There were only 24 hours left. Tomorrow the board would pull the plug on the project which had continued for well over 3 years. The total costs as per internal calculations had run into hundreds of millions of dollars.
External consultants reckoned that when you included the costs of internal resources seconded to the project from rest of the organisation, and other costs buried elsewhere in P&L’s the real total was at least double of that.
However, the project had built a momentum of its own. No one was willing to point at the elephant in the room, let alone to lead it out. Careers were at risk. Good careers – built over several years.
I will talk about the outcomes later in this piece. Before, I do that I want to spend some time talking about how did the company arrive here?
How did so many competent people miss obvious and easy signs that the project was not on track. More importantly, where did it all go off the rails?
Of course, I have covered these, and other similar questions in my book OUTSOURCING 3.0, and in my blogs and videos. The book, in particular, carries a very comprehensive model and diagnostic tool kit, which is value for money.
In this piece, I want to focus on only a few key points. And, I want to frame it as a positive affirmation of key things that would build momentum towards success.
Three kind of congruence is important:
In the case quoted above, while minor lapses occurred in all three, several major gaps very readily apparent in #2. It appeared as if IT team was working in total isolation from the Supply Chain and Business Transformation team – though their projects were closely linked.
Short term, tactical thinking – predominantly related to cost savings and control issues and considerations tend to dominate. It is quite easy to lose track of the big picture in the process. All the initial discussions and dreams of gaining competitive advantage are thrown out of the window at the first opportunity.
Then, what is the point in spending all the money? The project appeared like a lot of effort, just to stay in the same place.
This takes more than a flight of fancy. A lot of things will change when one thing changes. You cannot ever do enough of visualisation and preparation. Every time you do this exercise, you will discover some more things that need to change in parts of the processes, infrastructure, skill sets, SOPs, contracts, warehouses, etc. Change it.
That brings me to my last point. All this difficult work is highly specialised; it also takes considerable time and money. It needs skills rarely found inside organisations, or even in IT service providers.
While it is well known that most IT projects run into time and money problems, the scope adjustment problem is less well articulated. Yet, taken together, these can wreck havoc on your business outcomes.
The above graphic – taken from my book OUTSOURCING 3.0 sums up the situation nicely.
In the case study quoted at the start of this post, the outcomes were a lot different than what was expected by the majority. The board made a bold decision and pulled the plug on the project in the middle. That single decision most likely saved the company in the long run. They could have saved a lot more money if, at the outset, they are created governance structure to ensure just a few key points. After all, prevention is better than cure.
There is no doubt that confusion results in loss of action. Because clarity is the basis of all actions. Clarity gives you confidence and confidence results in action. Imagine a scenario where you need to make a decision and, in order to make a decision you need information, some of which is missing. Generally speaking, you will wait till you have enough information to have clarity and make a decision.
I was recently talking to a CEO whose business suffered from plummeting profits in the last few years. To some extent, the general economic climate had a lot to contribute to this fall of profit. However, as I began analysing the business by interviewing people and then looking at the data that they had produced, I reckoned that there was something much more serious than the business climate which had resulted in shrinking profits.
I saw confusions everywhere in their operations. In my mind, there were at least 5, maybe more, points of confusion which impacted directly on their profit. In other words if these 5 confusions were removed, the company could restore a significant part of its profitability loss, despite the economic downturn. Without revealing the type of the business or even any the specific details of industry it is operating in, here are the 5 things that really mattered. You may be able to use similar thinking in your business.
One of the first things I noticed was that the business had too many products. Product proliferation had festered to an extent where the customer was confused when at the point of consideration. Which one to purchase among the sea of products which looked and worked in a very similar manner?
A typical customer did not have time to discern the subtle differences between product A and product B. In my view, if product portfolio was simplified, back to perhaps 3 ranges of premier, mid-level and budget level, the company would be in much better position to actually educate the customers of the differences between these products and then help them pick whichever product suited their needs best.
No doubt that every niche wants a totally customised product and no doubt that market segmentation dictates more and more customised products to every customer need. However, this can go too far, and lead to too much complexity not only in the customer decision making process, but also in the entire supply chain – from purchasing to manufacturing those products, and then selling, transporting and storing them down the supply chain in the channels.
In short, product proliferation led not only to complexities which added a massive cost to the business, but also to confusion in customer’s mind at the time of purchase. It would have been far simpler to just create 3 ranges for the majority of customers, and then maybe 2 or 3 niche products which could then be quite easily communicated.
The second confusion, which is related to the first one also resides in a customer’s mind. Companies may not make it easy for the customer to buy, because he doesn’t know which button to press on the Internet or where to call to make an order and what information is needed to make an order. Subtle changes, subtle differences in this buying process can actually increase the customer’s order rate significantly not just on the B2C market but even in B2B because in the end, it is people who buy things, not computers.
I can give you hundreds of examples of web pages that I have seen, where companies spend a lot of time and resources trying to explain to their potential buyers all the benefits and features of their products with no call to action, with no hint on how to actually buy their product. Sometimes customers really have to hunt around a company’s website to actually be able to buy what they want.
Now it is ironic, as the companies are getting more connected you would assume that it should be easier to find the telephone numbers and get in touch with companies. Many companies now make it harder to get their telephone numbers and they prefer their consumers to communicate via e-mail or other electronic channels on their websites.
I think it is actually counterproductive. By creating this layer of protection which perhaps might save a few dollars, companies take away the customer’s ability to pick up the phone and call them in case of any confusion related to buying their products or using their services. In the end, unless the company is making a product which is only going to be bought by each consumer once in their lifetime, they should be making it easier for the customer to communicate with them using any channel they choose, even while using their product, because a good consumer in that case becomes a customer for a lifetime.
If I know that any time I have problem, I can pick up the phone, talk to somebody who can explain to me the intricacies of using a particular product or clarify any doubts that I might have, I would appreciate that level of attention to my needs and continue to buy the company’s products for a very long time. You might think that all this lack of accessibility is due to high costs of communication. In most cases, my conclusion was that it was rather a lack of clarity in the process, and customer needs.
The third confusion which kills the profitability of a business is actually on the opposite side.
What does that mean?
You would argue that it should be pretty clear that the purchasing manager is responsible for purchasing. But, hold your horses. In many companies the responsibility for purchasing, procurement, strategic sourcing is divided between the operational business units and, the strategic sourcing department or the purchasing department or the procurement department or whatever they are called.
Now this divided responsibility is generally meant to work very well where specialist knowledge of procurement and strategic sourcing departments comes in handy for the operational people when they purchase things, especially direct materials for their business needs.
However, this can also lead to the confusion where both of them feel responsible for certain things (say overseas fact finding missions) and neither of them feels responsible for other ones (say analytical preparation and grunt work).
And, a lot of things can fall through the cracks, as a result. Very seamless process or seamless working relationship between the operational department and the purchasing/procurement department is critical in order to make sure that the suppliers, the vendors or the outsource service providers do not take advantage of the confusion, and come up with their own de facto processes or their own de facto way of supplying which suits the vendor more than it suits the company themselves.
I can give you numerous examples where outsource service providers rely on such a lack of clarity to force their customers down the track they want. A typical IT or logistic service vendor comes immediately to mind. They will try and provide the service in such a way that it suits them: it reduces their costs to the minimum and at the same time imposes additional costs burden on their customers.
In one case, a logistic service provider would bring in their truck to make a pick up at a time where the customer would have to pay extra overtime costs to their own crew, as well as the service provider, because it suited them marginally better. In another example, one of our clients had a logistic service provider who was taking the client’s products to the warehouse which was halfway across the city – one and a half hour journey each way. Although this provider had a warehouse right next to our client’s operations, which had space availability, taking the products across town would have generated a lot more revenue.
Hence, they decided to store the product one and a half hour journey away from our client’s premises. W
hen you go and ask the service provider for a reason, usually they will create a half-convincing reason to explain it away.
However, a deeper causal analysis generally reveals that it is because of the confusion of responsibility between the operational unit and the purchasing unit.
It is common that purchasing unit did a deal where they signed off on a very low rate with the vendor and the vendor was left in a position where they could decide on the process. As logic follows, they decide on the process which suited them the most so that their revenues (and profits) were still very high.
The fourth confusion which can kill your profit is the planning confusion, especially between a sales forecast and the operational forecast.
The sales staff, within their own department produces their own forecast to answer the question how much they are going to sell. Obviously, they want to have enough units in stock when customers walk in. And they tend to be fairly optimistic about how much they are going to sell.
So, sales forecasters are optimistic people and they do not realize that there is a cost for this optimism. Having far too many extra units in the warehouses for months is actually counterproductive. Not only is this a lot of money lying around in the form of working capital on the shelves, it is also a bad signal to the customer himself.
Customers look at all these extra inventory and start asking for pricing discounts; they believe that the company is not able to sell as much as they are buying or producing. On the other hand, the task of operational people is to make forecasts in a more analytical manner, in order to keep the inventories to the minimum.
As a result, their forecast tends to be generally lower. This brings us to the big confusion between the 2 types of forecasts – the sales forecast and the supply chain/operational forecast.
Therefore, until there’s a joint forecast which everybody has agreed on, the confusion will continue to kill profitability. Companies not only need to know what they are going to produce and sell in terms of joint forecast, they also need to know, what they will do in case of extra demand or extra supply.
They need to have a plan for the fact that forecasts are never accurate. I will address the problems with forecasts (there are at least 5 to 10 different problems with forecasts themselves) in a separate blogpost. But in this piece I just want to highlight the inaccuracy of forecasts. By definition they are going to be wrong, either you are going to forecast too high or too low. What you want to do is to minimise the error, and the consequences of it by having a plan to cope with those consequences.
So if your forecast is too low and the demand is higher than anticipated, how will you meet that extra demand? Will you scramble the business units to produce more? Will you buy it from the market place? Will you be able to hold the demand in the pipeline? Can you tell the customer that you can produce it within a short period of time and supply them? You have to have a plan. Similarly, in case your forecast is too high and you produce too much, you still need a plan for the disposal of the extra units. It should not be just a fire sale because there is nothing that kills profit more than the fire sales.
Now the fifth confusion, maybe the biggest one which kills the profit – but dangerously, also the most covert. Companies budget their business on an annual budgetary cycle where the CFO and his team create the budget once a year.
At the same time they are doing the operational planning cycle on a monthly basis: they are running the sales and operations plans on how much they will produce and sell once a month. This confusion between the financial plan – which is a yearly plan and is rarely updated with the same rigour before the next annual planning cycle, and the operational plan – which is a monthly plan and is updated every month, leads to a situation where the finance function is almost always out of touch with the operational, as well as the sales realities of their business they are trying to control.
Financial controllers are doing their best to control the business with a tool that is totally out of sync with the business operational planning cycle. Again, examples abound, where due to budgetary constraints, companies have made suboptimal decisions in their purchasing, in their production, in their inventory calculations, in their sales forecasts just to be able to meet the budgets. And this has been not just suboptimal, it can totally kill the profit of the business.
The operational team may feel compelled to make these decisions because although profit could be killed, their careers are (not yet) on the line. I will write a more detailed blog on this fifth confusion to discuss how this disconnect between the annual budgetary planning cycle and monthly operational planning cycle can actually lead to immense profitability decline in the businesses.
It is rather obvious what to do about these confusions once you become aware of them. I will welcome comments on which of these, and any additional confusions you have seen in your business, and how you dealt with them.
My last post “Supply Chain Confusion could kill your business“ generated several great comments from highly qualified professionals around the world, and in this post I want to explore the reasons for the confusion. Obviously, the confusion is debilitating, and unprofitable. I am sure readers will have their own experiences with the confusion in supply chain world, and can add to the discussion by commenting below.
In my previous article I mentioned the examples of trucking companies (or warehousing companies) who have painted over their old trucks from XYZ Trucking/Transport to XYZ Logistics to XYZ Supply Chain Solutions without any material change in their capabilities or service offerings. While this kind of ‘branding’ exercise seems harmless enough, and most customers are not ‘fooled’ by such over-representation of the capabilities – it does have several deleterious effects. To give you an example – I was recently asked to answer a question on quora.com by a recent entrant into one of these companies who had entered the ‘field of supply chain’ to make a glamorous career. S/he was disappointed when s/he found that most of the work was rather mundane execution level work in transportation and warehousing. To exacerbate the situation they did not see any prospects of getting even remotely involved in the ‘sexier stuff’ such as supply chain modelling or business transformation. Evidently, then, this type is hurting careers, reputations and perhaps even the entire industry when these companies represent that what they do is all there is to SCM!
No doubt strategic sourcing, logistics, warehousing, production planning, inventory management, demand forecasting all are parts of good supply chain management. Yet almost all of them are quite capable of representing that they constitute the entirety of supply chain management. Look at the way that a number of professional bodies have renamed themselves and pretend to represent the entirety of ‘supply chain’ professionals. Their antics remind of the ancient Hindu tale of 6 blind men which was so well captured by the American John Godfrey Saxe in the The Blind Men and the Elephant (Source: Wikipedia):
So, oft in theological wars The disputants, I ween, Rail on in utter ignorance Of what each other mean, And prate about an Elephant Not one of them has seen!
Amusingly, the confusion in supply chain management also involves 6 different streams of thoughts.
Supply chain is a relatively new field. Especially at a higher level, there are no people who ‘grew up in supply chain management’.
Traditionally, supply chain professionals have come from one of the three or four streams in businesses.
I have worked closely with all 6 type of pedigree – and each of them have distinct foibles, strengths, weaknesses and biases.
One bias they all have in common is that they tend to have a soft corner for their own pedigree. For example, I spent my own formative years in shipping, logistics and transportation, and for some reason I am still a shipping person at heart. As they say once you spend time at sea – the salt water starts running through your veins.
However, all 6 type of pedigrees also have a great majority of people who are happy to represent their own specialisation as the entirety of supply chain management. That is what causes the confusion.
I could probably write an entire chapter of each of these 6 type of people, and their biases – including the impact of the confusion they cause to damage the profitability and ‘brand supply chain management’. But if you are from within the folds of supply chain management – you will easily recognise most of what I have to say here.
And, if you are not from with the folds of supply chain management then more explaination is no use to you – because you are better off reading my other articles on use of supply chain management for business transformation – just search for those keywords in the search bar next to the tool bar on top.
I will cover the rest of the cause of confusions in my next post. These are rather esoteric models and we will raise the level of conceptual thinking a few notches in that article.
By Doug Hudgeon
The Cost Reduction Tip
Taking your business down to its lowest possible operating cost typically involves changing (usually simplifying) processes. When preparing a business case for changing your current processes, it is usually easy to nail down system costs but people costs are almost always problematic. Even if you believe you can calculate them accurately, your stakeholders will each have their own views on the assumptions underlying your cost model and this can result in an impasse.
I like to use a Monte Carlo simulation to model people costs. It enables you to quickly calculate a range of costs for activities that can encompass the conflicting views of your stakeholders.
Here’s how I do it:
I’ve prepared a sample Monte Carlo simulation in Google Spreadsheets that you can review online and download as an Excel file.* Because the values in this file may change as I run different scenarios, I have taken a screenshot of the current settings and labelled the components of the spreadsheet. Please click on the thumbnail image to follow the discussion below but refer to the Monte Carlo Simulation Google spreadsheet to explore how it works in detail.
Note that I have prepared a subsequent post that takes you through the spreadsheet in some detail and, for those who are fire walled from Google Docs, please click this link for an Excel version of the Cost Analysis Monte Carlo Spreadsheet
Monte Carlo Simulations The first column (1.) shows each of the activities that will be modelled. In this case, I have set out seven steps involved in manually processing a PO and paying the resulting invoice. The next three columns (labelled 2, 3, and 4 in the thumbnail image) allow you to enter assumptions against the time taken to perform each activity
(2.), the fully loaded cost of the resource performing the work
(3.), and the number of transactions per month
(4.).In the above screenshot, you can see that Activity “1. Create requisition” takes between 1 and 3 minutes to complete and the fully loaded cost of the resource creating the requisition is $90K to $110K (assuming some pretty significant overheads for this resource!). Each month, the organisation prepares 10K to 20K purchase orders.Running a Monte Carlo simulation over these variables (FTE utilisation: 130 hours per month) results in this activity costing somewhere between $12,382.44 and $35,681.69 with a 90% confidence level
(5.).The last 5 words of that sentence are pretty important. When you are setting your variables for activity time, resource cost and number of transactions per month, you want to set the minimum number so that 95% of the values will be above that number and the maximum so that 95% of the values will be below that number. For example, in activity 1 when I said that the activity takes between 1 and 3 minutes what I mean is that 90% of the transactions I observed take between 1 and 3 minutes i.e. 95% of the transactions took 1 minute or more and 95% of the transactions took 3 minutes or less. If I am confident that this is correct for each of the values in the yellow highlighted area of the spreadsheet then I can expect that 90% of the time, my conclusions will be correct.**
Now, back to our stakeholder question: When you are speaking with your stakeholders with your Monte Carlo simulation in hand, you can explicitly discuss each assumption and, where the stakeholder has better information than you, immediately incorporate their information into the model and see the impact on the business case. If your business case still stacks up after this process then you can proceed confidently knowing that your stakeholders understand the numbers and have had their input incorporated.
* A Monte Carlo Simulation is an approach whereby you nominate an upper and lower limit for each activity and generate random results (in this case normally distributed)
** You’ll note that the Totals (6.) do not equal the sum of the 5th percentile or the 95th percentile. This is because simply taking the sum of all of the 5th percentile activities does not give you the 5th percentile overall – it gives you lowest cost for activity 1 plus the lowest cost for activity 2 etc. The value displayed in the spreadsheet is the 5th percentile of all 7 activities combined into a single transaction.
Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.
By Doug Hudgeon The Cost Reduction Tip The success rate of software implementations is woefully low. There are lots of reasons for it ranging from overselling by vendors, overspecing by customers, lack of consultation with stakeholders, under-resourcing the implementation team, etc. But in my view, much of the source of failure comes from unnecessarily bundling high risk process change with the software implementation. For example, if you are implementing a new payment system that changes your approval hierarchy then look for a way to implement the new approval hierarchy before you implement the software. If you are implementing a new public transport ticketing system, change the fares before you implement the system. If you can unbundle your high risk process changes from the software implementation then you’ll improve your software implementation success rate – at the very least you’ll discover you have an insurmountable change management program before you spend any money! Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.
I am fed up with a lot of organisations.
Is it just me?
Do others find too many simple basic mistakes are being made these days by organisations? These mistakes are also being repeated many times and do not seem to get corrected.
Why is this?
One of my theories is that, email is the means to create the mistakes whilst the expected end result is empowerment.
Let me amplify.
These days external connection is possible to most internal levels within an organisation.
The power of the internet can deliver messages to anyone.
Those receiving emails are now able to handle and deal direct with customer requests.
And by “empowerment” this will also enable decision making at any level.
People are now therefore able to take decisions and deal direct with queries.
Now clearly there are numerous advantages to this, but there are some disadvantages also. My fear is that these disadvantages may be getting camouflaged and disguised by the use of emails and by the aura of empowerment.
It is fine allowing decisions to be taken at low levels, but these have to be correct ones and have to be taken responsibly. They can now also be taken invisibly to the senior management. Therefore when decisions are wrong, the consequences may not be apparent. The result can then be a spiral of confusion and frustration. Those on the receiving end may have little chance for recourse or correction of handed down decisions that have been wrongly taken (and effectively taken sub optimally).
Another result is that some customers at the receiving end will “walk,” others will complain to “deaf ears,” and some may report their displeasure to senior management; however senior management may be dismissive as “we do not have this problem with others”.
The fact is they do have problems, but it has become invisible to senior management who in their desire to empower junior staff, have made themselves separate from what is really going on in the organisation.
How do we prevent this?
Simply by returning to a principle of management visibility
Good managers are supposed to keep kept their fingers on the pulse. Requests from and responses to customers should be seen. Support and guidance should be given to junior staff when required. A manager must ensure they know exactly what is happening in their department and they must delegate effectively whilst retaining accountability and responsibility.
Why cannot this be done? Why do we allow email to “bypass” such best practice?
It now it seems with email and empowerment, that whilst the “e” can certainly stand for efficiency, it does not always stand for effectiveness.
Efficiency is however found as messages are quickly dealt with, however non effectiveness is found as the correct result does not always follow. So we are maybe doing the right things, we are not always doing it right.
But worst of all, what is being done maybe invisible to those who can change things. However it is clearly visible to those customers who walk.
Is it just me who is fed up?
Ps: for those great organisations that do not do the above; well done and thank you!
After spending over 30 years in commercial private sector service industries, working in the UK and in Nigeria, I then moved into Training. This was associated with the, then, Institute of Logistics and Distribution Management (now the Chartered Institute of Logistics and Transport). After being a Director of Training for nine years, I then chose to become a freelance independent mentor/coach, trainer, and consultant. This built on my past operational and strategic experience and my particular interest in the “people issues” of management processes.
Link for the blog: http://www.learnandchange.com/freestuff_23.html
Note: Stuart Emmett co-operated with our very own Vivek Sood to co-write the book GREEN SUPPLY CHAINS – AN ACTION MANIFESTO. This book was one of the first books in the world on the topic of Green Supply Chains, and as such is used in Universities around the world for executive training and research purposes.