According to a study completed by AMR Research, seven leading business intelligence/performance management (BI / PM) vendors recorded revenue growth in 2006 (BI Landscape: A Closer Look at License Revenue, November 2, 2006). Two key trends are helping drive this growth in PM:
- Increased global competition and the resulting pressure on prices are driving initiatives in CPM. In manufacturing industries such as metals and chemicals, the increase in offshore capacity requires even greater efficiency in operations in order to maximize profits. The growth in the CPM market is solid evidence of corporations' desire to find innovative ways beyond the traditional management of margins and costs to optimize profitability.
- Manufacturers are seeking greater use of the data that they now have available, especially as a competitive weapon. The growth in CPM efforts is also driven by the greater availability of data within organizations. Having spent millions of dollars in enterprise systems to capture sales, cost and production data, manufacturers are looking for ways to use this data to increase efficiency, compete more effectively and thereby increase profits.
Challenges with data
The accumulation of data with technology systems evolved with the data existing in silos and making it difficult to bring
together. This is not just a function of different information being
stored in systems from different vendors with different data formats, schemas, and user interfaces. It is also due to elements of the
data being accumulated in one system without having to be tied
to different elements of the same entity (e.g. product, transaction)
held in another system. For example, the identifying reference to a
given product (number, name, or description) might be completely
different in the ERP system to that which is used in the production
system. Companies know that
there is value in using the data
they have available, but there
are challenges to overcome
in using it to improve performance.
A second challenge with corporate data lies in the granularity of specific information. For example, while a manufacturer may possess data on freight costs, this may not be broken down to the individual product level. To use such data as effectively as possible requires being able to break down the available information to a more detailed level.
Emergence of new, targeted CPM / BI
applications
To complement companies' growing desire to make more use
of available information, a new breed of applications is emerging
in the CPM area to address specific applications that will help
improve performance including profitability. Such applications
include budgeting, forecasting, and strategic planning. Several of
these extend the use of business intelligence in the enterprise.
While BI tools have provided strong value to organizations in being able to analyze the wealth of historical data now available, new BI applications can address specific challenges. For example, there has been increasing interest on the part of manufacturers to combine margin and production run-rate data to evaluate products, customers, deals, etc., on a profit-per-time basis rather than on a profit-per-unit one. The reason for this interest lies in the fact that the key metric for companies in reporting to shareholders is return on assets (ROA). While generally reported as a percentage, in reality ROA is a time-based measure since it is reported for given year or quarter.
Aligning operational decisions
with shareholder goals
When a per unit metric is used to make the myriad of everyday
decisions in sales, marketing, finance, and production, there is a
fundamental mismatch between this metric and that of most interest to shareholders – ROA. If these key operating decisions are
made on a margin-only or profit-per-unit basis, overall corporate
profitability and ROA will never be maximized. Manufacturers
could easily leave profits worth 3-5% of revenue on the table. For
a $1-billion company, this amounts to $30-$50 billion over the
course of the fiscal year.
While manufacturers have long realized the importance of production run-rates, as well as that of margin, they had no easy way to combine the different sets of data — especially if they are making hundreds or thousands of products in multiple production facilities and selling them to numerous customers.
However, applications are now available that address this challenging problem. They provide the ability to look at the profitability of individual products, customers, deals, markets, sales regions, salespeople, plants, and production lines from a profit-per-minute perspective. This view frequently leads to drastically different operating, marketing and pricing decisions than would have been made by looking at margin only. An application generating profit-per-minute views across the enterprise makes it possible to use ROA at the operational level since, as both are time-based measures, they are directly related. Thus, it enables choices in product, customer, and asset mix, and also in strategic pricing levels that can make significant gains in corporate profitability.
Embracing new applications
The previous example shows how the combination of the competitive environment, the availability of data, and the emergence
of targeted CPM / BI applications provide a new route to the constant goal of profitability improvement. The challenges involved
with the disparate sources of data and the difficulty of applying
horizontal tools are leading manufacturers to avoid engaging
in costly, time-consuming internal efforts and embracing a new
breed of targeted applications which can further contribute to
corporate profitability goals.
