Two New Articles – Profitability Without Pain, and Supply Chain Finance

In the past few weeks, Sloan Management Review published an article about my new book, and I wrote the lead article in CSCMP Supply Chain Quarterly. Here are links:

“Increasing Profits, Sans Pain” –  interview by Martha Mangelsdorf, Sloan Management Review, Winter 2011

“Join the Revolution” –  CSCMP Supply Chain Quarterly, Winter 2011

Please note that you can download the Sloan Management Review article from the link above.

The CSCMP (Council for Supply Chain Management Professionals) Supply Chain Quarterly article is only available to members and subscribers. The subject is how to successfully manage the revolutionary new possibilities in supply chain finance. The article describes how supply chain management has changed from a functional area primarily concerned with cost minimization and customer service, to one which can have a critical impact on all aspects of a company’s performance – revenues, costs, profitability, cash flow, asset productivity, and risk management. It gives a systematic step-by-step process for successfully improving company performance in all these areas.

I hope you find them interesting and helpful. If you would like to talk about either article, please send me a note to jlbyrnes@mit.edu.

Demand Management Disney Style

Many companies simply assume the seemingly obvious proposition that, to put it simply, demand is demand and their responsibility is to gear their operations to meet that demand. Certainly, most managers utilize advertising and specials to create demand and promote certain products, but these initiatives tend to be broadly aimed and not dynamic in nature.

A few very well run companies have learned how to manage demand in a dynamic, responsive way – at a very granular level – and to fit it to their supply. This gives them constantly full capacity, terrific customer satisfaction, and very consistently high levels of profitability.

Demand management is one of the most powerful profit levers, but surprisingly few managers consistently take advantage of it.

Disney’s demand management

Disney has a long history of effective demand management. Several years ago at MIT, we developed a workshop for executives of our affiliated companies on state-of-the-art customer service. The head of customer service at Disney World was among those presenting to the group. She described in detail how Disney has perfected both the art and science of customers service and effective demand management.

For example, Disney has done many careful studies of how long people will wait in line before they need to be distracted. Through these studies, they have determined exactly when to engage the waiting guests with wandering characters, videos, mirrors, and other measures. They also lay out their lines in a serpentine fashion so the guests can’t see how long the line really is, and so that they experience a feeling of constant progress.

A fascinating New York Times article published about a month ago explained how Disney has
continued to develop its techniques for demand management. Here are some of the key points:

  • Disney World has outfitted an underground nerve center with state of the art video cameras, computer programs, digital park maps, and other tools to detect waiting problems and deploy countermeasures in real time.
  • In an insightful move, the company outfitted the flat screen TVs in the nerve center with devices that depict the various attractions with green, yellow, and red outlines to represent wait time gradations.
  • If wait time is mounting, the center can alert the attraction to increase capacity (e.g. launch more boats), or dispatch a character to entertain the people waiting in line.
  • Alternatively, the operations center can route participatory mini-parades that guests can join toward attractions with shorter lines to siphon guests and balance capacity. Through these measures, Disney has significantly increased the average number of rides per visitor.
  • Underpinning Disney’s capacity management is a complex, computerized system that projects demand based on an analysis of hotel reservations, flight bookings, historical data, and even satellite weather information.
  • Disney is currently experimenting with smartphone aps that give directions to attractions and characters, and soon to the nearest restaurant with the shortest wait.
  • The company has also started adding video games to wait areas to further increase guest tolerance for long lines.

Disney managers have combined careful research, creative insight, and tailored technology to develop, deploy, and perfect measures like these. Through this process, they have met their primary objective of maximizing customer enjoyment, while at the same time fitting demand to their supply without the guests ever knowing it.

Dell’s demand management

Dell catapulted to prominence as a PC producer with its well-known direct model. This business model enabled Dell to effectively manage demand and fit it to its supply dynamically and in real time. Here are a few of the demand management techniques Dell developed.

  • Dell purposely selected customers with relatively predictable demand, especially corporate accounts, and avoided first-time buyers.
  • The company instituted a series of monthly and weekly meetings to match supply and demand, bringing these into alignment on an ongoing basis.
  • Dell’s managers developed daily processes to manage demand dynamically, and align it with supply. For example, if demand increased unexpectedly, purchasing could quickly shift to alternative suppliers. In addition, Dell’s sales managers gave the order takers incentives to shift customers to the makeable set of products (which were shown on their screens); the order takers also were encouraged to bundle available products with an attractive umbrella price.
  • The company changed its pricing on particular configurations daily to steer demand toward the available models.
  • Suppliers were selected based only 30% on cost, with the other 70% based on quality, service, and flexibility.
  • When in doubt, Dell’s managers over-forecast high-end products, because it was much easier to sell up, and high-end products had a higher shelf life.

These measures, and others, allowed Dell to systematically manage demand, and relentlessly fit it to its supply. (I describe Dell’s business model in more detail in my new book, Islands of Profit in a Sea of Red Ink.)

Management challenge

Note that Disney provides services, while Dell produces physical products. But both companies developed extremely effective processes that combined research, creative insights, and targeted technology to dynamically manage demand at a very granular level, and fit it to their supply. In the process, they maximized customer satisfaction while also maximizing their capacity utilization, asset productivity, and profitability.

Dynamic demand management at a granular level is one of the most powerful ways for a company to expand its islands of profitability, and to turn around the marginal business that constitutes its sea of red ink.

The challenge for all managers is to develop as a core business process the systematic knowledge, creative insights, and targeted technology that will enable them to constantly monitor their demand and fit it to their supply.

Those who do so will realize the twin objectives that mark the highest-performing companies: high levels of customer satisfaction along with sustained and growing profitability.

The Myth of the Operations Hero

Did you hear about the railroad operations manager who stayed up all night in a snowstorm helping right a derailed boxcar so the train could get through on time?

If you were running the railroad, what would you do –

(a) recognize him in a major company-wide event;

(b) reward him with a promotion; or,

(c) reprimand him and put him on disciplinary watch?

To most managers, (a) and (b) seem so obvious that it appears to be a silly question. But is it really?

I recall working with the top management team of a major US railroad a few years ago. The company was emerging from a difficult period characterized by chronic service problems. In this context, the operations managers like the one described above were treated as heroes. They embodied the values prized by the organization – tough, persistent, and effective. These were the managers that were celebrated and promoted.

But when I probed the situation more deeply with the top managers, it became clear that the real underlying problem was that the operations heroes had not done a good job of day-to-day maintenance and all the other mundane tasks that would have prevented the crisis. By celebrating the heroic response, the company’s top management team was in essence telling the organization that it was OK to skimp on the quiet, unobserved day-to-day work, as long as they responded forcefully to the problems that inevitably resulted.

They were communicating that crisis response is more important than crisis prevention.

I saw the same thing in telecom several years ago. When a line was out, a trouble report quickly went up the management hierarchy. If not fixed in a matter of hours, the report landed on a vice president’s desk. Just like the railroad. In this context, the manager who braved the elements to fix the line was a hero, even though the real issue most often was a lack of effective preventative maintenance.

The real problem

Both the railroad and the telecom company subsequently installed new operations management teams that instituted operations reorganizations. These new top managers understood the importance of crisis prevention, and developed a new focus on appropriate actions and metrics.

It was very difficult for these top managers to change their respective companies’ culture. One of the biggest problems was that the middle and upper-middle managers who were in place had been promoted for crisis management. They were not skilled in crisis prevention, and importantly, their personalities were more suited for the action-oriented crisis response than for the more systematic and analytical process of crisis prevention.

In both cases it took years to turn around the operations through a combination of steady knowledge development, comprehensive training, and slow change-out of the prior management team.

To the credit of both companies, the top operations managers of both companies were persistent, effective, and ultimately very successful.

The sales hero

A similar problem arises in sales and account management. When a major customer has a problem, the fire bell rings and everyone rushes to respond. The sales manager who saves the account relationship is celebrated as a hero, often slated for promotion. By contrast, the sales reps who are skilled at maintaining and slowly growing major accounts often remain in the shadows.

In the most effective companies, however, top sales leaders understand the process of quiet, steady account development. This involves mapping the customer’s buying center, understanding how to increase the customer’s profitability, and seamlessly involving operations managers with their customer counterparts to reduce the costs for both customer and supplier. This is a long, steady process, but it creates customer relationships with high sustainable profitability and growth.

It also leads to the question: who is the real sales hero? And to this question: are these operations managers – the ones who quietly drive major sales increases and cost reductions – the real operations heroes?

Profitability heroes

I was reminded of these questions a few weeks ago when I spoke to a joint MIT – Harvard alumni event in Jacksonville. The subject of my talk was “How to Lead a Profitability Turnaround,” and I was asked a question on how to be an effective transformational leader.

When I thought about it, it seemed that most of the images of a turnaround leader conjured up a “man (or woman) on horseback” like Teddy Roosevelt leading his rough riders in the charge up San Juan Hill. The action-oriented crisis manager – celebrated for his success. Like the operations hero.

In my experience, most of these “heroes” are skillfully (or not so skillfully) managing a crisis that was avoidable. In most cases, their companies were suffering through a very painful transition period that really should not have occurred.

The real profitability heroes are the managers who have the wisdom and insight to develop systematic information, processes, and behavioral drivers that enable their managers to coordinate with each other to achieve more and more profitability. With this in place, their management teams naturally form effective coordinative processes and a culture of profitability.

Effective transformational leadership is not at all like leading the charge up San Juan Hill. It is much more like deciding to get healthy by eating better and getting regular exercise. Not dramatic, not romantic, not exciting – just very, very effective.

Top management choice

One of the truisms of management is that – as in teaching – you get what you expect. If you celebrate the mythical operations heroes, sales heroes, and profitability turnaround heroes, you will get mediocre performance punctuated by occasional flashy displays.

But if you have the foresight to systematically create the conditions that enable your managers to inexorably increase performance and prevent crises, you will get consistent excellence that exceeds even your most optimistic hopes.

Inc.com Names Islands of Profit to Its 2010 List of Best Books for Business Owners

Yesterday, Inc.com named my new book, Islands of Profit in a Sea of Red Ink, to its 2010 list of Best Books for Business Owners. Here’s what Inc. said:

Islands of Profit in a Sea of Red Ink by Jonathan L. S. Byrnes

For those uneasy about new initiatives in a sour economy, Islands of Profit explains how to make more money from the business you already have. Jonathan Byrnes, a lecturer at M.I.T., makes the shrewd observation that no one in companies actually manages profitability. As a result, opportunities go unexplored and inefficiencies are allowed to linger. Worse, the mindless pursuit of new business means companies bring on customers who actually end up costing them. This enormously practical book shows readers how to rethink every part of their companies—from sales to supply chains to service—with an eye toward sweeping up money currently left on the table.

—Recommended by Leigh Buchanan

© 2010 Mansueto Ventures LLC. All Rights Reserved.
Inc.com, 7 World Trade Center, New York, NY 10007-2195

Integrity

Thanksgiving is a very special holiday. It commemorates the generous spirit of the Wampanoag Native Americans who sustained the starving pilgrims in Plymouth in 1621, and it reminds us of the deep values of family, friendship, and community that underlie our happiness and well-being.

Business is a community as well. Suppliers join with customers to create value for their mutual consumers. We’re all in the same boat, each pulling an oar. At the heart of this mutual enterprise, when it works best, is a web of deep trust: trust among business partners and trust among consumers and producers.

This trust rests on a bedrock foundation of integrity. In my course at MIT, I talk to my students each year about the critical importance of having absolute integrity. In the discussion, I emphasize two reasons – one personal the other economic.

On a personal basis, there is a tremendous personal value to living a life of integrity, knowing that you have always done right by other people, and that there are many people whose lives are better because they have interacted with you. That is one of the most wonderful joys of teaching.

On an economic basis, people who value their integrity won’t do business with others who do not have integrity. People who cut corners find themselves isolated from the mainstream business community, and it is very hard to climb back from this cellar.

What is integrity? Dick Baker, the headmaster of a small New England independent school, once said that integrity is what you do when no one will find out about it.

Shadow of the leader

There is a useful metaphor in business: shadow of the leader. That means that employees scrutinize their leader’s activities for clues on how to act. This applies to values ranging from creativity to open-mindedness, and especially to integrity.

I was reminded of this image when I read “David’s Delivery” in the October/November issue of MSC Today, the internal company newsletter of MSC Industrial Direct. David Sandler is CEO of the company, and “David’s Delivery” is his CEO’s column.

The CEO of a New York Stock Exchange company only has a limited number of opportunities to address the whole company. David’s choice of integrity as a subject and his strong articulate treatment of the subject speak to his own core values. As a director of the company, I’m proud to offer David’s words to you as a Thanksgiving message.

David Sandler’s shadow

Whether you’re a new associate, have been with us for a few years or are one of our many long-time veterans, given how our population has expanded over the years I thought it would be helpful to talk a bit about an important part of our culture – our core values and how we do business. Regardless of the economic climate, whether in slow times or high-growth periods, regardless of what is currently in vogue or the latest in business trends, we operate with a core set of principles that began going all the way back to our founding by Sid Jacobson in 1941. First on that list is acting with integrity in everything we do. We always make the ethical choice at MSC and for those of you learning how to be most effective in building a career with our company, I wanted to share what I thought might be helpful to use as a guide and act as your compass. While I understand that we run our business with this in mind every day, it is so core to who we are that I wanted to reinforce it:

1. Have integrity in everything you do. ALWAYS, period.

2. NEVER confuse our drive to capture market share, generate profit growth, achieve stretch goals, or keep commitments with compromising our integrity as the justification to do so. We are an aggressive company that is constantly raising the bar on ourselves and striving to do better. That’s because we drive hard to fulfill our mission statement which is “to be the best” and we take doing so very seriously. Never lose sight that HOW we generate our success is even more important than the end result of whatever is achieved. That is how we have become a company that is built to last and that is how we honor and protect our great legacy.

3. There is NEVER a circumstance where looking the other way or doing something that you would not be fine with having your family read about in your local newspaper is acceptable.

4. When in doubt, re-read number 3.

5. There is no such thing as we do the right thing “wink wink” at MSC. Never, under any circumstance. If ever you sense that is happening, question it immediately and talk to your manager or an HR associate.

6. If ever presented with an ethical dilemma, there is no dilemma, just do the right thing.

I realize I am being strong in my message but there is nothing I feel more strongly about than acting with integrity. I hope you can appreciate that I want to make my point very clear for all to understand. Our commitment to acting with integrity, fair play in how we operate and being ethical in every thing we do is unwavering and as we grow I want every associate to understand that and hear it directly from me.

By each and every associate accepting responsibility and being accountable to do the right thing we ensure our future as a company that is built to last and one that is the kind of place that associates generations from now will want to join.

Best wishes

Marsha joins me in wishing you and your family a wonderful Thanksgiving.