31 December 2008

World Class Manufacturing -- Really?

I found this quote on a Web site which will remain unidentified in this article:

World Class Manufacturing - A definition
World Class Manufacturers are those that demonstrate industry best practice. To achieve this companies should attempt to be best in the field at each of the competitive priorities (quality, price, delivery speed, delivery reliability, flexibility and innovation). Organisations should therefore aim to maximise performance in these areas in order to maximise competitiveness. However, as resources are unlikely to allow improvement in all areas, organisations should concentrate on maintaining performance in 'qualifying' factors and improving 'competitive edge' factors.... The priorities will change over time and must therefore be reviewed.
The author here identifies six "priorities":
  1. Quality
  2. Price
  3. Delivery speed
  4. Delivery reliability
  5. Flexibility
  6. Innovation
I would contend, however, that none of these 6 priorities may be achieved without setting the organization's primary focus on making money -- making money both today and in the future. Without making profit the first priority, there is no money to spend on improving quality; there is no money to spend on improving the speed or reliability of delivery; and there is no money to spend on improving flexibility or innovation.

One might say, "Well, if we improve quality, we will make more money." But unless the framework for the planning and focus of the organization has demonstrated by a rational method that improving quality will lead to improved profits, then that statement remains only a "hope" and not a plan or a true "goal." The same may be said for the other five "focus" points in the article.

If the manufacturer has no sound framework by which to determine precisely what steps it must take beginning today to increase its profitability -- to make it more effective at making money -- there is a chance it may not survive long enough to work on any of the six "priorities" listed above.

"Without theory there is no knowing." -- W. Edwards Deming

Having a valid theory -- a consistent "framework" -- by which to evaluate all that transpires within your business is critical to constancy of purpose and effective leadership by management.

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(c)2008 Richard D. Cushing

03 December 2008

Increasing Your Cash Velocity

Cash velocity is related to cash flow and in tough economic times, nothing -- and I mean nothing -- is more important to the health of a business than cash flow. Most organizations cannot survive if they run out of cash. In essence, an organization with a good cash flow is a healthy organization and an organization with a bad or declining cash flow is at risk.

The Cash Velocity value measures how rapidly your business generates cash. The Cash Velocity of your organization is a good one-stop metric on your business' health because it includes so many important factors.

Here is the way we would recommend that you calculate your Cash Velocity (CV):

CV = Throughput / Cash-to-Cash Cycle Time
  • Throughput = Revenues minus TVC (truly variable costs)
  • TVC or Truly Variable Costs are those costs that are directly proportional to your revenues and, in a manufacturing operation (for example), would typically include raw materials and outside processing costs, but would not include labor or overhead since labor and overhead do not vary directly with the number of units produced.
  • Cash-to-Cash Cycle Time is the average number of days it takes from the time you pay out cash to a vendor or supplier for raw materials or outside processing until you collect from your customer for a resulting finished good. The chart below shows how this cycle may be understood.

The Cash Velocity metric is, as a result, stated in terms of "Throughput-dollars per day."
As stated above, this consolidated metric is influenced by a number of factors upon which management may take action for improvement:
  1. Increasing Throughput - This may be done by either increasing revenues or reducing truly variable costs. Revenues may be increased in the aggregate (more sales) or by increasing prices (where the market will bear it and the net result will not actually be reduced aggregate revenues).
  2. Decreasing the Cash-to-Cash Cycle Time - This, too, may be addressed in multiple ways:

    a) Reducing Inventories will mean that goods will sit a shorter period of time in either raw materials, WIP, or finished goods inventories before they are shipped to your customers.

    b) Changing the terms of your sales (reducing the days between shipment and receipt of payment from your customers where the market will bear such a change).

    c) Accelerating collections (if you have a significant number of customers that delay payment beyond your terms).

    d) Shortening your manufacturing cycle time (if possible).
This metric may be further refined so that you are not evaluating your organization as a whole. Instead, you may look at Cash Velocity by product line, for instance, if there are significant differences in how your product lines behave. There is a big difference between a product line that produces $1 million in Throughput on a 300-day cash-to-cash cycle ($3,333 Throughput per day) and another product line that produces $800,000 in Throughput with a 90-day cash-to-cash cycle ($8,889 Throughput per day). Clearly, the latter is "healthier" for your business even though the total revenues may be lower.

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©2008 Richard D. Cushing

23 November 2008

Extending the Power of Your Information Technologies

In today’s exceedingly challenging business environment, it is becoming increasingly important for executive management to establish corporate strategies that include extending the reach and power of the organization's information technologies beyond the four walls of the firm. If your company is not building "communities" of customers or con-necting with your vendors and customers in real time up and down your supply chain, then it is likely that you are falling behind your competition.

No Technology for Technology's Sake

I am not advocating new "gee-whiz" connections beyond your enterprise just so the CEO can brag about them on the golf course or in the steam room at the club. Before embarking on a spending spree to extend your IT systems beyond the walls of your enterprise, it is important that you determine what you want to accomplish by moving forward with such efforts. Generally speaking, the valid reasons for investing in the extended enter-prise may be reduced to three fundamental categories:

1. Increasing throughput,

2. Reducing inventories or the need for new investment, and

3. Slashing or holding the line on operating expenses.

Let's consider some of the thinking that might go into such an analysis.

Increasing Throughput

When considering increasing throughput, your team should ask questions like these: Could a CRM (customer relationship management) system, a corporate blog or forum, or other enterprise extensions improve our ability to connect with our customers? Could such efforts improve our comprehension of our customers' needs enough that fresh new insights would result from understanding them better? Could the new insights lead to improved products, enhanced market segmentation, and the ability to create superior win-win offers?

If the answers to any or all of these questions are affirmative, then the next step would be to quantify the estimated impact and to set specific goals for any investments in new technologies. Each individual part of the IT investment plan should be directly correlated to expected quantifiable results. How many new customers will be added? How many additional sales to existing customers are to be expected? What additional market share are we likely to gain as a result of these efforts and investments?

Reducing Inventories or the Need for New Investment

The questions that should arise regarding inventories or investments should be along these lines: Will improved supply chain visibility with our customers allow us to better manage and reduce the volume of inventory lying between our manufacturing plants and our products' end users? Will linking our inventory systems with those of our suppliers allow us to reduce lead times and, as a result, reduce the amount of inventory we keep on-hand? Will improved end-to-end supply chain linkages reduce losses due to obsolescence and shrinkage?Again, if asking these questions leads to some "yes" answers, then the organization should take steps to quantify the benefits that are likely to accrue to the organization from reduced carrying costs, managing and handling less inventory, and (if true) the reduction in a potential investment in additional warehouse or production space, for example.

Slashing or Holding the Line on Operating Expenses

Generally, this area faces a two-fold battle: First, most organizations today have already done all the cost-cutting that they really can (or should) do. This is no longer the 1980’s – the heyday of cost-cutting as U.S. industry was struggling against the onslaught of Japanese products. Second, when you are talking about implementing new technologies, it is really difficult to get buy-in from your organization if the move is likely to lead to a significant reduction in the workforce.
However, results stemming from efforts to increase throughput (revenues) and reduce inventories are likely to drive growth, on the one hand, and internal improvements, on the other. Normally, then, a case can be made on the basis of these combined factors (i.e., growth and internal improvements) that your organization can support 30%, 60% or even 100% growth in the near future with little or no growth in operating expenses. The net result is often estimated and stated as savings in FTEs (full-time equivalents, i.e., the average cost of a full-time employee). In this way, the effect of “holding the line on operating expenses” may be properly factored in to the benefits accruing from investments in new technologies.


There is no longer a place for business as usual. In today’s highly competitive markets – driven to a significant degree by the international reach of the Internet and other technologies – every business owner, CEO, and CFO should be considering how extending their information technologies beyond the four walls of their enterprise might lead to in-creasing throughput and reducing inventories, while holding the line on operating expenses. However, every investment in technology should be carefully planned, be geared to achieving measurable goals, and fully aligned with the enterprise’s strategic and tactical objectives.

©2008 Richard D. Cushing

22 October 2008

Getting IT right!

Writing in InfoWorld magazine (6 Jan 2003), Ephraim Schwartz said:

"The goal of IT, since its inception, has been the timely (a relative term) delivery of information to those who need it. Behind this goal is an unspoken belief in technology: If IT could deliver to its internal enterprise customers all of the information all of the time, it would be impossible for them to make a mistake."

Understanding the difference between data and information

More likely than not, many of the folks working in your organization's IT department don't actually know the difference between data and information. To be fair, they are not alone: Many people working as supervisors, managers, and executives probably don't recognize the difference between data and information either.

  • Data are the bits of information your various systems store. The system may be any kind of system -- not necessarily and IT-related system. Those old metal filing cabinets still found around many offices store data, just like that 160 gigabyte hard-drive on your desktop computer stores data.
  • Information is data transformed (e.g., gathered, analyzed, collated, sorted, coded) to allow the user to rapidly digest and comprehend the implications of the underlying data for timely, accurate, and effective decision-making.

For example, a 300-page report printed on green-bar paper, like an old mainframe computer used to spit out for us at a firm I worked at years ago, is data. Make no mistake, the data -- in the 300-page report -- contained everything we needed to know to make an effective decision. However, it its form as a report, it was not readily digested and comprehended for effective decision-making.

At another firm for which I consulted a few years ago, one of the firm's key production managers would take home several reports from their existing system almost every night. Working at home in the evenings, he would comb through these various reports and, using an assortment of colored highlighters, would mark up the reports with various colors to guide his production decisions the following day.

What was he doing? He was transforming data into information.

The data contained in the aforementioned 300-page report could have been more easily digested and decision-making could have been faster and more effective if the data had been presented, perhaps, in a chart, a graph, or even reduced to some form of exception list.

Placing the information in its context

Data content may typically be broken down into three general classes for most organizations:
  • Operational data such as orders, purchases, inventory, and so forth;
  • Process data such as schedules, routings, bills of material, logistics, and similar; and
  • Administrative data including accounting, customer lists, vendor lists, employee lists and more.
The data context, however, must be understood before effective decision-making may be done for any particular organization. The context of the data give the data meaning within the framework where it is to be applied. The context includes such elements as:
  • The organization's purpose,
  • The organization's strategy,
  • The organization's vision and mission,
  • The organization's execution model,
  • The organization's capabilities and competencies,
  • The organization's structure,
  • The organization's policies and procedures, and
  • The organization's values and culture.
Clearly, depending on an organization's purpose or strategy or production model (for example), essentially the same data may drive two different organizations to make equally effective but totally different decisions.
It should be part of every organization's IT strategy to mandate the transformation of the huge volumes of data being collected into information by their IT systems. This transformation, in itself, should be flexible, timely, and subject to ad hoc transformation, as well.

That's what business intelligence is all about. In today's world, this is all about survival, not just improvement or excellence.

"Business, we know, is now so complex and difficult, the survival of firms so hazardous in an environment increasingly unpredictable, competitive, and fraught with danger, that their continued existence depends on the day-to-day mobilization of every ounce of intelligence."
-- Konosuke Matsushita, founder of Matsushita Electric (Panasonic) as quoted in Managing on the Edge: How Successful Companies Use Conflict for Competitive Advantage by Richard Pascale (New York: Simon and Schuster, 1990), p. 51.

17 October 2008

Information Is Not Knowledge

"Information is not knowledge. Knowledge comes from theory."
-- W. Edwards Deming

When Sir Isaac Newton was conked on his head by the falling apple (as the story goes), he had information. The information was, "apples fall from trees" or, put more generically, "things fall to the earth."

However, Newton still had no "knowledge."

Newton's comprehension of the facts did not provide "knowledge" that would be useful in any significant way. After all, people had known for centuries that things fall to the earth and, if one didn't want them falling to the earth, one must be certain that the objects are held securely in their present location.

Once, however, Newton began to construct "theory" around the fact that things fell to the earth, valuable "knowledge" began to spring from the "information" at hand.

For example, based on the "theory" that gravity was a force that always acted in precisely the same way, experiments could be set up to measure just how gravity functioned. From these experiments and calculations, we now know that the gravity of the earth accelerates objects at ~ 32.2 feet per second-squared.

This principle applies in business as well.

Having worked in the world of business management and computers since the time of the introduction of the personal computer (PC) in the early 1980s, I have found that many, many business people -- from owners, to CEOs, to CFOs, to middle managers, and on down the line -- confuse "information" with "knowledge". In fact, a very common fallacy is the belief that more "information" will lead to better management which will, in its turn, lead to better results.

Therefore, organization spend a considerable amount of some very limited resources (namely, time, energy, and money) acquiring or creating systems to give them more "information."

When all is said and done, however, these business folks often are not significantly better off than they were before they spent their precious time, energy and money, simply because, like the world before Newton, they have no "theory" by which to interpret the information they have. Without this theoretical "framework" in which to fit their body of information, many of their management actions are not much more than flailing at the wind. Some of their efforts work and some do not, but they generally cannot tell you (specifically or accurately) why one initiative worked and another similar one failed.

There are three required steps to gathering what one needs to take timely and effective action:

1. One must take the data (the raw, undigested facts -- perhaps line upon line of numbers) and convert the data into "information."

2. "Information" is data "digested" and put into a form (i.e., a chart, a graph, summed, analyzed statistically) that allows the user to quickly assess the essential implications of the underlying data.

3. The resulting "information" must be placed into a theoretical context -- a "framework" -- whereby the potential outcomes of any actions that might be indicated by the information may be fully comprehended.

Without these three steps, your organization may drown in data or become infatuated with "information" and, yet, never be able to move effectively when times are the most challenging.

©2008 Richard D. Cushing