RESULTS: How Achieved   >   Process Expense & Efficiency

    Enlarge Activity Expense Diagram
  • Businesses run by way of processes, and processes consist of activities executed by people or systems who perform different functions. An example of a process might be Order-to-Cash, which consists of activities like Order Entry, Picking, Packing, Shipping, and Collections.
  • Processes and Activities require Resources (human, machine, property, etc.) so as to perform them, and resources cost money. Therefore, processes cost money. Keeping with the O2C (Orders-to-Cash) example, a single iteration of a process can be more or less efficient than another, based on numerous factors – the size of the order, the handling requirements of the products ordered, the payment terms extended to the customer and their faithfulness to honor those terms – these are a few examples of variables which can make a single iteration through a process more or less efficient than another. Conceptually, then, there is a link between an iteration of a business process (which produces transaction records as an artifact in the ERP) and the expense of the Resources required to execute it. However, unlike inventory costs, which the ERP does a good job capturing and linking to these transactions, the relationship of Resource expenses to transactions is indirect. The ERP captures these indirect expenses in aggregate in the financial module, but does not link them to individual transactions vis-à-vis the efficiency of each individual transaction. (And this is OK and even preferred; there are good reasons not to put this burden on the ERP.)
  • Understanding of the expense and efficiency of business activities, and by extension, the business processes which they constitute, is a crucial pre-requisite to understanding Net Operating Profitability for trading partners, products, and transactions. Furthermore, process costing and efficiency insight drives numerous tactical and strategic decisions around Planning & Budgeting, Pricing, Customer Segmentation, and Supply Chain Routing, to name a few.
  • The VDDW provides detailed and accurate visibility into Process expenses and efficiency. The diagram to the right illustrate how it displays this information. The Red highlighted area show how the VDDW decomposes the P&L, and specifically, indirect operating expenses, into the supporting activities / processes for which those monies pay. Further, it expresses the efficiency of those processes in terms of their expense as a percentage of sales. Note the Blue highlighted section. (It matters less if you’re paying twice as much for the Shipping Activity for a certain segment of the business, if you’re also earning twice as much revenue.) Finally, it shows how much Resource Capacity is consumed by that segment of the business, represented by the ABC allocation units shown in Green.
  • The VDDW provides these Process Expense & Efficiency details in completely ad hoc fashion, analyzable along any business dimension (customer, supplier, product, service line, channel, location, etc.) even down to individual transactions. In doing so, it serves as the Intelligence Foundation for numerous important business initiatives, like those mentioned above.