Jun 6, 2022 | Change, Collaboration
Fragmentation of supply chains is the reality post covid, and now with the turmoil in Europe, evolving attitude of the world’s factory, China, Brexit, polarisation of the US, and the increasingly fragile geopolitical world order.
Many businesses I see have spent considerable effort internally, progressively optimising their own operations. Very few have spent anything like the same effort externally, optimising the interactions with others in their supply chain with the objective of increasing the strength of the whole, rather than just increasing their negotiating leverage.
Making one link in a chain stronger is great, but it is the strength of the weakest link that is critical.
One of my SME clients faces this dilemma.
His business is in a rapidly growing segment of a very large and well established market. He is the last link in the chain to the client, and has done an excellent job over the last couple of years building the foundations that will enable him to scale at an increasing rate. He has a number of suppliers for a key part of his offering, to which he then adds the value to the end client. Each of those suppliers has their own set of challenges, but the common feature is that they are modest sized, often relatively new businesses, all are underfunded, and management structures and discipline are generally poor. To varying degrees, and in differing ways, they present barriers to my client’s growth.
Question is, how does my client inject the ‘improvement DNA’ into his suppliers, so that they can grow together, make the pie for both parties bigger?
Collaboration is the easy answer, it is just that the distance between where they are now, and a fruitful collaboration is significant.
In my experience, there are four critical steps to be taken. These are not always sequential, although the deeper you become involved, the harder it becomes to extract yourself should that be necessary.
Pick the right partner.
Choosing a partner for a long-term collaboration is not unlike picking a partner for life. None is going to be perfect, and it will take time and effort, but in the absence of the right foundations, it will not work. Jim Collins in his book ‘Good to Great’ offers the advice to: ‘start with the who and then focus on the what’. Seems to be good advice.
Your chosen partner, and making a choice is essential so that you can focus resources where they will have the greatest impact, must be aligned with your strategy, and vision of the future. Only then can you engage collaboratively in the journey.
Learn together.
We humans learn better in groups than we do individually. The greater the variety of input and perspective the better decision making. Quicker recognition and wide acknowledgement of errors, and understanding of why they were made, leads to more robust recovery from those errors, and growth.
Leverage each other’s strengths
Every relationship requires ‘give and take’. When you assist a partner to improve their operations, you will benefit. That benefit may not always be directly evident, but indirectly it will be there. Reciprocity is a powerful motivation, on top of the commercial benefits that accrue from optimised operations. Often it is the case that the strengths of one partner fills the hole left by the weakness of the other, greatly benefitting both.
Measure together.
‘What gets measured gets done’ holds true, although you must be cognisant of Goodhart’s law. This states that when a measure becomes an objective, it ceases to be a good measure.
Both parties should be on parallel and intersecting continuous improvement efforts. Where these intersect there is significant opportunity for mutual improvement. Most often that is where there are shared measures. The most common I have seen are ‘DIFOT’ (delivered in full on time) and production scheduling and inventory measures. For example, years ago a business I worked for built a small number of measures that had shared production scheduling and inventory measures across the two collaborators. The result was a radically increased rate of ‘flow’ between the raw material and production scheduling of one party and the inventory and volume offtake of the other. Both parties benefitted enormously.
Such collaborative efforts, when they are successful provide the most effective antidote to the fragmentation of supply chains. While your competitors struggle with the fragmentation, you and your collaborators can leverage your success into market share and sustainable profitability.
Jun 1, 2022 | Change, Governance
As the new government beds in, the usual hymn-sheet of ‘the budget position is worse than the previous lot let on’ is being sung.
All the public discussion will be about nips and tucks around the edges of the tax system, when the reality is that fundamental change is needed.
There is an institutionalised imbalance between the outgoings and the sagging tax base from which those outgoings are funded, and the position is deteriorating. Deficits are supposed to be a cyclical balance, not baked into recurring expenditure as interest bearing debt. Kicking the can down the road must end at some point, and the longer the rot is left, the nastier the antidote.
The British government has announced a 25% levy on gas profits, being driven up by the war in Ukraine, an option ruled out by new Finance Minister Katy Gallagher.
Perhaps hasty, given the twin facts that the exporters of gas typically do not bother the tax commissioner beyond GST and the PAYE of their local employees, and that the resources they are selling are, or should be, the sovereign property of all Australians, including those yet to be born.
You can only sell the gas once.
Part of the new governments policy package is to crack down on the tax minimisation practices of multinational corporations. This has also been a common theme for the last 5 or 6 elections, yet little has changed.
Key to every (legal) tax minimisation scheme is the simple fact that legal systems are limited to individual countries, while money is global. The money therefore finds the gaps in the system and slides through, assisted by the armies of very smart lawyers and accountants who make piles for themselves assisting this legal but immoral practice.
Yesterday (May 31) Michael West media published yet another item outlining the tax performance fairytales of Google, Facebook and Netflix in the year ended December 31 2021.
The money fleeced from Australian schools, hospitals, and other essentials services by just these three is only a tiny amount of the total that goes walkabout. The tax loopholes enabled by places like Bermuda, Delaware, London, Malta, and many others that have low to zero tax rates, and hide the identities of the beneficial owners of the profits have created the loopholes. Those that hide in plain sight in developed countries, particularly the UK and US, should be the subject of the next round of bilateral conversations.
At the very least we should expect some changes to these practises to be made by the new government. The simple fact is that offshore tax havens and most tax management vehicles exist only to allow people and corporations to do things that are not allowed onshore.
Presumably, the new government will also act on its undertaking to create a Federal ICAC with teeth. The first target of such a body should be the ‘shopping bag’ payments and kickbacks made to individuals, who then can use the same tax loopholes to hide those payments from tax authorities.
Dirty money uses the same loopholes as less dirty money to avoid scrutiny.
Aggressive action is required. The lobbying response from those about to lose if changes are made will be sophisticated, well-funded, and effective at highlighting the ‘cost’ of such changes in the willingness of multinationals to invest in Australia. There will be short term costs, and some very loud losers, but we need to do this for the sake of our grandchildren.
I must be dreaming!
May 26, 2022 | Change, Innovation, Leadership
Opportunities abound, and are hard to ignore.
They emerge to consume resources, distract attention, divert investment, obscure the focus on strategy, and generally disrupt operations.
How do you ignore, or better still, systematically, and quickly assess them, learn, and then execute or walk away?
- Relentless focus on the long-term objective, and the framework that is the strategic plan and supporting operational plans that will deliver that objective.
- Consistency between the long-term objectives and the activities that are shorter term, tactical choices.
- Have a bias for action, coupled with the discipline that any action needs to move the enterprise towards that long term goal.
- Never underestimate the power of the status quo to water down and divert the bias for strategically oriented action.
- You need the right people, those that will measure every decision against the agreed strategic objectives. This is not to remove any opportunity to divert from the strategy, it just requires more short-term agility to take advantage of tactical situations as they occur.
- Make sure you have all the facts and are working from first principles.
Strategy is all about making choices, and making a choice for option A precludes also choosing option B. This cascading of choices becomes a Bayesian decision tree as the choices cascade through the organisation from the top to the points of tactical implementation.
Apr 6, 2022 | Change, Innovation
‘Go back to first principles’ is an often-heard expression. At least as often, those uttering it have no real idea of the meaning, beyond ‘think again’.
Twenty-six hundred years ago, Greek philosopher Aristotle defined it as: ‘The first basis from which a thing is known’
Application of ‘first principles thinking’ requires you to dig and dig into a situation until you are left with only a few foundational facts that cannot be disproved. You can then rebuild from the ground up.
Elon Musk is often cited as the current guru of this discipline, particularly as it related to the creation of what became SpaceX. Rather than buying a rocket at an astronomical price, he broke down the costs of the materials necessary, and set about assembling a team to do it for himself. The result was SpaceX, which reduced the costs of launching a rocket by 90%, while still making a profit. The same thinking was been used to create both Tesla cars and batteries, each relying on the other as a means to the end of replacing fossil fuels with renewables.
John ’40 second’ Boyd similarly broke the development and performance of fighter jets down to first principles, arriving at the OODA loop. He took it further with his thought experiment that led to the snowmobile.
These examples have something in common: they all combine ideas from different fields into a new solution to an old problem. How do you think the first suitcase with wheels came about? Engineer Bernard Sadow had a patent issued in 1972 after seeing the solution to his ‘luggage-lugging’ in an airport in 1970. However, real credit should go to a Croatian artist with a colourful background, Joseph Krupa, who stuck some wheels on a suitcase in 1954.
The key is to be able to see things from a functional perspective, rather than as a continuation and improvement of what you currently have. We have flying cars already, called aeroplanes, different form to what most might imagine, but the function is as we imagined, movement by air. The light bulb was not a result of continuous improvement of the candle, and the internet did not appear as just another significant improvement on Guttenberg’s printing press.
Thinking from first principles requires that you put aside all the accepted wisdoms, conventions, and forms in order to get back to the core truth. It is in effect another form of the lean ‘5 why’ tool, so useful in removing waste from processes.
The header photo is of Joseph Kruppa and his wheeled suitcase taken about 1954
Addition: This article by Michael Simmons has many more examples of situations which required the application of first principles to come to light, and the blindspots that prevent that happening..
Mar 31, 2022 | Change, Innovation, Strategy
Management over the last 50 years has been driven by strategic planning. Sometimes it has been done well. Often it is little better than a good chance to catch up with peers, have a few sherbets, and get away from the office for a few days.
After the session, the production of a new plan, and articulation of targets nobody really believes in, life gets back to normal.
Familiar?
The fundamental flaw is that we expect to be able to plan for a future we cannot predict.
This is in no way to ridicule the process of gathering information, generating ideas and views about the way forward, and the means to measure the success or otherwise of the efforts.
Those efforts are essential, they provide the intellectual fodder necessary to at least avoid some of the bigger potholes, and make informed and sensible decisions.
However, they miss the essential truth that planning for a future you cannot predict is bound to miss the mark.
The solution?
Instead of looking for the answers to questions thrown up by analysis of the data we can collect, look instead for questions that need an answer.
Setting out to answer a big question, go exploring the unknown, is way more powerful than figuring out how to change the status quo.
You do not have to be a Steve jobs or Elon Musk to see a big problem that needs solving, they are around us every day at a local level, we just have to see them.
A client of mine is busily solving the dual problems of poor acoustics and heat insulation of our windows and doors using European technology adapted to local environments. I watched a presentation last week by a local franchisee of ‘Bark Busters’. This is now an international business aimed at managing the behaviour of dogs, specifically dogs that bark. Perhaps neither are solutions to global problems like global warming, but both are big problems to those who are in contact with them.
Look for problems to solve, rather than extrapolating the present to a bigger version of itself.
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.
