Quality Everywhere!

On several of my Virtual CFO engagements, I was asked to look at the effectiveness of key operating processes. I had the chance to roll out quality tools and approaches in a lot of different places ranging from an Amish Fine Furniture Maker to cabinet makers in Washington and Florida.  

As part of the Six Sigma quality assessment process, you need to have measures after you defined the process.  In a couple of cases we had existing data, but wanted to engage the production team.  We created a simple manual tracking chart that was placed on the job floor to measure key process milestones.  It was as simple as placing some flip chart paper on a wall with volume lines and dates.  The shift supervisor updated it at the end of each shift and added any notes.

It was interesting to note that we saw process output improvements as we started to measure the process without making any process changes. Other than the act of measuring!  We saw teams beginning to exhibit "one-upmanship" as they wanted to out perform other shifts.  For these businesses, labor and materials were key cost drivers.  Besides working faster, we identified some work flow, floor layout, supply chain, and communication issues that improved productivity and reduced waste.  Several simple paper tools were used to improve the process. On average, the businesses realized over a 20% improvement in productivity that made a noticeable improvement in operating margins and cash flow.

Feel free to contact Steve Cassady for more information on improving your processes.
 

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Shocking Facts You Did Not Know (at least I didn't)

 

Interesting video that Kris Porter highlighted. This highlights how much and how quickly things are changing.  Imagine how much will change over the next 10 years!  Business is always changing.  Entrepreneurs have a lot of technology changes to factor into their business plans over the next several years.  This impacts marketing, customer service, and operations as well.  Technology allows entrepreneurs to better position yourself and to display your expertise in solving customers problems.

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The Real Margin: Economic Value Added (EVA)

I had a "Blast from the Past" question in LinkedIn's Financial Modeling and Analyst Group asking about Economic Value Added or EVA  and Weighted Average Cost of Capital or WACC.  It triggered memories of many late night brain storm sessions with my Sprint Long Distance Division Operations Analysis manager team of Ben Buttolph, Brad Zerbe, Clark Ward and our Financial Management Develop Program rotation participant Mike Ayres.  We actually called our concept Threshold Margins in our Economic Realities Project which became EVA the following year when Sprint Corporate rolled out Stern Stewart's Economic Value Added incentive plan across all Sprint Divisions.  The EVA/Threshold Margin concept is key to a Value Based Management approach that we were promoting in our Economic Realities Project.  I must admit Stern Stewart did have a better name for the concept!  I wish I had read The Quest For Value* before we did the project versus after making our final presentations.

 


EVA is an estimate of economic profit, which can be determined by making adjustments to GAAP accounting, including subtracting the opportunity cost of  capital. EVA is a way to determine the value created, above the required return, for the company shareholders.  EVA is Net Operating Profit After Taxes ( NOPAT) less the money cost of capital. The cost of capital refers to the amount of money rather than the % cost of capital. The amortization of goodwill or capitalization of brand advertising and other adjustments turn Economic Profit into EVA.



Mike Ayres had the task of proving that EVA and Net Present Value arithmetically tie under a variety of scenarios, so management could be assured that increasing EVA creates shareholder value. 

What he proved was that the Net Present Value of a Business Case was the same as the Market Value Added or NPV of the EVA of the business case.

I rolled out a simpler version of this concept to several small businesses and it highlighted that some of the higher operating margin segments did not provide the highest returns to the business due to their fixed and working capital intensity.

Let me know if I can help you understand your relative economic returns of your business segments.



*G. Bennett Stewart III (1991). The Quest for Value. HarperCollins.

Small Business Web Presence

Image by adria.richards via Flickr

One thing that amazed me in my many visits over the past five years to small business clients was the lack of any web presence.  While my engagement was generally involving Financial Planning and Analysis, Operations Analysis, or Fixing their Quickbooks, I always looked at the other key marketing and sales areas and noticed no web strategy.  In my discussions with small business owners, they felt it was expensive and too time consuming to implement.  I showed them that in 15 to 30 minutes of work, they would increase their web presence in a meaningful way. This is important today as 82% consumers use the internet to search for local businesses.   In some cases for those that were local in nature a simple and free registration with Google Places, Yahoo Local, and Bing Local for local businesses give them a free page one listing without even having a website. A small business owner also has many free simple website solutions in addition to Facebook Fan Pages as additional ways to make yourself known.  Yelp and CitySearch MyAccount can also help small businesses.  It will be interesting to see how small businesses can use Foursquare as that location based service expands.

In a couple cases the client was impressed when they received phone calls generated from the free listings before I finished the engagement. Contact me and I can provide you with some simple tools.

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Who's the Boss!

Who's the Boss is sometimes confusing for many small and medium sized businesses when the owner or owners are actively involved with the business.  I have completed two engagements that started out as Financial in focus, but ended up having Organizational Design improvements becoming key to financial success.

One engagement involved a restaurant in which the entire 45 person staff felt they reported directly to the owner.  Even the dishwashers' time off requests went to the owner.  Obviously, this kept the owner from focusing on the broader and strategic issues facing the business.  This design added significantly to the hours he had to work and his family had been unable to take even weekend vacations.  We ended up creating kitchen, catering, bar, and service leads to handle daily business issues.  We also designed key metrics for those leads to be accountable for business value elements they influenced and the owner and leads met every other week to review trends and discuss process improvements.  Profitability went up as the leads managed to their numbers and the owner was able to get some much needed time off.


My second engagement was almost the reverse.  It was a five partner veterinarian practice with over 100 employees focusing on the swine industry.  I found that conflicting information and guidance was being given as employees approach any of the owners as the "boss at the time of convenience for the employee".  I ended up designing a structure with each owner being responsible for a key business function and appoint a key employee as an office manager to manage a lot of the smaller operational tasks.  This enabled the owners to focus on their core areas of expertise while providing a cleaner communication and management structure for the employees.

In both of these cases, profitability went up due to better organizational design.  Does your team know who to go to?  How can I help you to find value in your business?

Economic Realities

Economic Realities is a concept I have worked with several small businesses and at Sprint dealing with relative product economics and how to optimize an entities performance.  The key is to understand the capital and resources driven by product/market mix.  My first development and use of this concept was at Sprint.  My  Long Distance Division Operations Analysis Team had recently completed several major initiatives:

• Activity Based Management prototypes for several shared services organizations
• Developed a Private Line pricing model
• Reviewed additional investments for several products
• Statistical study on the relationship of advertising spending to traffic growth for key industry players
• And, analyzed several large corporate contracts

Bill Gunter, SVP LDD Finance and I were waiting to meet with Art Krause, Sprint CFO to review a couple of these projects.  Prior to our meeting starting, Art mentioned he just reviewed a major network growth investment business case and saw the growth driving the network elements needing to be purchased but at the Long Distance Division level, he wasn’t seeing that kind of growth.  He asked me to take a look at it.

The initial answer was quickly derived.  While the national accounts traffic was growing, the consumer business traffic mix was declining as AT&T and Sprit were seeing consumer market share shift to MCI as a result of their Friends and Family launch.  Therefore, Sprint was seeing growth in traffic driving peak capacity needs; off peak capacity usage such as residential was decreasing as a percent of business.  Thus, capital spending was disproportionate to overall growth due to peak/off peak capacity needs.

While the answer was easy, I started thinking about the strategic consequences of this shift and our Marketing Business Unit Growth Profitability since the Long Distance Division MBU’s had differing levels of profitability.  I gathered my team and we discussed the issues and roughly tested several hypothesis.  While we weren’t charted to do this project and still had a heavy workload, the team ended up working evenings and weekends to contribute to this project since we saw the potential of the project to be very strategic.

While the Sprint LDD MBU’s had Market Margins which reflected their access, marketing, and directly controllable costs, a lot of network and shared services costs were not factored in.  Leveraging some of our studies and getting some help from other groups, we were able to develop contribution margins which reflected such costs as billing and network.  We also overlaid Working Capital implications given different billing policies for different customer segments and different payable differences driven by switched and special access billing practices by the Local Exchange Carriers.

In effect, we ended up with mini balance sheets for the MBU’s so that we can drive a cost of capital charge.  The MBU’s that drove the capital should cover the economic cost of capital.  An interesting conclusion was that MBU’s with the highest contribution margins did not necessarily have the highest economic margin when the economic cost of capital was factored in.  This work also enabled the Long Distance Division to quickly roll out Economic Value Added when that approach became a corporate initiative.

We then modeled the impact of value creation with a capital spending constraint in the five year forecast.  This study showed large differences in shareholder value creation depending on what products grew with that fixed capital constraint. This caused significant focus on our product mix in the upcoming Strategic Planning and Budgeting process.  It was rewarding to walk into conference rooms and see our concepts on white boards and how various Marketing and Network teams were going to work within that framework.

We ended up presenting this study to Sprint’s Executive Leadership Team and eventually to all of Sprint’s Divisions.  This Economic Realities Study became a recurring study to kick start the Long Distance Divisions planning process.  It is with pride that several of the analysts who worked on this project are eventually became Managers, Directors, and even Vice Presidents within Sprint.

In my consulting work, I was able to replicate this concept to small and medium sized businesses.  Do you know the Economic Realities of your business?

Measurements

I have been engaged to help improve bottom line results and cash flow for small and medium sized businesses.  In many situations I had the opportunity to deploy Lean Six Sigma techniques.  In some cases, minimal measurements existed. While following the DMAIC steps, it was interesting to see process performance improvements just by establishing and gathering the measurements.

DMAIC 

Define: Set the context and objectives for your improvement project.
Measure: Determine the baseline performance and capability of the process you’re improving.
Analyze: Use data and tools to understand the cause-and-effect relationships in your process.
Improve: Develop the modifications that lead to a validated improvement in your process.
Control: Establish plans and procedures to ensure your improvements are sustained.

After defining the objectives for the improvement projects, my team started to gather measurements. In my engagements with a cabinet making company and with an Amish furniture making company, the clients began to see improvements when process completion measurements we were tracking were posted. In both cases, we just posted a simple graph that was updated at the end of each shift by the shift foreman. Shifts began competing against each other and a shifts did not want to show slippage in performance and began wanting to achieve previous highs. We saw 10% to 20% improvements from our baseline before deploying any process changes, other than measuring the process output. It was interesting to observe human behavior just by the act of measuring.  

We also needed to make sure we had the right measurements that drive true profitability and cash flow.  In a lot of cases, I have come across clients using disfunctional measurements that had unintended negative cash flow consequences.  I have come a cross a lot of inventory and manufacturing cost accounting measurements driving poor decision making.


The important learning was to have the proper measurements and communicate those measurements to process performers.