Before the onset of the recession and the meltdown in the financial sector, for businesses addressing change meant adapting to more cash coming in and what to do with it to keep investors happy or adapting to unprecedented growth – one of those “good problems to have”. Organizations were looking at 3, 5, and 7 year strategic plans with upwards of 20% growth year over year. A company doing $100 million in revenue might have had plans to double in size in four or five years.

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.

Productivity

In order to reduce operating costs, virtually every department in every industry (except possibly health care and education) experienced at least one Reduction in Force (RIF) during the recession. For everyone this meant doing more with less. Management’s expectation was that the remaining employees would become more productive. In some cases tasks were reprioritized with less important ones; those adding little value were eventually dropped. 

There are many factors that contribute to a loss of productivity including reconciliation of multiple spreadsheets, manual adjustments, inconsistent data, a lack of standards for charts of accounts or calendars, or repetition of the same task across different parts of the organization. For Finance teams with reduced headcount, any processes that require manual entries or consolidating data in spreadsheets and then reposting is an inefficient and painful process that needs to be repeated on a monthly, quarterly, and annual basis. If a company uses more than one Chart of Accounts, for example, consolidating the data for reporting is problematic. Every account and every subledger needs to be mapped and reconciled manually, and many adjusting and intercompany entries need to be created. If different business units are operating on different calendars (month-end versus 4-5-5, for example), consolidating balances is also difficult. If there are multiple instances, there is even more effort involved in gathering and reconciling the data. If a company is operating a shared services center and the data entry team has to log into and out of different responsibilities for different operating units to do a check run, there is a significant loss of productivity. Consolidating instances, migrating to a single COA, standardizing on a single calendar, or merging operating units would significantly improve the team’s ability to produce accurate and timely reports and make decisions based on the entire company’s data without a host of manual workarounds.

It is no surprise that standard processes and data greatly enhance productivity throughout the organization. From data entry to analytics, there are significant gains that can be recognized by everyone in the organization understanding the data, using it in the same way, having a single, reliable place to get the data, and having consistent business processes. 

Let’s look at some simple math. If a company has 10,000 items in inventory and three instances and they want to do a price change, they will need to update 30,000 items – three times as much work for a relatively simple task. They have to apply patches, backup, and maintain three databases. If a company uses two charts of accounts, then the company needs to create two sets of reports, two sets of financials, and two different rollup groups and hierarchies – twice as much work for every process – never mind the additional work of reconciliation and consolidation. No matter what the object is (instance, chart of accounts, calendar, etc.), when there are more than one, there is extra effort involved, extra time, extra complexity, extra cost, and reduced productivity. 

Now, that’s not to say that a global company can operate with a single ledger or one operating unit. However, most EBS environments can be greatly simplified to reduce costs, comply better with statutory requirements, and be more manageable in the event of a RIF. 

Inventory

For many organizations, the first sign that the economy was in trouble was in their order numbers. One supplier to the automotive, manufacturing, and aerospace industries saw sales decline 30% and at the same time saw orders decline a staggering 41% in early 2009. The decline in orders was particularly troubling because it suggested that sales would continue to decline well into the future, as, in fact, they did. Managing inventory, reducing WIP, and renegotiating vendor contracts became a critical survival tactic not just for this supplier but for many organizations by 2009. But effectively managing inventory and quickly responding to changes in sales and orders requires systems that contain good data that can be easily and quickly accessed by demand management and purchasing. Another of the automotive companies had multiple duplicate items that cost them over $100,000,000 per year. They realized that their supplier agreements that prohibited price increases on an item forced their suppliers to create a new catalog item every time there was a price increase. Not only did the automotive company have items on the shelf taking up storage with two different product numbers (that they didn’t know were there), they had to reproduce different manuals, bills of materials, and replenishment orders. Another company did not report their inventory costs consistently among different subinventories. Other companies consolidated warehouses but maintained separate inventory organizations, so they needed separate receiving, inspection, and backorder processing. Several times, the item was backordered for one inventory organization, but there were hundreds available just across the aisle in the other inventory. For EBS customers, many of these problems can be solved by merging inventory organizations, resolving duplicate data, and restructuring the material handling, overhead processing, material overhead, outside processing, and expense costing accounts for subinventories as well as reviewing supplier terms across operating units. 

Operating consistently and with a good source of data significantly reduces inventory costs, allows for better planning and just-in-time delivery of goods, better use of storage, more profit, and most importantly, better service to customers who know if an item is in stock. Good data and consistent processes are paramount to reducing costs – and not only in bad economic times. Although making changes to the data can be costly and time consuming, the cost of excess inventory and WIP can be far greater. 

Days Sales Outstanding

Days Sales Outstanding (DSO) is the ratio of Accounts Receivable to Average Daily Sales. DSO is really a measure of how well Order Management, Inventory, Billing, Receivables, and General Ledger work together. There are many challenges to improving the order to cash process and thus reducing the DSO. Fragmented databases, a lack of visibility into the sales pipeline, multiple entries of sales and orders, and different revenue recognition rules within an organization all add days to the time between when an order is taken and when the cash is received. Streamlining the order to cash process may mean correcting or improving customer information (removing duplicates, enforcing consistent credit limits, invoicing correctly, and ensuring shipping and billing information is correct).

The ability to order across different inventory organizations or invoice across operating units can significantly improve DSO. An energy company using EBS had different operating units for their oil and gas lines of business. That meant that a customer subscribing to both services received two different statements a month and that there were different payment histories. There wasn’t visibility into the customer usage patterns – they didn’t even know which of their gas customers were also oil customers. After merging the operating units, they significantly reduced their DSO.

Having a single chart of accounts can improve the efficiency of receiving cash. Using Multiple Reporting Currencies (MRC) along with reporting sets of books enables timely enterprise reporting and analysis of DSO without going through a full financial consolidation or translation among different sets of books with different charts of accounts. Improving the receivables process, whether by improving the quality of customer data or consolidating instances or organizations so that there is a single consistent view, can have an immediate positive effect on cash flow.

Customer Satisfaction and Retention

Customer satisfaction is allowing customers to buy in the way that they want to buy. Retention is providing existing customers with an incentive to continue to purchase from you instead of buying from your competition. Obviously, during a RIF, a company needs to look at how they can provide products to their customers in the most efficient way and still have the flexibility to allow variations in customer buy patterns. When Sears bought Lands End in 2002 and Kmart in 2005, the challenge was to effectively merge three different types of operations: a brick and mortar that had a reputation of trust, reliability, and quality products; a catalog/on-line business that was extremely good at tracking customer buying patterns; and a retail outlet that was known for its discounts. The three companies all had many similar items (apparel, home goods, and travel accessories). However, 5 to 8 years after the merger, each of the three companies currently maintains separate product catalogs, different customer databases, different suppliers, and different order processing. Even today, when buying on-line, a customer can buy at the web store for each of the companies, but following the link to the other company means leaving the original web site and opening a new window. Of course, since there are three distinct web sites, a customer would have to have three different shopping carts, make a payment to three different systems, and receive 3 separate packages in the mail. Even in the brick and mortar stores, if a customer buys something at Sears, he cannot return it at Kmart. Some of the Sears stores do have a Lands End kiosk, and in 2009, Kmart opened a single Kenmore store within its main Kmart location; however, both the Lands End kiosks and the Kenmore store within Kmart still maintain separate computer systems. For the most part, the extent of the merger is that Kmart and Sears are able to carry merchandise from Lands End, and Kmart is able to carry the craftsman tools and Kenmore lines. The failure to merge product catalogs, orders, order processing, and shipment tracking across the three stores has resulted in the merger losing value.

The following chart shows the revenues, the cost of goods sold, and the costs as a percentage of revenue for each of the three companies before the merger, and also for the merged entity. For 2000 through 2004, the individual results are summed to provide a perspective of the cumulative results of the companies. In 2004, after the acquisition of Kmart, Sears put all the companies under the umbrella of the Sears Holding Company. When the merger was announced in 2004, Sears stated that they would expect a savings of $500 million a year after three years. The merger was completed in March 2005. As is obvious from the chart, not only have the revenues decreased Year Over Year (YOY) for every year except 2006 (for a total decrease in revenues of 60%), but the cost as a percentage of sales has basically stayed the same.

In all, the revenue numbers are a reflection of an unfavorable customer buying experience with disparate ordering, payment, return, and credit limit policies. Even though Kmart may sell a Kenmore appliance, the consumer must go to Sears for repairs or warranty work. Sears has not been able to leverage its buying power with suppliers who may supply many of the same items to the different stores. With different product catalogs, there are increases in the cost of inventory, increases in distribution and freight costs, and differences in pricing. A customer today researches products online, flips through a catalogue, and goes to the store, but he doesn’t buy before comparing prices with a mobile application. If, for example, the customer were buying a queen sheet set, he will see different prices for equivalent goods at all three companies (and Sears has to stock multiple brands of 420 thread cotton sheet sets). Sears has no visibility into their supply chain across the enterprise, and more importantly, Sears does not know who their customers are. And if Sears doesn’t know who their customers are, they will not know who to retain or how to retain them. Sears has failed to synthesize the best of the three brands: the quality that they had with the Sears brand, the customer buying demographics of Lands End, and the significant discount programs of Kmart. 

Conclusion

Productivity, Inventory, DSO, Customer Satisfaction, and Retention are five key business metrics that were affected by the recession and required strategic and tactical responses by management. Managers responded by cutting costs, reducing headcount, and reorganizing. Overtime inventories were slashed and product lines reduced. But with reduced headcount, the pressure on remaining employees to perform has mounted. Nevertheless, the pressure will continue to grow until confidence in the economy and available credit improve enough for employers to begin hiring again. Employees will begin closely examining, if they have not done so already, any and all of the manual workarounds they perform every day, week, month, and quarter and demand improved performance from their ERP systems. IT managers will have a singular opportunity to support their organization by improving its existing EBS so they – and the economy – can begin the inevitable recovery process.

You may be taking a hit everywhere, but you can streamline your Oracle E-Business Suite to recognize immediate cost savings and to increase your revenues and profits.