Sep 20, 2021 | Change, Innovation, Operations
Moore’s law is well known, understood, and has stood the test of time since published by Gordon Moore in 1965. Wright’s Law is less well known, and has also stood the test of time since the mid 1930’s.
Formulated by Theodore Wright, a pioneer aeronautical engineer, Wright’s Law describes quantitatively the relationship between volume and cost. It provides a reliable framework for forecasting cost declines as a function of cumulative production.
It states: For every cumulative doubling of units produced, costs will fall by a constant percentage’.
In various manufacturing operations I have been associated with, and many I have observed, I have seen this in action, but until recently I was unaware of Theodore Wright.
In effect, Wrights Law reflects the outcome of ‘learning by doing’.
Wright observed that for every doubling of output from the Curtiss-Wright Aeroplane factories, the production labour costs dropped by 10-15%. Other sources of cost reduction that together give a consistent cost reduction relationship are process standardisation and optimisation, labour specialisation, network effects, machine availability and efficiency, all things in the modern engineering toolbox.
Look around now at what is happening to the cost of Solar panels, Lithium-ion batteries, industrial robots, and what has happened to cars over a very long period.
Intuitively, Wrights Law stands up, and there is plenty of empirical evidence that supports Wrights 1936 thesis.
As Australia embarks on a path to some level of sovereign manufacturing capability, it will pay us to observe the realities of Wright’s Law.
This means we should find a way to judiciously apply patient funding to manufacturing operations that offer the opportunity to reach the volume inflection points that lead to a sustainable manufacturing base of key manufactured products.
We have thrown away many such opportunities, let’s not repeat the mistakes of the past.
As an aside, we now have another federal industry minister after the (necessary) resignation of Christian Porter yesterday. The now incumbent temporary minister Angus Taylor, is unlikely to do anything useful, but someone has to warm the seat. Being the eighth ‘seat-warmer’ in a government formed in 2013, 7 of whom would not know an ‘industry’ if it whacked them on the head is hardly an ad for consistent policy and investment confidence. Sadly this is in a time where both are desperately needed.
Header photo courtesy Wikipedia.
Sep 8, 2021 | Change, Marketing, Strategy
There is a massive but unrecognised marketing and branding war going on right on front of our eyes, unseen by most, but substantially funded by taxpayers.
It is the Covid vaccine marketing war.
Which brand will you choose?
The development of these vaccines has happened at unprecedented speed, driven by the commercial opportunities delivered to the pharmaceutical industry’s doorstep by Covid.
There are a number of agreements entered into by the Federal Government for the supply of vaccines, as well as the evolving commitment to creating manufacturing capability for mRNA vaccines. This would be additional to the rDNA capability we already have as a result of the brilliant strategic and financial management of CSL over an extended period.
Astra Zeneca? Pfizer? Both of which are TGA approved, and in distribution. Moderna is now TGA approved, on order, and about to arrive on our shores.
Which do you choose?
By moving the availability goalposts around by press release, and completely muddying the waters around the facts in the attempt to cover the total lack of planning in 2020, the federal government has created a minefield of questions and mistrust. Into this uncertainty have stepped the pharmaceutical marketers, often ignored genuine expert scientists, the ‘Looney-fringe’ with a barrow to push (a space inhabited also by some politicians with a vague grasp on the truth) purveyors of snake-oil, ‘no vaccers’, and a horde of self-appointed experts sprouting nonsense that just further confuses.
Who really knows the facts amongst the triumphant press releases and soothing words acting as prophylactics against the truth of the failure of (most) politicians to listen to, understand and communicate scientific advice.
‘Modelling’ varying covid outcomes has become a game of who can give me the answer I want. The Doherty institute modelling is widely and selectively quoted, misquoted, and ignored, as is the modelling from the Kirby Institute, and various other scientific and research organisations.
On top of the existing AZ, Pfizer and about to arrive Moderna vaccines, you have a range of other brand contenders. A Johnson & Johnson rDNA vaccine is being widely used in the US, amongst a number of not yet approved in this country options, like the creatively named ‘Sputnik’ and the Chinese ‘Sinovac’ version.
Then you have the schism between the rDNA and mRNA vaccines. This is science way beyond my understanding, but to a layman it seems that the ‘old’ vaccines, typified by Astra Zeneca are rDNA, and the newer technology, Moderna and Pfizer are mRNA
Which will you choose?
What an expensive and truly monumental mess for us, and a profit pool of unprecedented depth for those Pharma companies smart enough to put themselves in a position to dip the snout.
If I was a betting man, I would be betting on Pfizer as the winning brand. They have used one of the oldest and most effective selling techniques with great skill: scarcity. It has ramped up unfulfilled demand and this has increased perceived value enormously. In addition, they are the leaders in the newest technology, and in this space, the first mover advantage is huge.
For those who may be interested, following is some of what I have learned sifting through the mounds of material relating to the brands of vaccination medications. Apologies in advance for the simplicity, and for any errors of fact.
mRNA vs rDNA. A layman’s explanation.
DNA is the double helix design we are all familiar with, that carry the genetic instructions for the development, growth, and reproduction of life. It is the long-term storage device that drives the development and evolution of a species.
RNA is in effect the messenger that converts the instructions contained in the DNA into the proteins that take action to produce the individual cells that make up the individual organism within a species.
To date, vaccines have all been based on delivering a mechanism that results in variations that give protection from specific conditions when the cells reproduce, by altering the instructions carried when the strands of DNA split to create new cells. These variations offer protection from the condition for which the vaccine was developed. It is a game of trial and error in the lab. This is typified by the existing influenza vaccines that have been around for years. Each year, the pharmaceutical companies predict the ‘next wave’ of mutation of existing strains of the flu and produce vaccines in anticipation of next winters flu. The technology is well understood, and the processes repeatable. Many members of ‘big Pharma’ produce their versions of DNA vaccines, including CSL in Australia.
RNA has offered the holy grail of being able to translate the instructions from DNA into instructions for the cells of an individual to produce proteins that protect from the targeted infection.
The Corona pandemic put a rocket under the scientific work being done on RNA for several decades, compressing the scientific development time from decades into a year. They are based on new genetic technology called ‘synthetic messenger RNA’, a manufactured version of the substance that directs protein production in our body cells. The idea has been around for several decades, based on the recognition of the role RNA (Ribonucleic Acid) plays in the transmission of genetic codes necessary for our body to produce proteins. Understanding the mechanics of RNA is like opening a recipe book for bespoke medications for individuals to address a wide range of conditions, but the technical hurdles have been significant to date.
The result is ‘new boy on the block’ mRNA vaccines represented so far by Pfizer and Moderna.
Pfizer is 150 years old, founded by an immigrant German chemist in New York in 1849. It produced and sold medications for then common ailments such as intestinal worms, until a ‘bet the company’ investment in using fermentation technology to mass produce penicillin in 1942. Since that time Pfizer has taken over a number of significant competitors and adjacent companies, becoming a huge pharma conglomerate, producing ‘hit’ wonder drugs such as Xanax and significantly by accident, Viagra. The investment in mRNA has continued for some time, as a response to the waning sales of their other drugs as the lapsing of patents enabled competition.
Moderna by contrast is a new company formed in 2010 to commercialise the science emerging from labs around compounds that supress the immune reaction to the injection of synthetic RNA into an individual’s body. For them, the emergence of Covid was a ‘gift’ that offered an injection of capital and marketability of ballistic proportions.
Where to from here?
mRNA offers the potential, indeed, probability of developing more potent and targeted vaccines almost in real time, and there is a huge research effort quietly being applied, by both incumbent pharmaceutical companies like Pfizer, J&J, and now Moderna, as well as newcomers. For example, Alphafold is an AI breakthrough of a Google subsidiary ‘Deep Mind’ that can predict the structure of proteins, an essential piece in the mRNA jigsaw . It is a combination of Neuro and Computer science. Again, this is way beyond my understanding, but those ‘in the know’ seem to be jubilant. It seems it is an advance, using similar processes to the AlphaGo program that stunned everyone by beating the best Go player in the world. Go is a game of Chinese origin many times more complex than chess, and it had been assumed that algorithms could not replicate the billions of options open in the game. AlphaGo learns as it goes, just as humans do, and that learning can be applied to the development of the immuno-proteins that make up mRNA vaccines.
Then, we have the promise of geometrically increasing data analytical capacity with the development of quantum computing.
A couple of further places I would like to go.
- We stop talking about ‘70%’ vaccination rates as the point at which we might open up. Let’s be honest, and acknowledge that it is 70% of the ‘eligible’ population, which excludes those under 18, coincidentally the voting age. The reality is that it is more like 50%, and no epidemiologist I have heard speak believes that number is even in the ballpark of a reasonable place to consider opening safely.
- Let’s have an intelligent conversation about what happens when ‘son of Delta’ arrives, as it inevitably will, and let’s not be caught again without pants around our ankles, bending over trying to tie our shoelaces so we can run from it.
- Let’s also acknowledge that 50% vaccination rate, while grossly inadequate, is way better than much of the world’s population, whose governments do not have the funds to buy the jabs, or their ‘leaders’ have their resources tied in hidden accounts in Switzerland. I wonder where Son of Delta might emerge? Yes, probably amongst those unvaccinated populations in the third world.
Hopefully, if you have read this far, it is a bit clearer. It is to me. What started out as a simple post on the observation of an essentially publicly funded branding war became a monster, as I tried to answer for myself the ever present marketing question: what has to be true to give us this outcome?
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Aug 27, 2021 | Change, Leadership
This is it; we are in it.
There will be no return to the pre-Covid world.
Working from home, or at least in other than large, centralised offices, is acceptable and for many, strongly preferable, and will persist.
Social distancing has become more natural when amongst those we do not know. This has implications the way we plan and build anything from a garden fence to public infrastructure
Suffocating ourselves with masks, which are becoming a fashion item, while mandatory from time to time, will probably remain with us more widely when some of the restrictions are eased.
Being more accountable for educating our kids, which might be a good thing in a few cases is adding all sorts of pain to domestic life. Now, the cohort from 5 to 20 at least, has been denied 2 years of access to the school system. Flawed as that system is in many ways, at least it was more ‘averaged’ than trying to home school, and study remotely.
Business models are being destroyed, while new ones sprout like mushrooms after rain
Our behaviour patterns have been polarised. One hand we are suddenly more aware of the need for ‘community’ and are more dependent on them, while on the other hand, we are even more suspicious and unhappy with strangers.
The use of digital communications has skyrocketed (did you note my avoidance of the term ‘zoomed’) and as a result we are learning the value of face-to-face communication. We are a social species and talking to someone across a screen is not the same.
Un, and under employment is now seen as normal at higher levels than pre covid, therefore the need to take control of your own life, exercise initiative, take personal risks, to make your own way financially, is even more important. We are, however, not a community of risk takers. Despite our view of ourselves as laconic self-reliant individuals, we are just the opposite, always seeking the solace of group approval.
We are scared and fractured in ways not seen for several generations. ‘Common courtesy’ to strangers seems to have taken a dive. I was roundly and loudly abused a few weeks ago in a supermarket, just before we got locked down, again, for being so bold as to offer help to a woman in a wheelchair struggling to pack her shopping after going through the checkout.
Perhaps the worst part is the lack of leadership displayed by bickering politicians, distorting and selectively using the ‘numbers’ from various sources that suit their current narrative, while ducking for cover and shifting blame. I admit it is easier with the benefit of hindsight, but there has been so little transparent honesty displayed that trust is so eroded that we no longer believe anything we are told, and hope is absent.
There is a ‘national cabinet’ meeting later today. This was a process that started with the first wave of covid last year with much hope, and public approval, that has degenerated into just another political clown show. I predict the prognostications after the meeting show no sign of genuine leadership, accountability, or acknowledgement that we are all in this together.
I truly hope I am, wrong, but am, prepared to give long odds.
Header cartoon credit: www.Gapingvoid.com.
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:
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- 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.
