Aug 30, 2021 | Leadership, Management, Operations
What do we have to do to scale successfully?
That is a question that I often find myself answering in conversations with SME manufacturing businesses run by people who are seeking to map out in their mind, ‘where to from here?’
Generally, they know some of the answers, but they are hidden amongst all the other stuff going on, and the distractions of being all things to all people who walk through the door.
It is little different to building a house. You need solid foundations, upon which you build your house, brick by brick, designed to meet the needs of your family.
Before anything else, there are three foundational strategic questions to be asked, and answered:
What is the current status?
Every journey has a starting point. Doing the work to define that point clearly is the first step in any journey.
What are the trends, barriers, and competitive forces in their industry, and how does the existing capability set you have leverage those factors in a differentiated manner?
What is the objective?
It is important to understand what it is that they want to achieve. Articulating the objective in measurable terms is fundamental to being able to build the plans to get there. Often it is more than financial success, and unless that is clear from the outset, you can waste a lot of effort further down the track. I use a process I call ‘Hindsight planning‘ in which you imagine the objective has been achieved. You are therefore thinking in the present tense, from which you can look back and observe the mistakes, opportunities missed, and what went as expected with some level of imaginative hindsight.
What are the foundations of the business?
Every business requires a foundation, like anything you build, without which it is no more sustainable than a house of cards. The foundations of every business differ, but are made up of a variety of qualitative and quantitative bricks. The balance will vary depending on the nature of the industry. Childcare for instance will have more regulatory bricks in the foundation than life coaching.
Having answered the three essential foundation questions, you then add the frame that determines how the house appears publicly and shapes the way the activities in the house flow. The activities in the house never cease to evolve in the operational detail, but remain inside the framework determined in the design. Later, you can always add extensions, which are often ugly in the absence of creative thought, or you can build another house.
In no particular order, following are the 12 components of your framework.
Business Purpose. The expression of ‘Why’ they want to do whatever it is, a sentence that distills their motivation. This seems easy, but is in fact a very tough question, and is often not answered without considerable soul searching over some time, and often not before the building process is well begun. The caveat is that it must have something to do with the way value is added, and to whom. ‘To make money’ is not a purpose, it is an outcome of success.
Value proposition. What is it they can offer their customers that will make them want to do business with you rather than someone else? The benefits that they will gather by doing business with you. Often people I speak to are tangled up in the features they can offer, and struggle to get past them to understand customers are not interested in the features of your offering in the absence of any direct benefit to them.
Identify your ‘ideal customer’. The better the description of the ideal customer the better, not only can you target them better in connecting and communicating, but it also enables you to focus your efforts where they have the best chance of delivering.
Differentiation. What makes your offer different to that of any competitors? Differentiation goes hand in hand with the profile of your ideal customer. The differentiators you have must correlate to the specific pain points you are seeking to address with your ideal customer.
Branding. What are the brand characteristics you are building, the personality traits, messaging styles, what stories does the brand tell, and how do they relate to the ideal customer? In effect, it is what you would like those with whom you encounter to say about you when you are no longer in the room.
Strategy. How do you plan to go to market, which market, which channels, which customers, and how you are you going to execute on the strategy? All these questions need an answer, the absence of which will at best cost you money that could be saved, at worst, lead to your demise.
Business model. Your business model is how you turn your value proposition into revenue. Understanding, and making deliberate decisions about how your business model should work is a vital step.
Record keeping and reporting. This starts with the regulatory accounts, compliance reports and returns, but goes much deeper into the management of the enterprise. Producing and disseminating the relevant performance and progress reports to each level of the organisation in as close to real time as possible, is a challenge, but crucial to scaling. The old cliché ‘what gets counted gets managed’, applies.
Regulatory compliance. We live in a community, and there are always rules and regulations that must be followed on top of the moral obligations we have. Often these are seemingly pointless exercises in bureaucracy and politically correct box ticking, but they are nevertheless vital ingredients in the foundation of your enterprise.
The plan. Nothing happens without a plan, a goal without a plan is just a daydream. You must articulate how you turn all the above into a plan that is workable, realistic, funded, and with a clear path towards clear objectives, with activity priorities, review points and feedback loops built in.
People. Scaling is an intensely resource hungry activity that requires the right people. No business is anything more than an idea without people to make it happen. Having the ‘right’ people, irrespective of the size of the business is essential tom successful scaling. Indeed, it is essential for success at any level, but scaling is particularly people sensitive. The obvious challenge is to identify the profile of the ‘right people’ and even more complex, ensure that the mix of skills and thinking styles blend, and compound each other.
Cash. Cash is the enabler of all the above, without which, you will go nowhere. However, cash is readily available from all sorts of sources; the key is to get just sufficient working capital to match the rate of scaling, while ensuring that those around you have confidence in your leadership.
Image credit: Wikipedia
Aug 16, 2021 | Lean, Management, Operations
Anyone who has read ‘The Goal’ by Eli Goldratt, the original brain behind the theory of constraints, will remember the story in the book about Herbie, the slowest walker in a scout group in a cross-country walk. Herbie was the bottleneck, in that he set the pace of the others, as the group did not want to leave Herbie behind in the woods.
One solution would have been to just get Herbie to walk faster, but that would have moved the ‘bottleneck’ position previously held by Herbie to the next slowest walker.
Whatever they did, the line of walking scouts would spread out, particularly going uphill, and then squeeze back in, going downhill. A walking accordion.
How do you prevent such a hard to manage outcome?
You get everybody to walk at the same cadence, with the same step length.
Standardisation of all aspects of the stride of each scout and the distance between each, would ensure that they stayed exactly together, in unison.
Armies call it ‘marching’.
I call it ‘Standardisation’ when applied to any context other than ‘walking’.
Marching enables groups of soldiers to arrive at a destination at the same time, in unison, that both gives the soldiers a sense of ‘belonging’ and looks intimidating to any opposition who might turn up to fight. Remember the opening scenes of the movie ‘Gladiator’? The Romans were in their ‘Centuria’ operating as one, but in coordination with the Centuria around them. The ‘barbarians’ who substantially outnumbered the Romans fought as individuals. You know who won. (I know it was a movie, but the lesson remains)
Standardisation to a cadence is the best way to finish the most work in any given time, as the variation and resulting shortages and backlogs are eliminated. ‘Flow’ through the system is optimised.
When you want to evaluate something new, you have a standardised system to test it on, and can therefore see the results of the change of one variable to the outcome. If favourable, you can then apply the single change to the entire system to improve it.
Going back to marching. The US army marching cadence is a standardised 30 inches for each step. Every soldier steps 30 inches every time. If the standard step was 31 inches, and the cadence of the march remained unchanged, it would represent a 3.3% increase in the distance marched in any given time.
Standardisation and continuous improvement, an essential element in optimising the performance of your business.
PS. 24 hours after publishing, I stumbled across this article by Brian Potter which goes into a heap of detail on exactly the topic of this post. For those who want a deep dive, I recommend it.
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.
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 17, 2021 | Lean, Management, Operations
Chasing improvements in an enterprise comes down to doing the small things well, every time, and continuously improving, generating a compounding effect.
The best way to achieve this is for everyone involved to be engaged in the process, have a stake in outcomes, and understand how they impact on others.
At every level, this is achieved, not by memo, or strategic planning, but by consistent, focussed verbal communication backed by facts.
Best way to do this is to communicate often.
Not a lot at one time, but small bite-sized chunks regularly.
Daily, weekly, monthly, and so on.
At the ‘coalface’, it should be daily, which leads us to the daily stand-up, huddle, group chat, or as one of my clients call it, ‘toolbox’. Whatever you choose to call it in your workplace, it plays a crucial role in performance management.
This is a daily meeting at the beginning of a day, shift, or whatever the work cycle is, that reviews the day to come, in the light of what happened yesterday, with some acknowledgement of what will be coming tomorrow, and perhaps the next day.
Why it works
- Daily communication keeps everyone on the same page, enables problems to be surfaced and addressed before they really hurt, escalated as necessary, and contributes enormously to a culture of communication and collaboration.
- They replace the one-to-one conversations that need to happen many times, with a one-to-many conversation. This saves time and energy, while ensuring the communication is the same to all parties.
- It enables focus on the priority activities, removing some of the day-to-day firefighting and craziness that always occurs.
- It also enables quick updates to larger objectives and relevant projects to be delivered, which removes the always present rumour mill. This works equally well for the positive things as it does for the negative.
- They lead to significantly engaged employees, as not only are they heard, but they can see the outcomes of their ideas and suggestions.
In these days of increasingly remote workforces, this daily get together takes on a much wider role, in reminding everyone that they are a part of a team, and others are relying on them.
What makes them work
- Same time, same place. Having the huddle, stand-up, whatever you choose to call it at the same time, in the same place, every day creates a cadence that drives activity. Start on time, finish on time.
- Sitting down will elongate the meeting, so stand. It might be in the workplace, often it is just outside the workplace, which adds credibility to the process.
- As short as possible, no more than 15 minutes should be an iron rule.
- Everyone gets a say. Engagement comes with being heard, and the chairman must ensure everyone is explicitly given the chance to have a say.
- This can take many forms and will vary with the level of the huddle. At the coal face, a whiteboard is usually sufficient, with perhaps a photo or copy taken and kept for reference for a short time. At higher levels, the recording will vary.
- Be on time, do not ramble when it is your turn to speak. Take any follow up or extended conversation offline, the huddle is to identify problems, address the molehills, but the mountains are for another place.
- Be respectful of time, others and the process. Be attentive, with no side conversations, or banter.
- Meeting chair. Someone must lead the meeting, have control of the conversations and agenda. That may be the same person every day, or it might rotate, which in my experience is the better way.
Usually very quickly there is a sense of team effort, and even the small wins become evident and can be celebrated. It is an incremental process, which once the ball is rolling, picks up momentum that is very hard to stop, even if you wanted to.
May 3, 2021 | Operations
I was asked a challenging question from the back of a seminar room a while ago, before the lockdown, at the end of a conversation about the importance of flow.
The questioner asked, and I quote: ‘I get the theoretical stuff, but how do I go about measuring flow in real life”
It is a good question, with a simple answer that is challenging to implement. It is all about the approach taken to measurement.
The more granular the measurement the better, but the Pareto rule applies. It is also sensible to bother measuring only things that can be changed to improve performance in some way. Measuring for the sake of measuring without the intention to manage by the results only feeds vanity and ego.
The two core measures of flow are:
In my experience, these two parameters are core to every process, in every business. Manufacturing is where they are most obvious, but they apply equally to service businesses.
While these two items are intimately connected, measuring separately enables improvement.
Inventory comes in many forms. Finished goods, Work in progress, raw materials, and in the case of service providers, projects and tasks that are waiting, being done, or completed but not delivered. In some cases, it will be measured in dollars, others, in units of some sort. Granularity enables greater scope for optimisation. For example, a factory with 3 stations in a line that has 3,000 units of WIP, 500 at the first station, none at the second, and 2,500 at the third, clearly has an impediment of some sort at the third station that requires investigation, and improvement.
Cycle time is the time it takes to move inventory from one point in the process to the next. Again, this can be measured for a whole process, or individual parts of the process.
Comparing the cycle times and inventory numbers, will give you a measure of line, or part line throughput, and therefore the productivity, and will highlight the opportunity to remove waste, and generate improved ‘flow’
This sort of analysis of flow is as valid in a management process as it is in a factory.
For example: In a sense, your debtors ledger is inventory. The faster you can get paid, the lower the ‘debtors inventory’ the better the financial results. So, ask yourself how you get paid faster?
You ensure invoices are sent with goods.
You maintain constant and friendly relationships with customers.
You send a reminder a few days before the invoice is due to be paid with a thank you in advance for paying on time.
You ‘deselect’ customers who habitually do not pay on time.
Applying the discipline of ‘Inventory’ and ‘Flow’ to every part of an enterprise will radically improve results.
None of this is too complex for even a modest business. The challenge is to give it the priority it deserves, collect the data, and implement progressively. Incremental improvements compound over time to deliver significant improvement in financial and strategic outcomes.
The header photo is of the Alligator river in NT. It flows unencumbered.
