People often wonder where the best opportunities for start-ups are. Supply Chain Security space is getting a lot of attention in this regard.
In fact, just today someone asked me on a popular platform about opportunities for start-ups in Supply Chain Security space . They wonder whether these were more in software, or consulting arena.
Here is my view:
It would be neither of those two. Rather it will be a combination of hardware and software – initial application know-how will have to come from the user side.
Let me explain.
Post-2001 (911) the world of supply chain security has changed dramatically. The regulatory environment has evolved dramatically (as we explain in my report Global Supply Chain Group’s SUPPLY CHAIN SECURITY REPORT). But that is not the only change. Almost everything – customer innocence, political and cultural norms, technology and particularly technology – has evolved dramatically as is explained in this report.
Most importantly – the threat perception has evolved considerably. Look at the diagram below which summarises the supply chain threats over the decades:
So far, this is common sense representation of common knowledge. What is not common knowledge is how technology has evolved in response to these trends.
There are at least 6 technological streams which find applications in supply chain security. You will find them in the report, or in this survey on supply chain security – Supply Chain Security Survey
But the most interesting insight in the report is that almost all the opportunities offered are in combinations of hardware, software and some know-how in the application.
That is not to say that pure-play companies do not exist. In fact, many companies have evolved to products with a considerable component of application know-how. In mature products that is always going to be the case.
But, for a start-up, a combination of hardware, software and some application know-how is the best bet
First time I heard it, I was astonished. A friend (and an ex-client) was visiting Sydney with his wife, and we were sharing a dinner.
We had worked together more than a couple of decades ago, on some key projects, when I was still learning the art and craft of consulting. He had gone on to build a great career, culminating at the C-Level in one of the blue chip companies.
And, that is when the disaster struck, and he was made redundant during a clean sweep, that happens from time to time is such organisations.
In passing, he confided that now that he was over 50, he did not expect to find a steady job because of how the odds were stacked against it.
He was only a few years older than I was, and got me thinking. And, he was not the only one who quietly voiced this thought.
I feel the need to unpack the dynamics a bit more and see what is sitting inside.
Clearly it is illegal to discriminate on basis of age (as much as anything else). And, there are many ways to do a statistical analysis to prove such discrimination, if someone puts their mind to it.
Yet with so many people voicing similar thoughts, there might be some real underlying dynamics at play here. After all where there is smoke, there is fire.
I was trying to think of possible reasons.
Besides the inflexibility, and the unwillingness to take a step backward from lofty heights already achieved in the careers, are there any other dynamics are play?
I had to relate it back to my personal experience in order to think through the situation.
While the entire post is worth reading on its own merit, here is the most relevant extract:
Steamship Titanic sank when it hit an iceberg going full steam ahead in fog. Since that day, fog navigation is every Ship Captain’s worst nightmare. I still remember when I joined sea as a cadet, the moment the ship hit a fog bank – Captain would take over the navigation personally, station lookouts on Crows Nest, Monkey Island and many other exotic sounding places on the ship and try and listen to foghorns of other ships – all this despite the presence of 2 wholly functional radars.
Some captains were trained in the art of navigation long time ago – when radars did not exist. Many of these ‘navigate by feel commanders’ never got comfortable with radars – to their own peril and to the peril of their shipboard crew. As a result, shipping companies gradually eased these people out of command, making way for a newer generation of Masters who could make full use of available technology appropriately.
Today, an ability to learn, adopt, adapt and optimise new technology – all the while running the ship in its steady state – will become paramount.
No doubt, irrespective of their age many executives can, and will make, the transition into the brave new world. Yet the wall street is not betting on it – for an example try and decipher the chart below, and think of the underlying causes:
But that is just one of the reasons I do not bet on the wall street at the moment.
I was at a Melbourne Cup luncheon yesterday, and someone asked me why I do not write about Bitcoin.
On my mobile, I showed them a paragraph from my book THE 5-STAR BUSINESS NETWORK written in 2013, where I talk about the emerging Digital Currency Networks.
But the truth is that given the attention Bitcoin has garnered over the past 5 years – I have barely written anything more on it. During the period the price of Bitcoin has been very volatile, and every move has been accompanied with millions of words written by the mainstream press as well as the more respected blog writers.
Take a look at the 5-year graph below:
The value of a single bitcoin rose from nearly 0 in 2016 to over 25,000 AUD in late 2017. Since then it has been very volatile, now relatively steady in the range around AUD 9,000 mark.
Lots of people came on TV and explained all the reasons why it was where it was that point in time.
Braver people made predictions too. Some even proved to be right for a period of time. Some of those reasons sounded even plausible.
Many people asked me for my opinion, and I always referred them to Enron. I explained that around the start of the century when Enron was in a similar place, people in parties would ask my view on it.
Enron was the darling of the quick buck brigade at that time. Some people even made money on it. Much more money that anyone would ever make by flipping houses, or companies.
But there were at least two big reasons I did not offer an opinion:
Many friends who knew that I scored the only 100% mark ever in the sloggiest finance course in my MBA would not believe either of those too reasons. And, they would press me for an opinion. Perhaps they had money riding on it.
Some, the wiser lot, even took my unwillingness and inability to offer a point of view as a sign, and made the decision which turned out to be right for them. A few even thanked me. Yet, I claim no credit for saving them a buck, or two.
I was merely stating a fact –
I Don’t Understand It.
And, that is all I have to say about the Bitcoin.
If you want to know about more things that I do not understand – feel free to offer suggestions.
I have nothing against you President Trump. I have nothing for you either.
But, when I heard of the directive to manufacture iPhones in USA, I had to write this post.
This is one of the weakest ideas I have heard from Supply Chain point of view, and I am not indulging in a political debate.
I am merely pointing out what even a supply chain new comer will tell you – with the current global configuration of supply network of companies such as Apple, any meaningful change of this nature will be impossible to achieve.
Because, Apple supply chain has been extensively studied and documented. One of the better reports (though a bit dated) is located at this link and I am sourcing a few relevant data below from this report. For example, take a look at the following table showing key supply chain activity location sourced from (https://www.apec.org/-/media/APEC/Publications/2013/7/Global-Supply-Chain-Operation-in-the-APEC-Region-Case-Study-of-the-Electrical-and-Electronics-Indust/2013_psu_GSC_EE.pdf):
It is clear almost all the activities happen in the Far-East. Now take a look at another table, also sourced from the same report (https://www.apec.org/-/media/APEC/Publications/2013/7/Global-Supply-Chain-Operation-in-the-APEC-Region-Case-Study-of-the-Electrical-and-Electronics-Indust/2013_psu_GSC_EE.pdf):
None of this is news, even to neophytes in the game of business. To unravel and roll back supply chain globalisation achieved over decades will be near impossible, even for the most determined politician.
Global economy is delicately perched, and precariously balanced. It is also top heavy – just like the picture.
It does not matter how we got here.
It does not even matter which stone represents whom – bankers, politicians, business people, academics, common man – we are all going to fall in a heap together if a massive re-balancing of the stones is attempted at this juncture.
Recently, the value of trust in supply chain was brought home to me in a graphic manner. An owner of a medium sized business (who was trying to be one of our well-wishers) showed me (and one of our new recruits in sales management department) the way they were using dummy websites to generate leads for their business. He also mentioned that nowadays this is a very common practice to create dummy websites, even dummy companies and fake addresses for the sheer ease of doing so and anticipated potential benefits.
He wanted to encourage us to do the same thing. We listened to him politely, thanked him for his opinion, and refused to go down that path.
He was firmly in the camp of people believing that you have to fake it till you make it.
Obviously there is a huge contingent of people who follow this philosophy. To justify themselves they often quote Richard Branson saying this:
I don’t know if this phrase was truly said by the man himself. However I would feel a little bit uneasy if pilots in their airlines adopted this mantra. It basically means that they accept the job as a pilot hoping to figure out how it works later, meanwhile they are going to fake it till they make it.
I know I have carried the example to an extreme, and pilots do need certification before anyone offers them a job as such.
However, I am also aware that there are more subtle considerations such as aircraft types, routes and even airport characteristics where most pilots will not accept command of an aircraft till they know for sure they can do the job.
Like them, I am firmly in the camp which says ‘make it real and keep it real.’ The risks are far too high; and the numerous opportunities to train and learn without exposing your passengers (or business network partners) to the unnecessary risks make it almost callous to do otherwise.
Yet, many people persist.
This belief – fake it, till you make it – is usually based on the assumption that nobody will offer you a job if you’re perceived as not qualified for it.
On the contrary, you are the best person to judge whether you are truly competent enough to take on a job. At the same time, with the job offers comes the responsibility of choosing, whether to accept it, or not; the responsibility of evaluating your own skills, experience and competence for this particular job.
Unfortunately, there are far too many people forsaking this responsibility that can only apply at a personal level.
That is also the reason why there is a lot of trust deficit in the business world.
If you are faking it, your reader, your audience, your client, your customer will most likely know that you’re faking it. It is just a matter of time.
Whether you are a motor mechanic who’s faking the knowledge of the type of motor that you’re repairing or you’re a heart surgeon or any job in between. Faking it is definitely not going to make you happier or more successful for the simple reason that your customer will always be uneasy with you. Furthermore, in your heart you will always know that you are faking it, which is not the best thing for your self-confidence and self-respect.
Supply chain management is not a unique field which requires a large amount of trust between people to collaborate. In fact, trust is a fundamental requirement for all collaboration, cooperation and joint activities between human beings.
It becomes even more significant in supply chain management where it is both individual trust and institutional trust.
Why is trust so important anyway?
There is an important reason why I mention it.
As supply chains become more and more sophisticated, as they become more entangled and evolve into business networks, the need for trust within the supply chains becomes more and more intense.
Let’s take a specific example to make this generic statement more real.
Suppose you are a soft drink manufacturer, and the suppliers of empty cans has a captive plant right next to your bottling plant, you have a good chance of hearing about their business ups and downs and know well in time about events that might affect your supply. Now just substitute this captive supplier of packaging by a bunch of suppliers half way around the earth who might have significant cost advantage (because of manufacturing cost, for instance), and see how important it will be for you to keep open clear lines of communication in order to run your business smoothly and efficiently.
Companies typically want to engage with supply chain partners who will be able to deliver on what they promise, barring a totally unanticipated event. If your business network partners are not fakes themselves, most likely they will not engage with you further when they find out that you’re faking it.
Although trust in supply chain management is a very popular topic, it is evident that establishing trust within the business network can be very challenging. It takes time, patience and effort of each and every supply chain partner. It can be even more difficult to maintain trust over time. As the concept of trust is rather abstract, it is also hard to measure. At the same time, despite all the difficulties and efforts you can be sure that developing trust with your suppliers and customers is worth the efforts.
So what is trust and what are the components of it?
How to make sure that there is enough trust between you and your supply chain partners?
Is it always worth the investment of your time and effort?
Is there such thing as too much trust within the business network?
First of all, trust in supply chain management, as in any other cooperation between people, includes numerous factors.
You should maintain good communication at all times between you and your partners. Communication also means honesty and openness. Fairness and loyalty can also be very helpful in establishing trust. Another integral part is the competence and your openness about whether you are qualified for this particular job or not. This kind of relationship requires goodwill and willingness not to exploit your partner’s vulnerabilities. This is even more important because of the confidential information which is shared between supply chain partners and with management consultants.
My colleague, who was at the meeting mentioned at the start of this article, wondered aloud about the advisability of trying to create some websites to generate additional leads for our training business.
And my answer was an unequivocal “no”.
The reason was very simple.
I like to make it real – and keep it real.
I gave my colleague an example of the difference between level of trust required for a pharmacist, a general practitioner and an open-heart surgeon.
When you go and buy a medicine from a pharmacy, you do need a certain amount of trust. You need to be confident that the pharmacist will indeed give you the formulation that the doctor has prescribed. You need to be sure that it is pure, unadulterated and sold at the market price.
However the level of trust required from a general practitioner is much higher. Because you will have to literally remove your clothes in front of him. In this case you need the confidence that your general practitioner is able to examine you, to find out what was wrong.
This trust requirement further multiplies when we are talking about a heart surgeon. You need to be completely sure of your heart surgeon as you need to entrust him your own body, because he will be actually cutting you open and looking literally at your heart. Imagine a heart surgeon who lives with the philosophy mentioned earlier.
In the situation where people need to share confidential information, where the profitability of your business depends largely on the competence and honesty of someone else, it is critical to make efforts in order to develop trust. A low level of trust in this case may give a bit more independence and space at first but later on it will definitely result in lower productivity and profitability in supply chain.
Management consultants by their nature need to establish a very firm bond of trust with their customers. The clients need to be able to entrust them with a lot of confidential data and information as well as their innermost strategies so that management consultants could work successfully and effectively.
To be able to establish this kind of firm bond of trust you have to make sure that there is no possibility that your customer misunderstands any of your marketing messages. You should be unambiguous about your market position. It takes us to the next point.
It is always better to say clearly and honestly if the required skills or competences for a particular project are not within your company’s skillsets.
Let me make it real with another example. Very often when we formulate segmented supply chain strategies for our clients’ business, we need to understand the customer segmentation criteria. As part of that activity we need market research data, which is obviously outside the competency set of our business. I am very clear with my clients when such situations arise. I also say that I am in a position to recommend a few good market research firms, if necessary, but customers are welcome to choose any others that they want to use so long as the required segmentation data is available at the end of the exercise.
Sophisticated clients always appreciate a consulting company which is honest about where their competency starts and where it ends. On the other hand there are consulting firms who pretend that they are able to magically do everything.
In most cases they end up doing nothing well enough, and in the long term they usually lose not only the trust of their clients, but also their own self-respect.
Looking beyond management consulting, as mentioned before, trust is important for collaboration between supply chain partners. When you are working with your supply chain partners – suppliers and customers – in innovation, in order to create new products faster, in enhancing the profitability and reducing the cash-to-cash cycle, you know that relying on fakes will only come back and bite you at the worst possible time.
Typically deep understanding of customer segments is required to be able to configure a segmented supply chain so that the end-to-end business strategy is in coherence. This activity obviously requires an immense amount of trust running all the way through the entire business network.
However, similar to the example comparing a pharmacist, a general practitioner and a heart surgeon, the required trust will always depend on the situation and on the level of collaboration that we need from each participant within the 5-STAR Business Network.
I was reminded of this story because I was talking about it in a workshop on business transformation last week.
I repeat it here because it will be relevant to many people fighting the hard corporate battle, many times without adequate backup.
Here is the true incident without any build-up or embellishment. You have to allow for the fact that this incident is nearly 25 years old, and memory does fade after many years and varied experiences.
Today, this incident almost seems like from a totally another life and place. I was sleeping in my cabin (about the same size as a studio apartment) when I heard shouts from the deck. On this particular ship, the chief mate’s cabin was not too far above the deck, and since the ship was at anchor in a tropical paradise condition, I had left the portholes of my cabin open to allow fresh sea breeze in. In fact, the air conditioner was defective, and I had to keep the portholes open.
I expected a peaceful night at anchor, but alas it was not to be. The sounds of other boats’ or ships’ engines never disturbed me. The shouts from deck did. Quartermaster (QM) on duty on the deck, and the Officer of the Watch (OOW) were both trying to wake up me, the Bosun, and other crew at the loudest of their voices.
I hurriedly put on a T-shirt and rushed outside to the boat deck to get a picture of the situation. I immediately saw the Quartermaster (QM) and OOW standing on the deck holding a couple of large crow bars or similar implements trying to simultaneously repel boarders and wake up the crew.
Two boats had come alongside. It is difficult to identify the intentions of the boats at sea, especially at night. Most are merely fishermen, petty traders, or offering goods or services to the crew. In high piracy prone areas the standing instructions at anchor are to never let a boat come alongside without challenge and permission. However, this was not a piracy prone area (I will not name the location because I have many good friends from this region and they are sensitive to any perceived criticism of this nature).
QM and OOW were relaxed till they noticed one of the boats throwing a grappling hook over a gunwale (sort of deck railing). That was a clear sign of intransigence, and got QM worked up very quickly, who was shouting at top of his lungs from the deck. Seeing this, I rushed back into the accommodation, and grabbed the first useful looking implement, a fire axe.
Meanwhile, the Bosun had also come on the boat deck with another bunch of crew – each with a useful implement that could be potentially used to defend the ship. Alarm was raised on ships horn, waking everyone up. A crew member was sent to lock all the accommodation doors from inside – barring one, which we were using. Almost the entire ships crew except for a few engineers and the Captain assembled on the port boat deck to defend the ship.
One of the pirates’ nimble ‘associates’ had scrambled over the taut rope – a steep vertical climb of about 20 feet – to the ships deck. He was in the act of pulling up a small rope ladder so that the rest of the lot could scramble up. We still had the advantage, this was the second best time to repel the boarders. The best time would have been to cut the rope from the grappling hook before the first person had boarded.
Because this blog is getting too long – I have broken the story into two posts. The remainder of the incident is recounted in the blog titled Industrial Age Tools vs Information Age Weapons, which can be accessed by clicking on the link.
That title does give away the key learning which is as follows: In another set of situations, I see people grappling with impossible odds with inadequate weapons all the time. I am talking about business transformations that I help companies with for the last 19 years since becoming a management consultant after my MBA. Traditional tools of industrial age – methodologies, knowledge, practices and power structures are regularly deployed to fight superior forces of information age. Most people do not know the difference between the information age weapons and the industrial age tools, till it is too late.
Take a look at the graphic at the end of the blog. And, if you are still convinced that you have everything for the fight ahead – head out to Surveys Questions to confirm your opinion. On the other hand, if you are still taking stock of the situation, like I was doing from the boat deck before sending the repelling party out, These Surveys Questions will immediately give you the necessary information to formulate your game plan.
19 years ago, when studying for MBA, our Professor in Change Management, Dexter Dunphy told us that Change Management is nothing but management of downside. I understood that his point was every change has a downside – and as a change manager, the most important job you have to do is to understand the downside of the change being proposed, and manage it well enough. When I became a management consultant with a top-tier strategy house after my MBA, I took his dictum to heart, and it served me well through several change management projects. Those who were most affected by change appreciated the fact that the change was managed in a sensitive and caring manner – rather than imposed abruptly.
After a few years, when we started our current boutique consulting house, I started to notice another pattern. This was that many companies could accelerate their change management by skipping one entire generation of Supply Chain Management (SCM) in their efforts to make their businesses more modern. In other words, change management would entail moving from SCM 0.0 to SCM 1.0 or from SCM 1.0 to SCM 2.0 or from SCM 2.0 to SCM 3.0. On the other hand, many companies would want to take up an accelerated path – jumping 2 steps at a time – e.g. SCM 0.0 to SCM 2.0 or from SCM 1.0 to SCM 3.0.
This enabled them to frequently leapfrog their competitors, and transform their businesses rapidly and systematically. This was nothing different from many companies skipping a generation of Microsoft Windows when they upgraded their operating systems – for example skipping Windows Vista and jumping from Windows XP to Windows 7.0. The reasons were different, yet the methods were similar.
While change management entailed managing the downside for those who were affected by change, business transformation was more about understanding and managing resistance. By now, downside management has already become a big enough industry – just look at the number of large outplacement consulting houses, HR consultancies, and the booming business they do through the ups and downs of business cycles. Business Transformations will lead to a second boom in these.
If a business keeps up with the SCM evolution and moves with it, there will be a greater need for leadership training, corporate cultural adjustment, collaboration training and less outplacement and redundancies. And, there will be a need for understanding, managing and using resistance to further business transformation. What is the nature of resistance? What is the reason? How to identify 4 different types of resistance? How to use resistance to accelerate positive business transformations? That will be the topic of my next blog.
Organizational silos are based on the division of labor, on organizing the labor in such a way that each individual specialized in what he/she knows best, so that it can all be integrated in such a manner that a cohesive whole which is created in the result is much better in quality and much cheaper in price. This gift of the industrial age to humanity allows to make a production must better in quality and must cheaper in price. Indeed, because of the period of time, the person will become very good at his production and work at a much faster rate, even if the technology is the same. Each employee will make his work much faster, and he would make it much better quality than if he was making the whole product.
By the 70’s, the division had been carried too far, in fact, so far that each person would pretend that as if he has nothing to do with the other employees. To give you an example, I was working in a business transformation project in a mid-sized airlines and I was sitting in the office of the person in charge of maintenance planning of the aircrafts. At one point in the conversation he dug out and e-mail exchanged with his colleagues from across the room and this e-mail exchange had been carried on over a period of 18 months. This trivial matter could have been solved by just walking across the room in an authentic spirit of give-and-take and collaborating across the silos. People in both silos have entrenched themselves into such a position where no action could be taken, the decision-making was extremely slow and people were pointing fingers at each other.
In fact, every organization we have seen, to some extent or other, suffers from this silos mentality. The bureaucratic organization of supply chain 0.0 leads each department to become a pyramid. Any information which needs to be passed from one department to another would have communicated with the head office of one department to another. Imagine the time wasted and the problem of information distortion in the process. By killing the spirit of collaboration, it hampers efficiency and effectiveness.
No wonder this kind of organizations find it very hard to compete against even rudimentary supply chains, such as supply chain 1.0. Many companies struggle with one business transformation after another without addressing the root cause of information holding and silos in supply chain 0.0. If the company stays stuck in organizational silos, no appreciable improvement will be seen: Information holding will become rife and selective information sharing, the norm. Blame will be the name of the game in such a situation.
Below are 20 questions that every executive should ask about the supply chain in their business:
This picture prompted me to write the blog post. Like many other people, I am a great admirer of Steve Jobs – his integrity, his passion and his sense of design.
Almost single-mindedly he twice created a company that eventually became bigger than the economy of Spain (and many other countries).
Having grown up away from computers, I personally experienced his genius much later in my life than most people did; only when I installed a very expensive and clunky hard drive based music system in one of my cars I found out in a few months that his company had released a much more compact, mobile, versatile, far superior iPod, which made my costly, and clunky install redundant.
But today, when I reflect – almost every technology I use on daily basis has his finger prints on it – Microsoft Word, Windows, Android Phone – all have ideas inspired by him. It was his misfortune that ‘the look and feel’ was something that could never be patented – shows you how useless the patent laws really are when they protect what is not worth protecting and give no protection to what is worth protecting the most.
When I wrote my book ‘The 5-STAR Business Network’ I used Apple as a shining example of the first star – Innovation. The collaborative approach to innovation that Steve Jobs pioneered, and that is epitomized in the quotation above was worth emulating.
Admittedly, his is not the only company that does it – his company just used to do it better than anyone else. Using a business network of suppliers, suppliers’ suppliers and collaborators to co-create a product in far less time than anyone else could have created was a work of a genius.
He stood the Edison and Tesla model of innovation on its head. And, even Ford could have learnt a few things from him. What surprises me most is that despite the overwhelming evidence and a clear role model – why most companies still cannot get their act together when they sit back to create products that their customers would worship.
Why do they still settle for shoddy GM cars, or pills that do more harm than good.
I will end this blog with a quotation from Steve Jobs’ biography by Walter Isaacson:
“Because he believed that Apple’s great advantage was its integration of the whole widget – from design to hardware to software to content – he wanted all departments at the company to work together in parallel. The phrases he used were “deep collaboration” and “concurrent engineering”. Instead of a development process in which a product would be passed sequentially from engineering to design to manufacturing to marketing and distribution, these various departments collaborated simultaneously. ” Our method was to develop integrated products, and that meant our process had to be integrated and collaborative”, Jobs said.
He called it ‘deep collaboration’ – and we call it Supply Chain 3.0. Hopefully, we will have a lot more time to put it into practice. This tribute to the great man has been cooking up in my brain for a long time. The world is a much better place, for he was in it for a few brief decades. You cannot say that about too many people.
Disclaimer: I never had, and do not currently own, any shares in Apple.
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.