Identify the opportunity killer in your business

Identify the opportunity killer in your business

Aug 27, 2025 | Demand chains, Management

 

Have you ever thought creatively about inventory, beyond how to physically manage it?

Logically inventory is held to ensure smooth process flow, and to ensure you do not run out of finished goods to meet customer demand when it emerges.

However, inventory is a rabid consumer of resources. Cash, time, space, management attention, added complexity, and warehouses full of stuff retained because the ‘Boss’ is reluctant to write it off and take the loss in the accounts.

Tough problem.

Inventory has two dimensions:

  • Its legitimate place in a smooth operational chain.
  • The purpose for which it is held.

Often, the same item of inventory serves both purposes.

Finished goods. Ready for immediate sale.

Raw materials. Ready to be fed into the production processes.

Work in progress. Part way through transformation.

Buffer stock. Better called ‘Just in case’ stock. Sometimes confused and used interchangeably with the term Safety stock. The former is to enable the peaks and troughs in a production cycle to be smoothed out, the latter is in case of a screw up.

Understanding the volume and purpose of each type of inventory is the first step in addressing the challenge of freeing up the cash. I speculate that the purpose is never to tie up cash, and add to costs, complication, and workload.

Figuring out how to reduce inventory without compromising operational flow and customer service is a huge challenge for many of the manufacturing businesses I see. Getting their hands on the cash to leverage for success, rather than having it tied up in non-productive inventory is a key driver of success.

Inventory is an ‘opportunity killer’ as it consumes the cash that would enable you to chase opportunities for greater profit.

The supreme irony is that in traditional accounting, inventory is an asset, so accountants are often content to leave sleeping dogs asleep.

 

 

 

 

 

 

Opportunity Cost: The hidden thief of success. 

Opportunity Cost: The hidden thief of success. 

Aug 11, 2025 | Governance, Management

Opportunity cost is everything you could have done with the money, time, and focus you’re about to expend on a different course.

In a small business it’s never theoretical: it’s overtime you can’t afford, stock you can’t reorder, family weekends you skip, fancy software that never delivers what was promised. The list seems endless.

Opportunity cost is tough to calculate. It assumes that future benefit from something you did or did not do can be calculated. However, it is often obvious in hindsight, so learning from past misjudgements will assist future choices.

Opportunity cost steals from three of your pockets:

  • Cash. Dollars used on ‘X’ would have been better spent on ‘Y’
  • Time. The time spent Learning how to use ‘X’ would have been better spent deploying ‘Y’.
  • Focus. Our Mental bandwidth is finite. More than one priority at any given time dilutes the return on the time we invest, as well as the quality of the output from that time. Nobody ever went into a ‘flow state’ thinking about two tasks. 

For example, deploying a CRM is one of the great hidden generators of opportunity cost, particularly for SME’s. Customers will never thank you for not responding quickly to their enquiry. Failure to do so will erode hard won leads and brand credibility, while the lead evaporates.

Those hits don’t show up in the accounts this month, or quarter. Usually, they do not show up at all, but they quietly compound.

A responsible management asks themselves two seemingly simple yet very complex questions when considering the deployment of any of its limited resources.

  • Where else could we spend this resource?
  • What are the financial, cultural, and operational consequences of the choice we are making?

Opportunity cost never sends an invoice. It quietly drains the financial accounts, bleeds stakeholder trust, and erodes the energy and commitment of employees.  These are significant hidden costs that the best enterprises minimise.

Stop chasing that new shiny object by counting what it will steal.

 image by Sora

How competent are you?

How competent are you?

Jun 30, 2025 | Leadership, Management

 

 

As a consultant, I am often faced with managing the fragmented attention of my clients. The grass is always greener, and the new shiny thing syndromes are hard at work, particularly in the minds of the stressed owners of an SME, looking hard for an easier way.

Somehow, they must manage their limited resources of time, money, capability, operational capacity, and expertise, insulating themselves against the pull of the siren song of the silver bullet.

There is no substitute for the focussed application of all available resources on a market niche of some sort where there is a competitive advantage that can be defended. The niche may be as local as the best plumber close to your home, or as broad as a revolutionary application of technology to the world market, the logic remains consistent.

The late Charlie Munger had as part of his wardrobe of mental models one he called ‘The circle of competence.’ He credits this idea with much of the success he and Warren Buffett have had in Berkshire Hathaway.

In summary, he assesses all opportunities presented by determining if Berkshire Hathaway has a greater level of competence in the domain within which the opportunity lives than anyone else. The closer to the edge of the circle of competence, the less interesting it is, simply because there are others who know more about the drivers of long-term profitability than he does, and therefore in the long run, he is unlikely to win.

Many years ago, while working for Cerebos, I launched a breakfast cereal into test market in South Australia. It was a bridge between muesli, where Cerebos was a major brand in a small segment with Cerola (now disappeared from shelves) and the standard breakfast cereals, Wheat Bix, corn flakes and rice bubbles. It was a genuinely different product, offering a ‘bridge’ between the ‘tree hugger’ image of muesli, and the sugar laden three products that at that time stood alone in the market.

The launch was extremely successful, at first. Three months after our launch Kelloggs countered with a look-a-like product, ‘Just right’ and blew us away with the weight of advertising, power of the Kelloggs brand, and in store merchandising resources.

While it seemed that our new product, ‘Light and Crunchy’ was a logical and consumer centric expression of the trends in the marketplace, it was a step outside the ‘circle of competence’ of Cerebos. We did not have any competitive advantage in the general cereal market that could be leveraged after Kelloggs rubbed out the modest first mover advantage. It fell right in the middle of the ‘what you think you know’ circle of competence.

We did everything right, the longevity of ‘Just Right’ is evidence of that, but we did not sufficiently understand the drivers of our new competitor, Kelloggs, and the determination they brought to wiping out an interloper in what they saw as ‘their’ market. We were not sufficiently competent to be successful.

That insight came at considerable cost.

 

 

A marketer’s guide to Operational Continuous Improvement measures.

A marketer’s guide to Operational Continuous Improvement measures.

Jun 12, 2025 | Lean, Management, Operations

Many owners of small manufacturing businesses, up to about 30 employees in my experience, have only a vague grasp of the measures and mechanics of continuous improvement. Having a stable process, then experimenting to do the small things better, every time you do them. The impact compounds. Lean Manufacturing and Six Sigma offer practical tools to boost performance, reduce costs, and improve your ability to serve customers.

Below are 9 key measures for continuous improvement. Pick the few that are most relevant to you and focus on them.

Overall Equipment Effectiveness (OEE)

OEE shows how effectively your equipment runs by combining machine availability, performance, and quality into one simple metric.

Inefficient or underperforming machines will quickly create bottlenecks in your operation. The whole chain can only go as fast as the slowest link, so identifying those bottlenecks and earmarking them for attention will improve overall effectiveness.

In these days of cheap digital sensors and data collection tools it is becoming easier and cheaper to instal machine sensors, downtime logs, and quality checks to monitor uptime, output rates, and defects.

Cycle Time

Cycle time measures the time it takes to complete a process, from start to finish. Shorter cycles mean more output without extra costs.

The measure can be applied to an individual part of the chain, or the whole chain, using a tool as simple as a stopwatch, or as complex as a SCADA system.

This measure is not to be confused with Takt time, which is a measure of the rate of demand.

First Pass Yield (FPY)

‘Get it right first time’ is a cliché that refers to first pass yield. It tells you how many products come out within specifications the first time, helping cut down on rework, scrap, and wasted effort. The principle of the measure is simple, but the trap is in making it too easy. A wide spread of acceptable specifications is more easily met than a narrow one, and will distort the measure, possibly giving you a wrong picture of quality performance.

There is a myriad of ways to check quality ‘at source’ i.e.: from random checks to sophisticated visual and digital mechanisms.

Lead Time

Lead time normally measures how fast you fulfill orders. It can also be usefully applied to parts of the supply process, such as the time taken to respond to queries, provide details, quotes, and many other points of customer interaction. Faster lead times mean happier customers, referrals and repeat business, and better cash flow. In a world that is accelerating at unprecedented rates, being quicker to respond is a powerful competitive advantage.

The easiest way to track lead times is to start automatically time-stamping everything, and tracking through spreadsheets, your CRM, or even by hand.

Reversing the focus of lead time, and measuring your suppliers lead times, and DIFOT (explained below) is also a powerful way of managing improvement in your operations, and therefore ability to serve customers.

Inventory Turnover

In simple terms, Inventory Turnover is how many times your inventory is sold and replaced over a specific period. It is calculated using the average inventory value in a period and your Cost of Goods Sold. The simple formula is COGS divided by Average inventory.

Accountants see inventory as an asset, that is how it is treated in the balance sheet. However, as inventory is a measure of how much cash you have tied up, immobile, it is to my mind a liability beyond a delicate balancing point that is necessary to serve customers. Too much inventory ties up cash and risks obsolescence, too little causes delays. Balance is key.

There are many inventory systems, all do the same thing. Monitor stock levels, keep track of the value, and usually flag repurchase time based on usage and nominated procurement lead times when fed sales forecasts.

Inventory turnover is often expressed as ‘Days cover’ in fast moving environments.  The formula is the same, the period is days.

Scrap, Rework and Waste Rates

Waste eats into profit. You expend time and resources to add to the scrap pile. Anything that reduces waste, scrap and rework will boost efficiency and margins.

Scrap is when you simply send a completed or partially completed item to the bin. Rework is when you invest further time and effort to turn a unit that could be scrapped into a saleable unit, and waste is the material left at the bottom of the ingredient bag, the leftover material after the templates have been stamped out. Each is different, each warrants attention.

As with the other measures, there are many ways of tracking these three ‘nasties’. Your accountant should be able to give you the numbers based on what is used to produce the inventory, and the difference is the place to start looking for the scrap and waste. Rework usually requires added time and labour which can be tracked.

Customer Complaints and Returns

Often the best source of problem identification is what your customers are telling you. A returned product can be a source of intelligence that enables you to track and pinpoint problems to be resolved before they escalate.

Keep records of customer feedback, returns, and service calls.

Equally, customer satisfaction is a useful measure, but challenging to build reliable data. Many enterprises use the Net Promoter Score method, alternatively monitoring social media feeds may deliver insight. However, when customers pay you their hard-earned money, they expect to be satisfied, just delivering what is expected is hardly reason for a party

Safety Incident Rate

Ensuring as far as possible the safety of employees is not only a moral responsibility, it is now a legal responsibility that in some jurisdictions has had the onus of proof reversed.

Factories can be dangerous, and removing as many of the sources of danger as is humanly possible is essential. Tracking safety incidents is a measure of how successful that effort has been.

Delivered In Full On Time. (DIFOT)

DIFOT is an overarching measure that pulls all the above together. Failure in your operational processes will make delivering in full on time challenging, if not impossible. It is one operational measure that should be on every KPI menu. As noted above, it is a very useful measure of the performance of your suppliers.

Will AI clear bureaucratic logjams?

Will AI clear bureaucratic logjams?

Apr 11, 2025 | AI, Governance, Management

 

 

Anyone who has engaged with any bureaucracy at multiple levels will tell you that what is said at the top often does not get down to the operational levels.

It seems not to matter whether the bureaucracy is private or public, multiple levels result in an increasingly dense set of rules and regulations that should be followed and are often a default excuse for not thinking.

However, it does seem also that public bureaucracies are less able to accommodate any sort of flexibility in the absence of instructions from on high, and even then, it is difficult.

AI has invaded and won significant ground in private domains and will be rapidly deployed as businesses seek the potential productivity gains as a source of competitive advantage.

What of government?

There is no competition in the public bureaucracies, their political masters come and go, policies change, as do some senior people, but largely, they remain intact. How will they adapt to the new world of AI?

In a word, very slowly indeed.

Regulations, behavioural rules, and protocols set at the top level, are filtered down through organisations. At each level, they are imposed with the addition of seemingly necessary additions in order to stop those who seek to find ways around the rules, and in the eyes of the bureaucrats subvert the intent of the rule.

This imposition of rules compounds to the point at the operational end that navigating the imposed landscape becomes incomprehensible to normal people.

I spent time recently navigating the minefield surrounding the simple transition of my mother from her own home to an aged care facility.

The process required two apparently warring bureaucracies to simply recognise the assets Mum had, combined with the aged pension through Centrelink, and the War widows’ allowances due to Dads military service in New Guinea. My sister who did most of the work required, is an intelligent educated woman, but was driven almost to despair. The nonsensical overlapping and duplicated requirements of both departments, where it seems a comma in a different place in similar lodgements to each department necessitated we start from scratch with both after the applications were deferred or judged void.

The operational individuals were largely helpful but completely restricted by rules to which no variation was allowed. Yet, the policies stated from the top are designed to make the lives of aged Australians, particularly those who have given much to the country as have war widows as comfortable as possible.

What happens in between these levels.

Regulation begets regulation upon regulation as the rules are cascaded down through the organisations. As each level sets about ensuring they are not accountable for any misdirection of funds, and therefore difficult questions, the mess becomes ‘Gordian’.

All this does is catch and frustrate those trying to do the right thing, while the ‘smarties will always find a way through,

Into this maelstrom walks AI.

In theory AI should ease the logjam, making most of the necessary form-filling and translation of details from one point to another automatic and easy.

In practice, the flexibility and agility that AI platforms are capable of will be adopted very slowly by public bureaucracies. They require changes in culture, operating processes, and inter-departmental collaboration in more than just words and press releases.

Those changes seem unlikely despite the urgent need.

 

 

 

Choice outcomes are optimised by ‘impersonal dissent.’

Choice outcomes are optimised by ‘impersonal dissent.’

Feb 10, 2025 | Leadership, Management

 

 

When most people hear the word dissent, they think, troublemaker.

And sure, dissent can ruffle feathers. It challenges the status quo, pokes at comfort zones, and often triggers defensiveness or knee-jerk loyalty to “the way we’ve always done it.”

But here’s the thing: dissent, when done right, is one of the sharpest tools in your decision-making arsenal.

Dissent can expose blind spots, cracks in logic, and perspectives you might otherwise miss. It’s also constructively contagious. When one person feels safe to question the narrative, others find the courage to share their own opinions. That is how real progress gets made.

Too often, dissent is misread as a personal attack. Instead of hearing a critique of an idea, people take it as a critique of themselves. Cue the drama, defensiveness, and derailed conversations.

This is a sensitive balancing act for leaders.

Effective leaders know dissent isn’t just a “nice-to-have,” it’s essential. If you’re surrounding yourself with “yes people,” you’re not leading, you’re herding.

Leadership means being secure enough to invite challenges to your thinking. It says, “I care more about the right outcome than about being right.”

I once worked with a leader who actively encouraged what he called “impersonal dissent.” It was not a free-for-all. It was a structured process where we played devil’s advocate on every significant decision. The thinking was simple: the more diverse the viewpoints expressed, the more we leveraged available relevant data, the better we would understand the problems, explore possible solutions, and therefore optimise the odds of a positive outcome.

One plus one was not just three, it was exponential in value.

But here’s the kicker: it wasn’t a democracy. When all the arguments were on the table, the leader made the final call. And when the decision was made, the dissenting voices stopped, by convention, the decision became a group decision which all supported. That balance between encouraging dissent but knowing when to move forward was key to our success.

I discovered the downside when that person to whom I had been reporting left the business. I was elevated into his role, now reporting to an MD of the group whose view of dissent was different. Being still young, and  somewhat impervious to his displeasure, believing I had the runs on the board to claim the right to ask questions and argue a dissenting perspective, I did not last beyond the first ‘restructure’.

 

Header courtesy Scott Adams and Dilbert.