A world-class close is performed efficiently and effectively, in a few days or in some cases a few hours, with as few people as possible, using as little technology and time as possible, and with minimal use of manual or miscellaneous journal entries. After the books are closed for the reporting period (day, week, month, quarter, or year), within a few short hours final reports can be generated, the numbers are accurate, auditors check controls, and everyone goes on to focus on making money or reducing costs in the next reporting period – not on compiling and disseminating reports.

A world-class close can only happen when it is a priority for C-level management. But as a corporate strategic initiative, a world-class close can also be an indicator of a world-class organization with the following characteristics:

• Management and employees are all held accountable for the business.
• Performance metrics are aligned throughout the organization.
• Continuous Improvement programs are well established.
• IT systems are highly integrated.
• The organization is nimble and can easily respond to changes in the business environment.
• The organization is committed to training and cross-training employees.
• The organization values innovation.

In an organization with a world-class close, accounting and finance teams recently described their processes and day-to-day responsibilities. Common characteristics include:

• Enter data only once at the source.
• Automate the reconciliation process.
• Control tightly any manual or miscellaneous journal entries.
• Continuously review the period-end close process and recommend improvements.
• Hold yourself accountable for the period-end schedule and process.
• Time system run-times to the hour and minute.
• Track and hold yourself accountable for any booking errors.
• Centralize the period-end process for IT, finance, and accounting teams.
• Be accountable for compliance to the period-end process.
• Move to a single, global chart of accounts if you are not already there.
• Ensure that anyone who is held accountable for their departmental budget, both revenue and cost centers, understands the close process and receives or can access updated reports whenever needed. Variances will be easy to spot and to respond to.
• Make it easy for internal and external auditors to monitor controls over financial reporting by automating virtually every step.

A world-class close can have different characteristics in different organizations depending on numerous factors. For example, one organization may perform a full close each quarter without performing a monthly consolidation. In Month One, a local close provides reporting on the operating income detail. In Month Two, they would do a partial consolidation without, for example, eliminating profit in inventory. Another organization may perform a complete close quarterly at the corporate level but with sub-units still fully closing on a monthly level. Regardless, organizations should resolve any accounting issues before the closing so that the closing period does not turn into a decision-making period.

All contributing business units should also be tracked on the quality and the timeliness of their submission to the same set of metrics. For example, organizations should establish definitions for early, on-time, and late submissions (e.g. more than 4 hours before deadline, between 4 hours and deadline, and more than one minute late, respectively). The organization would then track the timeliness of the submission and publish a performance scorecard. Similarly, an organization would define thresholds for materiality. Anything above the threshold would be handled in the following reporting period to ensure that a timely report is released and the organization would focus on reducing, or eliminating, manual adjustments and corrections wherever and whenever possible. Using a single, global chart of accounts helps ensure accuracy not only in the reports, but also in the submissions with fewer variations – reducing the number of possible errors.

Focusing strategically on developing a world-class close process will bring the obvious benefit – less time spent generating reports and more time focusing on the business. The additional benefits for any organization can be substantial and provide a way to establish a culture based on quality and accountability, one hallmark of a world-class organization.

As businesses were growing, building their customer base, and hiring, they may also have been planning to implement lean manufacturing or otherwise improve a host of business processes, from financial and R&D to product management, sales, and marketing. Along with the business processes improvements, IT managers were retooling their IT systems, upgrading their infrastructures, improving performance and security, or adding functionality for a host of business users.

But as the recession took hold the optimistic forward-looking projections changed. Revenues dropped precipitously and survival tactics were implemented across the board. Companies cut their work forces. Cost centers like Finance, HR, and IT gave up headcount. Even R&D headcount, usually the last to go, was reduced. New products in the pipeline were pared to the bare minimum. Manufacturing shut down to reduce WIP and labor costs. Purchasers cut orders to reduce inventory. Marketers cut back on tradeshows and direct campaigns, redirecting scarce funds to less costly online programs. Sales organizations were consolidated, products heavily discounted, and travel budgets reduced. Across the board employees were furloughed and salaries were cut. Performance-based bonuses were first severely cut and later completely eliminated.

At the same time that companies hunkered down in survival mode, the business environment continued to change. Markets changed, customers changed, and financial or other regulatory requirements changed. Technology changed as well. In the middle of the recession Oracle released upgrades to R12 which included new “global” functionality, important bug fixes, and improvements. Other technology vendors in the ERP ecosystem released new products. Despite the changes and even with significant loss of headcount, IT managers somehow continued to deliver and support IT to their internal or external customers.

Below we examine how the economy impacted five key business metrics: Productivity, Inventory, Days Sales Outstanding (DSO), Customer Satisfaction, and Retention, how organizations responded as the recession unfolded, and the effects they had – or should have had – on ERP systems. Read more…

But our collective memories are relatively short. Already new mortgage-backed securities are being sold, this time on the backs of first-time home-buyers even as Dubai World sends jitters through the financial community. Are we able to recognize the weak signals that will eventually turn into tsunamis, but well in advance, so that we have time to react? Or are we still relying on the tried and true lagging indicators, quarterly sales reports and performance reviews?

And even if we recognize the signals and know what we need to do in order to stay competitive, will we be able to adapt quickly and then sustain the ability to respond for the next time when conditions change yet again?

Dealing with Change – Teaching an Old Dog New Tricks

Gartner maintains that companies need to be proactive in reacting to changes and recognizing the early indicators and patterns that can provide visibility into potential future opportunities and threats. These early-warning predictive patterns are increasingly coming from outside the enterprise, driven by an interconnected society and changes that are outside the control of an enterprise. As the investors in Dubai World seek funding, US corporate executives worry about the impact on their already fragile economic recoveries and how deliveries passing through the busy United Arab Emirates ports will affect their just-in-time supply chain. Earlier Sense and Respond systems and Business Intelligence systems did not focus on the transactional data in ERP systems that might reveal indicative patterns of future changes and help executives make fact-based decisions. Further, Yvonne Genovese, Gartner VP and Distinguished Analyst, identifies several factors that inhibit the ability to predict and adapt to change in ERP systems. Genovese maintains that, even when exceptions are recognized in an enterprise, there is “siloed visibility” meaning that the exceptions are not shared across different organizations. Additionally, the lack of transparency and the presence of conflicting data often result in conflicting patterns, and finally, ERP systems by their very nature are not flexible enough for decision makers to change the business processes in order to react to and change the pattern quickly (and not a 3-year reimplementation process).

Gartner identifies three component parts of Pattern Based Strategy: Seeking, Modeling, and Adapting. Read more…

As time passes, documenting the period-end process becomes more complex, and maintaining the process documents takes more and more time. But the collective memory of the finance team hasn’t forgotten what it was like to get through that first ERP implementation project – not to mention its enormous expense – and any hopes of improving the situation are abandoned as soon as someone says, “What about the ROI?”

Finance teams would have a better chance of responding to the ROI question if they banded together with their colleagues in purchasing, HR, product management, manufacturing, sales, marketing, and IT as they struggle with the same legacy ERP systems. Ask around and you’ll find that all of them have created their own sets of creative workarounds just to get through another day.

It’s happening everywhere…. Read more…

Manufacturers in North America and Europe are struggling to meet the challenges of a stressed economy. The good news is that the coming recovery is expected to see early signs of a sharp increase in demand for steel because the street thinks that the steel industry will be among those to lead us out of the recession.

Many manufacturers realize that they must make changes if they are to survive and flourish in a world that promises to be very different from the past. A quick look at some of the factors that are already impacting our world gives us a small taste of what we can expect as we move into the 21st century.

•    Customers are placing smaller orders.
•    Customers are looking for faster turn around times.
•    Customers are demanding more custom products
•    Customers are constantly changing as they try to keep up with their customers’ demand.

In addition to these external factors, manufacturers are being pressured to be more profitable by reducing waste, improving efficiencies and becoming more responsive. The new paradigm is clear; manufacturers who want to be successful must be able to reduce inventories while learning to react faster and smarter to change. For those paying close attention this is not breaking news, but it appears that many companies do not yet have a clear understanding of the underlying problems and what they need to do.

Doing the same old things but faster is unlikely to work and is not the answer. This has been proven through the success achieved by companies such as Nucor.  They have become one of the largest steel producers in the United States by putting in place strategies that have made them fast and nimble.

The underlying cause of the problem is that too many manufacturers are running their businesses with Enterprise Resource Planning (ERP) legacy systems that still have their manufacturing roots in early 1980’s MRP (Material Resource Planning) concepts and technology. These systems were primarily designed to address the needs of make-to-stock manufacturers who could rely on excess inventories at every level of their process. Many companies are starting to understand the limitations of this approach.  This article is for those who are looking to be leaner and more flexible.

The limitations of a traditional MRP based planning system can be more easily understood if applied to a real life situation such as planning a wedding at say 2:00 pm on June 24. This is obviously unrealistic but it does highlight the consequences that stem from a system that can’t even create a starting plan that is accurate and precise.

Everyone involved is initially delighted when told that they can book their wedding on June 24 at 2:00 pm.  What the wedding planner doesn’t initially know is whether or not other weddings are booked for that same day and time. This is a potential problem that could quickly evolve into pandemonium.

It would be nice if a planning tool had the ability to recognize a conflict and a need to re-schedule. MRP planning would not be able to do that because it doesn’t know there is a conflict and it has no logic to help it determine which weddings have priority. Even if it could prioritize the weddings, it couldn’t calculate precise new dates and times for each of the weddings. And if it could calculate a new date and time for each wedding, it would have no way of making sure that the priest was available at that time, and even if the priest was available, it would have no way of notifying the photographer and the chef and the restaurant, etc.

The underlying limitation behind all of these problems is that MRP-based planning systems can’t finitely plan even one constraint, and they certainly can’t synchronize multiple constraints. A few years ago a number of smart people who were frustrated with the limitations of such legacy systems started implementing a concept called Lean manufacturing. Lean was designed to remove complexity and waste and was made popular by the success of companies like Toyota.

At the planning and execution level, Lean is built on three key concepts of waste elimination – muda, muri, and mura. Without getting into too much detail, muda addresses the need to remove non-value added work such as overproduction (production ahead of demand) and excess inventories (all components, work-in-progress, and finished product not being processed).

Muri is defined mainly as the breaking down of tasks into their smallest constituencies, and mura refers to the need to make work flow from end to end by removing unevenness in the process rather than buffering it.

Other companies were starting to use a management strategy called Six Sigma that had been developed by Motorola to identify and remove the causes of defects and errors in manufacturing and business processes. Today these two concepts are often combined into one concept, which is sometimes called Lean 6Sigma or Lean Six Sigma.

Although most companies who decided to adopt Lean 6Sigma were able to achieve some level of success, manufacturers who had highly predictable demand patterns and a limited number of products were able to achieve the best results.

Other manufacturers who were still looking for ways to manage the daily bombardment of change saw only limited success. One of the reasons for this was that early Lean 6Sigma systems were manually intensive so they were unable to replace all the functions that had previously been performed by their Legacy planning systems.

So while Lean 6Sigma initiatives were working to reduce inventory levels their old planning systems were telling them to increase inventory levels. Because of the obvious conflict, mistakes were made resulting in inventory shortages, which led to late shipments and mass confusion. Faced with this situation, manufacturers realized that they either had to abandon their Lean initiatives or find planning systems that would not only dovetail with their need to reduce waste but would automate it where it made sense.

Without planning software that can prioritize and plan events at the detail level it is not possible to synchronize material and capacity constraints; without synchronizing multiple constraints, there is no basis for planning reduced inventory levels. Similarly, if something changes and specific materials are not available, this information must be synchronized back to the plan.

When the plan changes the new planning system must be able to instantly re-calculate the impact of each change on downstream activities, which, in turn, kicks off a new round of synchronizing and re-synchronizing. Right about now you should be starting to understand the problem because none of these things can be done with traditional legacy systems that rely on MRP planning concepts.

We believe that every second spent making the wrong product takes away capacity that could be used for products for which the customer is waiting.

Many industries, such as the steel industry, find it difficult to make only what their customers order because the efficient size of a production run is often much larger than the size of individual customer orders. Traditionally this means that they end up making additional stock that sits around forever.

Alas, those crystal balls seem to be a bit cloudy, and not even the best consultants could predict the substantial changes that a company undergoes over the life span of an ERP system. As companies approach 5, 10, and even 20 years running the same systems (albeit with numerous upgrades and additional functionality), they are deriving less value from the system that was originally implemented. The number of spreadsheets has multiplied, many are considering a re-implementation, and there are hundreds, if not thousands of interfaces to systems that perform similar functions, consolidate the data, or translate it so that it is useful to the ever-changing business requirements. The promise of reduced operating costs and consistent systems has resulted in a very high cost of ownership and a loss of business value.

The character of ERP systems also changed from supporting a business’ requirements to supporting regulatory and control compliance. Of course, as those requirements changed, there was a need to invest more capital and add more resources to support the ERP systems.

Further exacerbating the problem of a changing business is the growing complexity of the ERP systems. As the following chart illustrates, complexity of Oracle E-Business Suite has escalated with each new version release, resulting in a system that is extremely difficult to maintain. For example, Oracle E-Business Suite R12.0.6 contains over 2.6 million columns (about a 25% increase over the number of columns in R11.5.10.2), each of which could be related to any other, or could be part of a check constraint, or part of a unique or primary key. There are about 36% more constraints in R12.06 than in R11.5.10.2. Even relatively “simple” changes such as finding the impact of a chart of accounts change now affects several hundred more columns in R12.06. Thus, the complexity of changing a chart of accounts went up by more than a third between releases.

Obviously, the larger the ERP footprint, and the more complex those systems are, the greater the capital requirements for maintaining and changing them. The economics and the corresponding value of the ERP system has changed. To compensate for the higher costs, ERP systems must be able to be extensible and adaptable to changing requirements over a longer life span. ERPs must provide data consistency and process integrity in addition to system consistency across the enterprise, As Gartner states, ERP systems must support the “consistent and seamless capture, persistence, transformation and delivery of information throughout the enterprise. To create this infrastructure, enterprises must align their metadata, standards, information formats and technologies for persisting, accessing and delivering data. The demand for tools and approaches that manage data more effectively will grow.”

Transformation software that enables ERP systems to change rapidly can change the value of the ERP spend. Along with the need to manage the complexity of the business and the complexity of the ERP systems, the need to cut costs and realign IT strategies is driving successful companies to invest in changing their existing ERP resources.

The project was to go live in July, 2009, but has been postponed until July 2010. The projected annual savings of $10,000,000 will not begin to show results until the new projected go-live date of January, 2011 (18 months after the originally scheduled go-live date). During the eighteen months, the company could have been recognizing the results of $15,000,000 savings in operations – savings that would have gone straight to the bottom line. Additionally, even with a modest 3% investment, the company would have earned $450,000 on the $15,000,000.

More importantly, that money could have been used for research and development or for marketing activities that would have made the company more competitive. When the economy is down, buyers should think about how to use the money they have so that they get long-term benefits, recognize results quickly, and grow. For some more ideas on how to grow your business during a recession, please see this article.

By increasing the number of days a company holds on to cash, additional interest will accrue, whether using a daily sweep checking account or another instrument for cash management. The following calculator analyzes the benefits of extending the payment terms with suppliers and calculating the value of having the cash on hand for an additional “float” period.  >>See How Much You Can Save

As a result, companies often set up hundreds of operating units, each with its own freight carriers, matching tolerances, approval hierarchies, supplier terms, and contracts. It was difficult to determine how much business was conducted with a particular supplier, difficult to determine the enterprise cost of managing and maintaining different supplier relationships, and the burdened costs of different inventories. >>MORE

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