Jan 10, 2022 | Lean, Operations, Small business
While contracting as GM of a Federal body some time ago, I used to travel from Canberra to Sydney’s western suburbs on a regular basis.
I had the choice of driving which took a predictable three hours door to door, or catch a cab to Canberra airport, wait, catch the plane to Mascot, then a cab to my Sydney destination. That method took an unpredictable 2 and a half hours to 4 hours depending on all sorts of variables over which I had no control.
My car would happily sit on the speed limit all the way, a far slower speed than the alternative aeroplane.
Clearly, the top speed of one component of a journey will not determine the time for the whole journey, which is what really matters.
This applies to everything in life and business.
Find a way to remove the bottlenecks and the speed of your journey, whatever that is, will increase.
Dec 20, 2021 | Change, Operations
Some great minds have worked in increasing the performance of management.
Einstein is one of them, although may not have known it when he said: ‘Everything should be made as simple as possible, and no simpler’.
Along the same lines, 20 years later Einstein’s mate Peter Drucker said a similar thing: ‘Much of what we call management consists of making it hard for people to work’
Never was a truer word said about the machinations and genuflections usually necessary to get anything done in any organisational bureaucracy.
Organisations evolved to give us leverage, no one person can build something as simple and today basic as a computer mouse. There is a huge pool of people who all contribute from the electronics to the physical formation and design of the thing. This pooling of resources allows us to scale. This is not a new phenomenon. We have been complicating our lives since we moved away from subsistence family level groups. This classic genealogy of a pencil: ‘I, Pencil’ by Leonard Reed was written in 1946, well after we started complicating our lives by fragmenting and specialising tasks to achieve scale.
The down sides are real.
The added transaction costs in scaling operations, necessary to manage all the divergent and disparate jobs that need to be done, go largely unreported. As a result, they linger like a fart in an elevator, making life a bit more complex and often unpleasant.
The basis of all the thinking that has been labelled ‘Lean’ is flow, a necessary pre-condition to profitable scaling.
How do you get things to flow, to manage to the constraints of the value stream, thereby focussing attention on the constraints in some sort of order to be able to address them progressively in the most productivity delivering manner.
Achieving flow is akin to deep cleaning the elevator. It removes the lingering residue of people creating friction, making life more complicated than it needs to be.
Nov 26, 2021 | Analytics, Management, Operations
Communication of outcomes, from the strategic drivers of your business to what was produced in the last 5 minutes at a station on the factory floor, is increasingly recognised as the key to performance improvement.
Communicating the right things, to the right people, at the right time is as important as the communication itself. A communication is only successful when the meaning received is as intended, and the receiver can do something useful with the information.
Most businesses are already able to collect more data than they know how to use productively. The challenge is to pick the few that are the drivers of decisions at each level. Collecting data for the sake if it makes no sense. If it does not provide insight to decision making, why bother?
The five questions:
Who is it for?
The MD needs different information to the operations manager, whose needs are different to those on the factory floor. This cascade exists across the business, up and down the functional silos. The more the information can be made responsive and relevant to the cross functional users the better.
What is the objective?
What are the people using the data trying to achieve, and by when? Information is most useful when it charts progress towards an objective. Again, the nature of the information and the cycle will vary by level and role in the organisation.
What is the frequency?
By the minute, hour, day, month, all users have unique needs, and all information has a cycle time that makes it relevant. Typically, the higher up the organisational hierarchy, the slower the cycle time. However, making the information available to all on demand is an extraordinarily effective way of generating functional and cross functional alignment.
How do we improve performance?
Solid data is the starting point for every improvement initiative, from the smallest improvement on the factory floor to the drivers of strategic success. The scientific method prevails and requires the stability of good data on which to work.
What data is needed to answer these questions.
Data needs will evolve over time as objectives and progress toward them evolve, and is highly context sensitive.
Danger signals: there are two of them.
- Too many metrics. The dashboard should be three, up to five at a stretch, certainly no more. Data is only as good as the decisions and behaviour they drive, and the more there are, the less motivating they become. Ideally the three are: rolling current, next period, progress towards the objective.
- Vanity metrics. I see these all the time, they are easy, may look nice, but are functionally useless. The obvious example is Likes on a social media platform.
The cadence of an organisation is one of the defining factors of success. The frequency and relevance of the dashboards at every level, the way they make outcomes transparent is a key to performance improvement.
Oct 8, 2021 | Analytics, Management, Operations
We are all wary, in fact, usually very reluctant to put prices up, in case we lose customers. We ignore the sage advice of Warren Buffett who knows something about making a bob when he said: ‘If you have to go to a prayer meeting before raising your prices, you have a lousy business’
Increasing prices is a valid concern if two conditions are not met.
- You are undifferentiated in a way customers value
- You are in a commodity market.
There are five strategic drivers of price, the items that should be considered in your strategic thinking that delivers your pricing architecture:
- Your business model
- Price packaging
- Strategic priorities
- Market power
- Behavioural drivers.
Before you consider the actual price you will be charging, you need to have built the pricing architecture that best accommodates the dynamics at play in your market, and the price elasticity of demand.. Any pricing decision has two dimensions:
Strategic: The pricing architecture that is consistent over time, which provides the structure of your price list.
Tactical. Price can be moved around as necessary, while always remaining inside the pricing architecture.
Many just leave price decisions to the end, a grave mistake, as finding the Optimum Price, the one that leaves a minimum ‘on the table’ will have a profound impact on your profitability.
If you produce a simple spreadsheet, such as the one below, you will be able to model how the profit changes at various price assumptions. It is almost always the case, that to a point it is better to put your prices up and take a modest volume loss, than to drop prices hoping that the added volumes will deliver greater profit.
The assumptions in the chart:
- The Price we charge is entirely our decision.
- The volumes we forecast at any price point are the combination of experience, assumptions, and gut feel. They can be very tactical, varying time to time, and customer to customer in some circumstances.
- Cost of goods sold/unit and fixed costs are unchanged at any volume or price.
Developing a simple model is just maths and a range of assumptions, but we use it too infrequently. Our instinct is usually to drop prices in a crisis to preserve market share, rather than thinking about the impact on profit. If you have a gross margin of 40%, for every $1 you drop your price, you have to gather in $2.50 in added revenue to break even.
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Option 1 |
Option 2 |
Option 3 |
Option 4 |
| Price/unit |
$15 |
$18 |
$21 |
$25 |
| Quantity/period |
100 |
85 |
80 |
55 |
| GOGS/unit |
$6.0 |
$6.0 |
$6.0 |
$6.0 |
| Fixed costs/period |
$400 |
$400 |
$400 |
$400 |
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| The profit outcome of the various options can be seen below |
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| Revenue Price X Quantity |
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| Minus Total cost = ((COGS X Quantity) + fixed costs)) |
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| Equals Net profit |
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|
Option 1 |
Option 2 |
Option 3 |
Option 4 |
| Revenue |
$1,500 |
$1,530 |
$1,680 |
$1,375 |
| COGS |
$600 |
$510 |
$480 |
$330 |
| Total cost |
$1,000 |
$910 |
$880 |
$730 |
| Net Profit |
$500 |
$620 |
$800 |
$645 |
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| Breakeven point. |
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| Fixed costs/Unit Gross margin |
44 |
33 |
27 |
21 |
The break-even point also changes. This is one of the most under-rated but simple calculations available to businesses to gauge their financial health.
Whatever you do, there will be some for whom the price is too high and will not therefore buy.
There will be others for whom you are pricing below what they would have been prepared to pay.
Either way, you leave profitability on the table when you pick a single ‘Optimum price’ point.
This is represented by the left-hand graph in the header.
When you can have two price points, you tend to increase the profitability.
I.e., You drop one price below the ‘optimum’ single price, and pick up those ‘cheapskates’.
You have a second option with prices higher to capture those who are willing to pay the higher prices.
The challenge is, how do you effectively fence off the two, so you are not just delivering an extra reward to those prepared to pay the higher price, just to capture the cheapskates?
It is in the ‘Fencing’ that the creative strategic thinking must take place.
This is represented by the right-hand graph in the header.
The obvious example is economy airline seats. Every economy seat is almost identical, yet there are price fences based on time, and ticket flexibility. Book early, cheaper than in peak booking time. Book very late, you might get a very cheap price, or you might miss out altogether. This is in addition to loadings on location: aisle and window, forward and aft. This is also in addition to the fences that exist between economy, business and first class, which has similar demarcation, for time, as well as the premium to be there instead of cattle class.
A final thought. Many SME’s are not selling time, or input costs & materials, they are selling the results of knowledge and experience and the value they can deliver to their clients.
How do you put a price on experience?
We all have trouble with that, at least I do, and most people I have come across do also. There are three basic rules to follow as you consider how to price for a job.
- Price the client rather than the service. This means if you make them a million, shoot for a share of the outcome. This involves a ‘value conversation‘ early on. E.g., If I was able to deliver you added profit of 100k, how much would that be worth to you? This sets a benchmark, from which you can come to an arrangement. Remember, that a client asking you to do something for them is all about removing risk. You cannot offer guarantees with certainty, as there is always risk involved, but a bit of creativity can expose some useful ways to share the risk and reward. To quote Peter Drucker: ‘In business all profit comes from risk‘. Therefore, the answer to how much they are willing to pay would be tempered by the risk and reward to both parties.
A further example: A friend of mine is a hypnotherapist, and often helps smokers become non-smokers. The value conversation around her services should not be about the price/session, but by how many packets of cigarettes it was worth, in which case, success would mean an ROI in a couple of sessions. E.g., How much does a packet of ciggies cost? How many packets a week do you smoke? Quick mental arithmetic… that means that success here will save you $250/ month on cigarettes, and that is before you factor in the health benefits. What a great deal!!!
- Offer options. Where possible, offer more than one option at differing price points. A premium version, and one or more cheaper versions that have had some features removed. Think about the SAAS software options offered on the web. There are differing features listed for various price points, and it is always three.
- Anchor high. Three price options, start with the highest first, it acts as an ‘anchor’. This is opposite to what we do automatically, we tend to price low as it seems that will be more effective at closing, but the opposite is true. Price high, usually they will go in the middle. In addition, it is far easier to price high and give a discount than it is to price low and try to add features at an increased price.
None of this is easy, if it was, everyone would be doing it. However, it can be done with some creative thought, experience, domain knowledge, and good feedback mechanisms to enable ‘fine-tuning’
Note: Please excuse the dodgy graphs in the header. I am a strategic thinker, not a graphic artist! However, despite their dodgy state, I hope they convey the message.
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.
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
