Skip navigation
2015

I would like you to take a little quiz. Place a checkmark alongside each statement below that you believe is true about your business enterprise—or businesses, in general.

Quiz Questions.jpg

  1. We (our management team) understand the cause-and-effect relationships that lead to results in our organization.
  2. We can understand how our enterprise works by reducing the overall system down into smaller parts (like departments and functions), and then examining carefully each of those pieces.
  3. The best way for us to manage our enterprise is to control the actions of individuals and their actions within functions and departments.
  4. Small changes lead to small effects; and large changes lead to large effects.
  5. We can obtain the best results from our enterprise by working to optimize the efficiency of each department and function.
  6. Our enterprise is orderly and follows principles that are, more or less, like a very complicated machine. Inputs and outputs are predictable and understandable to us.
  7. Processes in our enterprise flow along more or less orderly and predictable paths with clear beginnings and results that we can rationally predict.
  8. All costs within our organization are additive. If we reduce expenses in any department or function, we reduce expenses for the entire enterprise and will make more money.

 

Ready?

 

I confess: in some ways, the quiz is a trick. Here’s why:


  • If you agreed with most of the statements, you are merely saying that you concur with a great deal of what is still taught in most schools of business and is the “theoretical” understanding of most businesspeople today—from Fortune 100 executives to hundreds of thousands of small business executives and managers.


  • If you did NOT agree with most of the statements, you may have found yourself thinking: “I know this is the way things are supposed to work, but my experience is telling me something else. I just don’t know why my experience doesn’t line up with the theory.”

 

Old ways of thinking must go

 

Since Frederick Winslow Taylor introduced scientific management theory more than 100 years ago, executives and managers have often thought of their enterprises like “machines.” Perhaps not intentionally, but implicitly, they frequently come to manage the people, functions and departments like cogs in a great machine. Their thinking would be something like this: “If we can keep each individual cog ‘well oiled’ and in good condition, then the whole ‘machine’ ought to work as well as can be expected.”

 

That approach worked reasonably well for a great deal of the last century—at least for the majority of businesses and industries.

 

However, the emergence of the Internet-empowered consumer, global competition, brand proliferation, extended supply chains, and many more factors has caused business enterprises and supply chains to no longer operate like “machines.” Instead, there is a growing consensus that business enterprises and supply chain have become, in fact, complex adaptive systems (CAS).

 

If we want to avoid the potentially negative unintended consequences of our management actions, we need to move to a view that considers the entire system.

 

A systems view allows us to complement the more common reductionist scientific paradigm, which focuses on one thing at a time, to the exclusion of everything else. Looking very closely at one thing can reveal important information. However, if we don’t take the systems view into account, and instead depend exclusively on a narrow view, we are in danger of experiencing negative unintended consequences.


["Understanding Complex Systems." University of Minnesota. May 4, 2011. Accessed February 21, 2015. http://www.csh.umn.edu/wsh/UnderstandingComplexSystems/index.htm.]

 

This means our old—generally, deeply ingrained—patterns of thinking also need to go.

 

Business Process Reviews (BPRs)

 

A common approach to improvement still used by many—read: most—today is the business process review. This approach, as generally implemented, is precisely the opposite of moving toward “a system view” (as mentioned above).

 

Instead, BPRs focus on each department and function individually. I know. I used to do them. In fact, I used to be a big advocate of them.

 

Fortunately, I got myself rescued from all that.

 

I recall being brought in to work with one large, nationwide enterprise about eight years ago. They had an extensive BPR project underway—just wrapping up, actually—at the time of my arrival. The CFO and his team could not have been more proud of the collection of some five or six five-inch three-ring binders laying conspicuously on their conference room table. Each of these carefully indexed binders was chock full Visio™ diagrams along with page after page of prose. Further, the flowcharts and prose were accompanied by tables and charts, documenting in detail each of the processes carried out by departments and functions across the enterprise.

 

Here’s the problem: Machines tend fail because of the failure of an individual part or subcomponent. Complex adaptive systems, however, tend to fail in the interactions between the parts that make up the system. Adaptations happen continuously and these adaptations could never be kept up-to-date in Visio diagrams and prose. These adaptations, in turn, lead to new interactions and requiring further changes or adaptations by other actors in the system.

 

Unfortunately, the thousands of dollars and hundreds of hours invested in those BPR binders were, for the most part, a waste. The contents of the binders only managed described the theoretical way in which each function within the system operated. But reading every word and studying every diagram in those binders would never inform the reader about how the system—the entire enterprise—actually worked (or failed to work) on a day-in and day-out basis.

 

There is a better way

 

There is a better way to capture the essential elements that are likely to affect the outcomes of your entire system.

 

The Thinking Processes are highly adept at capturing this kind of information and allowing management to document and review the real interactions in your enterprise that are leading to greater (or lesser) achievement of your goals.

 

Some years ago, I gave up trying to help companies create a process of ongoing improvement (POOGI) through business process reviews. I have found it much more effective to guide them into a real system view of their enterprise by employing the Thinking Processes. This also opens the door to helping the management team invent their own solutions. From there, they are frequently able to move forward on their own with a POOGI, requiring less and less help from consultants like me.

 

That, I call, real success.

-----------------------------------------------------------------------------

Leave your comment below. We would be delighted to hear from you.

Some years ago I was involved in mentoring a group of younger consultants and I ended up creating this sort of 30,000-foot level overview of “everything that can go wrong” in an FINANCIAL Cause-and-Effect Diagram.jpgenterprise.

 

Well, it’s not actually everything, but it does cover a pretty broad spectrum from product design (R&D, perhaps) and product life-cycle management (PLM) all the way to P&L statement and financial ratios.

 

If you look carefully at the accompanying “Financial Cause & Effect Diagram,” you might notice that one—and only one—box has arrows leading into it, but no arrows coming out of it. That box is the metric ROA (return on assets).

 

Something unique

 

There is something unique about the KPI return on assets or return on investment (ROI). That unique element is that ROA or ROI are the only KPI that measures the performance of the whole system.


Profit alone does not measure the performance of the whole system, because it doesn’t take into account the amount of money tied up in the producing of profit. A $160,000 annual profit might be okay for a small business with assets of $1 million. However, that same $160,000 in annual profit would certainly not be satisfactory to a global enterprise with $650 million in assets at work.

 

Profit, therefore, isn’t really the bottom line. The real “bottom line” is ROA or ROI.

 

Working backwards

 

If we work backwards from the “Low Return on Assets” result, we can see two causes:

  1. High inventories or investments
  2. Low profits

 

This makes perfect sense!

 

In calculating ROA/ROI, we use a numerator (profit) and a denominator (investment or assets). Therefore, if investment is too high or profits are too low, we get low return on assets. Inventories are highlighted here because (a) inventories are a part of the total investment, but also because (b) inventories are typically the most volatile and most manageable of the assets in the enterprise.

 

Low profits

 

While we will see that so many of these factors are interrelated (after all, that is the very definition of “a system”), let us begin by working backwards from the “Low Net Profits” entity next. There are only two (2) inbound arrows to “Low Net Profits”—much simpler to work with than the “High Inventories or Investments” entity with its five (5) inbound arrows.

 

Low net profits can come from two sources:

  1. High Operating Expenses
  2. Low Throughput

 

[NOTE: Here, we use some very specific definitions. We calculate “Throughput” as revenues less only Truly Variable Costs (TVC), where TVC are only those costs that vary directly with incremental changes in revenue. We permit no allocations in this figure. We calculate Operating Expenses as all of the rest of the money the system pays out on a regular basis in support of turning Throughput into profit—except for those costs included in TVC.]

 

High Operating Expenses

 

Again, taking the path of least resistance (and fewest factors), we can see three (3) factors contributing to high operating expenses:

  1. Poor control of G&A expenses
  2. High carrying costs on inventory
  3. High levels of inventory obsolescence or shrinkage

 

Of course, there are many reasons that Operating Expenses could be too high. Just plain poor management of expenses is uncommon. Nevertheless, it is not unusual for us to see operating expenses escalate over time—almost imperceptibly—because the organization hires more and more people to pick up the slack where others are drawn away from productive work to do “firefighting.” Firefighting is non-value-added work that leads to increased operating expenses while adding nothing to the value delivered to the customer.

 

Sometimes, the firefighting happens in the warehouse—especially in the shipping departments. This, in turn, leads to higher carrying costs for inventory—the warehousing staff is bloated to cover for waste (non-value-added) activities that soak-up time that should be spent providing value to customers.

 

And, of course, it is a general rule that, the more inventory you have, the more you will be paying of carrying that inventory—even if you hold the carrying cost percent steady.

 

Last, we see the cost of inventory obsolescence or shrinkage contributing to high operating expenses due to write-offs and write-downs. Too much inventory—especially of the wrong things (which is always the case, because if they were “the right things” they wouldn’t end up being obsolete)—leads to more waste. That waste may take the form of shelf-wear, damage from too much handling, and more.

 

These are all real problems that we encounter nearly every time we start working with a client.

 

We will continue our discussion of “Everything that can go wrong…” in future articles. Stay tuned.

---------------------------------------------------------------------------------

 

In the meantime, we would like to hear from you regarding your experiences. Please leave your comments below.

 

Thank you.

Assuming you are involved in a for-profit enterprise, it really matters little the particular business or industry in which you participate. It also does not really matter what kind of technology you are considering: ERP, HR, CRM, supply chain, project management or much, much more.Uncertainty - the elephant in the room.jpg

 

There are certain things you really should know before you buy. Unfortunately, the things YOU REALLY SHOULD KNOW BEFORE YOU BUY are not the same things that many technology vendors and resellers want to discuss with you.

 

Vendors and resellers would like to have you focused mainly on things like ease of use, reliability, reporting, integration and features. Sadly, these are also the same things that most “software selection committees” are thinking about and talking about.


However, are these, in fact, the really important matters to be considered?

 

Allow me to compare some of the standard questions covered in a “software selection” cycle with what I think the really important questions should be:

 

Typical Questions Asked

Better Questions to Ask

Ease of Use: How many clicks does it take to…?

Provide five (5) specific ways your technologies will allow our company to significantly increase Throughput* while holding the line on our Operating Expenses** (including changes to operating expenses that will stem from maintenance and support of your technologies).

Training: What training resources are available to support your technologies, and is there an active online user community?

Does the training you provide merely teach our users regarding the technical and functional aspects of your technologies, or will your training also teach our users how to leverage the technology fully given our particular application, industry and circumstances, so that we can maximize Throughput while holding the line on Operating Expenses?

Scalability: Are there significant quantifiable limitations in the use of your technologies as anticipated in our installation (e.g., number of users, database size, bandwidth usage)?

If we purchase your technologies, can we expect increases in Operating Expenses or additional Investment requirements in the near future—such as the need to upgrade hardware, operating systems, or other?

Initial Costs: What is the full estimate for our getting started with your technology, including hardware, software, initial maintenance and implementation services?

Tell us what our anticipated total Investment will be in the new technologies you are proposing, and tell us three (3) concrete ways in which this new technology will help us a) increase Throughput, b) reduce Investment (or demands for future investments), and/or c) slash or hold-the-line on Operating Expenses while supporting significant growth in Throughput.

Ongoing Costs: What are our ongoing costs likely to be if we accept your proposal for these new technologies?

Given your experience with other customers like us, how much will ongoing maintenance and support from you add to our Operating Expenses on an annual basis?

Start-up Cycle: How many hours should be budget internally for the implementation of these new technologies and the related training?

Tell us how you will help us minimize lost Throughput in our operations during your implementation and training cycle. Also, tell us how rapidly we might expect to see real and effective increases in Throughput as a result of leveraging the proposed new technologies.

Reliability: What functionality does the software have for detecting and reporting data errors?

Please provide us with three (3) references from companies (of a similar size to ours) that have been using your technologies for at least 24 months so that we can create our own estimates relative to time, energy and money we may need to spend in “firefighting” if we invest in the solution you propose.

Reporting: Provide us with a list of standard reports and alerts available out-of-the-box with your technology.

Tell us how data gather by or supplied by your proposed technologies can be leveraged by our company to increase Throughput (e.g., improve market segmentation, thus leading to more sales); reduce Investment (or the demand for new investment) (e.g., mobility clients will allow management of extended territories without new offices or warehouses in other locations); and/or slash or hold the line on Operating Expenses while sustaining significant growth in Throughput.

Adaptability: How adaptable are your technologies to support possible changes to our business model or industry?

We anticipate that our business model may change from X to Y over the next three to five years. Tell us how your technologies will allow us to adapt to the Y business model and still help us to grow Throughput and minimize Operating Expenses.

Enterprise Application Integration (EAI): How easy is it to integrate with your technologies or, vice-versa, to integration your technologies with our existing enterprise applications?

Our goal in every EAI effort is, first, to increase Throughput (while minimizing both Investment and Operating Expenses). Tell us how your technologies will allow us to extend our enterprise for increases in Throughput with a minimum increase in Operating Expenses and/or Investment. Be specific.

NOTES:

* Throughput is narrowly defined here as revenues less (only) truly variable expenses.
** Operating Expenses are defined here as all other monies paid out on a regular basis in support of producing Throughput, but not included in truly variable expenses (and not part of an Investment—the acquisition of a tangible asset).

 

The differences between these two columns of questions for technology vendors could not be more stark in my mind. The questions in the left-hand column are all generic questions leading to generic “rule-of-thumb” answers.

 

The questions in the right-hand column are all very specific. These questions are focused the technologies’ performance in your specific enterprise, under your specific circumstance and seeking specifics to help you and your team create ROI (return on investment) estimates for the project based on potential changes in Throughput, Investment and Operating Expenses.

 

Can the vendor or reseller do these ROI calculations for you?

 

No! Nor, should they be expected to.

 

However, if they are unwilling to help you and your team work through estimates and calculations to the satisfaction of your team then, perhaps, you should be talking to another technology vendor.

 

Rules of thumb can never do here! Your team of executives and managers need to get comfortable with making “approximately right” estimates for potential changes in Throughput, changes in Investment and changes in Operating Expenses based on what the vendor or reseller can tell you about how to leverage their offering for improvement.

 

Start asking the right questions—even if they are harder questions to ask.

----------------------------------------------------------------------------------------------

Let us here your comments on this topic. Please leave your comment below.

 

Thank you.

Every day we meet businesses of all sizes that are struggling to make decisions.

Puzzle001.jpg

Oh, we’re not saying that they aren’t making decisions. There’s plenty of decision-making going on.

 

But, to say there isn’t some consternation and wavering would be less than true to the facts. Most of the questions we run into in trying to help our clients improve lead them to choose among several unfortunate options:

  1. Hold to a single position in policy, but often violate that policy when driven by circumstances to do so.

  2. Hold to one position for a period of time and then, when there becomes too much negative fallout from holding that position, move toward the opposite position—sometimes slowly, sometimes hastily.

  3. Create confusing metrics that lead one department or function to hold to try to manage in one way, while (without knowing it) creating metrics that ask another department or function to manage (or demand actions) that are contrary.

Here is a short list of some of the key dilemmas that management face on a day to day basis:

  • Do routine maintenance on production equipment in order to prevent unexpected downtime
    or
    Maintain equipment on as required in order to maximize production time utilization

  • Buy in large volumes in order to get the lowest cost for purchased goods
    or
    Buy only as needed in order to minimize inventory and maximize cash-flow

  • Offer larger discounts or lower prices in order to get more sales
    or
    Maintain prices in order to keep margins up

  • Make production runs in large batches so that equipment achieve high utilization rates or measured efficiencies
    or
    Run in smaller batches in order to reduce cycle times and lead times

  • Authorize overtime expense increase in order to meet promised/due dates
    or
    Do not authorize overtime in order to hold the line on labor cost

  • Ship only complete orders so that shipping costs can be minimize
    or
    Ship partial orders so that customers can get at least part of their order on-time

  • Produce products using optimal resources so that costs of production can be held to a minimum
    or
  • Produce items on any available resource in order to help hold cycle-times and lead-times down

  • Build to order so that inventories can be minimized
    or
    Build to stock so that lead-times can be held to a minimum

Painful meetings and declining morale

 

Most folks have been forced to sit in at least one meeting—usually, several meetings—where there is no shortage of finger-pointing and blaming going on within the organization.


Top management is complaining that total sales are down and market share is declining. This is a double threat, of course, because it means the company is not only losing customers, but also that the sales department is feeling ever greater pressure cut prices just at the time when the company needs more revenues and better margins to keep moving ahead.


Managers in the Sales Department are complaining about how poor customer service levels are keeping them from making more sales and forcing them to compromise by lowering prices (and margins). They report that, compared to the company’s competitors, the firm is falling behind in performance. The VP of sales says, “We absolutely must get our customer service level up to 95 percent or better.


Accounting insists that product margins are already so low that, if things continue, “pretty soon we’ll be paying our customers to take our products!” Plus, the CFO complains that the company simply has too much inventory. “Inventory turns are way down,” he says, “and we don’t have the cash to stay on this course.”

 

Next, Quality Assurance and Sales jump on the bandwagon together complaining about how warranty issues have risen dramatically. Accounting confirms, saying, “Our warranty-related costs are at 230 percent of last year, and this is only August!”

 

In his own defense, the VP of Operations stands up and says, “Hey. Wait a minute. I have hit all my numbers. Efficiencies have never been higher. Our utilization rates are well above last year, and we are under budget with overtime.” Accounting confirms that what the VP said is 100 percent correct.

 

 

The meeting ends, but the pain doesn’t

 

Typically, these meetings end with the executive handing out some assignments using phrases like: “do a deep dive into…”; “look into… and come up with recommendations”; “make me a plan to…” and “find a way to….”

 

Everyone at the meeting (at least outwardly) “smokes a peace pipe” and they all agree that they will all “just have to dig a little deeper” and “put in 110 percent effort until things turn around.”

But, all too often, things don’t really change.

 

Maybe something changes in the economy, or the company catches a few breaks, and everyone feels relief for a while. However, a few weeks or a couple of months down the line, another very similar meeting is likely to occur. And, sadly, everyone in the room pretty much knows that’s what is going to happen.

 

 

What’s going on here?

 

Our experience tells us that, until there is some kind of breakthrough at a company like the hypothetical one described above, there is little chance that the folks on this management team will truly work well together. They will try. They will try valiantly.

 

But, the problem is, they leave meetings (like the one described above) not even agreeing on what the real problem is (or, problems are). Instead, they left with a mandate to investigate further in half-a-dozen areas.

 

A team that should be working together toward a common solution, instead of each doing their own thing in their individual silos, have no idea how unite.

 

 

What's needed?

 

Companies and management teams that find them caught in these cycles, and that cannot seem to get clear on which levers to push and which levers to pull, need to find a common language to describe the challenges their “system”—read: their entire company, and perhaps their entire supply chain—faces. They need to find a framework, a context, a method that will allow them to harness what they already know—their tribal knowledge—for creating real and ongoing improvement.

 

There is help available. We have found that, introducing companies to the Thinking Processes [PDF] really does help executives, managers and, even, whole companies think differently, see differently and create real, lasting improvement.

 

---------------------------------------------------------------------------------------

 

Tell us about your experiences along these lines. We would like to hear from you. Please leave your comments below.