Mar 18, 2022 | Change, Leadership, Strategy
Like it or not, official figures or not, inflation is back with us.
Inflation consumes cash like a ravening beast, but often goes unremarked until the 11th hour, by which time it is often too late.
Official figures always lag reality, and forecast models are only as good as the input data. My models are based on conversations with the owners and managers of SME manufacturers, very sensitive to rising input prices, and the ways they are responding.
Every input to manufacturing is in the beginning of an aggressive price surge that may see many go to the wall. Many SME manufacturers, those with whom I interact most frequently will see that wall close up for a number of obvious reasons, sadly mostly obvious only with hindsight.
- They use a standard cost model. Whether this be in a fancy enterprise tool, or excel, the product costs spat out are a function of the input costs. Typically, a standard cost system is reviewed and updated on a schedule, most often half yearly. When input costs are increasing rapidly, you quickly fall behind, and play catch up not only too ,late, but to the point where the input costs stood when the review started.
- Variances are insufficiently recorded and understood. A good standard cost model will throw variances from the standard. These may be reviewed monthly, but are they sufficiently well understood, and more importantly, does anyone take action to address the negative variances in input costs?
- Too few have visibility both forward and backwards into their own supply chains to understand the impact of rising inflation on both the supplier and customer side. In the absence of this insight, the forecasting tends to be both slow, and understate the impact.
- There is a strong resistance to increasing prices, not just from the sales force, generally over sensitive, but from senior management who do not get rewarded for rocking the boat. This results in price increases being too low, and too late. Do the maths and calculate the relative impact of losing a few sales by increasing prices, to keeping them low to retain sales at a lower margin. It almost always pays to increase the price.
Apart from addressing the 4 points above, what else should you be doing?
Act faster.
When you act faster than your competitors in a volatile environment, it leads to competitive advantage. The OODA loop at work. The enabler of speed has become digitisation, which requires investment in capability and takes time, but can deliver real time information, vital in a volatile environment.
Direct communication.
Direct and concise communication with others in the supply chain, and your own procurement people, dealing with supplier invoices every day, is essential. Being close to the action enables you to move quickly in response to changes and opportunities that emerge.
Reconsider your pricing model.
Most businesses have a price list that for ease is general, being the base from which various discounts and promotional opportunities flow. Being general means that you are probably leaving money on the table, as different customers will have unique needs and levels of price elasticity. Understanding these differences and pricing accordingly is both challenging and profitable. You might even take the opportunity to change completely your pricing model, usually extremely hard to change when things are predictable.
Change prices more frequently.
Find a way of enforcing some sort of dynamic pricing process. Developing the processes that will enable dynamic pricing will become a necessary competitive tool, impossible until recently, simply because the degree of data granularity was not available. Now it is, so there should be no excuse to at least embarking on the journey.
Understand the whole supply chain.
Develop a whole of supply chain understanding, knowing where the profit pools and points of stress hide to be able to anticipate and adjust to them, as the impact of inflation rolls through.
Operational Flow.
Removing choke points in all your processes releases capacity you have already paid for. This observation is as valid in the support and revenue generation processes as it is in manufacturing.
Apply Pareto
We all accept that 80% of your profit comes from 20% of your customers. In times of inflation, the need is for real growth of revenue and margin, not the inflated numbers, while holding costs. The most effective way to do this is to prune activities that fall in the tail of the Pareto. Double down on where the real margins are. The same logic applies to the products you supply. Weeding out those legacy products that no longer play a valuable role in the value proposition of the business will release capacity that can be used more productively.
The aggressive application of the Pareto principal always removes transaction costs that are hidden simply because they are hard to quantify. The choke points removed to enhance flow, will also remove transaction costs.
Strategic priorities
Focussing on strategic priories while managing a crisis is a very challenging double act. When time is not on your side, acting decisively is all that is left. Capex is one of the first things to be delayed when times get tough, along with advertising. While it is an understandable reaction, it is also the wrong one. History tells us that those that double down when others are pulling back benefit in the medium term. Do not let the organisation lose sight of the long term, this coming crisis will be over at some point, replaced by the next one.
Innovation.
Innovation is an investment in future cash flow. While it is usually expensed through the P&L, which is in my view a misleading treatment of an investment, it often suffers the same fate as marketing activity and capex. I break it out separately as it is even more often dismissed than either of the others, and is arguably at least as important.
Cash management.
All of the above are about the management of activities as they all impact on cash flow. This is critical at any time, but never more so than when there is a spurt of inflation coming at you. Managing by the P&L as many do, can be very misleading. Set aggressive targets for working capital, and aggressively apply them. Your suppliers and customers will be feeling the same pain. The risk of blowing out debtor days is real, as your customers will be looking to extend their payment terms, as you try and extend yours.
The risks associated with inflation are huge if you are too slow, or ignore it completely and hope it goes away. On the other hand, many opportunities will open up for the agile amongst us.
Header cartoon credit: Scott Adams and Dilbert. Again.
Mar 16, 2022 | Customers, Marketing
We are confronted every day with hundreds, thousands of messages, all competing for our attention. The volume has ramped up exponentially since the net delivered access to anyone with a connection.
The vast majority are tactical thought bubbles, cat photos and brain farts by people vying for attention, but then not knowing what to do with it when they are the winners of the lucky dip.
‘Yesterday’, access was not so available, you needed lots of money, which ensured there was a barrier to entry not hurdled by the figurative cat photo.
The generation of revenue, the process that encompasses both ‘Marketing’ and ‘Sales’ is a continuum. Sales comes in right at the end, at the point of, or near to the transaction. Marketing is the longer-term stuff that provides the opportunity to open and lead the process culminating in a transaction.
Think of it like a race.
Are you running a sprint next month, or a marathon?
If it is the sprint, training can be short sharp explosive sessions. You focus on the detail, short sharp sprints, and many of them.
By contrast, if it is the marathon, training for a sprint will not get you far. You need to have longer sessions, building slowly to the marathon distance.
Building a relationship that leads to making a sale is a marathon, not a sprint.
Most of the marketing I see is designed as if the race was a sprint. Usually this is the wrong training, as in most instances beyond small value commodity items, you need to get set for the marathon.
As a result, you have all this crappy tactical sales stuff thrown at you daily, which is rarely of any interest, so you turn off. Turning off just encourages the tactical digital set to chuck more crap at you in the hope that something sticks.
When you have to churn out new messages daily, weekly, it removes the opportunity for creativity, the building of the relationships that may lead to something meaningful at the end.
Most so called ‘marketers’ brought up on a diet of digital are unfamiliar, and as a result do not deeply understand this more strategic approach. They set out to sprint in a marathon, and end up coming in at the tail, assuming they actually finish.
Header photo: Marathon startline 1904 Olympics
Mar 14, 2022 | Governance, Leadership
Integrity is something we all say we strive for. Most statements of company values plastered on the reception wall seem to have it included.
The dictionary definition is something like: ‘the quality of being honest, having strong and unchanging principles‘
Trust and integrity seem to me to be a continuum? At one end, is integrity, the personal determination to do the right things. At the other is trust, the belief of others that you will do the right thing.
Trust is something that must be continually renewed by performance to be retained. In most cases, there will be an automatic quotient of ‘trust’ given at a first meeting. The more similar two parties are, the greater will be that ‘auto-allocation’ of trust.
After that, it is retained and earned by the behaviour displayed over an extended period. Trust is easy to lose, very hard to earn back.
You build trust by always meeting commitments, or, when there is a commitment that will not or cannot be met, there is a clear acknowledgement of that outcome, and responsibility is taken.
What is to be done, by whom, and by when is clear, unambiguous, and fair.
When you meet all your commitments, by the due date, or alternatively when they are unable to be met, that fact is clearly communicated beforehand, and responsibility accepted, integrity will be built.
This is a vital component of leadership, and of the ‘Cultural glue’ that makes up a successful institution. Others need to be able to trust that to be cliched, ‘your word is your bond’.
It also has significant implications for those that are being led. The casual relatively thoughtless acceptance of some sort of task and/or deadline that you know you cannot or are unwilling to meet is no longer acceptable.
When you accept a task and deadline, you must meet that acceptance with completion.
Many times, I have seen people in a meeting accept tasks that everyone knows will not be adequately addressed by the deadline. This is both bowing to authority and making your short-term life in the meeting better at the expanse of the longer term, and your own integrity.
The same process applies to institutions. We tend to want to trust them, and the people running them. However, when the people fail the integrity test, we tend to lose faith not only in the people, but in the institution as well.
I wonder, do those in Canberra who seek to lead us, understand the idea and its foundations?
Header cartoon credit: Scott Adams and Dilbert, again, have my thanks for a cartoon that makes my point.
PS. to the cartoon. Integrity may not buy you a boat today, but it certainly will tomorrow.
