ARC Forum Highlights RPM as an Enabler to Optimized Business Performance Executives from all over the world gathered to discuss Real Time Performance Management (RPM) at last week’s ARC forum in Boston, Massachusetts. RPM drives enterprises toward an environment that supports innovation and creates new value, not just reduced costs, as dynamic performance targets reflect current corporate objectives to ensure actions taken by employees optimize plant performance. Implementing RPM requires management commitment along with a culture change as this philosophy requires tearing down the silo mentality in order for all stakeholders to benefit. Above all, this new culture needs accurate information to instill confidence and promote proper application as everyone is now a decision maker. Economic necessity is driving the adoption of RPM as an integral part of today’s corporate philosophy. Real time costing underlies many of the concepts that seek optimal performance while adapting to changing market conditions. An effective RPM implementation makes every worker a business manager by aligning everyone’s actions to the overall business strategy.

1. THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN
ARC INSIGHTS
By Tom Fiske and Sal Spada
INSIGHT# 2003-24M
JULY 2, 2003
Economic necessity is driving the adoption
of RPM as an integral part of today’s
corporate philosophy. Real time costing
underlies many of the concepts that seek
optimal performance while adapting to
changing market conditions. An effective
RPM implementation makes every worker
a business manager by aligning
everyone’s actions to the overall business
strategy.
ARC Forum Highlights RPM as an Enabler to
Optimized Business Performance
Keywords
Real Time Performance Management (RPM), Operational Excellence (OpX),
Collaborative Manufacturing Management (CMM)
Summary
Executives from all over the world gathered to discuss Real Time Perform-
ance Management (RPM) at last week’s ARC forum in Boston,
Massachusetts. RPM drives enterprises toward an environment that sup-
ports innovation and creates new value, not just reduced costs, as dynamic
performance targets reflect current corporate ob-
jectives to ensure actions taken by employees
optimize plant performance. Implementing RPM
requires management commitment along with a
culture change as this philosophy requires tearing
down the silo mentality in order for all stake-
holders to benefit. Above all, this new culture
needs accurate information to instill confidence
and promote proper application as everyone is
now a decision maker.
Analysis
ARC’s Forum brought together leading automation suppliers and manufac-
turing companies to discuss RPM. The increasing need for RPM
throughout the entire enterprise is fueled by the inability of traditional fi-
nancial performance measures to support operational decision-making in a
rapidly changing business climate. Problems associated with traditional
accounting include lack of timeliness in reporting, improper cost allocation,
and the creation of internal rivalries to obtain budgets and meet targets.
The underlying philosophy of RPM involves improving performance by
combining historical data with real-time monitoring and feedback of inter-
nal operations, market requirements, and competitors’ activities. While
OpX drives a company towards “Consistently doing the Right Things

2. ARC Insights, Page 2
©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
Well”, RPM extends OpX by helping companies optimize performance in
an era where “the Right Things” and “Well” are always changing. By inte-
grating dynamic KPIs (determined by a balanced scorecard), operationally
relevant cost allocation, event monitoring, real-time visibility, and predic-
tive capability into the performance management system the enterprise
remains on course by empowering individuals throughout the organization
with common information that is consistent with strategic goals. RPM is
vital for reducing cost, improving performance, and value creation.
CMM
Business Processes,
Architecture, &
Relationships
OpX
Operations Best Practices,
Continuous Improvement
RPM
Perf. Measurement
Dynamic KPIs
Optimum Potential
Strategy Execution Results
CFOCFO
Real-time
Accounting
System
Real-time
Accounting
System
COOCOO
Dynamic KPIs
Real-time Costs Operations
Data
Sources
Operations
Data
Sources
Source Make Deliver
CFOCFO
Real-time
Accounting
System
Real-time
Accounting
System
COOCOO
Dynamic KPIs
Real-time Costs Operations
Data
Sources
Operations
Data
Sources
Source Make DeliverSource Make Deliver
CPAS/CDAS
ARC Business Improvement Concepts
Survival of the Fittest
Nicole Parent of Banc America suggested “survival in today’s market de-
mands organizational efficiency both in capital and human resources in
conjunction with increasing operating margins by lowering operational
costs and meeting customer needs.” The productivity gains of the 1990’s
resulted in excess manufacturing capacity; there is insufficient demand or
anticipated growth to ensure survival for marginal players. It is no longer
possible to “save yourself to prosperity through cost reduction programs”
as only players with innovative strategies will remain. She suggested that
the most profitable and innovative companies will embrace RPM.
Aligning Execution with Corporate Strategy
Operational Efficiency primarily focuses on cost reduction while the OpX
model facilitates innovation as it drives a common strategy throughout all
stakeholders. Professor Dhebar of Babson College emphasized that
optimum performance requires a holistic optimization strategy as local
optimization results in suboptimal performance. Achieving this requires
relevant information and accurate KPIs throughout the entire value net-

3. ARC Insights, Page 3
©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
work to assure that decision makers at every level are solving the right
problem in the current business conditions. OpX and RPM deliver funda-
mentally different value to achieve optimum potential.
Nearly every manufacturer uses a plethora of
KPIs, but most are static in nature and do not
necessarily reflect current corporate objectives.
Using the right KPIs and basing these metrics
on real time information drives optimum po-
tential, which can reveal hidden assets or
unused capacity. Performance targets are ex-
tremely important for successful execution of
enterprise objectives, but if production KPIs are
limited to historical measures or are not dy-
namic enough to reflect changes in objectives it
results in less than optimum performance. In-
corporating an RPM philosophy makes every
worker a business manager by linking every-
one’s actions to the overall business strategy.
Breaking the Constraints of Traditional Accounting
Organizations need to take advantage of the wealth of information con-
tained in automation systems by employing methods such as real-time
activity based accounting to generate more granular and timely information
to derive dynamic production costs. OCI Chemical, confronting a death
spiral in their business, needed to improve operational performance be-
cause of increasing labor costs, lower prices, shrinking margins, and global
competition. They needed to invest in plant and equipment but were con-
strained by a shortage of capital. By developing a gain sharing agreement,
OCI and Invensys were able to share in the risk and rewards of implement-
ing an RPM strategy in their plant. An RPM system is a natural fit to a gain
sharing approach because of its very nature of measuring performance.
Opportunity cost and maximum profitability was highlighted by extruded
aluminum components manufacturer Indalex, which has about 20 plants in
North America. The cost of manufacturing product varies by each plant,
customer and individual order types. The notion that a plant is a Profit &
Loss center rather than a cost center formed the basis of their corporate
strategy. By first establishing base line metrics and KPIs for each plant they
Performance
Measures
Attributes
Cost Operating Cost
Asset Utilization
Inventory Carrying
Quality Yield
Defects
Compliance
Effectiveness Cycle Time
Throughput
Ramp to Volume
Agility
Business Customer Satisfaction
Profitability
Shareholder Value
Supplier Network
Take Time to Define Metrics

4. ARC Insights, Page 4
©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
Take advantage of the wealth of
information contained in automation
systems by employing methods such as
real-time activity based accounting to
generate more granular and timely
information and derive dynamic
production costs.
were able to utilize scenario analysis for business performance optimiza-
tion. The Profitability Dashboard from pVelocity allowed Indalex to create
an accurate model of each plant and perform “what if” scenarios. Indalex
reinforced the notion of holistic optimization by incorporating collaboration
between sales, finance, and operations. Indalex has now radically im-
proved their understanding of costs, customers, and product profitability
using an alternative perspective that traditional accounting systems lack.
In the same respect, US Steel desired to make a
combination of products at a price and volume
that generates the highest cash contribution over
a certain time period. Traditional financial sys-
tems are based upon units such as tons and not
time. Profitability analysis is limited to standard
margin per ton, which does not provide the in-
formation sought to optimization profitability.
US Steel enlisted Maxager Technology to develop a methodology to under-
stand cash generation per minute by product, customer, and market.
Within the first quarter, the profit per minute information enabled US Steel
to make changes that increased cash flow by millions of dollars. More im-
portantly, the sales and production teams are more aligned toward a
common metric of cash contribution and are capturing market share with
the “hidden winners” products that generate the highest cash flow.
Recommendations
• In order to implement RPM you have to change the way your organiza-
tion thinks about operations, financials, and customers.
• To achieve global optimization requires breaking down the silo mental-
ity. This empowers individuals to make decisions at every level and
achieve continuous improvement in business performance.
Please help us improve our deliverables to you – take our survey linked to
this transmittal e-mail or at www.arcweb.com/myarc in the Client Area. For
further information, contact your account manager or the author at
tfiske@arcweb.com or sals@arcweb.com . Recommended circulation: All MAS
clients. ARC Insights are published and copyrighted by ARC Advisory
Group. The information is proprietary to ARC and no part of it may be re-
produced without prior permission from ARC.