Operating Model


We can categorise the Operating Model of an organisation on a 2-dimension chart. On one axis, we consider the levels of Business Process Standardisation within the organisation and on the other we consider the levels of Data Integration in the organisation.

Note that organisations in different industries and different types of business require different levels of Business Process Standardisation and different levels of Data Integration. However, as the nature of the business changes and/or necessities of organisations changes due to internal & external factors, organisations may need to move from one level of Business Process Standardisation to another and similarly from one level of Data Integration to another. We study here what are the implications for the IT Architecture of the organisation when they plan such transitions.

What is Business Process Standardisation?

If a process is standardised across units, it implies that the process will be executed in the same manner, or follow the same series of steps regardless of who does it and which unit it is executed in. Standardisation enables efficiency, predictability, and cost reduction because it allows for the activities of different business units to be measured, compared, and improved.

However, standardisation can limit innovation because it forces you to comply with a certain set of steps. For example, if you are a developer in a software firm that adheres to certain quality standards, certain capability maturity model or some such, you will need to follow a certain process of development even if it’s not aligned with your client’s need or organisation culture.

What is Data Integration?

If data are integrated across units, it means that data are shared in real time across these units for a single view of the customer, and other organisation stakeholders. Benefits of data integration include coordination, efficiency, transparency and agility.

A challenge in data integration of course involves developing common data definitions. For example what is a sale? Is it when the contract is sign, is it when the payment is made, is it when the product is delivered? Different units may have different representations that need to converge for data to be integrated.

Together, Business Process Standardisation and Data Integration defines the Operating Model of an Organisation.

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Not every firm, or business unit, or product segment requires Business Process Standardisation and Data Integration.

Diversified Model

Consider a conglomerate like GE. GE has multiple diversified areas of business, and does not necessarily needs standardisation or integrations across it’s lines of business. For example, GE Healthcare does not need to talk to GE Aviation, or GE Energy. In this case, General Electric operates a Diversified Model across its different member companies. However, within each of these companies they operate a different operating model.

Replicated Model

Replication refers to an operating model where the operating units have high levels of Business Process Standardisation, and low levels of Data Integration. For example consider a franchise model like Subway or a McDonald’s. The different franchises follow the same processes for customer service, procurement, etc. However, they don’t need insights into each others data, definitely not in real time. Therefore a franchise represents a Replicated Operating Model.

Coordinated Model

Coordination refers to high levels of Data Integration across operating units, with low levels of Business Process Standardisation across these units.

For example, consider the different business segments of a bank. Say, auto loans and mortgages. These two business units need to talk to each other since they share customers, and require unified view of that customer to provide the best service to him or her. For example, if I already have a mortgage loan with the bank and I walk in for an auto loan, the auto loan business must know this information so they can give me appropriate discounts for already banking with them. However, the two units will follow different processes in servicing me, including interacting with different institutions and agencies in providing that service, different methods of estimation of my monthly instalment, etc. Therefore these two segments require high levels of Data Integration, but lower levels of Business Process Standardisation.

They follow an Coordinated Operating Model.

Unified Model

An Operating Model characterised by high levels of Business Process Standardisation and high levels of Data Integration across operating units is called Unified Operating Model.

 

Think of any chain in the hospitality industry. You walk into a Marriott in Bangkok or Mumbai, you will likely encounter the same standards of customer service. Business Processes are indeed standardised across the different properties of the Marriott. Data too is integrated because the customers spans multiple properties and they need a unified view of this customer much like the banks. So, when I walked into the Marriott in Mumbai and asked for the Harvard Business Review, my preferences were recorded and made available to the property in Bangkok as well.

Now let us look at a case of what the current state of an organisation is and where it wants to be. We will see the impact of this transition on the IT Architecture.

Consider the case of an organisation with the following history of computerisation.

  1. The organisation has implemented an ERP. However, the implementation has been done in a distributed manner and thus there is no integration between the different systems and different geographies.
  2. There is little integration between the CFAs, Distributors, Retailers, Suppliers with the organisation’s operations teams like Production, Marketing, Sales, etc. At this moment, data is gathered manually and thus is not very reliable data. Besides there is significant lag in gathering this data to be able to make decisions based on them.
    2.a. In addition, there is little or no integration with support functions like HR, etc.
  3. The present Operating Model is PUSH Based. The organisation predicts the demand in regions of operations based on historical data and pushes stock to the regions. This is resulting in either over-stocking or stock-shortfall. Similarly, procurement from Suppliers is being done based on demand predictions by the organisation taken centrally without the knowledge of the actual ground reality. This is leading to excessive inventory or shortfall in inventories.
  4. The Production Team is unable to cater to sudden surges in requirements as they are getting information with very little lead the for production planning. Further, the Production Module in the present solution is not integrated with the Purchasing Module and the Finance Module.
  5. Several systems have been implemented by organisation and these are functioning autonomously and this is leading to disjointed systems. For example, the Vendor database is implemented individually across the factories. This is resulting in the same vendor supplying the same supplies at different rates to different factories.

All of the above gives evidence that the Data Integration levels are low in this organisation.

  1. Different processes are followed in different regions. This is also due to the fact that different systems have been deployed in different regions.
  2. Modus operand of Retailers, Distributors are different across different regions and also across different classes of distributors and Retailers. The same applies for the Suppliers as well.
  3. The methods of data capture and the units of data capture and the modes of data sharing is different across the different regions and also different across the different distributors, retailers and suppliers. The purchasing automation software, which was designed to monitor inventory and procurement activities, was not implemented across all factories for different product segments. Further the companies which were acquired had their own systems which continued to be used.
  4. Modus operand across Product Segment is also different.
  5. IT has so far been used to solve specific problems and this has led to different solutions at different points of time for different parts of the organisation.

All of the above gives evidence that the Business Process Standardisation level is low in this organisation.

Based on these characteristics, we can conclude that the Operating Model of the organisation is Diversified.

WHAT ARE THE PROBLEMS IDENTIFIED FOR THE ORGANISATION?

  1. The bottomline for the CEO is that Operational Efficiency of the organisation is below expectation. This become evident from the other issues that have been identified.
  2. One of the main bottlenecks is that the present IT systems have been developed for solving specific problems and thus have become disjointed. This is resulting in lower operational efficiency and thus becoming a bottleneck in meeting growth objectives. The need of the organisation is for making speedy and accurate decisions; however, the present systems being disjointed are not facilitating that.
  3. Forecasting was presently done based on past data. This denied the company of the planning with the ground reality in view. This leading to inefficiencies in the operations as there are situations of Stock Shortfalls or Stock Overruns and Inventory Shortfalls or Inventory Overruns. In any case, it is resulting in loss of Sales or burden of carrying unsold inventories.
  4. Forecasting is not accurate as there is a delay in obtaining market data as the present process is manual.
  5. The organisation endeavours to tap the Rural market where its presence is low. However, this will be possible for the organisation only if they are able to establish proper connect with the Rural Market and the Rural Consumers.
  6. Support functions like HR, etc have not been integrated along with the mainstream systems.

WHAT NEED TO BE THE TO-BE STATE OF THE ORGANISATION?

The organisation needs to be in the state where their Operations Model is UNIFIED.

The same can be inferred from the problems identified earlier.

A possible solution for the organisation is as follows.

  1. The organisation needs investing in a new ERP system. The endeavour is to integrate all functions of the organisation across geographies in the same process and have a centralised system. This will have integrated databases and will propagate unified processes across the organisation. This will lead to greater control, efficiency and elimination of redundancies. This will address the current problem of lack of Process Standardisation across the organisation. With such a ERP system being implemented, all the factories across all geographies will be able to follow the same process. Also, this will solve the problem of lack of Data Integration. Now, all the departments will be connected to each other. There will be no redundancy or duplication of data. All departments which were earlier not connected to each other (like Production and Finance, etc) will now be integrated thus providing real time data across departments in all geographies.
  2. The ERP system will provide access to real-time data and better visibility into supply and demand, thereby, improving overall profitability.
  3. The organisation needs to lay out plans to implement programs and systems for connecting Distributors, Suppliers, Retailers and also connection with the Rural Customers and Agencies. This will integrate the company’s systems with the field force and get them data in real time by use of technologies like PDAs, etc. Through the Distributor Connect, Supplier Connect, Retail Connect and Rural Connect programs and systems, the organisation will be getting all the external stakeholders in the same system. Now, there will be standardisation of process of doing business across all entities and across all product segments and across all geographies. Further, there would data flowing into the organisation in real-time leading to better business intelligence.

 

 

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