Category Archives: Control Systems

When Times are Good

“You look comfortable,” I said.

“Things are going really well,” Jordan replied. “The market is good, new customer count is up, year over year revenues are positive. Yes, things are comfortable.”

“I noticed your accounts receivable ratio to new sales is above your threshold limit. And, that you rented a new warehouse to store some slow-moving inventory. Your revenue-per-employee head count is way down over the past six months. What gives?”

“Hey, when times are good, those things happen. More revenue, more accounts receivable. We set the ratio threshold during the last recession when things were tight, so it’s no big deal. And, yes, we rented another warehouse to give us more capacity. The new warehouse gives us a buffer so if we get a spike in sales, we can cover without having to increase production. But, you are right. I am a little troubled by our revenue-per-employee. It just seems it takes more people these days, and wages are increasing so our revenue-per-payroll dollar is even worse.”

“Jordan, when things are tight, we pay attention, we measure, we make moves. We don’t make our biggest mistakes when times are tough. We make our biggest mistakes when times are good. A little success can create a whole lot of overhead.*” -Tom
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*Homage to Red Scott.

Cash Ain’t Cash Unless It’s Cash

“Where’s the money?” I asked.

Luis squinted. “What do you mean, where’s the money?”

“Look, you asked me to help you straighten out this mess. Where’s the money?” I repeated.

“We have a cash-flow problem, there isn’t any money,” Luis replied.

“Yes, there is a cash-flow problem, there is always a cash-flow problem. Luis, the first resource a manager has to manage is cash. But before you can manage it, you have to find out where it is. Sometimes you think you know where it should be, but if that’s not where it is, you can’t manage it.

Sometimes your cash is tied up in a machine. Sometimes your cash is tied up in unbilled work-in-process. Sometimes your cash is tied up in Accounts Receivable. Once you find out where your cash is, only then can you manage it. So, where’s the money?”

A raw nerve was struck. Luis shuffled some papers on his desk. “It’s here,” he said, pointing to the third column in his A/R aging report. “It’s over 60.”

“Well, now we know where it is, we can manage it.”
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Registration for our online program Hiring Talent – 2016 is CLOSED out. No worries. We will offer another class the first part of March.
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Today’s post was inspired by a quote from the late Red Scott, “Cash ain’t cash unless it’s cash.”

Controlling the Work

“So, your team isn’t here this morning because you worked them until midnight last night. You burned all the profit in the project on overtime and expedited shipping,” I recapped.

“Yes, I think it is important to control burnout,” Roger replied. “When my team works on projects like that, I can tell they begin to grumble.”

“Why did it take such an extraordinary effort to work through that project?” I wanted to know.

“Oh, I could tell it was a tough project right from the start. The client didn’t really know what they wanted, so we had a lot of starts and stops, re-work and changes. I didn’t realize how many resources we were using until I looked at the budget.”

“You looked at the budget?” I sounded surprised.

“Well, yeah, when the project was about 90 percent complete, I wanted to see where we stood. It wasn’t pretty,” Roger explained. “The client was kind of designing the project as it went along. Unfortunately, we were on a flat fee for the contract.”

“What did you learn?” I asked.

“That it’s a lot more efficient to design things on paper, make changes on paper, re-design things on paper than it is to do it for real. I guess the project would have turned out better if there had been more planning.”
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Are Budgets Necessary?

From the Ask Tom mailbag –

Question:
We are looking at our planning scenarios for next year, and one question we have is the value of creating a budget. Doesn’t it make more sense just to print comparative reports year over year rather than spend the time to create something new?

Response:
I always go back to purpose. What is the purpose for a budget? What are the questions we ask ourselves as we look forward to next year?

  • What is our market? Size of market? (Facts or assumptions)
  • What macroeconomic factors impact our market?
  • How much of that market can we expect to earn with our product or service?
  • Is our product or service something that can impact the market (materially) different than in the past, with a disruptive technology or delivery method? Or is it a product or service with a maintenance track that will substantially see similar volume to last year?
  • Given our assumptions about our revenue levels, what is the appropriate cost structure to deliver our promises in the marketplace?
  • Does that cost structure deliver the gross and net profit levels, appropriate to the risk, and within the return on (investment, assets) that we believe appropriate?
  • Is there a disruptive (to our market) cost that we are willing to suffer that might dramatically impact our positive ability to sell or take marketshare? Like a warranty program or alternate delivery method, like air freight for a heavy product? I know it might be heavy, but the question of air freight might spark an idea.

I see budgeting as a bit of realism for our strategic decisions. The purpose of budgeting is to help us make those decisions. As a post-mortem, budgeting helps us check our assumptions (were they wrong or confirmed) and how well did we execute on the decisions we made.

When I am working on this process with a company, a quarterly shakedown on the questions (above) help us deal with reality and adjust (our assumptions, our efforts, our cost structure, our decisions). In a stable, incremental business model, year over year may be a satisfactory approach. Where the business model is seeing dramatic disruption, by economics, technology, largess competition, regulation or other factors, a zero-base approach may be appropriate.

Budgets ARE necessary as a measurement to check our assumptions and aspirations in the market.
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Hiring Talent Summer Camp kicks off July 7. More information here.

Charles “Red” Scott – RIP

If you are lucky, you will meet someone in your life that changes your life. I was lucky.

In 1995, I found myself across a breakfast table from Charles “Red” Scott. We soon learned, like in the first five seconds, that we were both children of the great state of Texas, both born in the same part of east Texas, Paris, Texas and Tyler, Texas and both attended the University of Texas. Though Red graduated before I was born.

If you are lucky, you will meet someone in your life that changes your life.

Red interviewed me for a job. Not really a job, but a life-long venture, to be a teacher, to be a learner to a very special group of people that I had not met. Yet.

He asked me if I was lucky.

That was his favorite interview question. He told me how his life was changed on the turn of a dime. From a small town in east Texas, he was the president of his high school class. Leader of his class, that automatically earned him a ride at the University of Texas. I would follow a couple of decades later.

His birthday was the same as Texas Independence Day. And Red was independent. I think Red was lucky to be born that day.

And I was lucky to have known Red.

Charles “Red” Scott left us yesterday. He left behind many friends and a loving family. Yesterday, he left me, behind. And from behind, I can only look ahead. We will miss you, Red. I will miss you. You were a great teacher.

In December, the doctors told him not to buy any green bananas. He knew and we knew that life was moving on. As much as we braced for the day, told ourselves it was inevitable, when it came, it came. That brave face, our brave face, stopped and felt the rush of sadness.

Today, I will venture to find the greenest bunch of bananas, and I vow to outlive them, if I can.

Best Position to Make the Judgment

“I’m not being lazy, wishing my team would hold themselves accountable, instead of me, having to play the heavy role?” Gail was serious.

“Not lazy at all. We didn’t hire you to be an enforcement officer. We hired you to be a manager. We expect you to be an effective manager, not a traffic cop trying to meet a ticket quota,” I replied.

“So, what’s the shift I have to make?” Gail was curious.

“You are right. It’s a shift, but only a shift. And the shift isn’t necessarily all about you. The biggest shift is in your control system.”

“My control system?” Gail pushed back. “I still have to make sure we are meeting our standards for pace and quality.”

“And who is in the best position to make that judgment?” I asked.

Next Subject

I just got back from a road trip to Pennsylvania, working with two groups on the research of Elliott Jaques. As part of the workshop, we spent time looking at their biggest managerial issues.

Accountability. Accountability was a big one.

  • We find out a project is behind schedule. How do we get it back on track without being a bully?
  • Some defects in finished goods make it into the hands of our customers. How can we get our team members more focused on quality when we aren’t around to check?
  • How do we make our control systems more effective, without looking like a police force?

The next Subject Area in Working Leadership Online is Accountability – Control Systems and Feedback Loops. We are opening 50 Introductory Memberships (Free) for this program. If you would like to get on the list, please let me know. This program kicks off next Tuesday, June 1, so sign up today.

Control Systems and Feedback Loops

“So, let’s make the list. As you look at your control system, what makes it less effective?” I pressed.

“You talked about delay,” Ronnie replied. “You are right, delay makes the control system less effective. But, updating more often, is going to take up too much time for my manager.”

“But DELAY still makes the list,” I insisted.

“Okay,” Ronnie relented. “But I don’t see how my manager can do more.”

“Then, let’s have your manager do less. After all, if there is a problem with production, who is in the best position to take corrective action?”

“Well, the corrective action would be taken by the team.”

“Then, why don’t we change this control system into a feedback loop? Why don’t we have the feedback loop tell the team, and why don’t we run the feedback loop in real time? The manager just gets in the way.”

It’s Late and Unreliable

“Let’s run this timeline, again, looking at your control system,” I nudged. “Monday, your production team shows up for work. They have daily and weekly targets. A machine breaks down and they lose 45 minutes of production before they can get going again. How does your control system capture that?”

“The control system is counting,” Ronnie replied. “And it is sophisticated enough to detect the change in throughput.”

“So, that’s Monday. And on Friday, the control system automatically compiles a report and forwards it to the manager, five days after the machine broke down.”

“Yes, I mean, the manager is busy. We could compile the report every day, but the manager is busy. Besides, it’s not a good idea to have him yelling at his team every day.”

“Why have him yell at them, at all?” I asked.

“What do you mean?” Ronnie pushed back. “It’s my manager’s job to hold his team accountable. We are very big on accountability around here.”

“But, bottom line, your production crew is double-passing finished goods under the counter, or skipping the counter, making the whole system unreliable. So, where is your control system? It’s late, it’s unreliable and puts the manager in between the feedback and the production team.”

Ronnie stopped. I could tell he was frustrated. “So, what should we do?”

“First, let’s list the problems and see how we can change the system to make it more effective.”

Teach Each Other

“Alright, so I should have members of my team inspect their own work for accuracy. How do I know they will do the right thing?” Daniele asked. “These files are important and they have to be right. The feds could shut us down if they believe we aren’t in compliance.”

“Does your team know what the standards are?” I replied.

“Well, they should. Every one of them went through an orientation when they started to work here. And we have our quality sessions where I tell them what the auditor found that was wrong.”

I smiled. “Daniele, have you considered that when your team members went through your orientation, they were disoriented and may not remember all the details? Do you think we might go over that again. I looked at your orientation manual, it looks like there are five major sections to these files. You have five people on your team. Do you think you might divide things up?”

“You mean, have the team members teach each other?” Daniele gasped.