible along the way.
The key words here are “all processes” and “perfect value for the end-customer”. The latter meaning nothing less than an agreed product delivered on-time-in-full, and at the right quality. The former refers to making sure all end-to-end processes and stakeholders across the organization are aligned towards making this a reality, whilst maintaining the company’s objectives regarding service level, margin and working capital.
This article aims at providing actionable insights how to ensure a holistic end-to-end process focus when pursuing a company’s Setpoint – again through the eyes of our fictional alter ego Celena Noch. For those of you who have not yet made her acquaintance, she was introduced in a previous article: How I learned to stop worrying and love my Supply Chain, and is a representation of our combined experiences, with flavor from some of the real-life supply chain hero’s and their struggles we have encountered over the years.
When we last met, Celena – fresh into her new role as supply chain manager at a large industrial manufacturer – had just dealt with two things troubling her: the unsubstantiated inventory reduction she had inherited, and… what was it again? Ah, yes. The dead body. She had at least dealt with one of them… After some rewarding workshops, she and her team had confirmed the inventory Setpoint as 45 days, equal to $700m. Luckily this was in line with the company’s expectations, as this would mean a 10% reduction from the baseline inventory of $780m.
Celena knew from experience she would only succeed in reaching her now identified Setpoint if she got everyone onboard the same train: “a company is never better than the sum of its functions” she mused and recalled some of the early challenges of her career. Too many times had she seen companies fail due to miscommunication and misaligned targets across the organization, where individual functions and too narrow focus were allowed to sub-optimize the supply chain as a whole. Like the time when the production manager wanted to improve his OEE by running longer production series, without weighing in consequences on order-to-delivery lead times, service levels and inventory build-up – not to mention flexibility to meet near time changes in demand. Or the time when sales, in an attempt to make up for lost sales, pushed products with no available capacity to produce. It is true what they say: for a worm in horse radish, the world is quickly reduced to horse radish! She would need to help them see the big salad… picture.
It was however difficult to concentrate. No matter how hard she tried, her mind always wandered back to those last ominous words of the police detective: “I understand you are scheduled to meet your demand planner for the first time this morning. No need to stress, you have already met… in the broom closet”. If the dead body was her demand planner, who was aggregating and forecasting demand? Who was giving input to Sales and Operations Planning? She would have to look into this soon. But for now, back to the issue at hand.
Looking down, she realized she had been doodling on a piece of paper on the desk. Or, at a closer glance, not doodling but rather drawing a familiar structure. “Ha, muscle memory at its best” she thought as she looked at the ‘framework for sustainable results’ she had used so many times in the past. “Yes, this is exactly the structured approach I need” (see figure 1).
FIGURE 1. Nordstrom Advisory’s perspectives on change: framework for sustainable results
Celena liked the model because it illustrates the different verticals a Group Strategy should pass through in order to translate into its desired results. She knew it as an efficient way of highlighting and communicating constraints, as well as any real gaps:
First vertical: Does the corporate agenda provide a clear and common direction, supported by aligned short- and long-term targets and incentives across the organization, from Group to Individual;
Second vertical: Do the business fundamentals and supporting infrastructure (organization, processes, systems, and people) have the governance, capabilities, resources, and capacity to deliver on the corporate agenda; and
Third vertical: Does culture allow and reward holistic, long term and sustainable solutions rather than short term returns, and is individual behavior given sufficient focus as a critical component and driver in delivering lasting results.
Feeling good and invigorated for the first time since this morning’s meeting, Celena started planning her next steps. She would start by making sure her by now communicated inventory target were not in conflict with any other department: too many times before had she witnessed firsthand how companies’ best intentions were torpedoed by conflicting agendas. Not on her watch - she would not let that happen here!
Celena stood up and walked purposefully towards the door. Before leaving the office, she recalled the detective’s last words: “Oh, miss Noch – you should know the dead man was on his way to see you before he died. According to his last notebook entry, he had found something suspicious he wanted you to see…”
We hope you enjoyed Celena’s latest adventure. She will return again after the summer to share some more experiences and insights. And hopefully provide some answers regarding the body in the broom closet: how did he die and what did he want to tell Celena? Stay tuned, and in the meantime, we leave you with 3 take-away’s from today’s article:
1. Set your company up for success – make sure your company’s strategic targets are aligned with its operational and financial constraints. The best laid plans of mice and men often go awry because of unsubstantiated and unrealistic targets, where the organization has not been given the resources to succeed. Read more on this in our article: Supply chain bias and why organizations set themselves up to fail.
2. Maintain a holistic view and balance stakeholder perspectives across the organization – make sure your company’s targets and incentive structures are aligned across functions towards a common goal, where no individual function is allowed to pursue activities favoring themselves, without understanding the ramifications on the supply chain as a whole. Read more on this in our articles: Lean Working Capital – the gift that keeps on giving and Incremental steps towards your Setpoint.
3. You need to change the behavior to reach sustainable results – it is not enough to provide the direction and tools. A change in behavior must also happen in order to secure improved and long-lasting results. True behavioral change comes from an individual level, and builds on a combination of factors, e.g., understanding why it is important, ownership and motivation to comply.