Oct 4, 2022 | Analytics, Management, Operations
Too often KPI’s are all about the result, rather than the drivers that will deliver the result. When you are measuring just the outcomes, you have missed the opportunity to improve and optimise the actions that will lead to change the outcome being delivered.
Take for example the Cash Conversion Cycle (CCC) time. This measure is a fundamental tool in the improvement toolkit.
By improving the rate at which the cash outlaid to generate a customer service or product is turned back into cash by the payment of invoices, you reduce the amount of working capital required to keep the doors open.
The real benefit is to be found in the active management of the drivers of the CCC. The days taken to complete the cycle is just tracking the result of a set of actions that take place elsewhere, Manage the inputs, and the days will reduce.
For example, detailed examination of the debtors ledger will tell you which customers are slow to pay, thereby decreasing the speed of the cycle. It then becomes an item of potential improvement. Perhaps the salesperson responsible is not diligent enough, perhaps your collection processes are not explicit, you lack follow up, or clarity on your terms. In the end, perhaps you can decide that that a specific customer should be handed over to one of your competitors, weakening their cash position.
The same analysis becomes second nature around the inventory numbers: raw materials, WIP and finished goods. Improving those numbers without hurting the levels of customer service can dramatically improve the productivity of the investments made in the enterprise. As an added benefit, customers will thank you and give you more business.
As with anything, the absence of the information that details the drivers of an outcome, makes it hard to make improvements.
Another example. Sales personnel are often compensated by commissions on their total sales. If you want your salespeople to be out hunting for the next customer, rather than glad-handing existing ones, paying a commission on all sales is a poor strategy. It discourages the more time consuming and riskier task of finding and converting new customers. Existing customers in most cases can be professionally managed by an internal customer service function. The better use of commissions might be to encourage business development.
When you spend time identifying and managing the drivers of outcomes, the dollars will follow.
Sep 19, 2022 | Analytics, Communication
Social media platforms all compete for your attention, not just with other platforms, but with the rest of your life. Then, once you have given it, the real test begins.
What do you do with it.
The nature of social media is almost instantaneous. When something comes through your feed, an increasingly rare event for unadvertised material, it has a second, occasionally a couple, to grab and hold your attention, and encourage you to take the next step, whatever that might be.
It is not the long slow romancing of that great looking person in a bar, or at dinner party with friends, it is more like Tinder.
Swipe left, or swipe right. In or out. More information please or no thanks.
Your marketing task on social media, if you are to use it effectively, is to pass the initial tinder test, and have the other party look for more, and then pass on the post to their networks.
So how do you achieve that end, the referral of your material to others?
Most of the advice around is pretty accurate:
- Promise an explicit outcome to a specific cohort of potential customers.
- Photos of people should be front lit, and eyes not looking directly at the camera. This is to avoid the photo looking like a mug shot from the local cop-shop.
- Simplicity and consistency of design
- Make a clear and explicit call to action
- Make it easy for them to contact you
Remember always you only have a second to make the impact that will encourage them to swipe left, then the challenge is to add value, so they stay.
Better make that first second count.
Jul 28, 2022 | Analytics, Leadership
Psychology drives our behaviour, and yet we struggle miserably to forecast the impact it will have. Therefore, we cannot predict behaviour with any real accuracy, except with the benefit of hindsight, or across the average, assuming we ask the right questions.
There are five important psychological factors that profoundly impact the sorts of decisions, big and small we make every day.
Status, Certainty, Autonomy, Relatedness, Fairness.
Psychologists put them together into the ‘SCARF’ model as they set about understanding the drivers of behaviour, which centres around ‘away’ movements to minimise threats, and ‘towards’ movements to maximise rewards.
Status. We all know it is important, that is how Mercedes manage to squeeze 4 or 5 times the money out of buyers than a perfectly adequate, reliable, and outfitted with bells and whistles Korean or Chinese alternative. It is why people pay tens of thousands for a watch, assume crushing debt to have a luxury car in the drive, and Louis Vuitton is the world’s most valuable luxury brand.
Certainty. Uber nailed this one. The time we wait for a taxi is different to the time we wait for an Uber, even when the Uber wait is longer. This is because we are waiting with certainty, we know when the Uber will arrive, we know where it is right now, and we can walk out of the building as it pulls up, which adds a feeling of status to the equation. By contrast, call a taxi and then wait, uncertain when it will turn up.
Autonomy. We all like to feel we are making our own decisions, even when we are not. We love that feeling of freedom, even when it is an illusion, or inside a tiny arena of personal space.
Relatedness. Human beings are social animals, we like to feel like others are aware of us, and concerned with our needs, views, and ideas. It is like being in a book club, there are psychological rewards to being in a group that values your presence. We also need the group for protection, as it is the outliers that become a lion’s breakfast.
Fairness. Instantly we rate things on a fairness scale, we like to be seen as fair, even when we are diddling the books. Is it fair that the bloke next door who does the same job gets paid 20k more?
None of these things appear in economic models.
It was Einstein (amongst others) who said, ‘not everything that matters can be measured, and not everything that can be measured matters’.
Jul 25, 2022 | Analytics, Marketing
Almost every marketing so called guru, yours truly included, will bang on about calculating an ROI from your investment in marketing.
Marketing like any other investment should seek a return, and there should be accountability for those numbers.
Almost nobody will disagree.
The challenge is how you do it.
How do you attribute an outcome to any specific activity or individually weighted group of activities?
The amount spent divided by the sales, or margin returned from that activity.
Pretty easy in the case of a piece of machinery, another matter entirely for anything beyond a specific tactical action, such as an ad in Facebook or Google where the response can be counted.
In the case of marketing investment, how do you allocate the sales outcome to that activity?
When a sale is generated, was it because of the activity we are calculating for, or was it the phone call from the sales rep, attractive copy on the website, clean delivery truck, or the referral from some other satisfied customer?
How can we tell?
When some analytics nerd cracks the code on attribution, he will become histories fastest billionaire.
So, when some fast talker promising world market domination will result from investing in their new ‘thing’, run as fast as you can, unless they can prove they are the one who cracked the attribution code, which I do not expect any time soon.
Mar 23, 2022 | Analytics, Operations
6 sigma is a statistical toolbox designed to assist process improvement. It was originally developed by Motorola in the 80’s as they struggled with quality problems in their booming but now extinct mobile phone business. The tools seek to identify and remove the causes of variability and resulting defects in manufacturing processes. It uses statistics to identify problems, formulate remedial action, then track the impact of improvements as they are implemented.
In simple terms, 6 sigma compliance means there is less than 3.5 defects in a million opportunities for that defect to occur. This can apply to a specific machine or action, or whole production line. Clearly the latter creates many more opportunities for error, and therefore harder to stay ahead of the 3.5 defects/million opportunities benchmark.
Improvement projects are run to a proven statistical ‘recipe’ going by the acronym of DMAIC.
Define. Using statistics, define the problem, and the deliverables of the project.
Measure. By collecting data, you measure the ‘current state’ of the process or activity. This is the starting point from which the improvements will be measured.
Analyse. By analysing the data from each point of input, usually by experimentation, you isolate the cause-and-effect chains in the activity. This identifies the root causes of the variation being investigated.
Improve. Removal of the causes of variation will result in improved performance. The improvements require that changes be made and that the improved processes become the Standard Operating Procedures (SOP).
Control. Control is the continuing monitoring of the improved process to ensure that there is no ‘back-sliding’.
When engaged in a 6 sigma type project, I like to combine it with the SMART methodology in each component of the improvement process. This enables pro-active project management of the components of the process.
6 sigma is often confused or conflated with ‘Lean’ methodology. They use a similar toolset while coming at problems from different perspectives. In my view, and some disagree, they are highly complementary.
Feb 25, 2022 | Analytics, Operations
To improve performance, the key challenge is to identify the drivers of outcomes in real time, and enable the changes to be made that will improve the performance.
The ‘Box score’ is a term that has been hijacked from the recording of individual sporting performances in team sports by a few accountants seeking to capture real time operational data. The term originated with Baseball, but all team sports have a system that in some way records individual performances which when taken together are the source of team performance.
In a commercial operational context, the collection of metrics plays the same role, capturing the real performance of a part of a process, adding through to the totals for the whole ‘team’. It is a more accurate and responsive way of tracking the costs incurred in an operational situation, specifically a manufacturing process, than the favoured standard costing system.
Typically, standard cost systems while better than nothing, fail to reflect the actual costs incurred by a process. They are ‘lazy’, displaying the averages of past calculations, and as we know, averages hide all sorts of misdemeanours, errors, and potentially valuable outliers.
Sometimes these systems also have a component added to the cost of each unit of production that is noted as: ‘overhead absorption’. This just makes the inaccuracy and inflexibility of the standard costing system even more inaccurate and misleading, resulting in poor data upon which to make decisions.
Accounting has only two functions: the first is reporting to outside stakeholders. That has become a formulaic process with a template and rules about how things will be treated, this is to ensure that you are always able to compare apples with apples across industries.
The second function is to provide the information necessary to improve the quality of management decisions. The two are not connected except at the base level, the originating data.
This is where the ‘box score’ approach adds huge value: it captures the actual cost of a process.
A well thought out standard cost of goods sold (COGS) calculation typically includes calculations for the cost of packaging, materials used in manufacturing, and the labour cost consumed by the process. The calculation assumes standards for all three, and then throws out variances from the standard to be investigated. Standards would typically be updated regularly to accommodate variances that appear intractable. Changes such as labour rates, machine throughput, and price changes in materials, should be included in updated standards, but often they are not, and when they are, it is after the fact, and as averages.
A ‘box score’ by contrast captures the actual cost in real time, or close to it, so that more informed management decisions can be made.
30 years ago, I did an experiment in a factory I was running, the objective of which was to identify the exact cost of the products running through a line. To collect the data, a host of people needed to stand around with clipboards, stopwatches, and calculators. At the time it was called Activity Based Costing, ABC. The result was good, but the improvements resulting from the information gathered did not generate a return on the investment necessary.
These days with the digital tools available to collect data, there is little excuse not to invest the small amount required to measure the real throughput and resources allocated to get the better information for informed decisions. The options to collect real time data are numerous and cheap, and in modern machinery, just part of the control mechanisms. These devices can collect data and dump it into anything from Excel to advanced SCADA systems, which enable the data to be analysed, investigated and the outcomes recorded and leveraged for improvement.
Managing operations using the actual costs captured and reflected in a ‘Box Score’ manner enables more accurate and immediate decisions to be taken at the point of causation. It is no different to a cricket captain taking a bowler off because the batsman is belting him out of the park. When you can see what is happening in real time, you can do something about it.
Header: courtesy Wikipedia. The scorecard in the header is the scorecard of day 1 of the 1994 ashes test in Brisbane. It progressively captures the days play as it happened: a ‘Box score’
