Return on Investment is the basic calculation made to assess any investment, but too often gets complicated by all sorts of assumptions and forecasts.
In these days of rapid prototyping, access to A/B testing tools using the web, and the logic of many small bets in the innovation process rather than a few large ones, the calculation becomes less important if you follow the simple rule:
“Keep the “I’s” small, and nobody will bother you too much about the “R”
Last week speaking to a gathering, I told the group that Australia was now a net importer of food with a $2.7 billion deficit in 2010-2011, according to the AFGC State of the Nation report . Utter disbelief was the primary reaction, “how could that be” being a typical response.
The Australian food industry is dying at a rapid rate, the pressures on local suppliers are heavy, and increasing all through the supply chain. Retail oligopoly, high $A, regulatory impositions that make no sense, costs of supporting local government social initiatives, and all the rest of the stuff that clogs up the wheels of competitiveness and productivity.
Heinz moved to NZ last year, SP exports, Australia’s largest tomato grower in liquidation, a second major grower hitting the wall in April, and this week, fresh tomatoes hit $10/kg in supermarkets. A sign of things to come in many categories.
We are watching the death by a thousand cuts of an industry, small businesses that garner little exposure are hitting the wall all over the place, Golden Circle gone, Goodman Fielder on the skids, growers are going broke across the board, dairy processing almost all owned overseas, about all that is left is meat, because we are amongst the biggest producers, and horticulture, because most fresh produce does not travel well.
Now, if we continue to go the way it seems we are destined to go, housebrand NPD will eventually overtake proprietary NPD as it has now done in the UK, and you need to ask where that NPD will occur. Certainly not here, because not only have we seen off the manufacturing businesses, we have substantially depreciated the technical capabilities necessary for innovation. Even the CSIRO is a shadow of its former self in the food industry, having removed much of the intellectual infrastructure as its masters re-aligned the priorities to other areas, and progressively trimmed the resources.
The recent drop in the $A will help, just a pity there are few businesses left to take up the slack.
The word sustainable holds connotations of farming practices, and environmental sensitivity, all true, but only half the story.
A sustainable chain must also be commercially sustainable, and one without the other is by definition, unsustainable.
The characteristic that drive both are similar, transparency, and connections through the chain, both facilitated by the collaboration tools of the web. The outcome is increased productivity of the whole value chain.
The price deflation being experienced in the value chains supplying Australian retailers are testing the limits of Australian suppliers, and those that are surviving are dedicated to the implementation of chains that are commercially sustainable, and increasingly environmentally sustainable as consumers interest in product provenance increases.
Quietly, out of a home office, GFAP, a small chain consultancy that supplies a customised web based tool that manages value chains, to this point largely around horticulture, is flourishing. Very few pieces of produce arrive at Woolworths or Coles without being touched in some way by this system, but few have ever heard of it.
It takes discipline to concentrate on the process, and to let the outcome take care of itself, recognising that there will be stumbles along the way, but in the long run, the results will come when the process is optimised.
Business is filled with sporting analogies, very useful in making a simple point, so here are two more that make my point.
“Obviously, to get a low score I responded”
“How do you do that”?
“Get as close to the hole as possible, then sink it” I said, (or something like that)
“Is a long first shot always necessary”?
By then the penny was slowly dropping. Clearly not, the best shot is the one that makes the next one easier, and contributes the most to the outcome, a low score on the hole.
Dad reckoned Woods mentally put himself standing at the flag, and worked out his shots backwards, deciding where each shot should end up to make the next one easier, and more certain, and then selecting the appropriate club. By concentrating on improving the golfing equivalent of the interdependent processes required to get a low score, the low scores did come, more often than his opposition.
Pity he did not apply the same discipline to his life off the course, and I resist the temptation to pun on “score”.
Retailing is under pressure, all the established retailers are suffering declines in profitability, and the media is full of retail CEO’s bemoaning the eroding margins.
Australians appetite for flat screen TV’s over the last couple of years were is amazing, we now have TV’s in almost every room in the house, and prices have dropped precipitously as volumes have increased, and we are unwilling to pay for fat retail margins.
Surprise, surprise.
The reduction of the 40% margins for retailers, delivering from $530-600 for a unit 2 years ago, to single digit margins and $40 through the till today has all the retail CEO’s crying poor.
The change in the retail competitive environment has not been matched by the performance measures bricks and mortar retailers employ, and their business model is becoming redundant.
Retailers focus on dollars through the till, product and category margins, and returns for floor space. Generally they forget that business is about making a return on investment until the AGM, not counting margins that get chewed up by working capital requirements down the supply chain.
E-retail is driving a stake through the heart of bricks and mortar retailing of electronics, and it will come in white-goods very soon. E-Tail retailers focus on the return on funds employed, not margins. When you take the customers order and 10% deposit before you pay for the stock, and get the balance COD, it matters little if the margin is $40 when the volumes are skyrocketing, because the funds employed are very low.
It seems paradoxical to me that the most successful company on the face of the earth over the last decade, one that has been successful because of their astonishingly good product design, have not leveraged that innovative capacity into their operational design.
I refer of course to Apple, whose profit in the December 2011 quarter was $13.3 Billion, and they became, again, the most valuable company in the world.
The woes of Apple’s supply chain, particularly Foxconn have been extensively covered, and most, if not all of Apples customers would be familiar with at least a small part of the story.
Around the developed world, and increasingly elsewhere, it seems consumers are developing a conscience, they care about more than just product performance, and are evolving to make purchase decisions that includes some consideration of the “integrity” of the product concerned, from organic food, to sports shoes, to coffee, and now to electronics and gadgets.
Innovation is way more than just making the products better, it is also about making the supporting structures better, improving the whole operational chain, not just the consumer facing end.
Imagine the innovation Apple could bring to the manufacturing supply chains they employ if they took a small piece of their enormous and well deserved profits from their product design, and focused on operational design. Instead of observers using Toyota Production System as the benchmark, in 10 years it would be the APS, Apple Production System, and their profits would have soared again.
Oh, by the way, if Apple managed to create an APS, their improved profits would come not just from their superior design of the whole value chain, their APS, but because consumers do truly care about the integrity of what they buy. In that event, a few of the building blocks for a re-emergence of manufacturing as a economic driver in the US and Europe would be put into place.