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A Common Language
If the global business mentality is to truly blossom, a common language must be developed that expresses both individual and aggregate performance across supply chains. Because of organizational diversity, different cultures and varying methods of measuring functional effectiveness, companies have fallen short in the quest to devise metrics that incorporate all components of an international paradigm. The need to create consistency of measurements across fragmented business models regardless of industry, function, geography or language is the cornerstone to the legitimization and advancement of the SCM philosophy.
THE ATTACK OF THE BUZZWORDS
The only aspect of international trade that may be growing faster than commerce itself is the insistence of businesspeople on using buzzwords, acronyms and catchphrases to describe every aspect of their professional lives. Principally designed to bring significance to otherwise mundane ideas, most buzzwords have only served to detract from the few legitimate business concepts that actually have any value. In the jargon of today's businessperson, you don't need a PhD from UCLA to realize that most buzzwords are a bunch of BS.
Two buzzwords that are used throughout this book and that could be accused of the above crimes are "vector" and "velocity." Before passing judgment, however, it would be wise to understand the true mathematical meanings of these terms and their application to business situations. [1]
As first discussed in the Introduction, a vector is a quantity that has both magnitude and direction. Conceptually, any term that helps businesspeople to understand the scope of their operations and the direction in which they are heading can be considered useful. From a decision-making perspective, the ability to study options from different angles and directions will bring more information to the process and drive down the probability of failure.
Velocity represents the rate of change of position of an object based on its speed and direction. In today's business world, a good strategy (direction) is not enough; a company has to execute before its competition to gain any meaningful advantage. Rapid growth without strategic direction, on the other hand, will ultimately create waste in supply chains that suboptimizes operations. In tactical terms, managers must constantly focus on the speed and direction of their business endeavors, particularly in the areas of manpower, machine and methodology.
Taking the definition of velocity a step further, it is both mathematically and commercially significant to note that the derivative of velocity is acceleration. Thus, from a business perspective, it is important to measure not only the change in position and direction of an organization, but also how quickly that is happening. Even if a business has speed and direction, if it is not continuously accelerating, the competition will eventually catch up.
One may discern from the definitions of vector and velocity that they share a common characteristic: direction. Taken in concert, the intersection of strategic direction (operational scope) with speed and magnitude makes for big medicine. The additional element of acceleration reminds businesspeople that they have to execute their models at continuously increasing speed. From both a mathematical and commercial perspective, it should be clear that the terms vector and velocity have earned their way into the supply chain pantheon.
With the above taken as the genesis of SCM, finance and accounting must be established as the lengua franca of the enterprise, serving as the great translator and unifier of multi-lingual commercial activities. Simply stated, finance and accounting must be to other business disciplines what Latin has been to the Romance languages. Finance and accounting is what unites the various business lexicons, creating a single platform from which all functional activities simultaneously are born and into which they feed.
In the case of inventory management, finance and accounting is what bridges the gap between anecdotal support for customer service levels and the exact dollar amounts invested in inventories. With regard to lean or Six Sigma tactics designed to reduce lead time and landed costs, the proper interpretation of period-to-period financial information can clearly measure their effect on balance sheets, income statements and cash flow statements.
Even though countries have different methods of calculating and reporting financial results, there are sufficient similarities in accounting practices to transcend almost all cultural or business differences. At a minimum, most commercially oriented societies utilize the balance sheet and income statement to report activities and changes in financial position. More recently, business entities have also adopted the cash flow statement to augment the traditional measures of organizational performance. [2] An important addition to the accounting arsenal, this allows businesspeople to not only measure profitability or summary changes in general ledger accounts but also identify the sources and uses of cash during measured periods of time.
Used properly, the information found in these reports forms the synapse between operational velocity, asset utilization and profitability. The challenge for today's manager is to truly understand the nature of these relationships while actively managing their well-being to the benefit of the organization. If businesspeople can find the way to blend what financial statements reveal with the principles of lean thinking and application of Six Sigma tools, the result will be much greater than any single component could ever accomplish on its own.
[1]M.G. Kendall and W.R. Buckland, A Dictionary of Statistical Terms, Longman Group, 1971, p. 186.
[2]Martin S. Fridson, Financial Statement Analysis: A Practitioner's Guide, John Wiley & Sons, 1995, p. 94.
