Bottom-line-Focused Digitization Efforts

-- Everything boils down to increasing throughput, reducing inventory, and lowering operating expenses.

One of my favorite books ever is “The Goal, A Process of Ongoing Improvement” by Eliyahu Goldratt. It tells about the struggle of a blooming Plant Manager, Alex Rogo, who needs to turn-around their plant’s productivity. Otherwise, their operations will be shut down, and many people will lose their jobs — a lot of families will go hungry. He met with his long-lost Jewish professor, who gave him bits and advice, but he had to decipher and discover their true meaning to arrive at each suggested solution. The story emphasizes that the goal of a company is to increase throughput while simultaneously reducing both the inventory and operating expense.

It zeroed-in on effectively managing these 3 key concepts defined as follows:

Throughput - the net profit from selling a product or a service.

Inventory - the money tied up in fixed assets to enable Throughput.

Operating Expense - the money spent to produce Throughput.

This book introduced and popularized “The Theory of Constraints” or TOC and has become the de facto and the foundational standard for the supply chain management. TOC is basically a model that explains the impact of decision-making on the bottom-line profits of having a healthy supply chain management system — by focusing on the element of time and the effective elimination of bottlenecks. According to TOC, “a chain is only as strong as its weakest link," and therefore identifying and strengthening the weakest link in the chain will always give you the bigger bang for your buck. It presupposes that people, processes, and technology are vulnerable to the weakest person, broken processes, or bad systems that could adversely impact the operation’s overall productivity.

It suggests that to find the “weakest link” and to improve constantly, one needs to answer the following questions:

1. What to change?

2. What to change it into?

3. How to cause the change?

4. Why change?

5. How to maintain the process of ongoing improvement?

6. Repeat...

Hint: the bottleneck would typically have a pile or a bunch of work in front of it, and no amount of automation and digitization can eradicate it as they are mostly process failures. If you try to automate a bad process, you are simply making a bad process run faster without really addressing the root cause.

The Goal of Digitization

By the turn of the century, many companies have adopted “Digitization” as part of their core organizational strategy and mantra. However, according to a study by the Everest Group, 73% of enterprises failed to provide any business value whatsoever from their digital transformation efforts. A good 78% of them failed to meet their business objectives. This is not a big surprise or a mystery to most of us, at the back of our heads we have a good idea why most digitization mission fails. GE, Ford, and other major players poured a whopping $1.3 trillion into their transformation initiatives but failed to deliver. The typical culprits would be — the cultural and generational gaps, failure to communicate (goals, strategy, purpose, and outlook to employees), failed buy-ins, budget, and poor timing. However, I feel that there is another major factor in why digital missions go down the drain, which is the lack of focus on contributing to the bottom-line. If your digitization efforts did not pass the ROI litmus test, did not increase sales, or decrease cost, it did not really increase your organization’s productivity — perhaps you need to reconsider and rethink your strategy. Perhaps more elemental and basic structural issues that your organization needs to address first before digitization. Start with people and processes first — then technology last, as this is usually the easiest among the three. Understanding the bottleneck's end-to-end operations, its capacity, and optimizing it before pouring-in new tools to the mix will get you a long way.

Again, the goal of digitization efforts must be to increase net profit, return on investment and cash flow. If it is not addressing these 3 key factors simultaneously, then you might be just playing with the latest multi-million/billion-dollar shiny little toy.