Knowledge pays

FACE IT. Most knowledge management efforts are doomed to failure. They are internally focused, and they have fluffy measures of success. Often, the KM team counts inputs ("We have 20 people working on KM") and activity ("We have 1,500 best practices codified"). You end up keeping very smart people busy producing lots of paperwork, and increasing overhead costs, for fuzzy benefits.

To succeed, CIOs must redefine knowledge management in terms that focus on what would make it most valuable to a business. That means having a deep knowledge of your company's supply chain, from what your customers want to when they want it and which suppliers can quickly deliver high-quality parts to meet those wants. You can use this knowledge to focus on the critical goal of improving the return on capital for your company, your customers, suppliers and business partners. And by mastering KM -- one of the squishiest IT concepts out there -- you can help your company seize an enormous digital age opportunity.

Here's why. While the 30-day payment cycle has been a convention for as long as anyone can remember, it's obsolete in the digital economy. The traditional principle governing the physical supply chain made a lot of sense when it took me three to five days to book an order, 15 days to ship it, and six days for the bank to clear the transaction. But the rules are no longer valid as business becomes more digitized. When I click "buy" on a webpage, everybody should get paid.

Understanding this shift and the importance of managing knowledge about your company is what will make capital flow in your favor. Business conditions have not yet caught up to this potential. Companies that have good knowledge of their supply chains can take advantage of this "float" to get cash from customers at new economy speed, while paying suppliers at old economy speed. This means you can keep inventory out of your own supply chain until the last second, moving all that inventory and capital volatility onto your buyers and suppliers' balance sheets. In a volatile market, you have more strategic flexibility because it's their capital that's bouncing up and down, not yours.

And this is where redefining knowledge management comes in. Why is KM such a difficult, executive problem? The primary issue is that knowledge itself cannot be directly measured, only its indirect effects can. That's because knowledge exists in Why is KM such a difficult, executive problem? The primary issue is that knowledge itself cannot be directly measured, only its indirect effects can. the context of its use. For example, anyone interacting with a Dell premier webpage to order a product is only building a virtual version of a machine, which is available, can be built and is costed to the price negotiated with that individual's employer. The value is in the interaction of the customer with the knowledge. The correct solution to configuration has a profound impact on Dell's business process; an error drops like a rock into a calm pond, with problems rippling costs through inventory, customer satisfaction and labor.

But if Dell provides its customers with the information necessary to make a purchase comfortably, giving them the sense -- before they've even seen the product -- that they understand what they are getting, why, and how they will use it, Dell has built customer satisfaction into the front end of the selling process through KM. Opening the box becomes an anticlimactic event because the customer is presatisfied. And the bad-configuration rock never drops.

How does this knowledge impact finances? It begins with the basic order to cash cycle. From 1989 to 1998, Dell's working capital moved from a positive 70 days to a negative 11 days. What enabled such a dramatic shift? Knowledge of every part of its value chain: configuration, customer demand, part availability, supplier quality.

Most important, Dell shared this knowledge with its suppliers and customers. When Dell passes knowledge that a first-time buyer generally won't pick a 21-inch monitor to its monitor suppliers, the suppliers can bump up production of smaller monitors based on the percentage of first-time computer buyers who visit Dell's website. That in turn means that Dell can collect cash faster and use fewer assets. The cash flows to Dell because the old 30-day payment cycle that it uses with its suppliers has not yet caught up to the best-of-breed production and delivery cycle. Dell's model enables the company to get paid for finished products, before they are actually built.

This is not only asset management and knowledge but using the "knowledge" of what customers want. Dell takes a customized order on the Web or by phone, and is able to hurl that toward its suppliers, who make and assemble the parts. The complete knowledge Dell has about the desired computer, service needs, delivery statistics and customer specifics to all parties involved in the process turbocharges the supply chain.

W.W. Grainger, the $4.5 billion industrial distributor, has this same kind of deep knowledge of the maintenance, repair and operations (MRO) space. If you want to find one of 5 million parts online, you can enlist a sophisticated search engine at Grainger's website. If this doesn't work, you can go to a service called FindMRO with specialized search tools, or you can submit a request online to ask Grainger to find it for you.

Don Bielinski, group president at Grainger, says the typical online Grainger order averages $250. FindMRO orders average $1,200, and 80 percent of the goods are shipped directly from the manufacturer to the end user, converting demand to cash much more quickly.

At Grainger, information about assets is substituting for the "hard assets" themselves. But to make the information useful, there has to be knowledge of how the information serves customers' needs, knowledge of the logistics and delivery, and knowledge of the suppliers. The company needs to know how each part works and how they fit together.

As CIO you need to focus your KM people on the goal of lowering asset intensity and improving the cash collection cycle. Focus on high-transaction, high-customer touch points: customer service, inside sales, accounts payable. These are the kinds of processes that have short cycle times. Geneticists study mayflies because they live only 24 hours. If they instead examined sea turtles (which can live 100 years), we'd still be waiting for the first study! Your KM efforts should focus on areas of your business where you can see the direction of the impact of changes rapidly, and across many transactions.

Have your company build a KM system for sales where you can support cross-selling and track common complaints. Put it in the service department where you can leverage the knowledge of your front-line workers to get returns down and dispute resolution shortened. Put it in support of your field sales force and stay the course. KM is a social process where people must change their behavior, and the more suppliers and customers are involved, the longer it takes.

Superior knowledge management frees companies to operate on fewer assets, collect their cash faster and have less volatility. The challenge is to make sure that the scope and the goal of the process is clear and focused.

This story, "Knowledge pays " was originally published by CIO.

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