6 confronting questions for every initiative to ensure success.

6 confronting questions for every initiative to ensure success.

Oct 26, 2018 | Management, Operations

 

Long term survival of every commercial enterprise is dependent on one thing, and one thing only: Consistently being able to make a profit sufficient to ensure that the owners are prepared to continue to have their capital in the business rather than moving it elsewhere.

This simple observation applies to the corner store as much as it does to the current incumbents of the Fortune 500.

No initiative developed for a commercial enterprise is worth the paper it is written on if it does not articulate how, in the long term, the businesses shareholders will  be better off as a result of the plan being successfully implemented.

This reality should inform the way every activity, from strategic planning down to minor improvement projects are developed.

Ask 6 simple, but often confronting  questions:

Will this initiative sell more?

This is not about price, it is simply about volume. If you can sell more at current prices while maintaining margins, you are in with a shot.

Is the sales mix maximised?

This question goes to the mix of products sold. Selling is a resource intensive activity, and managing your product portfolio for the best outcome from the resource investment made will deliver results. Every business I have ever seen has products that deliver a range of margins from differing customers and customer segments. It is often challenging to alter the mix of products, channels, and customers serviced, but only by doing so can the profitability be maximised over the long term.

Can you increase the price?

Warren Buffett, who knows a bit about long term profitability says, “The single most important decision in evaluating a business is pricing power. If you have the power to raise prices without losing business to a competitor, you have a very good business. If you have to have a prayer session before raising the price by 10% then you have a terrible business’. This is a piece of wisdom that will serve you well.

How can you reduce costs?

Almost every business I see these days is cost sensitive, but too often that sensitivity is disconnected to the productive outcome incurring the cost delivers. Any time there is an across the board cost reduction of a percentage mandated, it is a reason to run for  the hills, as it is a short term Band-Aid that bears no relationship to the returns. A thoughtful cost reduction regime will over time identify and eliminate the sources of waste in the business, activity that does not add to profit. In manufacturing businesses there is almost always excess inventory held, and rework that becomes necessary to fix a problem. Eliminating the causes of  both will reduce costs.

How can you increase productivity?

We all understand the notion of leverage, doing more with less. In a business when you figure out how to do more with the current investment, or alternatively reduce the investment while generating the same level of outcome, you have increased the productivity of  that investment. This is more than, but closely associated with the reduction of costs, but it looks at the outcome of a cost incurred, rather than the dollar amount of the cost itself.

How will that investment increase profit?

There are many tools accountants use to justify and choose between investments, IRR, ROI, being just two. However, they all rely on assumptions of future cash flow in some way. If you expand the thinking a bit, it often pays to invest in less obvious areas. A former client had great difficulty finding a specific set of skilled trades, and spent a fortune advertising and on labor hire firms with poor results. They invested in two areas to solve the problem:  They increased their salary rates way beyond the so called ‘market rate,’ and they invested in the skills their workforce had. The result was a significant reduction in staff turnover, with attendant cost savings and productivity increases. The investment over time was a very good one indeed, spending money to make money is not always obvious, but it does work.

The answers to  these questions are not often obvious. Finding answers you can bet on, which is what you are doing, requires deep consideration, experience, domain knowledge, and experimentation.

Header: The thinker. August Rodin

What is the most universal and useful management tool of all?

What is the most universal and useful management tool of all?

Oct 15, 2018 | Lean, Management, Operations

Easy question. ‘5 whys’.

5 Whys was first articulated by Toyota’s architect of the TPS, Taiichi Ohno in the 50’s, but it was not new.

Anyone who has had children has been on the receiving end of a form of the ‘5 whys’ from about two and a half years old, to 6 or 7, by which time they have learnt  that the question is not always appreciated or answered fully, so they stop asking.

The process is deceptively  simple, keep asking ‘Why’ until you get to the root cause of the problem, well past the symptoms, so it can be fixed, and the problem not recur.

In a previous life managing a manufacturing business, we had a recurring problem with an automatic box erector that seemed intractable despite huge efforts. The whole line stopped every time the erector spat the dummy, causing serious production losses.

While it took months to find the right cause, after chasing a lot of rabbits down holes, we finally nailed it using 5 why.

  1. Why did the erector jam?

One of the arms was out of alignment to the flat box

  1. Why was the arm out of alignment?

One of the flat box ends was slightly crooked

  1. Why was the box end crooked?

The box end was slightly out of specification

  1. Why was the box end out of specification?

The purchasing manager had changed suppliers for a significant saving, and the new suppliers actual operational control allowed variations outside the erectors demanding requirements,  resulting in an occasional  mechanised  ‘dummy-spit’.

This example in fact only took us ‘4 whys,’ but the trick was to ask the right questions  in the first place, in the right sequence. This took us several months and cost a huge amount in lost production, and maintenance resources as we eliminated possible causes of the problem before anyone thought to examine if a 1 mm variation outside the spec of the flat box size was significant.

Once identified that it was, the problem was quickly fixed by moving back to the previous supplier with whom we had encountered  no problems.

Subsequently, we evolved a process that used 5 whys as a matter of course in search of improvements in the factory, and later, admin processes, and found that our problem resolution times dropped dramatically.

The process is pretty simple, just challenging to implement:

  • Institute a ‘5 whys’ meeting in response to a problem.
  • Invite (read insist) everyone involved and/or affected by the problem to attend the meeting.
  • Agree a ‘chairman’ for the problem who will take overall responsibility.
  • Proceed to ask ‘Why’ until you get to the root cause of the issue. It almost never takes more than 5 ‘whys’ hence the name. This step can take time and often takes several meetings as possible answers to the ‘why’ are considered.
  • Assign responsibility to install, test and validate the solution
  • Document and disseminate the solution which has been broken into a written process to ensure compliance, or easier further investigation should a similar problem arise.

The whole objective is to get to the root cause of  the problem, a process that is applicable not just in industry, but in your life, when you think about it.

 

 

 

Diagram courtesy Mindtools.com

How do you solve a critical problem?

How do you solve a critical problem?

Oct 12, 2018 | Change, Management

Define the problem first!

Dealing with problems effectively requires that  you first define the problem. This sounds pretty obvious, so obvious in fact that many do not think about it, they just persist with workarounds that address the symptoms, without getting to the core of the problem to solve it.

Not all problems are the same, so logically, they will not all have the same solution.

Classifying them in some way is a good first step, so here are four suggestions.

The ‘Cock-up’ Box.

Something or someone has acted in a way that is inconsistent with normal. There has been a cock-up. It could be a machine broke down unexpectedly, a customer delivery does not arrive, or a key component of a marketing program is missing, and many others. Point is, it is abnormal, so go looking for the root cause of the abnormality. ‘5 Why’ normally works very well in these circumstances.

The ‘Poor Process’ box.

The outcomes of a process done regularly seems to vary each time it is done, there is no reliable standard. The level of reliability is such that someone has to check or rework what has been done. I had a client whose MD routinely checked the detail of quotes done by his staff, looking for the errors he knew they were making, which he corrected, without taking any further action. Unless the process that enables errors of this type to be made is addressed, the problems will persist. Mapping what happens always helps to identify the ‘holes’. In this case, I ‘attached’ myself to a couple of quotes from the point they were initially received, mapping  the action taken, by whom, when, and what was the trigger, and created a ‘map’ of the process. It was then obvious to all where the causes of the variations occurred, and steps were taken to remove them. The result was a much greater level of confidence in the accuracy of the quotation process, which freed up a significant chunk of the MD’s  time to do more useful things.

The ‘Get Better’ box.

This often looks like the one above, but the motivation is different, it is often the result of an external pressure, resulting in a previously acceptable level of performance no  longer being acceptable. The typical examples are cycle times of all sorts of things being shortened, from order to delivery time, design time, response time, to improving the quality, however that is defined. In Australia, the example on everyone’s mind is the management of power. Costs have gone through the roof, and suddenly shaving a percent off the power bills here and there becomes an item of considerable priority, so effort is going into tracking and addressing all points of power consumption that can be modified to cost less, or be eliminated.

The ‘Out of the Box’ box.

As the name implies, this is where the ideas to address the emerging challenges are addressed. These are  innovations that you can either implement yourself, or responses to the trends observed that require big change. Having an established process to deal with and leverage innovation, significant improvements, unexpected situations, and opportunities that become apparent, is challenging. What it requires is a continuous focus on strategy and the long term vision, mission, purpose, whatever terms you use in your business. These things are way too easy to stick in the ‘too hard basket’ or the ‘will do it tomorrow’ basket, in the knowledge that tomorrow never comes without another short term crisis to address.

When you need assistance defining, then categorising the problems you face before developing solutions, give me a call.

 

 

 

The 5 steps to optimise process development

The 5 steps to optimise process development

Sep 10, 2018 | Change, Management

 

Processes are the means by which we get stuff done, and are therefore an integral part of our personal and professional lives.

Mostly we just  allow them to evolve, usually in a pretty unthinking manner without much critical analysis. However, this is a mistake, as it leads to duplication, mistakes, omissions, personal idiosyncratic behaviour, and waste.

When valuing a business, one of the tell-tale signs of good management is the presence of a simple set of process maps which guide the way things are done, from the most mundane to the really important. This ensures, or at least makes the effort to ensure, that the same jobs get done in the same way every time, irrespective of who is actually doing the job.

The cost savings that result from this simple idea are enormous.

Creating a ‘process map’ or running sheet for the simplest to the most complicated process is pretty much the same.

The point however, is not to create a set of rules that can never be broken, it is just the opposite. A process to be optimised and improved  needs to be subjected to critical analysis on an ongoing basis, the written process just gives a stable starting point.

My experience with process mapping has involved 5 steps, that usually happen in an overlapping manner

 

Learn by observation and questions: Observe what happens currently, how things actually get done, consider the range of cause and effect chains in place, ensuring you do not confuse cause and effect with simple correlation. Go out and ask questions, seek insight into the hidden ‘wrinkles’ that exist in every process.

Experiment: An effective experiment requires discipline, primarily to test one thing at a time so you can accurately measure the impact of any change. The scientific method works: develop a hypothesis, test if it is true or false by collecting data, adjust the hypothesis and test again, until you find a hypothesis that holds true. As  Sherlock Holmes’s mentor said: ‘When you have eliminated the impossible, whatever remains, however improbable, must be the truth’

Codify: a process that remains in one persons head is no more than an opinion. To be effective the thought must be codified in such a manner that it can be accessed by anyone, and given the status of the ‘right way’ of doing something. I like visual process maps, they are easier to understand, and absorb quickly.

Distribute: once codified, the process needs to be distributed, and made easily available. There are now many digital tools around that enable distribution and simple reference. In the ‘old days’ processes would be in a manual somewhere that nobody looked at, even if they knew it existed. Nowadays there is no excuse, the process can be available to everyone with digital access.

Optimisation and creativity.  The paradox of all this is that with a stable process, you can now be creative, seeing alternative ways of delivering an outcome.  For improvement to occur you first need a stable system so the impact of changes are visible in measureable outcomes. This is the opposite to the chaos that people often consider to be a part of the ‘creative process’

Header acknowledgement:  Hugh McLeod at Gapingvoid.com

 

 

The 5 ‘Literacies’ required for superior performance

The 5 ‘Literacies’ required for superior performance

Sep 5, 2018 | Leadership, Management

Over the 23 years of working with medium sized businesses to improve their performance, the activities have all come from 5 common buckets.

  • Financial Literacy
  • Strategic Literacy
  • Operational Literacy
  • Business model Literacy
  • Revenue generation Literacy

 

Every action, strategy, and tactic employed comes from one of  them, but importantly has flow on effects on all the others, sometimes in unanticipated ways. In those cases, having the performance measures in place that show up the outcomes early enables you to double down on those that work, and back off those that do not.

Business improvement is an iterative process, ideally a tightly managed one, but iterative none the less. It also needs to provide the opportunity to incorporate ideas, insights, and new information that comes to light. What I call ‘Loose Tight’ management.

Similarly, each bucket has a hierarchy supporting it, and the more you go  into the weeds with the detail, the greater the apparent interdependence they all have.

However, thinking of them as buckets that require a series of decisions or actions helps to organise all the disparate things that get in the way of performance. You are able to sort out at each level in the supporting hierarchy which actions are important and which are not, which deserve the focus of resources over the others, recognising that you simply cannot do all the things that may seem sensible and important, no matter how big you may be. It also enables project management, timelines, cascading KPI’s and individual and group accountability to be clear.

You have to make  choices, and the choices in one arena inevitably impacts on those in others.

Add them together and you get superior performance as an outcome. The whole is always greater than the sum of the parts when done well.

A marketers explanation of Free Cash Flow.

A marketers explanation of Free Cash Flow.

Sep 3, 2018 | Governance, Management

The net flow of cash into and out of a business is to my mind the most vital measure of the success or otherwise of that business, captured in the cash flow statement.

The P&L, and Balance sheet, vital as they are as performance measures, can be susceptible to ‘management’. The flow of cash is less able to be similarly ‘managed’

It is however, like all numbers, subject to the context.

Free cash flow is the cash generated by a business less its Capital expenditure.

The summary formula is: Net operating cash flow – Capital Expenditure. (Capex)

It is a very simple calculation once you have the cash flow statement in hand.

Free Cash Flow can vary dramatically over periods of time, so the trends are a vital part of the consideration. A business might invest a lot today in capital that is expected to deliver profits in the future, and should not be penalised for doing so, rather it should be supported, so long as the investments are sensible, which is another whole set of considerations. Every business needs to invest in the productivity of existing assets by way of renovation and replacement, as well as supporting innovation and maintaining regulatory compliance.

The trends in free cash flow and Capex expenditure are key measures of commercial sustainability.

I have seen businesses being tarted up for sale that display impressive increases in free cash flow over a few years, but as always, the numbers can lie. When you go behind them, the Capex has been restrained to the long term detriment of the business, to make it more attractive in the short term.

As an antidote to the rosy picture that can be generated by reducing Capex, I like to see the free cash flow and capital expenditure trends on the same sheet of paper, and being a marketer, as a graph. You can go one step further and break up  the Capex into three categories:

Capex spent for regulatory and compliance reasons

Capex spent for productivity and capacity reasons

Capex spent on new products and processes.

The nature of the Capex can tell you a lot about the health of the business, and its prospects.

Cartoon credit to Scott Adams and Dilbert.