Over the summer McKinsey published their top 10 trends for the next year or so in Harvard Business Review in July 2009 (Link to HBR site). This post discusses the trend related to resources.
Resources feeling the strain – Stable
Commodity prices and demand pressures were a hallmark of the world about a year ago with Oil above $140 a barrel and metals prices at record highs. That all seemed to evaporate with the recession – but the core supply side constraints remain and are in fact exacerbated as people have delayed investments in production facilities such as refineries, energy generation, mines, etc. Given these factors, the trend calls for a return to resources based cost increases. McKinsey’s recommendation is to look at ‘resource productivity’ that they define as the output achieved for each unit of resource input.
Resources and commodity price volatility are IT issues
Its easy to see resource issues and IT issues as unconnected with the possible exception of power costs to run the data center. That would be a limited view as many CIOs felt budget pressures as companies sought to preserve profitability through reducing Sales, General and Administrative (SG&A) expense.
CIOs should have an approach to raising enterprise productivity as a response to a return to resource price increases – else face the situation where the company tries to balance its profitability on the back of its administrative processes. This involves actions to reduce production related resource requirements (raw materials, inventory stocks, etc) as well as service related resource requirements (locations, product complexity, customer complexity.)
Information is critical to raising ‘resource productivity’ as information drives the decisions that allocate, apply and adjust resource requirements across enterprise production and service processes.
- Information in the supply chain is the clearest example as information drives resources used in the production process, cash flow and inventory quality.
- Purchasing and procurement also benefit as information supports consolidated purchasing, understanding resource intensity and price sensitivity as well as finding alternative resources and suppliers.
- Process improvement regimes such as six sigma and lean use information as their lifeblood to identify issues and best practice performance. Accelerating the distribution of best practices and reducing the variation among operations conserve resources and raise efficiency.
Using information to raise the resource productivity of core operations is clearly an area of focus for both product and services based companies. However, there are other factors that drive resource usage that are less clear. These are related to the company’s product, geographic and customer structure. We often take these for granted as part of the way of doing business, but each contributes to a core rigidity in the company’s cost structure that will come under pressure from commodity input prices.
- Your product set and product architecture consumes resources – particularly the 80% of the product set that generates 20% of your revenues. Often these are overlooked in terms of raising resource productivity. The fewer product lines the more they can operate at scale.
- Your organizational structure consumes resources. Enterprise divisionalization was a response to poor information flows and weak reporting systems that are resolved through improved enterprise reporting and advances in business intelligence.
- Customer segmentation consumes resources both in terms of marketing, channels and operations as well as organizationally and product wise. Narrowly defined markets, ones that will never match the scale of their supporting production processes, are by definition resource inefficient.
A return to commodity price spikes is a distinct possibility given the conditions we faced prior to the recession and the fact that the core drivers of those conditions have not significantly changed. Preparing for and taking action to raise resource productivity involves replacing resources with information in order to change the way we work and the resources we require.