Archive for the ‘Operations’ Category
“Measure What?”
“What gets measured gets managed”. A quote attributed to Peter Drucker.
Managing a business requires a broad set of skills and attention to all parts of the business. Many CEO’s are good at making or selling “things” (goods and service offerings) but some don’t spend enough time monitoring the overall health of their business. Keeping close tabs on the performance of the business is critical, particularly as our economy works its way through this recovery. The easiest things to monitor are sales and cash in the bank, but that is only part of the picture. Positioning the company for growth requires additional effort to understand and monitor not only sales but also those activities that impact profitability and cash flow. A key to successfully growing the business is identifying a set of key metrics that provide the visibility to help chart the course for the company’s growth, let’s review “What to Measure:”
Margins - The first step is to understand your gross profit margins (sales minus cost of sales). Begin by segmenting sales into groups of products or services that are similar, such as product families. Segment the cost of products and services into those same groups or product families. This will enable the monitoring of margins by product family and make decisions about pricing and position you to monitor costs in each product line.
Expenses – Next, monitor those costs that create and market the products and services, such as research and development, marketing and sales expenses. To the extent possible, group the costs to design and market products so that those costs can be compared to the margins generated by the sales of those products to facilitate decisions about continued and new investment.
Receivables – Once the products and services are sold and the quicker the receivables are collected, the sooner the cash is available for supporting the business. Speeding collections starts with taking orders accurately, invoicing correctly and following up with customers to ensure that all steps have been done by the company to support the customer’s approval process. Measuring these key steps will help reduce issues and speed collection resulting in better cash flow and reduced write-offs and increased profits
Inventory – If the company creates or buy products for resale, measure how quickly the overall inventory turns (inventory used or sold), and if the company has a process that supports it, measure how quickly groups of inventory turn. Every dollar tied up in inventory is a dollar in cash unavailable for other operating needs.
Operations – Look for operational metrics such as employee counts, number of hours billed, square footage, etc. Besides looking at those operational metrics, try to combine financial metrics with operational metrics to provide a fuller picture of the business.
Measurement steps – Create a scorecard using a spreadsheet or by purchasing a scorecarding product. In either case, look for a balance between the level of effort to collect the data and the frequency of providing the information. Start at a higher level of information and keep it simple. Add more complexity as additional areas are identified that warrant more analysis. Look at the trends in the metrics over several years to get a big picture view about where things are improving and where attention is warranted. Also, check with the bank to get industry standards so that a baseline can be established for comparison purposes.
By frequently measuring the important trends in any business the management will be in a better position to control the growth of the business.
25 Attributes of Effective Teams
If you take a magnifying glass and hold it up to most organizations recognized for their effectiveness, you will see that they have two characteristics in common; they have effective Leadership and they operate through effective Teams. If you believe the chicken came before the egg, then you would agree that it takes effective leadership to establish effective teams. Many organizations understand the value of teams and may even experiment with them when it comes to small projects, but I suspect this is still an ad hoc practice with no design or long term purpose. Companies in their early stages of growth or more mature organization losing growth momentum should assess how effective they are at nurturing and using teams to move their enterprise forward. If they do not focus on a team oriented culture, their quest for success will certainly be a more challenging one.
Let’s explore the attributes of effective teams:
Definition of an effective team- An effective team “is a small group of people who are mutually accountable to achieve a common purpose and performance goals through their collective talents and collaboration.” (Kristiina Hiukka, BigAgendaCoaching.com)
8 Attributes of an effective team leader:
- Creates a compelling mission for the team
- Knows the priorities: 1. team mission, 2. team, 3. individual members and 4. themselves
- Communicates concisely, clearly and openly (communication occurs when both sides understand what the other is trying to convey–until then it is just talking)
- Encourages feedback
- Supports and encourages diversity
- Supports members by mentoring and coaching
- Delegates authority and accountability
- Selects members for their skills and desire to participate
- Promotes continuous improvement
- Fosters a positive team culture
7 Attributes of an effective team member:
- Strong discipline skills
- Good communicator
- Proponent of working in teams
- Enjoys collaboration with other member
- Self motivated
- Strong work ethic
- Self-directed within team roles and responsibilities
10 Attributes of an effective team:
- Clear purpose
- On-going supportive leadership (coaching/mentoring)
- Enabling processes and structures
- Supportive organization
- Members possess the “right” skills
- Commitment and trust of members
- Clear roles and responsibilities
- Clear team ground rules and protocols
- Open communication
- Performance goals and accountability
- Adequate resources
- Support group diversity
- Members are us-directed
- Self-directed
- Driven to continuously improve
“You Get What You Pay For”-Rewarding Incorrectly Will Hurt You!
Most organizations will say they reward “results”, yet that is not necessarily true. Organizations establish a formal or informal process to incentivize their workforce to achieve a desired level of performance. Depending on the size and culture of the enterprise, this compensation plan may include all employees, just management or something in between. All such plans establish some target or metric that the company measures in order to determine if the plan’s thresholds are achieved or not. The establishment of these metrics is where the error usually occurs, which truly hurts the overall performance of the company. The metrics will fall into one of three categories; Intentions, Actions and Results.
Intentions-These are deliverables that are planned to be delivered in the future. This is the weakest of all metrics. It is difficult to see how an organization could build a compensation plan around rewarding for nothing more than “hope”. Yet, many corporations reward senior management for just that, “they had great intentions”. We even re-elect politicians based on their “intentions”, and we seem to accept that metric over and over again. I am not sure why? If you want to grow a culture of discontent within your company, reward your management for intentions.
Actions-These are deliverables that are focused on activity. An associate of mine uses the tag line “doing=1/2 done”. One of my favorite sayings is “don’t confuse efforts with results”. Rewarding actions or effort is a way to move initiatives forward, but not a way to get them done. I can see a compensation program that would breakdown a larger project into steps or stages, and reward based on the number of steps completed, but there are very few other examples to support rewarding actions. Rewarding actions will not hold the workforce accountable for the end result, yet there are a large number of organizations that do just that; reward the starting of something, but not the completion of it. Unfortunately, it appears many governments (local, State and Federal) seem to have adopted this method for rewarding their agency officials.
Results-Results are definite deliverables. These are usually dates, dollars, ratios, numbers or other such “objective” measurements. They are tangible events that can be tracked and measured. Compensating your management and workforce based on results will provide a greater level of accountability to your company. Without accountability, the enterprise will aimlessly move forward in a manner much like a sailing ship without a rudder.
Shifting From Accountability to Entitlement-Whose fault is it?
I recently read an article about the shift within corporate America from a workforce that expects to be held accountable, to a workforce that looks for entitlement. Why should we even be concerned with this shift? We should be concerned since a growing level of entitlement within our population is having an impact on the level of productivity found in the United States workforce. In my opinion, there are several reasons for this shift. A few key reasons for the shift to an entitlement attitude are Diluted Leadership, Unionism, Executive Compensation Levels and Government Growth. Let’s explore how these factors are contributing to this severe problem for the corporate America:
Diluted Leadership-Unfortunately I’ve noticed a decline in the level of “Leadership” in the US over the past few decades. Too often, C-Level executives are more concerned about their own careers and compensation than the overall performance of their corporation. Political Correctness continues to be a filter used before decisions are made and actions taken. These diluted leaders are not leading. You don’t find them rolling up their sleeves and taking a position in front of their company, saying “follow me”. No, they are behind closed doors, sending out others to experiment with their plans, and if successful, then they surface to gather the spotlight. I like to call these diluted leaders “empty suits”, and there are many major fortune 1000 companies that have employed these empty suites. True leaders set attainable deliverables and hold everyone accountable to the process of reaching those deliverables, even themselves. They are not afraid of holding themselves and their executive team to the same levels of accountability as they do the rest of the workforce.
Unionism- Although this may not be popular with unions and some union members, I believe that most unions have outlived their original purpose and are not providing constructive benefits to their members. There are certain skilled trade unions that maintain standards and require continuing education to upgrade the skill level of their members, but a vast majority of unions go far beyond that objective. For example, anytime a union recommends a strike to its membership, and goes as far as to whip them into a lather to carry out a strike, I believe it has gone beyond its usefulness to its members, the companies employing their members and the economy. My experience with unions over the years has convinced me that no one wins when a workforce goes on strike. The enterprise loses momentum and both the company and the union members are often unable to recover from the financial losses they incurred, possibly for several years.
Unions can promote an unhealthy level of entitlement within their membership. Ironically, if there was true corporate leadership (not diluted leadership) within more companies, unions would be less popular.
Executive Compensation- Nothing leads to the heightened level of entitlement thinking in a company more than an unreasonable level of executive compensation. A few research studies that I have read state that over 75% of the fortune 500 executives receive over 400x more than the compensation of the average American worker. European and Japanese executives have been reported to receive approximately 130x and 40x their respective average workforce compensation levels. When a workforce sees under-performing executives receive bonuses or exit packages in the $millions, it is difficult for the non-executive workforce to be understanding when the company then claims that they do not have the finances to compensate the average workforce more fairly. The crux of it is that although the general workforce may actually be compensated fairly, because the executive levels were compensated so unreasonably high, a sense of entitlement and discontent grows within all levels of the company.
Government Growth-Governments at all levels, Municipal, State and Federal are growing. One study recently reported that approximately 25% of the total US workforce is employed by government or governmental support organizations in one way or another. Despite good intentions, governmental organizations have never been shining examples of efficiency and effectiveness. A growing number of workers are searching out government positions because the job security and benefits are generally higher than the private sector, often with fewer required work hours-further fueling the entitlement attitude. Less accountability, union protection, lower levels of accountability, political filters applied to performance and a “don’t make waves and you’re safe” culture is a toxic breeding ground for entitlement attitudes.
Personal comments: My fear is that we are slowly following in the footsteps of the European Union. In the book Mind Set! (John Naisbitt), he states that the European Union leaders commited themselves to creating “the most competitive and dynamic knowledge-based economy in the world by 2010″. What have they accomplished since that commitment; Higher taxes and bigger governments, less innovation, slower productivity growth, restrictive labor laws and declining export market share and rising protectionism. Naisbitt further states “Europe is increasingly losing ground in trying to become the world’s economic driver, because it dearly embraces what one of its famous sons, Sigmund Freud, wrote: “It is easier to suffer than to act.” The EU countries all have a strong culture of entitlement which is part of the reason for their anticipated shortfall for 2010.
Full Service Professional Organization Failures: Why?
Full Service Professional Organization Failures: Why?
Professional organizations spend a great deal of time and financial resources advertising that they are full service; yet, I continue to find customers that are very dissatisfied with the services they receive. Relying on good faith and advertising claims, when selecting a full service Professional Service organization to support your needs, is not always enough to ensure satisfactory results. Here are a few thoughts to keep in mind.
The Deception
The deception, intentional or not, is that professional organizations advertise and represent themselves as being “full service” when they are not; at least not to the degree that the client expects. Examples of professional organizations that represent themselves as being “full service” are those entities that provide legal, accounting, investment, banking, insurance, engineering, and/or a variety of other consulting services. In most cases, these service providers are extremely professional, highly skilled and ethical. The client gets short-changed, however, when the service they need is a subordinate skill within the full service provider. The client receives results, but not to the level they expected based on the description that the “full service” provider promised. Why is this happening?
Hasty Diversification
Service Providers need cash flow to operate like any other business. Diversification is a way, if done correctly, that they can expand their revenue base. Those Service Providers that hold true to their core skill-set usually maintain exceptional customer loyalty. Those who diversify too quickly, into sectors they are not highly experienced in, run the risk of upsetting customers, losing business and ultimately suffering revenue losses.
When a Service Provider decides to diversify, it is important that they seriously consider and evaluate the risks associated with moving away from their core skill-set and operating culture. Often, when a firm diversifies, they choose not to make the financial commitments that are necessary in order to go first class. They instead put their “service toe” in the water to test the “revenue” temperature, before making a true commitment (i.e. allocating finances for research, training of existing employees and/or hiring experts) to the expansion. In the meantime, they advertise and prematurely represent themselves as “full service”.
Unfortunately, this is a common scene for many struggling companies. There are accounting firms that offer bookkeeping, tax, insurance, investment and retirement planning services. There are banks that offer banking, planning, investment, and retirement products. There are legal organizations that offer a wide array of legal services (personal, corporate, wills/trusts, real estate, etc.) and business development services. There are sales/marketing firms that offer marketing, web development, social media advertising, branding, graphics, and customer care support. Each of these companies may spread themselves too thin with hasty diversification. They all have a core skill set and operating culture that made them very proficient in a particular area, but not in all. So what to do?
Know that “Full” Service may not be synonymous with “Fully” Satisfied
As the prospective client, it is your responsibility to select the Service Providers that meet your needs. You may not need the “world class” provider, but you want to make sure you have selected a firm that will leave you fully satisfied with the results you receive. Here are a few steps you can take to improve your chances of receiving the services you need:
- Look to referrals from trusted colleagues that had a similar need and were satisfied with the results.
- Ask your other Service Providers for a referral.
- Regardless if a referral or not, provide the prospective firm with a detailed, written requirement of the services you need and the results you expect to receive.
- Interview the principals whenever possible.
- Ask detail probing questions about “how” and “who” will perform the service you are requesting.
- Ask if they provide frequent progress reports as to the status of your project.
- Have a written contract that clarifies the deliverables in detail.
- Don’t be afraid to question unclear situations or statements—YOU ARE IN CHARGE.
- If along the way, their weaknesses surface, try to get them back on track. If you are unsuccessful, don’t be afraid to terminate the relationship and move on.
Most enterprises gravitate to the “Full Service Provider” out of convenience. They do not want to take on the role of a “general contractor” that works with multiple Providers offering separate skilled services. This approach may initially require more time and energy, but long term it may also save you money (in fees and delayed revenues) and provide more desired results.
Organizations-Playing Offense or Defense
Organizations in today’s economic times are either playing offense or defense, whether they know it or not. What determines which style of play? Cash or operating capital availability. With the credit markets shrinking, cash on hand has become a significant criteria for survival and the opportunity for growth. Those organizations that have lived from month-to-month off their line of credit are now in trouble. Those lines of credit are being reduced or foreclosed on due to a lack of payment. Organizations that have kept their on hand cash balances in proportion to their debt have a chance to survive the current slumping economy. The organization that maintained a healthy cash position now have a chance to take advantage of that strategy and take advantage of great bargains on asset purchases, merger/acquisitions with competitors, product development, etc. Everything is discounted, and if you have the cash you can make short term deals that will multiply in the long run and make your organization more successful.
Layoffs-think before you act
During these times of the recession, most management start cost cutting by laying off employees. This may be a mistake, depending on the knowledge level needed for your product or service. Consider lowering payroll costs through eliminating or deferring bonuses, salary annual increases, reducing contract labor, reducing salaries across the board (management first, then other employees); if you have to let permanent employees go, consider restructuring the organization, eliminating management first, flatten the organization and reallocate employees to other areas of the company and establish a mentoring program to support those taking on new responsibilities. A JOB AT A LOWER SALARY IS USUALLY LOOKED UPON AS BETTER THAN NO JOB AT ALL.
The recession is short lived in comparison to the damage that management can do if they do not handle the down turn correctly
Traning-Investment or Expense
Hibernate or Renovate
A recession is not a time to hibernate and wait for inevitable upturn of the business cycle. A recession is an ideal time to renovate your organization-addressing the current economic climate with a new operating strategy that positions you to perform more effectively in either an up or down business cycle.
Create a Plan
If the organization decides to renovate its operating environment to either expand or contract specific functions in preparation of growth opportunities or efficiencies, then create a plan. An effective renovation plan should include the following:
- Identify and communicate your vision and rationale for the planned activities,
- Describe in detail the desired outcome for each planned activities,
- Review and assess all risks of taking the desired actions,
- Establish reasonable estimates, in detail, of resources and timing required to complete the planned activities,
- Define the key milestones or events for monitoring and tracking of progress toward your desired outcome,
- Assign responsibilities and accountability to all stakeholders, and
- Establish change and risk management feedback procedures to handle change
An effective plan will aid in communication and managing of a renovation effort, but there needs to be a solid execution effort to accompany the plan to insure success.
Cash is King
We often find opportunities to renovate an organization during a recession by expanding functions and/or markets, or becoming more efficient. These changes are possible because we have adequate levels of a critical asset-“cash.” These opportunities may be at the expense of others in the industry that are less financially healthy. “Cash is king” and it will be always. When credit is not readily available, those organizations with adequate levels of cash should seize the opportunity to acquire inventory, equipment, facilities, new product development, and market penetration. Spending cash in this way leverages lower prices, better terms and much faster implementation schedules. You may also uncover opportunities to merge with (or acquire) competitors or competitor functions that still have value because they have to shed these functions to raise cash for themselves. In any case, the organization with the best cash position, is usually in the best position to negotiate favorable prices and terms.
If your organization is not in a solid cash position during this economic downturn, then let it be a lesson learned and work toward a new cash management strategy to be in a better position, for the next down cycle. It will come!
Workforce Assets
Organizations often declare “Our workforce is their greatest asset.” Why is it that when a significant downturn occurs, the first action many of these same organizations take is to reduce their workforce. The duration of the downturn is a key factor in determining if a Reduction In Force (RIF) will really generate savings for the organization in the mid-long term. Organizations may hurt themselves if they reduce knowledge and productive workers that will be needed if the work load returns within six-twelve months. The cost of hiring replacements, training, and ramping up production may actually out weigh the cost savings of letting the employee go in the first place. Organizations also use the downturn as a reason to weed out the unproductive members of the workforce, but that seems to reflect a flaw in management practices. Unproductive employees should be coached, retrained and if they do not respond, then they should be relocated to a position where they can be productive before being removed. You shouldn’t wait for a downturn to have an excuse for these unproductive workers to be removed. During a downturn, your workforce can be further trained to increase their skills, they can be cross trained to be more flexible and they can be mentored to become more productive. Almost always, savings from a reduction in the workforce is often over estimated, and can hurt an organization if they cannot take advantage of the early stages of the upturn.
Supply Chain Management Failures-Suggested Solutions!
Earlier this year I had the pleasure of presenting at the Pacific Northwest Aerospace Association Convention. Since most of the attendees were small to medium size manufacturing and supplier/vendor organizations, I felt this was an opportunity to get firsthand feed-back on how well their supply chain management processes were benefiting their organizations; a subject I was researching for an article. They surprised me! Not one had a positive comment on the benefits to their performance. Maybe it had to do with the industry, the size of company, or more than likely, it had to do with the force-fitting of a process in order to “qualify” as a supplier/vendor. Let’s explore their comments;
What went wrong?
- “We have a computer application but we are short on processes.”
- “The cooperation with our customer is no better; orders still arrive with insufficient delivery time.”
- “Our only communication with the customer is with the purchasing department demanding lower prices.”
- “They (the customer) still want us to warehouse advanced orders without any compensation to us, which we can’t afford.”
The overall sentiment was not a ripping endorsement of their supply chain management process and their customer relationships.
Why?
There are always two sides to every story, but there certainly seemed to be a consensus on the issues above at this particular gathering.
- It is all too common for organizations to look at the topic of supply chain management as a system or application, versus a change in the way they conduct business with their customer and their suppliers/vendors.
- Customers that view supply chain management as a new fangled order processing mechanism are spending a great deal of time and cash on a process that may not produce their intended results. They are failing to either understand or fully embrace the implementation of an effective supply chain management process.
- Failure to nurture an effective and open communication environment between customers and suppliers/vendors will perpetuate higher rejects, increased expediting costs, longer inventory turns, surplus inventory, short or late shipments, and a tense relationship that is not conducive to productivity enhancements for either party.
- Customers that treat their suppliers/vendors unreasonably, will see the relationship deteriorate and impact their ability to perform.
What to do?
Resolving issues of this type is not simple, but it is critical if the enterprise wants to perform effectively. The key responsibility to bring a positive result to these issues must fall at the feet of the leadership at all levels, not just the CEO.
- There are three key factors that must be synchronized in order for a supply chain management process to be effective. These factors, in order of importance, are the people, operating processes and systems and applications. Supply chain management processes cannot be effective without these factors working in unison with a common purpose—improved performance.
- The relationship between customers and suppliers/vendors is the lubricant that makes the supply chain management process function smoothly. Customers need to take an interest in their suppliers/vendors, sharing in the responsibility for their success. In turn, suppliers/vendors should always take a vested interest in their customer’s ability to perform—that is a definition of a “stakeholder” relationship.
- An open communication environment between customers and suppliers/vendors is a two-way platform, not just “flowing down hill”. Surprises are not permissible, but they happen, and it is up to both parties to work together to minimize them. One CEO I talked with said “just give me the bad news as quickly as you know it, then I have the best chance to fix it and still meet your needs”.
- Collaboration means to work together for each others best interest. If either party makes a mistake, own up to it and work through it together. Just don’t make it a common occurrence. Going the extra mile for either company builds a buffer of “trust” that will carry each organization over those unpredictable problems when they occur. I believe that long term trusting relationships breed higher performance opportunities for both entities. If you have a customer or supplier/vendor that does not want to participate in this form of supply chain management-–find a way to terminate the relationship and find those that will. They are out there.