Viable Vision: Transforming Total Sales into Net Profits

Notes from the awesome stragetic management book called Viable Vision by Gerald Kendall.

Most companies do not appear to have the correct roadmap to their vision.

A smart person learns from his or her mistakes. A wise person learns from other people’s mistakes.

Common sense is not very common – Mark Twain

Something that ties it all together…

We want to put our organization on a process of ongoing improvement; we cannot do that while allowing common nonsense to govern people

Any company that has only 30 percent market share and excess capacity should first look in their current markets to increase sales.

You must offer in writing to pay your customer penalties if you are late on delivery. But there is a big catch! Offer to give up 100 percent of your profit if you are late.

Within any complexity, there is an inherent simplicity that governs the throughput of any organization.

The value proposition does not sell itself. Sometimes the sales people are not sufficiently trained to sell the value.

A value proposition keeps you in busines, but it is not the same as having an offer to the market that is too good to refuse.

The first step in this process was to identify the organizations biggest constraint… to find a leverage point.

Not just ideas…

How is the company going to reach such a high goal? What is the mechanism? What will make your offer to the market too good to refuse? Why won’t your competitors be able to copy it easily? What logical changes must be part of the solution to achieve it? How will you start to get the fruits within six months, not five years from now? What does each functional area have to do to help achieve the vision?

When you give a consultant an answer, it is always ‘obvious’ to them.

Before we talk about compelling offers to these markets, you must make sure that they are not wasting what they have.

For stock levels we want three things:

  1. React very quickly to change in end consumer demand
  2. Reduce inventories across the supply chain
  3. Create a compelling offer

Other than competitive pricing, warehoused inventory, and fast order turnaround…

Must be simple and work perfectly.

Simplest pull system I have ever seen implemented is to order, every day, exactly what you sold yesterday.

Add product variety… one of the keys to increasing throughput exponentially.

Ask their top suppliers to accept daily orders.

Order lead time is cut.

Today many executives operate with a belief that the way to attack complexity is to break a system down into manageable parts. With this belief, the movement to look for independent improvements in each functional area is very common. I see this reflected in Lean, Six Sigma, and other approaches… to reduce variability everywhere – a mammoth effort. These techniques are excellent. My question is, can we apply them with much less effort and get far better results?

There is an inherent simplicity that governs the throughput of the organization.

We must look at the entire organization as one system. That is necessary to find the biggest leverage point.

Since most functional areas are cost centers, they naturally focus on reducing cost within their local area. Rather than improving the organization.

On which factors must the entire management team focus all of the improvement effort to get the best results?

Chapter 3: Moving from complexity to Simplicity

The more complex the problem, the simpler the solution must be or it will not work!

Overwhelmed management:

What do you want me to do, fulfil my operational responsibilities or work on improvement projects? I do not have time to do both.

The Additive Rule

If you are a cost center (procurement, production, engineering), improvement naturally means a focus on cost reduction or greater efficiency within your silo.

Changes in costs do not obey the additive rule (pg 25)

Using the additive rule as their framework, funtional areas are being encouraged to operate like silos.

Cost Accounting: Antileverage (pg 25)

Distortions of cost accounting.. measure the production silo on efficiencies, encouraging them towards high utilisation of their resources… lists the resulting excess inventories as ‘assets’…

Popular joke in accounting, when you ask an accountant how much does it cost, the accountant answers, how much do you want it to cost?

Throughput (p27)

A chain is only as strong as its weakest link. Marketing must create a demand for the services. Sales must close the deal.

Strengthening a link that is not the weakest does not increase the strength of the chain and does not help generate more throughput. Therefore, this intense focus on the leverage point, the weakest link, is the opposite of the cost frame of reference, where managers operating under the additive rule look in every local area for improvement.

Today’s environment is much more complex than several decades ago. In the 80s, markets were more stable and product life was much longer. … managers feel compelled to deal with increasing complexity by breaking down organizations into smaller pieces.

Typically, each lower layer of management has a narrower view.

Each company within a supply chain acts like a silo.

Much simpler framework to align every part of a supply chain.. removes silo mentality.

Predict the outcomes of any decisions.

1. Identify the biggest leverage point for improvement across the entire organization
2. Define what each part of the organization must do to exercise that leverage / connect every action and every decision at any local level to the impact on the company as a whole
3. Remove the distortions of local measurement

Chapter 4: Simpler frame of reference for decision making

Too often, sophistication is just a disguise for ignorance

Profit center – When one dept acting as a profit center, allocates its costs to other depts who have no control over those costs, it is no surprise that the profit center induces criticism, resistance, and illogical behaviour. Since when does the IT dept have a bank account to collect profits?
A profit center puts various parts of the organization into an automatic win/lost situation

The new frame of reference must encourage measurements on real profit centers and discourage the nonsense associated with artificial profit centers.

Calcualting product cost based on forecasted sales is about as reliable as long-term weather forecasting.

Forecasts are wrong about 100% of the time

  • Throughput T
  • Investment I
  • Operating expense OE

T is the rate at which the organization generates goal units (dollars).
T = revenue – materials and direct expenses
T is a rate, expressed in days, hours, weeks, etc.
T is not recognised until money has been received

  • To generate T, requires I
  • I includes capital (buildings, equipment, computers, etc) and inventory (raw materials, work in process, finished goods)
  • OE is the the money required to convert investment into throughput (salaries, depreciation expense, costs of supplies, heat, electricity, rent, etc)

2 derivaties:

  • Net Profit = T – OE
  • ROI = NP / I or T – OE / I

Managers need to conduct tests with the new materials to assess the impact before making a decision. Not measured on local improvements in isolation.

Impact on T? Impact on OE? Impact on I?

See Wikipedia on Throughput Accounting.

The fatal mistake that organization made years ago, when the Total Quality Management movement was popular, was to apply the TQM process everywhere. Most methods are correct, but only when applied to the right problems.

Five Focusing Steps

  1. Identify the systems constraint
  2. Decide to how exploit the systems constraint – to squeeze everything you can out of the constraint
  3. Subordinate everything else to the above decision – requires every dept to bend over backwards to support the constraint
  4. Elevate the systems constraint – improve its capacity so it is not longer a constraint
  5. Back to step 1

We do not want to hear about manufacturing efficiency any longer and we do not want precious project management resources tied up for months on the accounts payable project. The constraint is in the market, not in manufacturing and not in accounts payable. For not is is OK for manufacturing and accounts payable to operate inefficiently, if it helps to subordinate to the above decision.

An oragnizations level to improve is governed by the strength of the weakest link… into a process of ongoing improvement.

Since we have not yet seen a company making infinite profits, we assume that every company always has a constraint.

We still need to evaluate the investment, so the first question to ask is, what is the change in throughput that we expect from this investment? Second, what is the change in operating expense? Third, what is the change in investment?

70% of companies today have their constraint in the market.

Chapter 5: Marketing

Marketing – spreading the corn so the ducks will want to come to your field. Sales – taking a gun and shooting the sitting ducks.

In most companies today, you will not find marketing. Instead, you find a host of tasks such as sales support, sales training, advertising, collateral development, promotion, and others. Labeled as marketing, these tasks do not come close to accomplishing the vital role of marketing. Further, if the real problems of the markets are not addressed, the company ends up wasting its sales effort.

Successful marketing should bring a lot of ducks into your field with glue on their feet!

This perception of value is based on what problems the product or service helps customers overcome.

Marketing’s job is to increase the customers perception of value of the product, compared to all competing products.

Focusing on the prospects problems. Once you try to shoot a sitting duck and miss, the duck is no longer sitting.

Analysing a valid sample of those customers who said no. Simple surveys.

Criteria for customer perception of value and why it lost os many deals, the key criterion was lead time.

They found the inherent simplicity within their complexity.

Do not make it harder for customer to buy.

Marketing Strategy: The Mafia Offer and Segmentation

The Mafia Offer

Elevate, brings more ducks t your field who are drooling over your corn.

What problems do the clients in our markets have that no one in the industry is addressing? This question is the core of market research.

When a marketing person can access senior customer management and learn about the business through this approach, the resulting analysis often leads to a huge competitive advantage.

Find policies that drive customers crazy, and change the policy!

Segmentation

A market is segmented if and only if the price and quantity of a product sold in one market is not impacted by the price and quantity sold in another market.

Vital rule is to segment your market, not your resources. Gives flexibility to shift resources between segments based on demand.

Chapter 6: Operations

Tell me how you measure me and I will tell you how I will behave. If my measurements are not clear, no one can predict how I will behave.

If you have excess inventory, you have excess capacity.

The Current Reality of Operations

Operations is the sequence and interaction of processes directly involved in the production of a product or delivery of a service.

3 goals:

  1. On time delivery
  2. Short lead time
  3. Competitive service (quality, value, etc)

Negative effects of attempting maximum utilisation… driven by operational measurements and local efficiencies… assuming idle resource is creating waste.

Solution:

Drum, Buffer, Rope system. (p57)

Chapter 7: Distribution

Obsolescence and excess inventory. Hold stock at manufacturer, and have slick replenishment pull system. Pool the inventory where there is the greatest predictability. The more macros the level you are forecasting, the greater the predictability.

Chapter 8: Project Management

Projects follow the two-cubed rule. They take two times as long as planned, cost two times as much, and promise two times what they actually deliver.

Many of us have heard the story of a two-year project that was 95% complete and took another year to finish!

57% of the 367 largest corporations surveyed have replaced their CEO in the past 3 years – March 2003, Chaos Report.

We don’t have enough resources… priorities are constantly changing…

Seeking to manage complexity by insisting on local accountability everywhere.

Problem begins with the way people develop a task estimate. Most people are involved in more than one projects.

Student Syndrome (leave it to last minute)
Parkinsons Law (work expands to fill the time available)

Additional start up time by refocusing on multiple projects creates lack of progress.

Critical chain is the longest chain of dependent events, considering both task and resources.

Every team members focus is on the project deadline, not a task deadline.

Relay runner work ethic.

Get the work (baton) to the next resource as early as they can.

Focus on much less work.

No new project beings any sooner than the capacity of the strategic resource permits. The strategic resource is where projects get stuck the most or the resource most heavily loaded across the collection of various projects.

Measure throughput per strategic resources.

Today, project durations are much too long because of a common management practice – holding people accountable to their task estimates. This local optima measurement distorts human behaviour on projects to such an extend that project durations are often more than doubled. When projects are late, executives do not met their goals. So execs try to push more projects into the system, irrespective of the capacity.

Chapter 9: Supply Chain

The purpose of measurements is to motivate the parts to do what is good for the supply chain as a whole.

Chapter 10: IT

Chapter 11: Buy-In – Overcoming layers of resistance

The more powerful the solution and the more obvious the benefits are to you, the more difficult it it will be for you to sell it to someone else.

People who sponsor the ideas behind any major change see all of the good aspects of the idea to such an extend that they become blinded to any problems.. ‘fanatics’.

Starting a presentation by putting forward a solution is a major block to achieving buy-in.

There are several layers of resistance to change. Objections are often voiced when the presenter talks about the features or benefits of a solution before establishing the need.

Objection prevention.

Layer 1: People do not agree on the problem

What the problem is in the eyes of their specific audience members. There is more than one problem. E.g. competition, overheads, capacity, lead time…

Connecting problems by a root cause.

Layer 2: People do not agree on the direction for a solution

Partial, nonholistic solutions… include a holistic frame of reference that aligns and focuses the entire company on its constraint and the related drivers for exponential growth.

Layer 3: People do not agree that the proposed solution will overcome the problem

Compelling logic.. symptoms and the root cause… cause-effect, a structure build with cement, not spit.

Once people are convinced the solution will address the problem, they have 2 types of negative concerns:

Layers 4 and 5: Yes, But…

Implementation of the proposed solution could lead to negative consequences
Obstacles to implementing

Capture the concern in written form, formally acknowledging the concern. Next, find out if the concern is valid.

If the persons’ concern has a reasonable chance of being correct, your response should be: You are right. That could be a problem. Do you have any idea of how to solve it?

Surprising how often the same person has a great idea to overcome them. Include their solution and their buy-in has just increased significantly.

  1. Layer 1 – this person understands my pain
  2. Layer 2 – Our direction for a solution must meet some vital system needs
  3. Layer 3 – Solution will overcome every major problem
  4. Layers 4 and 5: All my major concerns are addressed. How can I help implement this?

To grow exponentially, you must have a clear road map.

Chapter 12: Strategy

Most long-term strategies are as useful as a five-year weather forecast.

Have a strategy that insulates it from huge swings when there are economic downturns or major new competitors.

Creating a lading competitive edge:

5 necessary prerequisite conditions to any good strategy

1. frame of reference for all management (T, I, and OE combined with the 5 focusing steps)
2. Predictable operations logistics that allow the organization to turn on a dime. DBR
3. Distribution within a supply chain that is superior to competitor supply chains
4. Project management through critical chain and dedicated urgency
5. Process / software solutions

Chapter 13: Paradigm Shift

Let’s not fool ourselves that is is possible to change a company culture through a computer

Begin with the CEO to ensure an understanding of the goals of the organization and his/her perception of the major problems blocking achievement

Generic supply chain problems:

Marketing

  • General market complaints about providers
  • Market share and market pressure to reduce prices
  • Product shortage impacts
  • Competition of new and existing products
  • Returns
  • Excess inventory
  • USP

Operations

  • Due date performance and current expending activity level
  • Difficulty handling peak demand situations
  • Level of work in process and finished goods
  • Existence of urgent orders and the ir implications
  • Quantifying quality problems

Distribution

  • Level of finished good inventories and their locations
  • Quanifying overages and shortages
  • Existence of urgent deliveries
  • Dependancy on the accuracy of the forecast
  • Existence of a single replenishment policy
  • Logistics of the current system

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4 key elements to a viable vision

  1. Marketing strategy
  2. Logistics
  3. Correct frame of reference (5 focusing steps, global parameters of T, I, and OE; supply chain measurements of Throughput $ Days and Inventory $ Days)
  4. Rapid project management
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