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.

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.

Profit from Managing Returns. Yes, Returns.

What do a typical hospital and a typical retailer have in common? They both have a problem managing returns. Let me explain.

About a year ago, I spent a day with the President’s Cabinet of a major medical center. This is one of the most prominent institutions in the country, with a very talented and dedicated management team. During the day, we reviewed and discussed a number of important topics, ranging from prospective healthcare legislation to growth plans.

One comment in particular caught my attention. A senior physician noted that the hospital didn’t systematically monitor readmissions – patients who are discharged and soon return to the hospital for additional care.

I thought about a friend who had started a company to oversee the care of patients who had a particularly difficult chronic illness. He had done studies of patient care, and he found that a surprisingly large portion of hospital readmissions occurred because of simple logistical errors. For example, when many patients were discharged, the oxygen or other medical supplies were not delivered to their homes in time. This resulted in very costly readmissions.

A few years ago, I did a number of studies of product returns in retail and distribution companies. I found that virtually all companies viewed returns as a logistical hassle to be managed primarily to minimize the handling cost and residual product value.

My studies showed something very interesting, however. When I compared retailers in the same industry, their rate of product returns varied significantly. Not only that, but even within the same retailer different associates had very different returns rates – even for the same product.

The conclusion: the returns rate was really a measure of the quality of the sales process. The retailers and associates who had low returns rates were very good at diagnosing a customer’s real needs, and had a good understanding of what supplemental instructions a customer typically needed. The others did not.

The traditional way of managing returns turned out to be to not manage them at all – just to handle them efficiently. The right way to manage returns is very different: to view them as a quality feedback loop that enables a manager to pinpoint the places where the sales process breaks down, and to formulate sharply targeted measures to improve the process.

In a sense, the hospital readmissions rate is very much like the retail returns rate. Some patients legitimately need additional care, but many simply come back because they experience avoidable errors – most of which are not the hospital’s fault. And in most institutions, this critical measure is not systematically analyzed.

Both the hospital and the retailer had the potential to monitor their “returns” not just for handling efficiency, but more importantly to improve the quality and drive down the cost of their core organizational processes.

The big profit leverage that comes from managing returns – not just handling them efficiently – is that the returns rate offers a very important window into how well the institution or business provides service to its customers.

In both business and not-for-profit management, there are a number of “hidden” quality measures like the returns rate. The insightful manager will seek out these measures, and use them to maximize the overall performance and profitability of his or her organization.

Three Missing Steps in Supply Chain Optimization

I just finished an interview with a journalist who is writing on the importance of supply chain optimization. This writer is addressing a set of distributors of products that have relatively low value for their weight and volume. This makes supply chain costs really critical to their profitability.

As I thought about the topic, it struck me that there are two very different ways to approach the problem. The traditional way is to assess the software and automation possibilities that could be deployed, and then to think about ways to get the operating personnel to “buy into” the solution. I could visualize the usual checklists of software packages and capabilities.

Certainly, a number of terrific software packages and warehouse automation systems have been developed, tested, and put into widespread use. But the real question is what to do with them.

In this slow economy, customers are minimizing their inventory, and increasingly depending on distributors for fast service. This enables strong distributors to increase business, but it also places a big cost burden on them. In the particular industry the journalist was writing about, this cost dynamic was having an extremely strong impact on profitability.

When I considered the deeper question of how to optimize this supply chain, three steps seemed especially important – steps that are all too often left out of the process.

First. Divide the business (logically) into core and non-core customers, and core and non-core products. Usually, your core customers and products are characterized by high-volume. If you think of this as a 2×2 matrix, each quadrant has very different characteristics, and each requires a different supply chain.

For example, core products for core customers should flow like a river from suppliers through distributors to customers, with minimal inventory (relative to sales) and minimized handling. Think about how radically this differs from core products sold to occasional customers, or from non-core (sporadically-ordered) products even sold to core customers.

The most important initial step in optimizing a supply chain is to understand that the right supply chain solution (decision rules, inventory levels, physical process) for each quadrant can and should be very different.

Second. Work with your customers – especially your core customers. Many customers do not have a sophisticated knowledge of how to set inventory levels and reorder patterns. You can make a big difference in both your profitability and your customers’ profitability by helping them. This is especially critical in these difficult times.

I recall working with a major distributor a number of years ago to reduce supply chain costs. After a little investigation, we figured out that there were only three or four inventory/replenishment systems that the customers used, and that most customers did not know how to keep them set correctly. We created a small team that worked with the core customers to readjust their systems. After a month or two, the cost savings were surprisingly large.

Third. Get the sales reps involved. In most distribution businesses, the sales reps are the primary link to the customers. In my experience, sales reps in many companies have an overwhelming number of objectives, ranging from revenues to promotional programs to brand introductions to point-of-purchase displays. While some companies include gross margin in sales objectives, net profitability, per se, is almost never an objective.

In many distribution businesses, supply chain costs are a critical determinant of profitability. These costs can vary considerably from customer to customer and product to product. They are deductions from gross margin in profitability calculations, so a simple focus on gross margin eliminates a major source of profit improvement.

It is very important for the sales force to understand the profit impact of customer orders and other supply chain costs, and to be given a fairly simple program to selectively improve customer profitability. Here, creating a simple “red-yellow-green” color-coding designation can provide terrific results.

For a sales force to be productive, the reps must have at most 3–4 clearly understood objectives. Profitability maximization must be one of them.

All too often, managers instinctively reach first for technology solutions, focusing primarily on the selection and implementation processes. But the real profit impact comes from changing the business.