Time can only be productive, or wasted. Which will it be?

Time can only be productive, or wasted. Which will it be?

Feb 27, 2019 | Customers, Marketing, Operations

Time is our only truly non renewable asset, and it is absolutely finite. Therefore it makes sense to use it as wisely as possible.

In a management context, in measuring a process, time has two dimensions.

  • Clock time. Start to finish, how long does a task take to go from one end of the process to another.
  • Event time. How long does it take to go through the activities necessary to complete the process.

It might take a bank 3 days to process your loan application, clock time, but the event time may only be the few minutes it takes to check your credit history, current income and automatically calculate your ability to repay the loan. Event time.

In most cases, customers are only aware of the clock time, and when it extends beyond what they think is reasonable, they become cranky with you.

The difference between the two is the opportunity for improvement, and to ensure customers only get cranky with your competitors.

 

The 5 types of cost in your business.

The 5 types of cost in your business.

Feb 25, 2019 | Management, Operations

Cost is a part of every business, you have to incur them in order to deliver a product.

For most, the extent of cost management is via the Profit and Loss account in the monthly reports, and by the comparison of expenditure to budget.

Both are  by themselves inadequate, and miss three of the generators of cost from which great benefit can be derived by intelligent management. In addition, just cutting costs with no regard to the role the cost incurred plays in the generation of revenue and margin, often results in greater costs in the long term, almost always only indirectly connected to the cost cutting. A former corporate employer engaged in a ‘re-engineering’ exercise which was code for reducing headcount. Short term there was a benefit, but the hidden costs incurred as tasks were not done, and the survivors left as soon as they had another job, incurring recruiting and training costs for the replacement employees,  were considerable.

The nature of the costs vary, but there are 5 classes that occur in every business. To one extent or another, they are a part of the profit equation.

Profit = Revenue – Cost

Direct or marginal cost.

Direct costs, as the name implies, are driven directly by the production process. In most manufacturing environments these are recorded as the Cost of Goods Sold.

Indirect costs, or overhead.

These are the costs incurred to keep the doors open, disconnected directly from revenue generation. Rent, insurance, management wages and salaries, for instance are necessary, but not connected directly  to the generation of revenue.  

Opportunity costs.

Nobody has enough resources to do everything they would like, no matter how big and profitable you may be. Therefore choices must be made, option A instead of option B. Opportunity costs are those benefits forgone as a result of those choices. They are rarely definitive costs, although calculations done that lead to making those choices such as Internal Rate of Return, and discounted cash flow forecasts, make some attempt to do so. 

Transaction costs.

Transaction costs are similarly challenging to identify, as they are generally invisible amongst the general overheads. However, focusing attention on transaction costs can yield considerable savings. For example, a client of mine had 5 suppliers of the key raw material for his operations, each supplying across a wide range of specification variations, and each having about a 20% share of my clients purchases. Each of the 5 relationships consumed time of the purchasing, operations and accounting personnel, as they managed the paperwork, reconciled mistakes, and maintained the human contact. Over a short period we engaged in a process to reduce the number of suppliers, one that would supply most of the required product, and a second as backup. Not only did we get a much better deal on price, but it quickly became evident that the time consumed by staff engaged in the day to day was reduced by a huge amount, leaving them free to undertake more productive and personally satisfying activities.    

Short cut costs

As with transaction costs, short cut costs are hidden, perhaps even more so. Taking short cuts almost always results in longer term higher costs in remediation. You might make the short term budget, or target, but at the expense of the long term. It is a bit like losing weight, take the quick way out by ‘starving’ yourself, and you might get a short term result, but unless you change your eating habits, once the short  term pressure is off, your weight will start to go back on, slowly. In a factory, short cuts usually lead to waste generated elsewhere, which are often just as hidden. Doing a patch up job on a machine to keep it running today, can lead to a major breakdown tomorrow that closes the factory for a week. These costs are rarely attributed to their real cause, and as a result, keep happening. The best cost  is the unproductive one you just eliminated!

There is a 6th cost, only sometimes seen with then benefit of hindsight: Opportunity cost. While your resources were tied up, particularly your strategic attention, an opportunity emerged that was not seen, or for which you did not have the resources.

The ’90 day trick’ for success

The ’90 day trick’ for success

Jan 18, 2019 | Leadership, Operations, Small business

 

We tend to overestimate what we can do in a day, but underestimate what we can do in a year. 

This is a well understood cognitive bias first articulated by Roy Amara, as it applied to tech development, but I have found it holds everywhere else.

90 days appears to be the intersection of the two.

It is short enough to create a bias to action, a sense of urgency, but long enough to make meaningful progress while accommodating the adaptations that appear along the road.

In my consulting, I encourage, indeed demand planning followed by execution of the plan. However, it is always challenging to have a 3 or 5 year plan aligned with the day to day activities, so I encourage what I call ‘nested’ plans.

A nested plan is one that has a longer term outcome agreed, then progressively broken down into annual, three month planning and performance assessment cycles, broken further into monthly and even weekly and daily plans, depending on the situation.

For example, a factory should be working on rolling daily plans, sales working on weekly plans. Performance measurement should follow the planning cycles, and be made absolutely transparent. For example, I encourage weekly rolling 13 week cash flow forecasts, which deliver the combination of urgency and perspective over the more usual financial reporting of monthly profit and loss.

It all comes down to determining what you are going to do today that will contribute to the outcome required, today, this week this month, this quarter and so on. 

Without a nested plan to which you commit, you will always tend to do the seemingly urgent but unimportant things rather than the important longer term things. These longer term activities are always more emotionally and intellectually challenging, which is why we put them off, find excuses, and generally procrastinate.

It is a fine circus act, this short term/longer term balance, one that is hard to maintain, requiring concentration, situational awareness, and finesse, but essential for success.

A note of caution to finish.

As essential as the planning being a part of normal activity, so should be the ongoing incorporation of feedback into the plans. A robust review and incorporation process is as important as the planning itself. No good ensuring you stick to the plan when it runs you off a cliff. 

 

 

To focus, ask the ‘Framing Question”

To focus, ask the ‘Framing Question”

Jan 16, 2019 | Management, Operations, Small business

 

One of my acquaintances is in a real muddle, and stressing out beyond the point of sensible.

His business is circling the drain hole, and he is drowning in things that he thinks he needs to do, and things that his various service providers, suppliers and customers have told him he must do, now, or sink.

Problem is, they are all different, and all come from the perspective of the person offering the advice.

Over a beer, during the Christmas break he observed I had been the only person he knew who played in this space, and had not offered a ‘perfect solution’ to his problems, so he asked my opinion.

I do not have all the details of his situation, so have no solid base from which to offer a view, but suggested he ask himself what I call ‘The Framing Question’

‘What is the one thing I can do, such that by doing it, everything else will be easier or unnecessary’

Answering this question will lead logically to several others, such as ‘How’,  which leads onto a set of steps, which begins to sound like a plan!

You can have a plan that is really long term, which often resembles a dream until you put specific milestones and performance measures in place, and work towards it progressively. Exactly the same thing can be said about the tasks that confront you on a daily basis.

Making sure that the daily tasks build towards the longer term one is simply a cascade of the daily answers building over time. The daily answers will vary, the longer term answer should not.

In my acquaintances case, the answer was ‘Cash’

He is now working on executing a plan we developed on the back of a coaster that manages his cash better, and will generate more of it.

The plan was for 90 days, which was all he had left if nothing changed, with targets and tasks, and he now has a cascade of monthly, weekly  and daily priorities that he and his staff will work on before anything else. 

What is the one thing I can do…..?

A simple question, but clear and with no room for wriggling.

 

 

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