‘Management by exception’ is a key business concept, and an extremely useful one for industries which depend on logistics monitoring and management (for example freight management, warehousing and manufacturing).
It is a concept taking hold across the globe, particularly in countries which rely heavily on those logistics based industries. For example Australia, where approximately 10% of Global Domestic Product is accounted for by the freight and logistics industry alone!
In this article, to unpack this growing interest in the ‘management by exception’ concept, we explain:
- What exactly ‘management by exception’ is
- Why it is so useful to logistics based business, and
- How to find the right software to implement the ‘management by exception’ approach.
What is Management by Exception?
Management by exception is an approach where human attention or effort is only used in situations which differ from the norm.
The norm is something that is well known, well understood, and can therefore be dealt with through standard, even automated procedures and processes. But when something exceptional or unexpected happens, which differs from the norm, standard procedure may not suffice. In these cases, a unique action or decision making process is needed.
Management by exception is basically a way to prioritise management effort to those situations which need a unique, non-standard response; the exceptions.
“As the likelihood of exceptional or unexpected circumstances increases, so too does the need for ‘management by exception’“
Exceptional Circumstances in Business are on the Rise!
Today’s business and industry is suffering an ever increasing rise in exceptional circumstances. To explain why, let’s look at the very basic driving factors behind business and industry:
Supply, and Demand.
Once upon a time, supply and demand behaved in a localized, slow paced and predictable way.
Sure, it had volatile and complex moments, but in general it stuck to the rules. Supply and demand could be predicted and relied upon. Exceptions could be dealt with using management attention, because they weren’t as numerous as today.
They weren’t as numerous because changes in supply and demand couldn’t happen overnight. Communication channels and business processes were not that quick or responsive. Everyone accepted that there was a natural pace at which all parties had no choice but to follow.
These days, however, our globalized, high paced economic environment is causing an increase in exceptional circumstances in supply and demand. There are no more rules. Throw in the constant cloud of financial crisis and global political instability, and who knows what tomorrow will bring!
As a result, the ‘management by exception’ approach is gathering steam. It’s even recommended as best practice by world renowned project management programs, such as PRINCE2. And it is easy to see why!
The Modern World of Business
Our modern world operates at a much higher pace than it use to.
It’s faster, more transparent, more volatile, and more unpredictable. The world is now completely interconnected. There is no virtual or physical boundaries limiting the pace of business and industry. And on top of this, communication channels are now instantaneous, efficient, transparent, and available to everyone.
This results in three things:
- Expectations are higher.
- Exceptions are more frequent. And
- There is less time to deal with exceptions.
Today’s Supply and Demand Can Change At the Drop of a Hat!
Supply chain businesses are expected to adapt in sinc to this volatility.
The greatest impacts are felt by industries which rely heavily on their ability to predict supply and demand, and link them together to create a supply chain.
Thus, the ability to cope with and adapt to changes has become a key factor in business growth and productivity. We now need to prepare for the unpredictable.
The Impact on Supply Chain Management and Logistics Based Business
Rapid changes in supply and demand can throw whole supply chains off course. Supply chain industries like freight, warehousing and manufacturing are particularly vulnerable.
Their operation and efficiency relies on the recording and interpretation of a huge and constant flow of data. And when this data becomes volatile (i.e. as a result of supply and demand exceptions), it becomes harder to deal with issues in a consistent, automated way.
Logistics software has been developed to help deal with volatility, but there is side effects. For example, some logistics software is so responsive and transparent that every little hitch, bump or wobble in the standard flow of business is detected immediately.
Sure, it’s great to have a constant finger on the pulse, but it also means supply chain businesses have to be able to immediately correct issues and adapt to change. This isn’t a downside of the software, it simply highlights that we have to be more responsive.
Responding, Correcting and Adapting All Requires Management Attention and Effort
The problem is, management effort is a limited resource. And if it is poured into correcting all the little bumps hitches and wobbles which are immediately detected in everyday logistics, there is none left for the real problems! The ones which can derail a business.
And that brings us back to the management by exception concept.
The Management by Exception Equation
To summarize all of the previous information:
- More supply and demand volatility = more logistics exceptions
- Shorter timeframes = less time to deal with exceptions
- More exceptions + less time = more need for management by exception
- Too much management effort used responding to numerous everyday exceptions (the common bumps, hitches and wobbles) = inability to manage the more serious issues.
What this all means is, we need management by exception, but it needs to used in the right way. You must find a way to prioritize which exceptions are managed, and which are automated.
So, what is the solution?
The Management by Exception Solution
For logistics based businesses like freight, warehousing and manufacturing, the answer is Enterprise Resource Planning (ERP) software.
You need ERP software which allows you to define and configure exactly how you facilitate and allocate the use of you’re limited management resources.
What Exactly is ERP Software?
ERP software is a program or system used to organise, track, assess and evolve all aspects of business. ERP uses logistics to monitor and manage as much of your business process as possible. A good example is freight management software.
Freight management software can manage a huge range of processes critical to a freight and transport business, for example:
- Fleet management
- Service workshop management
- Pallet management
- Fatigue compliance
- Item traceability
- Depot scanning
- End-to-end mobility solutions
- Proof of delivery processes
- Electronic data interchange; and
- Customer services.
In every one of these freight related areas, exceptions can occur, i.e. circumstances which do not stick to the norm.
The biggest drawcard of ERP software solutions is that you can automate the response to the majority of these exceptions. All the bumps , hitches and wobbles can be balanced out, almost immediately in many cases.
Larger issues which cannot be solved by your ERP software can be flagged, and dealt with using the surplus of management resources you have left over, which isn’t needed for the everyday issues.
So whether its about freight, manufacturing, warehousing, or any other industry based on logistics, an ERP software solution can help implement the ‘management by exception’ approach, to focus management effort where it really needs to be!
How Exactly Does ERP Software Focus Management by Exception?
It comes down to how ERP supply chain software manages logistics. When boiled down, it goes something like this:
Data in → Data out → Management by Exception
If everything relevant goes in, and you set the output to meet your needs, then the management by exception approach can be implemented exactly how you need.
Further, by configuring all rules, guides, workflows and policies, you can use ERP to manage the majority of the business for you, and deal with exceptional circumstance with as little management effort as possible.
Here is some further explanation.
Data In – Entry, Analysis and Differentiation
The right ERP software will be able to record and monitor all data relevant to your business.
The best ERP software solutions let you set the rules. ERP software will have access to supply chain wide data, and can therefore be configured to analyse and respond in the best ways to the everyday issues.
You can have it configured to deal with the many everyday issues automatically (i.e. the degree of automation), and to facilitate a management response should something more serious occur.
For example, an everyday issue might be a minor delay in a delivery. ERP software could send the customer an automatic notification letting them know the product is on it’s way, albeit slightly delayed, and can provide contact information should they need further information. No management effort required; Everyday issue – solved.
But, if a freight vehicle can’t complete a priority delivery, then unique management effort may be required. Another delivery may have to be manually arranged, or if the customer may have to be directly contacted.
This brings us to the next component, how should an ERP software solution facilitate management effort?
Data Out – Solution Management and Scenario Modelling
With a good ERP software solution, you should also be able to set the rules, guides and workflows to facilitate unique solutions to exceptional circumstances, which should not be automated.
The ERP software needs to know when to act, and how to act on those exceptional circumstances, and you should be able to decide how it should do that. Whether it’s about who your priority customers are, what your priority deliveries are, or any other important areas of business you want to focus management attention.
Responses may include things like notifications and alerts to management staff or reports and analysis which highlight issues.
The important part is, it facilitates the right management response, to the right business area and the right staff members.
Issues like invoice discrepancies or budget anomalies can be instantly detenced and flagged to accounting staff. Traffic issues or supply inventory problems can immediately be visible to planning or delivery staff. Everyone can use their management effort to solve the problem in the most efficient way.
The best ERP software will also provide a range of solution options, through scenario modelling, and using supply chain wide information it has gathered. For example, ERP software for freight services will know exactly what is available in the product inventory, exactly where all the delivery feet is at any given time, and can therefore shortlist the best available options to address any given problem.
This all helps to make sure that management by exception can happen as efficiently and successfully as possible!
Management by Exception – Time, Funds Resources and Business Planning
The last part to this puzzle is having the right business processes and resources in place to act on and implement the solutions provided by ERP software.
The best model is where exceptions which cannot be automated are tracked and dealt with consistently through a centralized planning framework, and very complex issues are sent to an issue resolution team.
ERP Management by Exception Summary
To summarize, you can use ERP software to implement the management by exception approach in the following ways.
- Ensuring the ERP software records, analyses and interprets the right data.
- Configuring ERP software to respond to exceptional circumstances exactly how you need, whether that is automation or alert notification.
- Set the ERP software to provide the best solutions to facilitate the best management response.
Management by Exception Response:
- Establish the right business structure and process to act on ERP software alerts and suggested solutions.
The Consequence of Not Utilising ERP Software and the Management by Exception Method
Most logistics based industries are moving, or have already moved too, the use of ERP software solutions to implement the management by exception approach.
The ralisity is, that businesses which do not opt in to this new style risk being left behind. They risk investing too many resources in everyday management, which could ultimately be addressed through automation.
ERP software is your best chance to address that risk. So the real question is not about whether or not your business should move to ERP software solutions, but which ERP software solution you should choose.
How to Choose an ERP Software Solution
To ensure you choose the right ERP software, which can target and respond to exceptions in the most efficient way, you need a product with the following attributes:
- It must be tailored to your business (i.e. too big and it’s overkill, too small and it may not have the capacity to deal with exceptions how you need).
- Fully customizable (i.e. you need to be able to set all rules, guides, workflows and policies).
- A centralized, overarching software solution (i.e. one software package through one vender who also supplies support services, is the most efficient logistics software solution). And
- Developed by a company who has a long history in software relevant to your industry. Nothing beats industry experience!
The management by exception concept is extremely important to the survival of logistics based business in today’s fast paced and volatile supply and demand environment.
And in addition to using the management by exception approach, you need to implement the right management response to each exception.
The best way to do this is through ERP software solutions. This allows the high majority of logistics monitoring and management to be automated, leaving management effort available to address the issues you want prioritized.
The overall benefits of this approach will include:
- Less risk of serious supply chain delays or failures
- Better customer service; and
- More productivity and growth.
The more globalized and transparent industries become, the more this management style will be needed in the future.
To further discuss your ERP software options and how to implement the management by exception approach, contact Infocomm.
Frequently Asked Questions
1. Does all Enterprise Resource Planning Software (e.g. Freight Management Software) use the management by exception method?
These days, most ERP software will have the ability to utilize the management by exception approach.
However, some do it better than others. For example, some are more customizable, which means you are able to define exactly what it considers an exception, what kind of response it should have, who to notify and what kind of solutions to suggest.
To find the right ERP software, you should discuss your business requirements with an experienced logistics software company.
2. Is management by exception only relevant to managers?
No. It is relevant to all those involved in your business.
It simply helps to improve the efficiency and success of your businesses response to unexpected or exceptional circumstances, to maintain productivity and growth.
It can free up resources across the board, by allowing for the automation of everyday tasks, and responding, or facilitating a response to the situations which warrant a unique action.