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2016

Carol Ptak, writing at BeetFusion.com observed cogently:

The deep truths that are so accepted today will [ultimately] be exposed for the [fallacies] they truly are. These include the focus on cost, [the belief that] customer service [is] directly related to inventory levels, and the belief that if only [forecasting] was more accurate, then planning problems would be solved. Just because these ideas are [commonly accepted today] does not make these ideas valid today…. They are common nonsense.

 

DDMRP Flow-to-ROI Links.jpg

While most companies around the world have focused their management attention on cost-cutting and trying to balance the demands of the finance silo (“keep inventory to a minimum”) and the sales silo (“keep our customers happy”), a relatively small number of companies have discovered the secret of FLOW. (By the way, Carol Ptak’s handle on Twitter is @ItsAllAboutFlow.)

 

Toyota Motor Corporation is one such company. While the rest of the worldwide auto industry has gone through huge and dramatic ups and downs over the last 50 years, only Toyota has shown a consistent pattern of improvement as expressed in the most crucial of KPIs: return on investment. FLOW is at the very core of what has become known to the world as “Lean.” The elimination of waste is to promote FLOW, not for cost-cutting.

 

In their latest book, DDMRP – Demand Driven Requirements Planning, Carol Ptak and Chad Smith reveal precisely why the old and outdated methods must be laid aside in favor of new and innovative approaches to supply chain management focused unwaveringly on FLOW.

 

I strongly suggest that you buy and read this new book, but only if you care about improvement and profits.

 

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“Excellence happens when your tools and processes are aligned with a shared vision, when there’s an understanding of the ‘why’ behind the actions….”BOOK MissingLinks cover.jpg

 

Following in the genre of The Goal, the now famous business novel by Eliyahu Goldratt, author Caroline Mondon presents us with The Missing Link – A Demand Driven Supply Chain Detective Novel. Mondon is a past-president of Fapics, the French Association of Supply Chain Management, and is also author of an award-winning and bestselling French business detective novel entitled Le chaînon manquant. This is her first novel in English.

 

Reading this book was a real treat!

 

While the mystery surrounds a character named Thierry Ambi, a brilliant and forthright consultant by the name of Lila Fractalle-Cass takes center stage in helping the H. Rami company emerge from the sudden passing of its CEO, a leadership vacuum, and its downward financial spiral.

 

Typical “Clues”

The H. Rami company is suffering from all of the typical symptoms found in the vast majority of small to midsized business enterprises—and not a few giant conglomerates.

 

While struggling with the all-too-common “pyromaniac-firefighter” management methods, effective scheduling of production and replenishment becomes all but impossible.

 

So, just what is the pyromaniac-firefighting management method?

 

That’s simple: it means having an executive and management team that sets fires (unintentionally, of course) by applying bad policies and ill-informed metrics on the one hand, while taking extreme measures to put the fires out on the other hand.

 

This book is full of sound how-to advice and gems of wisdom woven into a fascinating story to keep the reader enthralled to the very end.

 

Here are a few gems and snippets to whet your appetite for this book:

  • “Scheduling in a company that tolerates ‘firefighting’ is probably one of the most difficult and stressful jobs on earth.”
  • “[L]ittle islands of excellence in a sea of mediocrity will not move [a] company forward.”
  • “It is only when you know the source of errors that you can then make improvements.”
  • “Excellence is the result of having mastered the what, the how, and also the why. Without the why’s you cannot motivate people to learn new things and pass this knowledge on to others.”

On Starting the Journey toward Ongoing Improvement

Author Caroline Mondon, in the midst of her novel, brings forward a compelling argument against those executives and managers of companies or supply chains who are trying to improve without articulating clear goals or developing a clear plan for improvement.

 

When you know where you are, and you can see where you want to go, you’re sure to get there in the end if you take a small step in that direction every day. And the good news is, the more steps you take, the more you’ll enjoy the journey, even if each step unbalances you a little bit. In fact, it’s precisely these small destabilizations that allow you to adjust your course to adapt to unpredictable external events. This way, you’re always getting closer and closer to your goal, even if your goal shifts somewhat. Remember, continuous improvement is a journey, not a destination.

 

Like men and women wandering aimlessly in a wilderness, we come across companies where there is no clear trajectory on a path of improvement. Instead, we find them retracing their footsteps over and over again—trying again and again the same tactics that have produced no durable improvements in the past.

 

If you and your management team are finding yourself wandering over the same ground again and again without lasting improvement, then I would suggest you read this book. This book is for CEOs, CFOs, supply chain managers, and anyone else involved in management of manufacturing, distribution or supply chains.

 

Read it! You’ll be glad you did.

 

 

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Many of the companies with which we come into contact in the course of our business are (or, were) rapidly growing companies. They were started some years earlier, and have been growing pretty steadily since their founding.What You Want v What You Get.jpg

 

However, many times we are called in because the growth curve has become unsatisfactory. Perhaps the companies’ profits have been relatively flat for several years. Or, in some cases, profits have turned negative. As a result, executives and managers are looking for new ways to return their companies to a growth trajectory.

 

All too often, they come to us with the sole thought in their minds that some new technology is what is needed to put them back on the path to the profitability that they desire. They have in their minds this concept that technologies are something that can be “poured” into their company like a miracle engine additive that will help their company “run smoother, last longer and get better mileage.”

 

They frequently have such thoughts when the challenge they are really facing is a common struggle to so many companies: they are struggling to leap the chasm between “entrepreneurial” and “enterprise.”

 

Why is there such a struggle? And why is it such a common struggle for companies when they reach a certain threshold in their growth?

 

Entrepreneurial Thinking

When entrepreneurs start their companies, their thinking about how to make more money is very un-complicated.

 

When entrepreneurs see an opportunity, they are generally able to quickly and incisively do an analysis that incorporates the following general line of thinking:

  1. Revenues (R) – “If we can take advantage of this opportunity, I believe we can gather in about $R in gross revenues in the first year from our customers.”
  2. Truly Variable Costs (TVC) - “In order for us to take advantage of this opportunity, we will have to pay out about $C for each unit we deliver to our customers.”
  3. Investment (I) – “Before we can start collecting our Revenues, we will need to invest about $I to get the ball rolling.” (This investment might include capital equipment, inventories, or other.)
  4. Operating Expenses (OE) – “Once we get the ball rolling, we will have some ongoing expenses. We will need to pay out about $OE each month over the first year of our operations.”

 

There are some important things we should note about this back-of-a-napkin kind of evaluation that is quickly performed by entrepreneurial minds.

 

First, note the repetitive use of the word “about.” In these kinds of evaluations, being approximately right is key. There is no need whatsoever to hone these numbers to increasing levels of accuracy.

 

After making rough calculations, the net opportunity can be assessed as being a certain size and can be scaled by order of magnitude. If the net opportunity calculates to a few hundreds of dollars, the risk may not be worth it. However, if the net opportunity calculates to tens of thousands, or hundreds of thousands, of dollars, they may wish to pursue it immediately, lest it slip away.

 

Importantly, also note that there are no needless allocations of expenses to products or services delivered. The entrepreneurial mind tends to recognize intuitively that every dollar of R minus TVC above OE is profit. Allocations add nothing to their ability to evaluate the opportunities available to them.

 

Calculating the “Net Opportunity” Value

The net opportunity value emerges from a formula that may never be articulated by the entrepreneurs, but it exists in their minds nonetheless. That formula may be stated as the following for PROFIT:

 

P = (R – TVC) – OE 
Where…

 

If some not insignificant investment is involved, then the calculation for return on investment (ROI)—still simple enough to be done in a coffee shop on a napkin—becomes:

ROI = ((R – TVC) – OE) / I

Where, I = Investment

 

(See more on Throughput accounting here.)

 

Continued Growth

Most entrepreneurial organizations continue to use these formulas (perhaps, and frequently, never articulated as such) to rapidly evaluate profit opportunities. The application of this approximately right methodology becomes a key factor in rapid, accurate decision-making that leads to generally high return on investment and not uncommon double-digit compound growth rates.

 

Such companies generally follow this pattern of decision-making until they reach a certain size and level of complexity. (Here we use “level of complexity” to describe the size of the enterprise as defined primarily by the number of active participants or the number of transactions in the daily of execution of the business—that is the number of employees and trading partners involved.) As transaction volumes increase, so does the need for accounting and other systems to track the various aspects of the transactions. Ultimately, an Enterprise Resource Planning (ERP) system is generally implemented. With the ERP system comes the accumulation of historical data and the ability to perform relatively complex analyses and reporting on the accumulated data.

 

Also, accompanying such growth and complexity of systems, come the people who believe it is their responsibility to use these accumulating mountains of data to “improve decision-making” through complex analytics. Applying GAAP-compliant methods (which were designed for external financial reporting, and not for management decision-making), they begin to make complex what used to be simple calculations on how and when to take advantage of clearly profitable growth opportunities.

 

Studying the Cadaver

The entrepreneurial mind is clearly forward-looking. Entrepreneurs tend to be able to be able to see opportunities on the horizon, envision a way to profit from those opportunities, and calculate—at least by order of magnitude—the dollar-value of the opportunities they see.

 

Now, encumbered by mountains of data and those they have hired to oversee and analyze these mountains of data, their focus is moved from forward-looking to a constant reconsideration of their historical data. (After all, that’s was an accounting system is: it is a history-keeper designed for reporting the results of past operations. Such systems were never designed for management’s day-to-day decision-making.)

 

These executives and managers—trying desperately to leap the chasm from entrepreneurial to enterprise—are now spending their time “studying the cadaver” of their organization in the vain hope of making decisions regarding future opportunities.

 

H. Thomas Johnson and Anders Bröms describe, far better than I could, the problems associated with focusing on “the cadaver” rather than the future in their great book, Profit Beyond Measure.

Studying the cadaver…is the prevailing management strategy. Influenced by the mechanistic worldview of the social sciences, late-twentieth-century managers view a business organization exactly this way. They operate businesses by imposing on them an artificial design that connects the organization's parts and then shows its interactions in linear quantitative terms, financial and otherwise. They view the financial performance of the business as the sum of the separate financial performance of each part. Anyone of these parts, they believe, can be added to or subtracted from the business with a predictable financial impact on the whole.

 

Quantity cannot explain, however, the internal operation of a natural system. It can only describe the natural system's external features.... Quantitative measurements give no insight…into why, or how, such natural systems function as they do. Measurements never provide understanding of the internal operation of a natural system. – Johnson, H. Thomas, and Anders Bröms. Profit Beyond Measure: Extraordinary Results through Attention to Work and People. New York: Free, 2000. Print. P. 48]

 

Restoring Focus

There is no mystery in what we do. We help companies trying to successfully leap the chasm from entrepreneurial to enterprise regain the vitality they formerly had by helping them regain their focus on the future. We help them see that management accounting and the analytics that benefit management decision-making are not the same as numbers and methods used for GAAP-compliant reporting on financial results.

 

We help executives and managers once again see that they methods they used as entrepreneurs to launch their business and gain so many early successes are still valid today. These methods can be used to calculate the magnitude of any number of alternative improvement or growth opportunities, and even prioritize them for action.

 

We would like to store life to your organization and supply chain, too, by helping you see your future afresh and end your focus on the cadaver of your history.

 

Let us know your thoughts. Leave your comments here, or feel free to contact us directly.

 

 

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IndustrialRevolution 4-0.jpg

The first Industrial Revolution involved mechanization, employing water and steam power. The second Industrial Revolution moved industry further from artisans and craftsmen, and introduced the huge efficiencies of mass production and the assembly line.

 

The third Industrial Revolution (Industry 3.0) came with the introduction of computers and automation. This brought another huge wave of efficiencies and reductions in the costs of production.

 

Now, Industry 4.0 has arrived and the new Industrial Revolution is underway.

 

Industry 4.0 will encompass cyber-physical systems integrations (think: self-driving cars) and will be predicated on the Internet of Things (IoT) and cloud computing.

 

Synergies

Certainly, each of the first three Industrial Revolutions (as defined above) brought new efficiencies. Less and less manpower was required to produce and deliver the goods that people wanted and needed. But, not all of the benefits lay in merely “reducing costs.” Markets themselves changed, and those who recognized the changes in how markets would change and business would be transacted benefited most from seeing the synergies that would emerge.

 

I keep on my wall a chart I made to remind me from time to time that the greatest benefits are reaped in business by those who foresee and take advantage of emerging synergies. Here are some examples:

  • John D. Rockefeller saw the synergy of the availability of railroad transportation and kerosene (for lamps) to change the way people lighted their homes all across the country. Later, he saw the emergence of the gasoline-powered internal combustion engine as a way to expand his market further.
  • Andrew Carnegie saw synergy in the mass production of steel and the need for the expansion of the railroads as his opportunity to grow his market and increase profits.
  • Henry Ford leveraged mass production and the assembly line to produce “the car for the common man,” thus making his millions.
  • Cornelius Vanderbilt took his knowledge of the transportation industry and leveraged the synergies in the growing demand for energy (kerosene and gasoline) and the increasing availability of low-cost steel to create a railroad empire.

 

What point am I making here?

 

The point is simply this: If you, your business and your supply chain see Industry 4.0 as a way to merely reduce costs, chances are you will reap some small benefits. But as Industry 4.0 expands across more and more industries and continents, your advantages will continue to shrink into irrelevance.

 

Beyond Cost-Cutting

If, on the other hand, you have begun to recognize that reducing unit costs is not the same as making more money, then you have an opportunity to leverage the synergies of Industry 4.0’s IoT, cloud computing, and collaborative-aiding infrastructure for many more advantages in your supply chain.

 

After all, leading technologically means little unless management also changes how it thinks. Leading technologically without changing your thinking may lead to merely becoming very efficient at doing the wrong things. (Witness how Henry Ford, who once dominated the auto industry, fell prey to emerging auto makers that brought new thinking to the marketplace. He did not lose his advantage by falling behind technologically, but by failing to change his thinking.)

 

Reaping the Benefits of Industry 4.0

Our aim is to help companies get their supply chains under control. In order to do this, we begin by helping them begin to see that supply chains are not Newtonian linear systems. Instead, their organizations and their supply chains are Complex Adaptive Systems (CAS) where traditional management approaches no longer deliver the traditionally anticipated benefits.

 

The traditional rules by which most businesses are still managed to day are more than 60 years old. Many of them had their roots in the first Industrial Revolution, or the second, and have not changed much since. At a minimum, most management concepts are remain rooted in, and unchanged from, Industry 2.0 and 3.0.

 

Worse! The logic of Industry 2.0 and 3.0 thinking is firmly and irrevocably encoded in nearly every Enterprise Resource Planning (ERP) system employed in business today.

 

Plainly stated: The rules by which most management thinks and by which most ERP systems operate today are rapidly become unfit to manage the highly volatile and complex events at work in supply chains at this juncture.

 

This, of course, explains why supply chain management today tends to be a world of constant stress and firefighting.

 

Demand Driven Planning and Execution

We introduce our clients to demand driven planning and execution methods. These methods are fully-aligned with what is required to produce ongoing improvement (a POOGI) within a CAS. We help them discover the relevant information that can guide the reliable flow of relevant materials all across their supply chain.

 

This kind of work is ERP-system agnostic. It doesn’t make any difference whether you are using an ERP system that cost you $10 million to deploy, or one that required an investment of just $50,000. The fact is, everybody needs the kind of help we can provide if they are going to reap the benefits of Industry 4.0.

 

We would like to hear your thoughts. Leave your comments or questions below.

 

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