AAOM Handbook

ST.01 Specify Business Structure

Context

The stakeholders in a business (shareholders, employees, community and government) collectively define the expectations that the business must meet in order for them to continue to support its operation. These expectations, interpreted and defined by the board and senior management, typically encompass safety, environmental, social and economic dimensions. These overall business expectations define the success factors for the business, and set the context for the performance of every element of the business. A business is typically comprised of a number of interconnected processes, each transforming, transferring or storing materials or information required to produce the outcomes expected of the business. Achieving the overall expectations will require the achievement of specific, and generally differing, expectations from each element of the business. It is therefore necessary to define how the overall Business Expectations break down to meaningful targets for the various processes that make up the business, and how the measured performance of these processes rolls up to a measure of the overall business performance. The first step to defining the performance targets is to break the performance targets into smaller elements. Where there are independent processes their output and cost results can be added to define the connections between their performance targets and the performance targets at the overall business level - it is straight arithmetic. An example of this type of situation is a large mining business where there are mining and processing operations independently producing a single final product in different countries. The output and costs of the operation in one country are not determined by the other. Even parameters such as margin, cash flow and return on capital can be derived through bringing output, price, costs and capital invested into the series of calculations - although now it involves multiplication, division and subtraction as well as addition. Whether we are looking at setting targets or measuring results the arithmetic of the relationships will, in the case of independent processes, work. Unfortunately, real businesses and their processes are often not as simple as this. Complexity enters the picture where the processes that contribute to the outcome are not completely independent, i.e. the results of one process have an impact on the connected processes. This is very frequently the case. Take our mining example again, and consider a single operation within a country. In this case one that has several mines, from which ore is crushed and blended to a stockpile, and then fed into a single process plant. In this case we cannot just use arithmetic to determine the targets. We must also consider the logic that governs the flow of material (based on the capacities of mines, crushing facilities, stockpiles and the plant), as well as the quality and cost of the material being produced from each location. Regardless of which of the above situations we are dealing with, we need to construct a set of diagrams that accurately reflect the relationships and will support the development of a series of models that help us to understand how

© McAlear Management Consultants 2006

Operational Planning: Set Performance Targets

Updated: August 2018

Page 14