Thursday, November 13, 2014

Leaking business value

It was frustrating to sit with the General Manager and the owner's representative at a business in the Middle East earlier this week. They're leaking tremendous value from the business and don't seem to realise it.

The General Manager was trying to drive down production costs, say by an extra 5% year on year. He'd already got piece costs down to 22 cents per item compared to European costs of more than 70 cents.

He was trying to argue that he couldn't invest in new stuff because his prices weren't as high as the Europeans'. Instead of holding prices and cutting costs to give him the margin for his investment, he was just cutting sales prices, while costs might well be rising...

I soon realised it wasn't worth pointing out he was comparing apples with oranges: I'd guess that factoring in the difference between regional wage, tax, property and utilities rates would bring the numbers more in line between the European and Middle Eastern regions.

Instead, I suggested that his strategy of 5% year on year cost reduction would fail because it's not possible to maintain quality while always reducing margin. And they weren't making any provision for capital equipment replacement. Eventually they'll be unable to maintain production, even it they haven't lost all their customers to a higher quality competitor before that happens!

A much better strategy would be to increase prices and justify the increase with additional services, quality differentials and more. For example, a quick tour of the factory floor showed a mass of workers but no controls! Most stages of the production process had no visible measurement and reporting tools in place; where tracking was in place, it was in the form of paper on clipboards, but no way to join up the observations, or to track during the production process. The best they might hope for would be to get some visibility after goods had left the factory and somebody had typed the paper into a spreadsheet.

With almost all the desks in the office clearly never occupied, and only a couple of the desks with a computer, I can't imagine they do they even that!

Trying to explain that data is the new currency; that they could be generating loads of it as a natural by-product of their production process; that they could be gaining insight into their own operations, and those of their customers; and that some of these insights could be turned into additional saleable products and services ... None of this made sense to them and I left with a mental image of a gush of their local currency pouring out of the factory and running, wasted, down the street and trickling away, into the sand of the desert...