Aug 9, 2021 | Change, Operations
Standard accounting practice is to calculate a standard cost of goods sold, and apply it to the P&L to calculate gross margin. It is a system that has worked well, is well understood, and can be tuned by the use of variances.
It does however have the significant and usually unappreciated flaw of not reflecting the reality of the flow that occurs through a factory.
Standard Cost of Goods Sold is generally comprised of the direct material, and direct labour used to produce products, tuned to machine rates. Usually, the standards once set are in place for a lengthy period, with adjustments made for variances via labour and material variances on some sort of timetable, usually budget time. If the standard says that there will be $50 of material used, and you use $60, there is a variance that needs to be explained, and if not a one-off, included into the standard COGS. Similarly with labour direct costs. If the standard is that 100 units are produced during a shift, and you produce 110 units, you have a positive variance, your labour has been more productive than the standard indicated, your machines have run faster or for longer on the shift, so the standard should be adjusted.
The challenge however is to make the standards dynamic, so they do not hide inefficiency or the opportunity for productivity increases. In their most dynamic form, the standard COGS is dispensed with, and replaced by an actual cost of goods sold, which reflects the actual costs incurred.
Lean practitioners call this producing a value stream P&L.
Inventory purchased for resale or transformation can only be consumed in three ways:
- It passes through the manufacturing process and is sold
- It is scrapped during the manufacturing process, or after it as inventory becomes redundant for one reason or another
- It is stored as finished goods inventory to be sold or scrapped.
Every business I have ever seen has purchased materials for all three buckets. The improvement task is to reduce them all, done in a number of ways:
- Reduce scrap during manufacturing
- Increase the flow of manufacturing to reduce WIP
- Reduce the lead times for delivery of materials, introduce JIT deliveries.
- Manufacture to order, or as close as you can to it.
The impediment to this improvement is often the accounting process itself.
The balance sheet records inventory, no matter its type as an asset, and a reduction of inventory is a reduction of assets. This is not a great thing to an accountants eyes, and often contrary to the KPI’s of executives. The only benefit from an inventory reduction that can be seen on the balance sheet is the freeing up of cash, to be used more productively than being tied up in inventory to be sold or scrapped. However, you must look closely, as it is just a transfer from inventory to cash, that often goes unremarked.
I encourage all manufacturing businesses seeking factory efficiencies to move from a standard Cost of goods sold calculation to a dynamic one. It is an easy transformation to say, but is in my experience often a very hard one to ‘sell’ to financial management, and even harder to implement. However, the effort will be worthwhile, as it will deliver way more sensitive management of cost of goods sold calculation, and is one where ‘coalface’ staff can play a role that delivers satisfaction and engagement to them, contributing to improved productivity.
Aug 4, 2021 | Change, Management
Time is the most important, and only non-renewable resource we have.
We all have exactly the same amount every day, week, and month. It is how we use it that counts.
It seems common that almost none of us have enough of it, yet we all know we waste a lot.
If you are like me, you have tried all sorts of things, lists in many forms, blocking out time for specific tasks, all the way to leaving it to someone else to manage your calendar.
None have been wholly successful, which I put down to my own lack of discipline and routine.
However, there are several techniques to make it easier.
The ‘top 3’ technique.
I use this a lot in workshops, where the challenge is a lack of common focus amongst a group of executives. It works equally well on a personal level.
- List all the priorities on a whiteboard that those in the group are working on.
- Combine those that are common. This usually brings what can be a large number down to 15 or so.
- Weight them all, by putting them in order of importance, one to however many you have.
- Draw a line under number 3 and declare that these are the only three things we are working on, the rest are in a parking lot, to be brought out when one of the three top priorities is completed.
It works, mostly, and then usually only for a while so it gets repeated.
The 6 questions technique.
Six very simple questions, all of which require an answer.
- What will you stop doing?
- What will you start doing?
- What will you continue doing?
- What should you do more of?
- What should you do less of?
- What are you building?
That last question is the only strategic question, the other five are all tactical.
I would suggest you use Warren Buffett’s technique, which obviously works for him. He leaves a lot of time uncommitted to accommodate the opportunities that emerge, think creatively, and deal with the unexpected.
There are many other methods, find the one that works for you, and make it a habit.
You will be far more productive as a result.
Jul 19, 2021 | Change, Customers, Innovation
Edges are often fuzzy, but are where the action happens, in nature and in business.
At the edge, there is less homogeneity, more opportunity for the different and interesting to be seen, trialled, and if successful take hold. By contrast, in the ‘middle’ there is little but homogeneity. It is why large businesses have trouble with innovation, their model is to do the same thing repeatedly, optimising it continuously, removing the opportunity for the unusual and unexpected to influence the way things are done.
If you think about where the ‘edges’ are in your business, they seem to fall into three categories:
The technology edge: where the existing technical status quo bumps up against development happening elsewhere. These days this is remarkably common. I once found a simple Bill of Materials program based on MS Access for a client. It successfully managed his inventory, costs, and associated information in the form of a program designed to manage the recipes and inventory in a restaurant. It worked perfectly well in an entirely different environment; the names just needed some changing.
The customer edge. The point at which you initially interact with your new customers and engage with potential customers is an edge. The interpretation of your value proposition changes depending on the context, and the challenges faced by people inhabiting a niche you may not have seen or considered relevant.
The core/non-core edge. This is an ‘internal’ edge. What is seen by the leaders as core and what is non-core to a business. The debate about what is core, and what is non-core capabilities, and competitive advantage started by the outsourcing movement 30 years ago remains. Enterprises seek operational excellence and differentiation by innovation at the same time. Often these are mutually exclusive objectives. I have seen businesses move one way and then another, as the competitive environment around them evolves. It can be argued that we are on a significant inflection point in the core/non-core debate currently. Supply chains are being disrupted by climate change, Covid, increasing complexity and the resulting reduction of item invoice price as the determining factor, and the growing awareness of the value of sovereignty.
To find an ‘edge’ opportunity, ask yourself four simple questions, continuously, during the strategy development and review processes:
-
-
- What are the challenges our different types of customers face?
- What could or should our solution include?
- Which of our capabilities may be useful elsewhere, and by who?
- Which of our assets would others value, and why?
You might uncover something surprising that delivers a new lease on life.
Jul 16, 2021 | Change, Collaboration, Operations
Nothing these days is done in one place, by one person, beginning to end. There is always a process in place, a chain of events that has to all work together in a co-ordinated manner to optimise the outcome.
We all know that old cliché, a chain is only as strong as its weakest link.
This is how it is with any process; it is limited in output by its weakest link.
Therefore, rather than spending resources in vain attempts to boost process performance by doubling down on the obvious bits that work well, find the weak link, fix it, then move on.
Eli Goldratt, the brain behind the Theory of Constraints, wrote a book called “The Goal” to articulate his theories in simple form. Boiled down in the book is a story of reverse engineering the process chain in a mythical factory. The management identifies the weakest link, works with it until it is no longer the weakest link, then moves on to the next identified target, now the weakest link in an improved process chain. This is an ongoing process of continuous improvement.
As Aiden Kavanagh, one of the best ‘Lean Thinking’ implementers I have seen in my travels put it succinctly in a comment on a previous post: ‘Tune the system to the pace of the bottle neck and make sure everything else has capacity to make sure the bottle neck never stops’
Is this how your improvement initiatives work, or are you continually making investments in new shiny things that always seem unable to deliver the promised outcomes?
Header photo courtesy of Daniel Stojanovic
Jun 30, 2021 | Change, Governance, Marketing
I have been at this ‘marketing’ game a long time, long enough to know that the bits you see, as a customer, prospective customer, or just by accident, are only the tip of the iceberg.
For many so-called marketers, what you see is the whole iceberg, they are ignorant, wilfully, or otherwise of the underlying factors that go into making a success of the process of ‘marketing’.
Despite the market research, social tracking, customer satisfaction measurement, and all the other stuff that we can do, the customer is often ignored.
Why is it so??
- There is little ‘fit’ between the market and the product/service being offered. This is usually because there is no ‘seat in the boardroom’ for customers. This should be the responsibility of the marketing people, but they so often revert to cliches and fluffy qualitative assertions that they are ignored. I really like the practice of Amazon, where there is an empty chair in every meeting, signifying the customer.
- Products are designed back to front. Businesses assemble the resources they have available, and build products they think customers will buy, rather than identifying customer problems and working backwards to assemble the resources that solve them.
- Marketing is usually seen as a subordinate function. The heads of the accounting, engineering, and operational functions are more likely to wield corporate influence than marketing. Partly this is the fault of marketers, who have systemically failed to speak the language of the boardroom. Marketing, which is about the future, tends to speak ‘qualitative’ whole other functions are all about the past, and can speak authoritative ‘quantitative’. This difference makes them more believable, as our brains like the certainty of quantitative. Partly also it is a failure of leadership. How many CEO’s are you aware of that have ‘marketing’ as their core skill?
- KPI’s rarely involve customer metrics of any value. I am a huge fan of tracking performance, but measures that do not relate to the manner in which the job done satisfies customers is a metric that is only looking internally. Some are necessary, but most are not, in my experience. Then, you see the occasional customer metric touted, and it is the number of likes on a social platform, vanity measures that again mean nothing. In fact, such measures are worse than nothing, they are misleading.
- Marketers by their nature are looking forward. This tends to enable them to be blinded by the newest shiny thing that emerges. This constant response to the shiny object serves to erode any focus and consistency of brand building, customer awareness and loyalty. When you are constantly moving around from video to podcasts, clubhouse, Tik Tok, and all the rest, you become hard to follow.
- Poor key strategically important customer definition. Too often marketers are unable to focus on the niches where the really powerful returns hide. The old cliché that you cannot be all things to all people prevails. The more important to the few who will buy your products and nothing else you are, the better. The temptation however to try and broaden the appeal, just a bit, to get a few more customers just dilutes the power of the value proposition.
- Innovation is messy, suboptimal, and experimental. Marketing and strategic development, whether it be of product, brand, customer groups, geographies, always has significant elements of trial and error, risk, and the inevitable failures. In enterprises that run on continuous improvement and optimising processes, this ‘messiness’ is unacceptable, and so is minimised. The result is the evolution of the enterprise stalls for lack of innovation, and marketing cops the blame. The corollary is that marketers are intimidated by their KPI’s and the status quo, into not making waves, so are always playing safe. This results in bland, undifferentiated marketing that has little impact.
- Marketers are not often the smartest people in the room. It seems to me to be a sad fact that this is often the case. From the outside, marketing looks easy, so those who do not seek or are unable to make the grade into professional training often seem to gravitate to marketing. Of the outstanding marketers I have seen and hired, many seem to come from a professional background. Scientists, lawyers, accountants, engineers, looking for something that values their creativity in bigger doses than their first profession. Running a marketing function in a large company for some time, I always went looking for these people when hiring, although it did take me some time to figure it out.
- Marketers fail to engage the other functions that are critical to success. Marketing is the only function that needs the co-operation of others over whom they have no functional control, to be successful. While this is a great test of leadership, it most often ends in tears. How often have you seen an operations manager whose KPI’s are all about factory efficiency, take a hit because the marketing manager wants to do a factory trial of something the ‘Ops’ people regard as a fantasy?
- The pace of superficial change is faster now than ever before. However, human behaviour does not change easily. The tools we use are becoming like our underwear. The reasons we wear underwear do not change, but the brands, types, cuts, and colours of the underwear we buy can change easily. This profound difference is most often shovelled under the carpet, kicked away by the seeming attraction of an apparent change in short term choices we make, which are at odds with the underlying drivers of behaviour. The unfortunate added outcome of this is a dilution of the creative impact of advertising communication. When you have to produce volumes of ‘content’ on a short term timetable, the impact of that communication is necessarily diluted. We fail to give the creative part of the communication process sufficient time to generate the attention and magnetism required in a frenzied world of fragmented communication.
- DIY syndrome. Marketing, like everything else has become increasingly fragmented, and specialised. No one person can cover all the required bases, any more than a doctor can be a specialist in more than one narrow niche of medicine. Yet many fail to recognise the competitive necessity of engaging specialists for specialist tasks. This can be addressed in large companies by very specific job descriptions and skills of those employed, but in SME’s, it requires often expensive specialists to be engaged on an ‘as needed’ basis.
The good news is that all these shortcomings can be overcome. The bad news is that it takes large doses of experience, leadership, and time, to do so
Header cartoon credit: www.TomGauld.com in New Scientist.
Jun 10, 2021 | Change, Governance, Management
Culture change is perhaps the hardest challenge to be faced by any leader. It can evolve over time, with patience and commitment, but every successful change I have seen comes after a catalytic event of some sort.
Many years ago, I worked for a manufacturing business that had built a new factory in the west of Sydney, which had more than its fair share of teething problems. The production the factory was supposed to absorb and build upon came from an inner-city site that had been operating for almost 100 years.
In those years there had been built up a powerful culture of management Vs workers, and fierce demarcation battles between the many unions on the old site, several with only one or two members, desperately trying to build their position.
This toxic mixture was transferred to the new, automated site with the predictable results. Manufacturing productivity was appalling, labour relations non-existent, demarcation disputes ongoing, the place was on the brink of being closed as the biggest disaster since the Titanic.
In a desperate dispute, to make a point, someone (no charges were ever laid) resorted to arson in the warehouse. The damage was extensive, and the already hobbled ability to produce saleable product was almost destroyed.
However, it was a monumental catalyst for change.
In the middle of the night, I found myself driving a forklift, working shoulder to shoulder with warehouse and production staff clearing stock from the refrigerated warehouse into trucks for transport to outside storage.
This would have been absolutely unthinkable just 24 hours before.
Suddenly, everyone in the plant recognised that their jobs were about to go, forever. The unionised workforce recognised that those in so called ‘management’ were just people who wanted, like them, to do as good a job as they could. We found it was easy to communicate without the artificial barriers that had existed, and we all had a common purpose, to survive.
Within a few months, after enormous effort and collaborative changes unthinkable before the fire, the business had been transformed. The fire had been the catalyst for a determination to acknowledge the failures of the past, and to accept massive change was necessary, welcome, and in the interests of every stakeholder.
In a small way, this is what is needed in Australia.
A common purpose, clear and consistent communication, determination, and goodwill.
This does not mean there will not be fierce debates, and difficult decisions that need to be made, but it does mean that there is a general understanding of why those decisions were made.
After royally stuffing up the reaction to the fires in December 2019 and January 2020, the government recognised their failings when the Corona virus took hold. It served as a catalyst, and suddenly there was bi-partisan and general community agreement that change was needed.
We moved forward.
As things quietened down, the collaboration and goodwill dissipated, partisan politics and apparently ill-considered and reactive decisions taken by fragmenting politics at all levels re-emerged, driving people apart.
Question is, can we restore the emergent culture of goodwill and collaborative communication that served us well in the crisis? It is the same question commercial leaders need to ask of themselves after experiencing a catalytic event.
Do we have the leaders capable of driving the culture change necessary?
How do we assemble the resources necessary?
Can those with vested interests in the status quo, resistant to the changes, be shunted to the sidelines?
In the case of ‘Australia Inc’, failure to respond will leave all our children and grandchildren poorer: financially and emotionally.
Header cartoon credit: Dilbert, again. Scott Adams and his mate have a knack of hitting that vital nerve.
