Inquiry NO. 50

SAP Center for Business Insight | Brief | Q&A | Case Study | Inquiry | E-Book 1

The Future of Resource Management: Become Predictive“MAKE SURE THERE’S A BUNCH OF INVENTORY AVAILABLE SO THAT WE NEVER HAVE TO SHUT DOWN.” THAT’S WHAT RESOURCE MANAGEMENT USED TO MEAN FOR COMPANIES.

By Sven Denecken and Polly Traylor

Inquiry: The Future of Resource Management: Become Predictive2 NO. 50©2014 SAP AG or an SAP affiliate company. All rights reserved.

Today’s challenges go far beyond overstuffing the warehouse, a wasteful practice anyway. Executives need better ways to predict global market demand and then quickly match up resources for production and delivery.

This notion of being a predictive business means operating with a clear view of anticipated needs, risks, and problems in resource management.

However, being predictive isn’t just about having better visibility into the supply chain and better coordination. Increasingly, companies must be able to predict their ability to access the most basic resources that form the foundation of the supply chain.

In 2008, for example, floods temporarily shut down four Nike factories in Thailand, and the company remains concerned about rising droughts

in regions that produce materials it needs, such as cotton. Further, over the past decade, Coca-Cola has faced an onslaught of production and legal threats from diminished water supplies in drought-stricken regions where it has plants, such as India.

As a result, Coke now uses water-conservation technologies and Nike uses more synthetic materials that depend less on weather conditions.1

But companies’ predictive abilities can’t be limited to things you can touch. Intangible assets, such as employee knowledge and intellectual property, have a much larger influence on stock market valuations. Think Google and Netflix, companies that depend on content and data for profits rather than on physical resources, as in the industrial age, when steel and car companies ruled the markets. Protecting and nurturing those intangibles will be a key strategy for staying ahead of market changes.

Today, companies must do more than simply manage their supply chains, resources, and intangible assets. They must be able to anticipate when a key supplier is going to crash or run out of product before it happens. After years of sweeping the notion of sustainability under the carpet, companies must now be able to foretell how economic, environmental, or social issues will affect them and their employees, customers, partners, investors, and suppliers. And they must make sure they stay ahead of changes in their markets by creating the ideas behind those changes themselves and hiring the right people to make them happen. That’s why becoming a predictive business isn’t just a management fad, it’s a necessity (see Three Steps to Predictability).

After years of sweeping the notion of sustainability under the carpet, companies must now be able to foretell how economic,

environmental, or social issues will affect them and their employees, customers, partners, investors, and suppliers.

Being predictive by understanding what the market needs or wants and then delivering on it quickly seems like a no-brainer with our always-on technology, yet research shows that it is not the norm. Aberdeen reports that only 20% of supply chain professionals have information available within a day and less than 10% have direct connections with suppliers. Worse, more than half of supply chain managers report that supply chain issues had a significant negative impact on revenue or profitability over the past few years. That’s according to a recent Cap Gemini survey of 150 large U.S. consumer goods companies.2

Inquiry: The Future of Resource Management: Become Predictive 3NO. 50 ©2014 SAP AG or an SAP affiliate company. All rights reserved.

The Death of Gut InstinctConsider the story of a 13-year-old unknown singer from New Zealand named Ella Maria Lani Yelich-O’Connor, who was discovered when Universal Music Group saw an online video of her from a talent show when she was 12. Three years later, the artist, who now goes by Lorde, snapped up two Grammy awards.6

There’s a good chance that data mining played a role in predicting and nurturing Lorde’s success. Every day, Universal receives data from online music streaming service Spotify, where it markets its music. Managers tap into thousands of data points about how particular customer segments are responding to their artists. They search a database of a million interview subjects, containing data on everything from where consumers shop to the new music they prefer, some 50 different indicators.The company uses the insights to select new artists, determine which track to release as their first single, and how much to invest in marketing. Scouts now have a powerful, more analytical way to map their future talent and help existing artists grow their audiences.

Predict with accuracy. Combine data from the Web with transactional records and past market trends to find patterns. Cisco’s strategic marketing group collected historic data and social media mentions from its customers who had a propensity and high readiness to buy. Cisco’s sales force used that insight to lift sales U.S.$4.2 billion.3

Determine the best actions to take. Companies collect tons of data; the big issue is how to make the best decisions from it. New York City’s Mount Sinai Hospital ran hundreds of simulations to optimize its patients’ first 8–12 hours in the hospital. That analysis helped improve utilization, which had the financial effect of adding 100 new beds – without actually adding a single one.4

Act fast. It’s one thing to have the right data and another to actually do something about it when it matters. Every day, Gilt Groupe, the leader of online flash, or deal-of-the-day, sales, sends 3,000 highly targeted e-mails to its 3.5 million members. The messages predict what items members will like based on what they have shopped for in the past and what others who bought similar items like. Gilt updates its predictions daily and shares detailed demographic portraits of who’s buying what with its brand suppliers to help them understand and better target customer demands. The predictive approach has paid off. Gilt posted U.S.$500 million in revenue in 2011 and $600 million in 2012.5

2

3

1

To compete as a predictive business, companies need to be able to:

Three Steps to Predictability

Less than

have direct connections with

suppliers

10%Supply Chain Professionals:

Only

have information available

within 1 day

20%

Predict Disruptions Before They HappenA predictive business should also be able to spot and fix broken processes. Consider the scenario in which contract workers put in 18-hour shifts because plant managers don’t know about the late arrival of components until the last minute. Not only are these kind of last-minute business practices wasteful, they aren’t humane, a quality that is increasingly becoming important to branding.“As lead times get shorter, the effect of a disruption gets more significant,” says James Marland, vice president at Ariba, an SAP company. “A networked supply chain will have the ability to route around the defective node, just like IP routing on the Internet.” Predictive analytics and automated monitoring tools can be on the lookout for red flags, such as an increase in late shipments or a fire at a plant. The system can apply fixes automatically or notify a senior VP before the entire production line grinds to a halt.

Getting access to the information that really matters to a business is much harder than it seems. That’s because it’s all in the analysis. The way a company collects and combines the massive amounts of data available and converts it into something that can predict what’s coming next is what really matters.

Inquiry: The Future of Resource Management: Become Predictive4 NO. 50©2014 SAP AG or an SAP affiliate company. All rights reserved.

How to Be Sustainable at a ProfitWant to transform your business around the concept of reducing resource consumption while helping the bottom line?

It’s possible to incorporate environmental and social values into your business in a way that’s not “fanatical or unrealistically romantic,” says Harvard professor Rebecca Henderson. “Some firms are much more productive this way, using more objective, not just short-term, measures.”7

For example, Daimler entered the car-sharing business in 2010 to meet the rising demand for the service in metropolitan areas. With unemployment still high for young people, purchasing and maintaining a car remains unaffordable for them.

But adding car sharing also addresses the fact that decades of effort toward increasing fuel efficiency have not saved the planet. Car ownership has quadrupled in the past three decades as well, offsetting those emissions improvements. Companies like Daimler are progressive in realizing that many of their younger consumers are looking for alternatives.

Meanwhile, the service adds to Daimler’s bottom line by drawing steady revenue from the shared vehicles.

Four Ways to ExperimentExperiments like Daimler’s will become increasingly important as the millennial generation gains more purchasing power. This group of 21–34 year olds thinks that business should innovate to help make the world run better and improve people’s lives. That requires companies to focus not just on products and services but also on how products are made and services are consumed – and still turn a profit.

Here are four sustainability experiments to try:

Use your carbon footprint to pinpoint inefficiencies. Danone undertook a massive project to monitor the carbon usage of all 35,000 of its products – every month. The result was that Danone pinpointed inefficiencies in its supply chain, helping the bottom line while reducing its carbon and related energy usage by 40%. Now the company uses its carbon footprint as a baseline to determine when efficiency has dropped, which makes correcting problems faster and less expensive.

Share resources. Companies’ access to resources is strained. There are many reasons why: the scale and speed of demand from emerging economies, a decade of tight commodity markets, price volatility, and supply disruptions, not to mention rising political tensions. Resource sharing is already happening: consider the growth of cloud computing for sharing data-center space and equipment across many organizations. What about sharing overstocked supplies or goods with companies that need them now or renting equipment that sits unused for 10 months of the year? Says innovation expert and business consultant Don Tapscott, “This is an opportunity to shift the way that we manage resources from a traditional industrial batch kind of model to a real-time interactive and collaborative model.”

Use technology to disrupt the industry with a greener product or service. When Skype disrupted the telecommunications industry by offering free voice-over-IP calls, it did so without incurring a lot of overhead, such as technology infrastructure. The company simply took advantage of the existing IP infrastructure on the public Web. (This approach is also an example of creating a sustainable business in terms of making profitable use of shared resources.) Skype passed on those savings to customers and has since introduced innovative paid services that still cost less than traditional phone service.

Transform your product into a service. Creating a service behind a product is one way to reduce emissions and make a few extra bucks without disrupting the entire supply chain. When you sell a service, you retain the physical assets, which translates into a more sustainable model. Instead of investing in selling and producing large quantities of the same thing, companies focus on asset longevity. For example, Interface Inc., a global carpet tile manufacturer, offers its FLOR carpet-tile system as a full lifecycle service, maintaining the carpet from installation and replacement to recycling at the end of use.8

2

3

1

4

Inquiry: The Future of Resource Management: Become Predictive 5NO. 50 ©2014 SAP AG or an SAP affiliate company. All rights reserved.

The Costs of Not Predicting Environmental DisruptionsDisruptions can be much bigger than a supplier running out of a component. The growing frequency of flooding, droughts, hurricanes, tsunamis, and carbon pollution are cutting into bottom lines in unexpected ways, disrupting business on a global scale.

And when a disastrous accident occurs, the cost to the company’s reputation is significant. The Deepwater Horizon oil spill began as an environmental disaster, killing or injuring thousands of birds and marine animals and damaging deepwater coral and the aquatic food chain. But then it began hitting BP’s bottom line. Beyond massive payouts that are still being settled, the oil giant’s stock price remains lower than it was before the 2010 disaster. Companies that experience such incidents suffer for a long time – not just from financial loss but also from the loss of brand loyalty and reputation.

Beyond the DisasterThe BP incident is a particularly harsh example of why companies must become more predictive about sustainability. Indeed, how a company humanely manages its workers, suppliers, and processes and pays attention to environmental impact is becoming a major determinant of brand value. A recent survey by Bentley University found that 84% of millennials, defined as the generation born between 1980 and 1993, said they care more about making a positive difference in the world than workplace recognition.9 This difference means acting responsibly with natural resources and promoting safe labor practices – a tragic lesson that large retailers learned from 2013’s Bangladesh factory disaster.

Seeing these trends early not only is good for brand value but also helps the balance sheet. Companies such as Daimler have realized that becoming greener is important to getting stagnant traditional businesses growing again (see How to Be Sustainable at a Profit).

HOW A COMPANY HUMANELY MANAGES ITS WORKERS, SUPPLIERS, AND PROCESSES AND PAYS ATTENTION TO ENVIRONMENTAL IMPACT IS BECOMING A MAJOR DETERMINANT OF BRAND VALUE. of millenials

care more about making a positive difference in the world

than workplace recognition

84%

Inquiry: The Future of Resource Management: Become Predictive6 NO. 50©2014 SAP AG or an SAP affiliate company. All rights reserved.

Pay Attention to Intangible ResourcesProgressive companies are learning that intangibles, such as intellectual capital, employee knowledge, and partner relationships, are valuable and play a critical role in making their businesses more predictive.

In the 1970s, 20% of a company’s value was intangibles and 80% was physical or financial assets, according to Prof. Dr. Christian Berg, global head of sustainability, Business Transformation Services, for SAP AG. “Today this is exactly the opposite,” Berg says. “Only 20% of the market cap of public companies is represented by financial and physical assets. The rest is intangibles.” This is why when Google got its start, it had the same

market cap as Daimler, even though the Internet company had few physical assets and a fraction of the auto giant’s employees, Berg says. Intangible assets fall into three categories: human capital (skill sets), relationship capital (the value of business relationships and brand value), and structural capital (collective knowledge, corporate culture, and intellectual property).

Companies must learn to measure, track, and manage their intangible intellectual capital with the same rigor they have applied to their more tangible assets. Only then can they begin to use these intangible resources to stay ahead of the next wave of innovation (see How to Keep Your Intangibles Healthy).

Intangible assets – essentially the knowledge embedded in your products, services, processes, and employees – are key factors for building a more predictive business. Here are four strategies for keeping intangibles and, therefore, your company, from stagnating.

Don’t isolate innovation from operations. Large companies struggle to be entrepreneurial because they create a skunkworks division that is independent from the rest of the business, says Chris Trimble, adjunct professor at Dartmouth College and author of several books on innovation. That strategy is flawed because innovation actually benefits from corporate knowledge. A best practice is to integrate entrepreneurial teams with staff who are experts on corporate process, he says. The concept of shared and dedicated staff for innovation efforts is highly beneficial but “a delicate partnership to manage,” Trimble adds.

Share intangibles. Partnering might be the optimal path to innovation, says Tapscott. In 2013, pharmaceutical firms lost up to 25% of their revenue because of the so-called patent cliff when patents expire and blockbuster drugs go generic. “Coping requires fundamentally changing the modus operandi of companies and of the industry,” he says. GlaxoSmithKlein is leading the way by arguing that all clinical-trial data should be placed in a commons where pharmaceutical companies cooperate to do the basic research, says Tapscott. “The drug-makers then compete on a higher level: on the packaging of drugs or on the customization of drug delivery systems or on the services related to that. If they do this, they can save the industry and advance human health in ways that were unthinkable in the past,” he says.

Track and measure intangibles. Determining how to measure nonphysical assets is critical. While many companies aren’t doing this yet, it’s possible to use existing management and planning systems to create custom scorecards that measure intangibles and the resulting impact on innovation, says Trimble. “Too often, learning is not captured and decisions are made on intuition,” he says.

Rethink traditional roles. As data-driven strategies become central to operations, whether to understand customer demand, develop new processes, or refashion product lines, those who are closest to the data have the power. For example, in addition to focusing on inventory, distribution channels, and production schedules, supply chain managers should also work with R&D and marketing. “Their role is being elevated from a back-office service provider to an integral part of senior management making strategic decisions,” says Rasmus Wegener, partner, Bain & Co.

2

3

1

4

How to Keep Your Intangibles Healthy

Inquiry: The Future of Resource Management: Become Predictive 7NO. 50 ©2014 SAP AG or an SAP affiliate company. All rights reserved.

There’s more.DOWNLOAD THE Q&A REDEFINING RESOURCE MANAGEMENT TO LEARN MORE ABOUT HOW COMPANIES ARE CHANGING THEIR APPROACHES TO MANAGING RESOURCES.

The SAP Center for Business Insight is a program that supports the discovery and development of new research-based thinking to address the challenges of business and technology executives.

Resources Are Key to PredictabilityWith predictability becoming so much more important to businesses, resource management has become a priority. Becoming a predictive business will require embracing a definition of resource management that goes beyond supply chain to encompass sustainability, scarcity, and nonphysical resources such as information and ideas. Following these tenets, companies can avoid being blindsided by change.

The authors gratefully acknowledge the valuable knowledge contributed to this article by Prof. Dr. Christian Berg, global head of sustainability, Business Transformation Services for SAP AG.

Sven Denecken is vice president, Strategy Cloud Solutions, for SAP.

Polly Traylor is a freelance writer who reports frequently about business and technology.

SAP Center for Business Insight | Brief | Q&A | Case Study | Inquiry | E-Book 8

© 2014 SAP AG or an SAP affiliate company. All rights reserved.No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of SAP AG or an SAP affiliate company.

SAP and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG (or an SAP affiliate company) in Germany and other countries. Please see http://www.sap.com/corporate-en/legal/copyright/index.epx#trademark for additional trademark information and notices. Some software products marketed by SAP AG and its distributors contain proprietary software components of other software vendors.

National product specifications may vary.

These materials are provided by SAP AG or an SAP affiliate company for informational purposes only, without representation or warranty of any kind, and SAP AG or its affiliated companies shall not be liable for errors or omissions with respect to the materials. The only warranties for SAP AG or SAP affiliate company products and services are those that are set forth in the express warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional warranty.

In particular, SAP AG or its affiliated companies have no obligation to pursue any course of business outlined in this document or any related presentation, or to develop or release any functionality mentioned therein. This document, or any related presentation, and SAP AG’s or its affiliated companies’ strategy and possible future developments, products, and/or platform directions and functionality are all subject to change and may be changed by SAP AG or its affiliated companies at any time for any reason without notice. The information in this document is not a commitment, promise, or legal obligation to deliver any material, code, or functionality. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates, and they should not be relied upon in making purchasing decisions.

1 Coral Davenport, “Industry Awakens to Threat of Climate Change,” The New York Times (January 23, 2014), http://www.nytimes.com/2014/01/24/science/earth/threat-to-bottom-line-spurs-action-on-climate.html.

2 “The Struggling Supply Chain,” Cap Gemini (October 2013), http://www.capgemini.com/sites/default/files/resource/image/supply_chain_infographic_0.jpg.

3 Zachary Tumin, Doing Business the Data-driven Way (Ariba 2013), http://www.ariba.com/resources/library/doing-business-the-data-driven-way.

4 Tumin, Doing Business the Data-driven Way.

5 Tumin, Doing Business the Data-driven Way.

6 Brandi Fowler, “Discover Lorde’s Rise to Pop Superstardom,” E! Entertainment Television, January 30, 2014, http://www.eonline.com/news/505705/discover-lorde-s-rise-to-pop-superstardom.

7 Rebecca Henderson, interview, Choose2Lead, March 24, 2012, https://www.youtube.com/watch?v=BBgLJgAZ6wc&index=4&list=PLCA5081120B2D1927.

8 Peter Graf and Will Ritzrau, Business Unusual (SAP, November 5, 2013).

9 Millennials in the Workplace (Bentley Center for Women and Business, August 5, 2013), http://www.scribd.com/doc/158258672/CWB-Millennial-Report?secret_password=2191s8a7d6j7shshcctt.