Survey Says…. Kitchen!

Leo Sadovy
Leo Sadovy|May 14, 2013

The question, by the way, was: “Where do you most commonly sort your mail”.

And the reason is that the kitchen is where the trash can is.

Let’s quickly walk through the process of sorting through our daily mail, or my personal process anyhow.  First, you set aside the packages – usually good stuff in there.  Any personal letters (do people still write letters?) and cards also immediately catch your eye and get special attention.  Bills and other official looking pieces get their due and go into their own separate pile for further evaluation and action.  Magazines go wherever it is that magazines go, the junk goes in the trash, leaving you with the occasional, “What is this?”

With the sorting over, next comes opening each remaining piece to assess its importance.  Is that item from your insurance company a bill, or a change to policy terms and conditions, one of those mysterious, ‘we just changed your monthly premium again for no apparent reason’ statements, or just a marketing piece disguised as official business?

The last step is the filing.  Updated policy statements go into the “Insurance” folder, bills go into the “Bills to be paid” tray, birthday cards get displayed on the counter, and on second thought, that gardening tools catalog can go right into the trash too – what was I thinking?

It’s a fairly standard process: Sort it; Score it, Store it.

We do the same with our email inbox, and not just more rapidly either - sometimes we have “rules” that do some initial sorting depending on the source, with some items going into a specific subject folder, while others are funneled directly to SPAM/Quarantine, and not to forget the ever handy DELETE without reading option.   For the ones deemed worth a read, if they are going to be important in the future for action or reference, they, and/or their attachments, get filed in any number of locations using a very clever filing system that you’ve now forgotten (“should I file this under the customer name, the product name, or both?”).  Then there are the more ambiguous messages and documents that require more thought (before you delete them).  I have TEMP READ and TEMP FILE folders, you know, for later, when I have more time to better evaluate the document, supposing of course that “later” ever comes.

A lot like what you do at home, but at ten times the volume, and with a little automated help that your postman/woman would get themselves fired for.  Sort it, Score it, Store it.

Multiply all that by a factor of 1012 and you’ve got your enterprise data.  Seeing as you can now buy a 1 TB flash drive (a bit pricey, but nonetheless available on the market) I’m going to skip over the “Store it” issue, and get right to the first two steps – sort and score.

How do you sort your mail, electronic or otherwise?  You use your brain.  Brains are quite good at these types of tasks.  Your brain has developed rules to follow and patterns to look for that have proven to have paid off in the past.  Your brain is a walking, talking, sorting and scoring machine extraordinaire.  Just not terribly efficient at terabyte scales.

For that, we have analytics and information management; Text analytics and social media analytics and descriptive analytics and visual analytics.  They do the same sorting, scoring, pattern-seeking and rules-based tasks that your brain does but millions of times faster and without all the personal drama and bias (and they learn faster too, no disrespect intended).

Now, let me ask you – you don’t personally just STORE stuff without sorting and scoring it, do you?  Okay, let me rephrase that – except for that big pile on the corner of your desk, you don’t just store it, do you?  No, you don’t, you can’t.  You cannot run a business on, “I know it’s in there somewhere – I saw it about halfway down the stack just a week ago”.  But the truth is, we often do run our businesses this way.  We store everything now, because storage has gotten so cheap, and call it Big Data.  And then we launch an initiative to deal with our Big Data problem.

Instead, how about nipping that problem in the bud by performing sorting and scoring analysis on the front end as the data comes in?  Weight it, label and classify it, tag it, attribute it, compare it, contrast it, correlate it.

Sort it.  Score it.

And dare I say – trash some of it.  Focus on what’s important, and don’t let volume sneak in there as an unjustified proxy for “important”.

Post a Comment

Innovation in Infrastructure – pairing Possibility with Return

Leo Sadovy
Leo Sadovy|May 7, 2013

A question was recently put to me by everyone’s favorite futurist – Thornton May:  “Most people don't put innovation and infrastructure in the same sentence.  They simply tend to view savings derived from optimized infrastructure as a funding source for “other” innovation investments.  My thoughts?”

My thoughts initially circled in on the maxim that there are three primary ways to innovate: product, process or business model.  'Product' is the one that gets the most attention and $$$, while 'business model' generates the most “why didn’t I think of that” statements.  'Process' innovation tends to play third string to the other two, but still manages to get some playing time, and is the most closely tied of the three to infrastructure innovation.

We’ll get to intra/endo-firm infrastructure momentarily, but first let's consider some of the broader scale, economy-wide inter/exo-firm infrastructure innovations of the past and present.  The ones that come immediately to mind are:

  • The Transcontinental Railroad and the Interstate Highway System
  • The telegraph, telephone, broadcast, cable and optical fiber communications networks
  • The ATM, and now, the more complex internet banking over mobile phones / cell towers

If I had to pick a recent innovation in infrastructure for the major impact it has had, I would choose containerized shipping, and all that entails, from the ships themselves to the marine terminal cranes to the railcars, the trucks and the warehouse logistics.  Without containerized shipping, Walmart is nothing like the retail behemoth we see today – there is just no way we could keep the cost reasonable on all those imported unnecessary plastic objects without the improvements and cost savings provided by containerized shipping.

Sticking to this grander scale and looking out into the future, other possible infrastructure innovations might include:

  • Electric vehicle charging (or battery-swapping) stations
  • Hydrogen dispenser stations for fuel cell powered vehicles
  • Pervasive on-line, degree-granting higher education
  • Distributed 3D printing

For an exciting tour of the 100 most significant on-going infrastructure projects on the planet see this terrific “Infrastructure 100” presentation from KPMG, or projects like Denmark’s Oresund Bridge and Sweden’s almost too successful recycling program.

What these seem to have in common includes:

  • A significant public policy role
  • The ushering in of not just incremental improvement, but an entirely new paradigm and related business models that obsoletes the old way of doing things
  • In a similar vein, they are not driven by a cost-saving mentality, but rather by a mission-driven mind-set.
  • It solves a significant problem in a rather spectacular way (the Transcontinental Railroad cut coast-to-coast travel time from six months to two weeks), often with a literal war-like approach to mission and implementation
  • The infrastructure is an enabler of not just one immediate solution, but multiple possibilities as yet unimagined
  • Dependence on an underlying product/technology innovation
  • Critical mass
  • Experimentation; often the first attempts were, if not failures, less than spectacular successes

Large scale public infrastructure innovation, however, does come with its associated struggles, especially the inertia and active resistance of large, powerful entrenched special interests. Comparatively, endo-firm innovation should be a simpler process to execute; a CEO doesn’t need to conduct a poll and gain approval from both houses of Congress to initiate change.

I can immediately think of three obstacles to internal, intra/endo-firm innovation.  The first is that, unlike product innovation, which enjoys at least 17 years of patent protection, innovative business processes are easy to copy and the competitive advantage can be short lived, so we tend not to allocate scarce investment resources to them.  Secondly, we typically evaluate the ROI on our infrastructure investments based only on the hard numbers, the hard $$$ savings.  Unless someone in sales is willing to sign in blood for increased revenue and market share, these “soft” benefits remain as footnotes in the appendix.

Lastly, it generally takes a portfolio approach to make internal infrastructure investment pay off.  Too often an infrastructure project or investment that could subsequently support multiple other business solutions must be 100% cost justified by only the immediate business solution/problem at hand.  The best practices of the best companies take the long view and piggyback their projects together so that they can all make maximum use of the initial infrastructure build-out.

IT infrastructure innovation is of course the one nearest and dearest to my SAS heart, and there are a number of cutting-edge, IT-driven innovations that likely will be game changers once they come to fruition, such as vision and speech/text recognition, and tactile / remote sensing capabilities.  Then there is of course the digital nervous system of Brian Arthur’s “Second Economy” , which holds much promise and possibility, especially when analytics is incorporated to serve in a decision support capacity, similar to the “big data” sensory and memory processing that goes on in the human brain just below the level of consciousness.

In the end, my thoughts regarding Thornton’s insightful conjecture are still split. On the one hand, contrary to Thornton’s stated assumption, there is much investment in innovative infrastructure going on; in fact it seems that large classes of infrastructure investment are inherently innovative by definition.  On the other hand, infrastructure innovation at the level of the individual firm is constrained by risk and lack of scale that tend to steer the investment focus away from business processes and into only product innovation.

The trick for the individual firm looking for innovative business processes, it would seem, would be to pair return with possibility; to not just tolerate some soft money benefits in the ROI justification of major investment projects, but to mandate them, along with the associated project plan milestones that might lead beyond just current cost savings to new and innovative business processes and models; to use those pioneer projects and infrastructure investments as kickstarters for the future.  Most importantly, it requires always evaluating your solution and infrastructure investments not in isolation but as a portfolio where the sum of the parts can lead to the enablement of possibilities not yet imagined.

Post a Comment

Metrics for critical Behaviors, rather than just final Outcomes

Leo Sadovy
Leo Sadovy|April 30, 2013

This quote from Gandhi (similar to one made centuries earlier by Lao Tzu),  is the typical formulation we learned in Psychology 101: beliefs precede attitude, which precedes behavior, and the conclusion typically arrived at is that in order to change behavior you need to get to the root cause and change beliefs.

In the real world we tend more often to see the opposite formulation, whether it's Tony Robbins or your HR department: focus on the behavior, it’s the only thing under your control. Change the behavior, and attitude and beliefs may eventually fall into line, and if they don’t, no matter – behavior is what matters.

I once applied this latter approach with a former staff member of mine, someone brilliant at finance (customers and sales reps alike loved them), but lacking a bit on the interpersonal skills when it came to dealing with internal authority.  I was quite transparent in my intervention – I stated frankly that I’m no trained psychologist,  that I didn’t care what the attitude issue might be, that I was going to take the behavioral approach, so how about we work on that.  I made explicit the specific behaviors that needed to change, offered my suggestions as to how to begin and what alternatives might work, and much to my surprise, less than six months into our experiment, it worked!

This topic of behavior modification came up during a discussion I was having about a presentation to us by Lora Cecere, who, along with my SAS colleague Charlie Chase, recently wrote “Bricks Matter - The Role of Supply Chains in Building Market-Driven Differentiation”. Lora had remarked about how relatively unchanged our overall corporate inventory levels have been despite decades of focus on inventory control and management.

My own particular observation on this topic was that, as a finance manager, what I want out of a supply chain or inventory optimization initiative is (near) PERMANENT improvement.  It does me little good when it comes to cash and working capital management if the inventory improvement from four to six turns is not sustainable, and I am forced soon enough to refinance the working capital.

What this means in practical terms is that there needs to be some permanent change in behavior(s) somewhere along the line, which as I got to thinking about it, can be hard to specify and pinpoint, and is clearly a most difficult component for any change management initiative.

What’s the behavioral change when it comes to improving inventory turns?  Either lower safety stock levels or faster cycle times, I would think.  If the organization is unwilling to commit to either of these, perhaps for fear of adversely affecting customer satisfaction and revenue, then what you have is definitely not an inventory improvement initiative (which might be okay, you just to be clear about the revised customer-centric objective).

This is where our typical focus on outcome-related metrics comes back to haunt us.  I’d like to propose that, wherever reasonably possible, we should PAIR our metrics: one for the desired outcome, with one for the most significant behavior we think is causally related to that outcome (or more likely, multiple pairs of metrics depending on the applicable operational function, varying the behavioral element to best suit that function, while holding the outcome measure constant).

Take this example, one of my favorite SAS success stories – Maine Medical Center.  What they did, using SAS Strategy Management, was to focus on one particular behavior, adherence to treatment protocols, that they thought might most influence their outcome objectives of patient health and financial cost.  The baseline situation was that in only about 60% of all admitted patients, once diagnosed, did the staff follow the prescribed treatment protocol.  By simply indicating, via regular and clearly communicated metric reporting, how important this behavior was, compliance rose to 100% in short order.

Monthly meetings with the resident medical staff lamenting the high costs, long stays, and unimpressive patient health outcomes, or berating the staff to “do better” or “work smarter/harder” on objectives that are only distantly connected to their daily activities, would not have been nearly as effective, if at all.  Focusing instead on the behaviors under their immediate control, however, was the winning combination.

I previously noted in this post, “Metrics for the Subconscious Organization”, to consider what sort of metrics and performance measurement system your employees feel they need to do their jobs – not just the metrics you need in order to set and refine corporate strategy.  Now I can offer more specific advice on this matter – the metrics they need will be BEHAVIORAL metrics, measuring not some vague, enterprise-level strategic goal, but the very things they do day in and day out that become the levers that ultimately affect those strategic objectives.

In some cases, as with Maine Medical, these behavioral/operational metrics will be obvious, but I suspect that in most cases, it will take hard work, analysis, and insight to work backwards to those operational causes that matter.  You will need to identify those that correlate strongly with the desired outcomes, and also sort out those that are working at cross purposes with each other across the organization.  But as with my experience with my wayward employee, you just might surprise yourself.  Focus on changing behaviors first, outcomes second, and culture last, using culture not so much as a catalyst for behavioral change, but as a vision and reinforcement for the new world order.

Post a Comment

Supply Chain therapy for your troubled Customer Relationships

Leo Sadovy
Leo Sadovy|April 23, 2013

No one likes to have to fire a customer, nor divorce one.  As we all know, it’s an order of magnitude more expensive to acquire a new customer than it is to retain a current one.  But the problem with customer relationships is just that – they are ‘relationships’, and the two parties change over time.  Why you fell in love five years ago may now be the reason you fight all the time.  It’s one thing to say that you have a customer intimacy strategy, or that you are customer focused, yet quite another to execute on that promise.  But before you get to the point of dividing up the cars and the children, there is one business practice you can take to improve your own ability to respond to changing and varied customer needs – supply chain segmentation.

If you want the detailed, in-depth analysis version, I highly recommend this research paper by Matt Davis of Gartner: “The Seven Steps of the Supply Chain Segmentation Journey”.  But for today’s purpose I’m going to propose a more simplified approach to get you thinking about priorities and first steps.  To begin, I am going to section the supply/order fulfillment chain into three large segments: product, production and service, and then offer up two choices for each of the first two, product and production, and three choices for the last one, services.

Product

  1. Leading edge / innovator / early adopter; following Treacy and Wiersma’s “innovation” strategy, or …
  2. Mature / majority adopter / mid product life cycle

Production

  1. Low cost producer / lean / efficient / make to stock; following Treacy and Wiersma’s “operational excellence” strategy, or …
  2. Agile / configure / customize / complexity / quality / make to order

Service

  1. Self-service (on-line, return-to-factory), or …
  2. Some help / standard service  (tech support, next-day), or …
  3. Mission Critical / premium (7/24, on-site, 1 hour response, 4 hour fix); following Treacy and Wiersma’s ‘customer intimacy’ strategy

All together that’s 2 x 2 x 3 = 12 different combinations.  If you are trying to serve all twelve equally (or more, if your current segmentation is even more complex), then that is likely a big part of your relationship problem.  There just isn’t a business model out there that keeps all twelve happy and makes money.

However, you have probably made some strategic decisions that have already narrowed the focus somewhat. With regards to the pairing of the first two, product and production, you theoretically have four (2 x 2) possible outcomes here, but not necessarily in your particular case, where your corporate strategy might already dictate that only one of these four options is acceptable.  Do you only see yourself as a low-cost producer of mature products, or as an agile producer of leading edge products, or as an agile producer of mature products?  If, however, you offer a broad spectrum of products through mulitple fulfillment channels, all four are of course still viable.

Now let’s look at the other end, the service end of the value stream.  More so than with the product or fulfillment aspects, it is your customer’s service needs that have most likely changed and evolved over the life of the relationship.  It may start with a need for an innovative/leading edge product, now heavily discounted to match their previous low-cost price, but it always ends with demands for premium service at standard or self-help rates.  Your cost-to-serve goes through the roof.  They may be your biggest and oldest and most loyal customer, but now they are also your least profitable.

As we did earlier, let’s see if we can simplify these three service options even further.  Are you or are you not in the premium / mission critical space?  Offering, and then failing to deliver on, mission critical-like service commitments, is probably one of the biggest reasons for unhappy customers threatening divorce.  And truthfully, there are a lot of small, mid and even large manufacturers who are ill-equipped to play in the premium service space.  Design for serviceability, if it is even considered at all, is typically last on the priority list, after features, cost and manufacturability. It takes volume and critical mass by geography to be successful with a premium service business model.  If you don’t have a core competency in premium service delivery you should seriously consider outsourcing that function (just as you might outsource something further up the supply chain) or drop the offer.

Okay, let’s say you’ve thought this through, evaluated your priorities vis-à-vis your corporate strategy and decided that all twelve combinations are still in play – can you still simplify this situation?  You bet!

First, consider developing an activity-based costing approach to understanding product, production process, and cost-to-serve profitability for each customer.  Use the profit cliff to segment your most and least profitable customers (and products).  And don’t stop there – use that same activity-based data to assess the efficiency and effectiveness of those production/service processes.  Your low-cost production line may not in fact be that much more efficient than your configurable line, and both may be much less efficient than the benchmark in your industry.

Next, do some cluster analysis on your customers.  Assign ratings for each on the attributes that matter to your customers, attributes such as cost, features, speed/logistics, quality, customization/choice, and service, along with a customer-profitability metric.  Once completed, I doubt you’ll find that you’ve got twelve equally-weighted clusters, but instead there will be 3, 4 or 5 that comprise 80% of the total, with maybe one or two others that deserve an honorable mention.

Once you’ve gotten to this point, the supply chain counselor can only sit back and inform you and your customer that the rest is up to you.  Many of the non-viable clusters will have already been eliminated via your strategic lens as initially discussed.  Furthermore, several of the remaining third-tier clusters can perhaps be migrated into one of the others, for which you will of course need a migration strategy, but there may still remain a few where there is nothing left to do but hopefully part amicably as friends.  If that is to be the case, make sure it’s the right decision, a decision based on facts and analysis, not feelings and guesses, the promise being that after the divorce, the rest of the family remains much stronger, happier and profitable.

Post a Comment

Print me a liver

Leo Sadovy
Leo Sadovy|April 16, 2013

There is a scene towards the end of Star Trek II: The Wrath of Khan, where Captain Kirk, being hunted by Khan and out of necessity defending his crippled spacecraft, maneuvers it into a nebula that disables both ships defenses and navigation.  Kirk makes the observation that Khan, unlike the starship crew, is accustomed to living only in a two dimensional world, previously confined to the planet’s surface, and likely does not have the perspective to think in the 3D manner required in outer space.  So Kirk launches an attack from underneath Khan’s ship, correctly supposing that Khan is only thinking in the right/left and forward/backwards dimensions, and not in the up/down direction.

In the business world we too are often caught like Khan, unprepared for a strategic threat from outside of our particular domain and comfort zone.  After all, we’ve been in this industry for decades, some of us even invented it – if anyone is an expert in this field, it’s us.  We plan for incremental change and react to incremental change.  Version 2.1, then 3.1, then 8.6.  Product line and brand extensions.  We centralize, then decentralize, offshore, then reshore, acquire complementary technology and market share, and occasionally (but not often enough) divest or shut down unprofitable lines.

Strategically we tend to concentrate on just a subset of Porter’s Five Forces: always, of course, the Direct Competition, and often the impact of large suppliers and/or customers.  We do take note of the New Entrants once they’ve reached a level of visibility that garners them the attention and label of “niche player”.  However, the threat of substitutes – products, services, materials, and especially, business models, are too often overlooked until it’s too late.  Even then, as I described in an earlier post, “Surfing the Disturbance”, our initial reaction once we’ve recognized the threat is often to double down on our own need to return things to the status quo.  When I think of such a disturbance, the book publishing and selling industry comes to mind, rocked once by Amazon and then again by the eReader, and the turmoil might not be over yet.

In that vein, with one man’s threats as another’s opportunity, the potential for disturbance in the physical goods market from 3D printing, or more formally, ‘additive manufacturing’, is significant, and is quickly moving beyond its initial prototyping niche and into the mainstream.  A few of the examples that make the point spectacularly include:

All of this is beginning to feel eerily similar to those food replicators and Dr. McCoy’s surgical tools on Star Trek, isn’t it?  I first saw 3D printing in action with a small machine that printed an adjustable wrench.  Normally such a wrench comes in three parts: the main body, the sliding movable jaw, and the knurled adjusting knob.  The 3D printer, however, made it as one, single unit – all the separate pieces move and adjust as they should, but you’ll never get that knurl out of there without totally destroying the wrench.  To be practical of course the scales have to get bigger (which they are), and the variety and usability of printable materials has to improve.

Speaking of the materials, evolving hand-in-hand with 3D printing is the supporting materials science. The process is both requiring and inspiring new materials, some of which are delivered in bulk, while others are assembled molecule by molecule.  What in the past you machined out of steel or aluminum may in the future be printed using metal powders or liquids, ceramic dust, plastic or composite feedstock, live cells and organisms, and a whole host of yet undiscovered exotic nano and bio materials.

Talk about threats from substitutes: the production process, the materials, the logistics and likely the commercial terms and business models as well.  It’s enough to make you wonder if asking the strategic question: “What business are we in”, is enough?  Still though, with robotics, 3D printing, nanomaterials and who knows what else, the reports of the death of manufacturing are greatly exaggerated.  While direct manufacturing labor jobs will likely continue to decline worldwide throughout this decade, manufacturing’s share of global GDP is likely to rise as the focus on innovation and business/customer value comes to fruition.

Post a Comment

Personal robotics - Like personal computing but with arms

Leo Sadovy
Leo Sadovy|April 9, 2013

They promised me trips to Mars, flying cars and a personal robot.  Mars is still 20 years away, all my cars are still solidly on the ground (in retrospect, flying cars was probably not such a great idea anyhow), and until last week all I knew about personal robots was the Roomba.  Now, however, let me introduce you to Baxter via this article in the Fiscal Times, a personal industrial robot from Rethink Robotics in Boston, Massachusetts (full disclosure – I have no affiliation or relationship with anyone at Rethink Robotics).

I am not nearly as doom and gloom about the jobless aspect of robots as the article portends.  In fact, it’s developments like Baxter and other related technical innovations that make myself and SAS quite bullish on the prospects for manufacturing around the world, in the developed economies as well as the less developed.

To quickly summarize the article (well worth the read),”Baxter, and those like him will completely change manufacturing as we know it.”  Baxter is cheap ($27,000 including the three year warranty), mobile, can work in close proximity with humans, and is trainable in fifteen minutes – no engineer level programing required.

Robots are just another piece of machinery, another piece of capital equipment, tools typically employed not to replace humans, but to make them more efficient and effective, or allow them to do things they normally couldn’t do.  Humans as machine operators - tool users so-to-speak.  We are all familiar with the heavy equipment operator running his bulldozer, power shovel or crane, and don’t give a second thought to the hundreds of men that the equipment replaced, because by and large, that piece of heavy equipment didn’t really replace anyone – most modern construction projects could not even be attempted without such equipment available.

As counterpoint to my position from an earlier post, “Triangles, Tools and Transformations”, where I originally touted the transformational aspect of analytics, I want to stress instead for this immediate purpose the tool or “force multiplier” aspect of robotic development, although truth be told, Baxter, with his trainability, combines the best of both worlds.  Robots allow us to become equipment operators rather than simply manual labor for its own sake.  Our human labor isn’t being replaced, it’s being multiplied and augmented.

That of course is the primary message of Rethink Robotics – that Baxter doesn’t really replace anyone - Baxter augments the human labor already there, increasing worker productivity by tackling tasks that have never been economically automated before and  improving the ability to compete with manufacturers who rely on low-cost, offshored labor.  Rethinking robotics implies rethinking offshoring, keeping simple manufacturing processes in-house, with lower logistics costs, shorter supply chains, close to engineering and design, and most importantly, close to the customer.

Rethink Robotics in fact agrees with my analogy to the personal computer and how it revolutionized the office worker's job.  Up until now manufacturing equipment and the associated robotics have been big, even huge in scale – think of automobile assembly line welding robots.  Early in my career I worked for a laser manufacturer where one of our products was a CO2 industrial laser, a massive, permanently mounted device that emitted an invisible beam of infrared radiation that would take your leg off like a hot knife through butter.  Most definitely NOT a personal laser.

The PC started out by automating our mundane accounting / spreadsheet / word processing tasks, giving us control over compute power that was previously reserved for only the biggest of computational tasks in the data center.  But it soon evolved into areas where no mainframe would ever tread, such as video games and music, going miniature and mobile on laptops and cell phones.

The PR (personal robot) has the same potential as the PC, creatively enabling production capabilities and business models that would be the envy of Spacely Sprockets.  The first several generations of Baxter and his kin are likely to automate and augment known repetitive manual tasks, but it won’t be long before resourceful individuals start to hack their Baxter and put it to uses that begin to bring the world of the Jetson’s closer to reality.

Post a Comment

Twenty-four extra-large bunny suits

Leo Sadovy
Leo Sadovy|April 2, 2013

I worked at the General Dynamics (now Lockheed-Martin) F-16 jet fighter plant in Fort Worth, Texas, during the mid-1980’s, where they subsequently manufactured the F-22 and now the F-35. My tenure there spanned the era of the $400 hammer and $700 toilet seat scandals in the military procurement world. While we didn’t have any of those specific issues to deal with, management wanted to make certain that no similar skeletons hung in our closet, so we were directed to inspect and assess EVERY SINGLE VENDOR INVOICE during the prior twelve months.

We operated on a cost-plus basis with the government, where vendor and direct costs were assigned to various cost pools, such as production, R&D or maintenance, upon which a pool-specific, pre-negotiated overhead rate would be applied, and which included GD’s profit margin.  So while it was unlikely that any particular invoice would surface as a public embarrassment, the government had the right to audit any and all of the supporting documentation for the cost pools at any time, and we simply wanted to assure that we would come out squeaky clean should that occur.  We had the authority to reject obvious incorrect charges ourselves, such as reimbursed personal expenses that should have been excluded from the pool, whereas other more questionable charges were to be brought forward for management review.  I happened to come across one of those.

My memorable moment came when I unearthed an invoice for “twenty-four extra-large bunny suits, ears and tails removed”, from a local costume shop.  The department incurring this charge was the Flight Line, that row of hangers across the street and adjacent to the runway at Carswell AFB where the engines were installed in the otherwise completed aircraft and where the test pilots would run them through their paces before turning them over to the Air Force for active duty.

The question on my mind, and everyone elses back inside the main admin building was: What exactly are they doing over there on the Flight Line?

The Flight Line was not one of my normal departments, but the task fell to me to phone up the department manager and find out what was going on.  He was exceedingly polite and actually seemed excited that someone was paying attention.  “Can you come out here between 2:00 and 3:00pm this afternoon?  We’ll have two aircraft ready for their next flight tests, I’ll show you around, you’ll get to see them take-off close-up, and I’ll show you those bunny suits and what we do with them.”

Turns out the bunny suits were completely legitimate, which perhaps should have been obvious from the one clue – ears and tails removed.  During engine installation, adjustment and testing, the engine maintenance engineers have to crawl up into the engine bay.  The bunny suits were worn over their normal clothes, and with the outfit zipped up to the neck, served two purposes.  First, the soft, furry fabric would not scratch any of the maze of fuel or hydraulic piping and fittings (have you ever seen the inside of one of these engine compartments?), and it would prevent things like watches, shirt cuffs, buttons, buckles, belts, belt loops, shoelaces and the like from inadvertently snagging on something, bending or damaging it, often in a manner undetectable until years later during a high-G turn during combat.  And secondly, it prevented small objects like pens and coins from falling into the compartment and perhaps later working their way into the moving parts of the engine, causing catastrophic damage.

What this goes to show is that often your outliers can be as interesting as your “normal” data.  Often the outliers are discarded, replaced or ignored in an effort to get ever more precise in the measurement of that mean, median or next quarter’s forecast.  This of course is a commendable endeavor, but don’t let it distract you from the equally valuable information that lies on the other side of this analytical coin.  Tell me something new, tell me something I don’t know – these are the kinds of insights that can come from an analysis of the outliers (which are only "outliers" with respect to some other analytically determined norm), something SAS Visual Analytics is exceptionally well-designed to explore and address.

A few examples might help:

  • Gray Swans.  I mentioned in an earlier post, “A Plethora of Black Swans”, that black-swan-like events are common enough to perhaps warrant the creation of a class of ‘gray swans’ – “predictable events with known parameters that evolve into something with more significant, and quantified, outcomes”.  Look for the correlations among your gray swan events, and the attributes that might be signaling something worse to come.
  • Gray Swans (con't).  We tend to be both over-optimistic in our assessment of the future, and poor judges of risk in general.  In another earlier post, “A Favorable Product Mix”, I stated: “Your pessimism is not pessimistic enough, and your worst case is not even close to being worthy of the title. Your planning and budgeting is based on a most favorable product mix that has almost no chance of actually coming to pass. There is more variability in your business than you realize; your intuitive, gut-level instinct as to how bad things can get in the normal course of business is just not as trustworthy as the data itself”.  An analysis of your outliers can help rectify that – it can put a spotlight on not just what a worst case might look like, but what its contributing factors might be.
  • Bluebirds (since I seem to be on a bird theme). Not all outliers are negatives - on average half of them should be on the plus side.   Innovation, new product ideas, new combinations of products, new and unique product uses, and even new business models, might be lurking there amid those unseemly discards.  It has been joked that only in a math problem can you buy 60 cantaloupes and no one asks what is wrong with you.  But why did that customer buy 60 cantaloupes, or light bulbs, or birthday cards?  What are they doing with them?  Is this a new trend we’re catching on the upswing (what Gartner calls a “weak signal” in a Pattern-Based Strategy). Can we bundle that together with a service and capture or invent a new market?  Innovation was really what the twenty-four bunny suits were all about.
  • Process Management (the birds have flown). Outliers are going to show up in any analysis of your operating processes, the most worrisome being things like rejects, dropped calls, misclassified results, etc …  And while we are of course always on the lookout for ways to improve our efficiency, every now and then a real stunner emerges from the data.  Why did the reject rate spike from 0.02% to 3.6%, and why did it remain there for over an hour?  Why didn’t someone notice?  Why didn’t someone shut down the line?  Do we have a bigger problem here than just equipment failure – do we have a culture that is afraid to bring these events to management’s attention?

This is just a sampling off the top of my head of what benefits might be hidden in your outlier data;  I’m certain you can come up with a quick 3 or 4 that apply to your industry, market or circumstances.  And as for those bunny suits on the Flight Line, as legit as they were, management decided not to submit them to the government as  part of the cost pool for reimbursement – too risky and too difficult to explain if the media ever got a hold of it.  But for some small costume maker in Fort Worth, it was a most lucrative outlier indeed.

Post a Comment

Knowledge squared

Leo Sadovy
Leo Sadovy|March 19, 2013

Depending on the traffic, I have at least a thirty-five minute one-way commute to and from work, just enough time to fit in one 30-minute lecture from a course-on-tape/CD.  At last count I had about 65 of these courses completed and stacked in my library, with my latest venture being “Foundations of Economic Prosperity”, taught by Dr. Daniel W. Drezner, Professor of International Politics at The Fletcher School of Law and Diplomacy at Tufts University.

Rosalind Franklin and her famous x-ray diffraction photograph of the DNA molecule

One of the interesting claims he presents is that the need for capital is qualitatively different between the developed and the developing world.  That is, both types of economies need capital, but they need it for distinctively different purposes.  On the one hand, ask any developing nation what they need most and, aside from the cessation of war and strife, what you’ll get is a list almost certainly containing:  schools, hospitals, water and sewage treatment plants, robust power grid, seaports and airports, roads and rails, plant, property and equipment – what we would of course recognize as “capital” from Econ 101.  Denzer goes on to point out, however, that in the developed world, while there is still the need for capital, it’s usage/emphasis is quite different – the developed world needs capital for research and development (commercial, governmental and academic), for education, for intellectual property development, for innovation and for working capital.

Don’t get him or me wrong here – he’s not saying that there are not large unmet material needs in the developed world, nor is he discounting the role of a basic education, especially among women, in the developing world, but relatively speaking, the developed world’s capital needs are not what we traditionally think of when we hear the word “capital”.  The developed economies in the 21st Century invest significantly more in drug and medical device research than in blast furnaces and assembly lines compared to fifty years ago, or compared to the developing world today.  And it is in the more developed economies that an advanced education can best be put to productive use because of the information-rich infrastructure that surrounds him/her.

I want to dovetail that with some comments recently made to an audience of SAS employees by Dr. Randy Woodson, Chancellor of North Carolina State University, where all three of my children are currently enrolled in the School of Engineering.  He stated that, due especially to the rapid growth in the student population at NCSU over just the past few years, he was able to fund some new faculty positions, with most of these new positions being interdisciplinary in nature – the intersection of math with physics, statistics with biology and health care, the sciences with engineering, economics with computer science, and so on.  Knowledge, insight and innovation come as much from the intersection and synthesis of the disciplines as it does from the pure science itself.

The importance of an interdisciplinary approach is generally well understood and accepted in principle but often less so in practice.  Perhaps the most famous example of interdisciplinary success was Watson and Crick’s discovery of the structure of DNA.  It was Crick’s early pre-War training in physics and X-ray crystallography that allowed him to properly interpret as a double helix Rosalind Franklin’s famous X-ray diffraction photograph (above).  Today, many of the most important discoveries and inventions come from large commercial or academic teams comprised of half a dozen or more disciplines.

What this is all getting at is the critical importance in the modern, developed economy of information, information management, collaboration and information sharing, and the analytics that derive value and insight from all of that data.  What many had dreamed of 20, 30 years ago – information as a utility – is coming to pass.  Just as with electricity, we literally plug into the internet, or more recently, simply raise our WIFI antenna and soak up information from the airwaves like it was a Top 40 AM radio hit and think nothing of it.  That you can pay your mortgage via your mobile phone, and all that entails (security, on-line transaction processing, communications, etc …) should astound you, yet in such a short time it has become commonplace.

I was born in the Atomic Age, grew up in the Space Age, was first employed during the Computer Age, but what will likely outlast them all in relevancy is what we tend to call in these post-modern times the Information Age.  What I learned in business and economics courses in college during that Computer Age was that there were four factors of production:  Capital, labor, management and raw materials/land.  What I think we will learn in this next age is that we were missing one – information.  Up until now we’ve treated information as an asset, a subset of the other four perhaps - a little bit of capital, raw material, management and labor combined together.  What we are learning is that information itself may be a bedrock principle of modern economics and society.  There is even now the holographic theory of the universe – that the universe is just one big quantum computer and that it’s ALL about the information flows.

Treating information as an asset has gotten us this far, but not taking seriously the prospect that information could be the fundamental foundation for our future would be a big mistake.  Several weeks ago I wrote about how “The Value is in the Network”, largely because the information is in the network.  The information you need to compete and succeed is vastly larger than just the data you generate internally and store in-house as an asset.  I again point you to Brian Arthur’s “The Second Economy”, where the digital economy is taking on a life of its own, independent of its predecessor - the physical economy.  In the physical economy information is a by-product of the process; in the digital economy the information comes first and defines the process, while the physical components are more or less just along for the the ride.  And as the interdisciplinary approach shows, the collaboration and sharing is as important as the information itself.  It's a non-linear, non-additive effect - not just "information + information", but "knowledge squared", or insight.

It has been noted that ‘individuals may be able to set aside money for the future (i.e. “save”), but not a society or an economy as a whole; a society as a whole guarantees its future only by real physical and social investments. Savings are valuable only because they represent a claim on real resources produced and available in the present’ (URL link HERE). In the developing world those real investments do tend to be physical / infrastructure.  But for the developed economies, those investments are increasingly becoming social; a collective wisdom so-to-speak, of education, innovation, information and knowledge, and the interdisciplinary insight and value that analytics can create with them.

Post a Comment

Corporate culture: Your organization’s response to stress

Leo Sadovy
Leo Sadovy|March 5, 2013

“Culture eats strategy for breakfast”.  If we’ve heard it once we’ve heard it a thousand times.  I even wrote one of my early posts on this topic (“When metrics collide”).  Consultants, analysts, academics and other thought leaders have examined and questioned its veracity, but still the consensus seems to be that the aphorism is in fact true – culture is a force to be reckoned with.

Not satisfied that this horse has been beaten thoroughly enough, I too recently took to re-examining this common maxim.  My starting point was to define my terms.  As for strategy, I like Michael Porter’s assessment that strategy is how an organization responds to competition.   Porter of course goes on to define particular strategies or classes of strategies, such as his three generic strategies or his marketing strategies, but returning to the high ground of the basic definition, he further elaborates on the competitive aspect with his “Five Forces” model – “The Five Competitive Forces that Shape Strategy”.

As for the corresponding definition of “culture”, the one I think we are most familiar with is: “How things get done around here”.  There is, however, I think some value in devising a complementary definition, one that incorporates Porter's idea of an organizational “response”, so my proposal for today's purpose is to define culture as an organization’s response to stress.

I do of course realize that this is a somewhat negative way of defining culture, as it ignores the positive contribution to culture of organizational values such as innovation, customer-centricity, authenticity, inclusion or achievement.  But to get at the heart and truth of this whole breakfast feeding frenzy I need to keep the definition narrow enough to allow for some useful comparisons.

Operating on this premise of stress, culture is how an organization internally responds to things going badly.  Revenue did not meet targets; the product was late to market; the competition beat us to market, our cost structure is out of line; our quality is suffering; we’re losing customers and market share; our web site is a disaster and our user interface isn’t much better; we’re being out sizzled and out sexied.

So what is the response?  Panic?  Anger?  Fear?  Denial? Not invented here? Blame and finger pointing?  CYA? Retrenchment into process and bureaucracy?  Freeze everything? Fire everyone?   Reorganization?  An investigative committee?  An acquisition?  Fraud/cooking the books?  Surround everyone with everything we’ve got?

There are of course more positive responses to stress.  Just this past week we’ve had two separate and unrelated events in space exploration that showcase this more positive side.  On Mars, NASA had to quickly and unexpectedly cut over from main computer A to main computer B when a problem with the Curiosity rover’s computer A memory cropped up.  Over at SpaceX, three of the four maneuvering thrusters on the Dragon resupply craft to the ISS malfunctioned, leaving it in a precarious orbit and far short of its objective of safely docking with the ISS.  That they got the thruster problem fixed after what founder and CEO Elon Musk termed a minor “glitch” shows that he and his senior staff most likely did not respond to the stress by going off on an emotional tirade.   In fact, what both the NASA and SpaceX responses had in common was that they were rehearsed responses.  Failure had been anticipated and planned for.  Failure had been simulated and an appropriate response crafted and practiced.

Now, getting to the heart of the matter – Why does culture eat/beat strategy?

My proposition is that for the real human beings that actually make up your organization, INTERNAL threats to themselves, their position and their security take precedence over the EXTERNAL threats typically addressed by strategy.  Abraham Maslow wins again.

So what’s to be done?  Remaining true to my Maslow analogy, there are two approaches that can be implemented simultaneously.  The first is to attack the issue of culture and response to stress directly, essentially addressing the safety and security levels of Maslow’s Hierarchy of Needs.  Why do we blame?  Why do we become bureaucratic?  Why do we think we can reorganize ourselves out of our dilemmas? This undoubtedly will involve focusing on the personalities and personal behaviors of executive management and the rest of the organization under stress, but it will also center on creating alternative models for response to stress and failure, often beginning with an admittance that failure, while not an option, is a possibility.  In other words – prudent risk management and risk mitigation

The other approach would be to focus higher up the hierarchy, on organizational self-esteem and purpose.  I think there is much to be said for the adage that every successful organization needs an enemy, or perhaps a worthy and imminent adversary.  Coke needs Pepsi, Ford needs GM, Ali needed Frazier (and vice versa) (although it would appear that cats need neither dogs nor anyone else).  A thriving organization requires a strong and compelling external threat on which to focus its attentions.  The same holds for non-profits: it's that externality of preventing hunger, curing cancer or saving wildlife that musters the toops for the cause.  You may not be able to quickly fix your underlying cultural issues, but you can grab and shake that organization by the shoulders and shout – “Look!  Stop the naval gazing!  There are real threats out there folks, and I suggest you get on it.  NOW!”

Support for this externally focused approach can come from a variety of inputs:

Yes, culture eats strategy because Maslow was on to something.  But I do believe that corporate culture can change, can evolve, and improve – you are not by any means stuck with culture.  It will of course take an honest assessment of some vulnerable aspects of ego and human personality to effect those changes, but there are many examples of individual humans and giant corporations that somehow manage the transition all the same.  Any difficult cultural shift of a magnitude sufficient to significantly change outcomes is going to take time, time that you don’t have in a competitive environment.  So while you are working on cultural and behavioral responses to stress, you can also be creating and enhancing your external strategic response to competition as a tactic to galvanize your organizational cohesion, attention and passion.

Post a Comment

Missed opportunities: Risk, reward, and mountains of cash

Leo Sadovy
Leo Sadovy|February 19, 2013

CNN reported last week that Apple is sitting on $137 billion in cash.  That’s more than the U.S. Treasury typically holds at any one time.  As CNN says, they could buy Nokia and Blackberry and still have $100 billion left over.  This hasn’t escaped the notice of Apple’s primary hedge fund investors, who are clamoring for that cash to either be put to use or distributed.  Cash as a percentage of total assets is higher than at any time since the post-war economic boom of the late 1950’s.  The Federal Reserve reported that U.S. corporate cash just exceeded $2 trillion for the first time, approximately a 50% increase over the low levels hit in Q1 of 2009.  Globally, the amount of cash sitting on corporate balance sheets exceeds $10 trillion.

There are of course several good reasons being put forth to explain this phenomenon, the three primary contenders being:  1) continued global economic fears, 2) disintermediation as corporations become their own banks, and 3) lack of investment opportunities.  Addressing the first two is a bit above my pay grade for the time being, but I do have thing or two to say about that last one – investment opportunities – the basis of which is this brilliant recent article from the WSJ: “A CFO’s Guide to a Cash-Rich World”.

 

For my first trick, I’m going to have you write down your internal pre-tax hurdle rate on a piece of paper, and place it facedown between us without showing it to me.  The number you wrote is 20%, am I right? For finance managers of a certain age, the hurdle rate has been 20% for our entire careers - to use any other figure would be sacrilege.  But does this make any sense when the Federal Funds Rate sits at 0.25% and the average U.S. corporate bond yield is around 3.5%?

Let me restate:  the risk-free rate is basically zero, and even if you double the risk-adjusted rate to account for taxes and whatever, we should not currently be using an internal hurdle rate above single digits in our financial investment calculations.

But we are.  And because of that, we’re missing opportunities, and the cash just continues to accumulate.

The WSJ article goes on to make several suggestions, such as investigating strategic M&A and emerging markets, but it also makes three other points that I want to explore further:

  • Risk
  • Innovation
  • Insight

Beginning with risk management, you can broadly categorize SAS’ customer base into two camps. In the first camp are the financial services institutions that have been managing risk to three significant digits for decades now, and who come to us for assistance with better managing the “return” side of the risk / return equation (such as activity-based management, financial management, and strategy management).  In the second camp are all the rest for whom the risk / return equation is out of balance in the other direction – they want help understanding their credit, market and operational risk vis-à-vis their profits / returns.

If you haven’t already had the chance, this would be a good time to acquaint yourself with what I call the best business book not written by someone named Drucker – “Competing on Value” by Mack Hannan and Peter Karp.  I introduced the book and it’s subject matter as a three-part series in this blog way back in 2010: “How Much, How Soon, How Certain”,  “How Certain is that Number in the Window”, and “Making the HOW CERTAIN Decision”.   Netting it all down for the cash-rich / low interest rate circumstances in which we now find ourselves, the lesson would be:

  • ‘How Much’ is still ‘How Much’ and always will be
  • ‘How Soon’ has been marginalized by the low interest rates / discount rates / hurdle rates
  • What you are left with as the deciding factor is the ‘How Certain’ decision;  the RISK component

As I repeatedly mention in those three posts, understanding and quantifying risk is a weak spot.  Corporate finance can do 'How Much' and 'How Soon' in their sleep, but can be light years behind when it comes to putting structure, process and discipline around risk management.

I’ll be brief and to the point about innovation – If everyone is sitting on bales of cash in an economic environment of unnaturally low interest/hurdle rates and cost of capital, what avenues are left to you for strategic differentiation?  I would posit that if innovation isn’t among your top three strategic initiatives, there had better be a good reason why not.

That leaves me with insight.  SAS’ specialty – Analytics for insight.  Insight into risk and innovation for sure, but insight into every other operational and customer relationship aspect of your business as well.   With cash to invest, your best FIRST investment would have to be in the analytics that makes the insight into all of these other innovative, differentiating, emerging market and M&A strategic decisions possible.  Historically low hurdle rates implies that there are more opportunities awaiting discovery than ever before. What opportunities are you missing that analytics might uncover?

Post a Comment