PPG - A management tool for Predictable Profitable Growth

Predictability. Profitability. Growth. You need all three to achieve maximum results and stakeholder value.

1. If you have profitable growth but actual results are out of line with forecasts then you inevitably have many operational inefficiencies to handle the variances.
2. If you have predictable profits but no growth then you're most likely missing out on many opportunities to leverage a solid foundation for growth. In a public company, the stock price multiple will lag far behind competitors that have all three attributes.
3. If you have predictable growth without profits then you need to take a good hard look at the core business and strategy.

What I love about PPG is that you can use it as a management tool to guide a company and management team. If you identify one or two areas of strength, then you can focus on the other areas. You can develop specific projects and tactics to help develop the model and you can rally a management team around the whole philosophy.

At PL Developments, we had strong profitable growth but limited predictability. The company had grown from a small family-owned business where it was easy to react to variations in demand, supply, and production. As the company grew, it became harder and harder to react without accurate predictions. We put in place initiatives to improve predictability throughout the organization, including:

• sales forecasting and tracking (we could predict what, when, and how much would sell)
• purchasing and scheduling (improved our processes to plan what, when, and how much to make and what, when, and how much to buy)
• production metrics and forecasting (we could predict what, when, and how much to make and it's associated costs!)

Of course there were many facets to these initiatives and they all required technology and systems support, business process change, and most importantly - a change in culture.

Read More...

Summary only...

The Pendulum Effect

I had a good conversation today about the role of senior management to balance the sometimes conflicting needs of different departments while optimizing the overall business - and the pitfalls of allowing the "pendulum" to swing back and forth between which metrics (and therefore, which departments) are "optimized" at any particular time.

For example, a production department would prefer to have large production runs to minimize changeovers and maximize overall output even though this may create more raw material and finished goods inventory. Production planning would prefer more frequent small production runs to minimize inventory and provide flexibility to meet urgent customer demands even though it might reduce production utilization. Sales and customer service would like a ton of inventory to maintain the highest customer service levels and promise any customer any product at any time. Of course this assumes that the departments are primarily focused on different metrics, e.g., overall production output, inventory turns, and customer service.

Senior management is focused on overall growth and profitability - for both the short term and the long term. If a senior management team is not careful, they can drive undesirable behaviors based on the metrics that departments think are most important.

For example, if senior management only asks about overall production output for 6 months and then goes wild about growing inventory they will create a "pendulum effect" where the organization swings from trying to optimize for one goal and then the other. What's the answer? Senior management must engage all departments in the primary overall objective of the company, help everybody understand the interdependencies, and consistently use a set of metrics to measure and manage progress that minimizes large swings in direction and helps the organization build momentum in one direction.

Read More...

Summary only...