The How and the Why of Operations Strategy

Many companies focus on the tactics of continuous improvement and are often disappointed with their lackluster results. They look at top line growth and see anemic improvement, and instead of bottom line profitability they see little or no growth. Because company value is often based on top line and bottom line growth as well as cash flow, a steep positive improvement curve helps rapidly increase your business’s value.

But isn’t it best to just move ahead with improvement efforts to get the quickest bang for your buck? Not if you really want exponential improvement. The problem with tactics is they focus on the how of improvement efforts without the context of why.

Why is powerful. Why:

  • Informs your employees of the purpose of their efforts and ultimately what’s in it for them.
  • Puts things in context so priorities are easy to set and decisions are easier.
  • Helps focus on what’s important to be sure your improvement efforts are targeted correctly.

Why is strategy, how is tactics. Putting tactics first is putting the cart before the horse. Do you have a strong operations strategy that aligns with your business model and vision? Are you achieving breakthrough results in your business?

© 2019 – Rick Pay – All Rights Reserved

Operations Strategy – What Are Your Options?

At this time of year, many companies conduct the annual off site planning retreat to develop strategic plans for the next year. Then it’s back to work and the plan sits on the shelf until next year’s retreat. Strategy represents the means selected to achieve the vision, which sets the goals you are trying to achieve over a short period of time, usually two to three years. Strategic planning is actually an oxymoron, since strategy and planning are on different levels. Planning involves the tactics used to implement the strategy.

 

Operations strategy involves the specific operations and supply chain means that the company will use to help achieve the vision. There are five different strategies that could be selected, and you get to pick no more than two:

  • Low cost
  • High Quality
  • Speed/flexibility/responsiveness
  • Wide line/custom
  • Innovation

For example, part of what drove the offshoring trend in the 1980s and 1990s was the strategy of low cost. Then speed started the reshoring process. Tesla has a strategy of innovation, while Lexus is quality.

What is your company’s operations strategy? Do you have a clear vision that you want to support? Establishing a vision and then picking your strategy before you start the tactical activities allows you to prepare for the future and dramatically increase the value of your company.

 

© 2016 – Rick Pay – All Rights Reserved

What Would Sherlock Do?

Sherlock Holmes, though fictional, was an innovator in crime scene investigation. Rather than relying on witnesses like typical London policemen of the day, he got out his magnifying glass and carefully examined the scene. Through Sherlock, Arthur Conan Doyle brought “the art of deduction” to the foreground in crime solving.

Many of my clients refer to me as the Sherlock Holmes of operations and supply chain because I’ve developed an uncanny knack for observation and deduction, and I use those skills to move companies into the fast lane, dramatically improving their performance.

Click here to read more about finding hidden clues in operations and supply chain.

Creating Innovative Operations

One of the four key elements of a successful operations and supply chain architecture is creating innovative operations. Innovative operations leads to world class performance, which puts companies in the top 10% of performance. It requires different thinking, not just increased efficiency.

Bending without breaking

The two vital elements of innovative operations are agility and flexibility, which help to avoid performance plateaus. Agility helps managers think quickly, execute swiftly, and change strategies when needed to respond to market forces. Flexibility is the ability to bend without breaking, to be willing to change while maintaining focus on the future vision for the company.

To develop innovative approaches, companies must make revolutionary changes before evolutionary ones. They must be agile before implementing continuous improvement. They must be quick on their feet and manage dramatic change successfully. These traits lead to world-class performance through creating innovative operations.

© 2016 – Rick Pay – All Rights Reserved

Innovation Saves the Day

Last week my wife accidentally burned her hand by picking up the lid of a pan fresh from the oven without an oven mitt. It was a simple mistake, but could have had very dire consequences – the oven was at 350 degrees. She immediately put her hand under cold water, but then she treated it in a very surprising way by coating it with yellow mustard and soy sauce. There was no swelling and the next day you could hardly tell she had burned it.

She’d read about this innovative burn treatment in a magazine and when the opportunity arose, she took advantage of her new knowledge and gave it a try. It worked.

To put innovative ideas into practice, you have to recognize them and be open to trying them. A key part of my practice is to bring innovative ideas in operations and supply chain to my clients and to help them personalize those ideas by trying them in their environment. Many clients have experienced extraordinary results very quickly by doing so.

Keep your eyes open for innovative ideas. You never know when that idea will save the day, in your kitchen or your business!

© 2016 – Rick Pay – All Rights Reserved

Where Has The Strategy Gone?

Yesterday I was talking to yet another frustrated CEO who wondered why his lean project wasn’t yielding any financial results, even after two years. The shop looked better and throughput seemed to be up, but when he asked his Lean consultant if labor as a percent of sales had improved, the consultant told him not to worry about percentages.

This is one of the reasons that lean “fails” over 70% of the time according to studies by McKinsey and others. Companies see it as a package of tools and techniques that reduce cost and thus, theoretically, improve profit. CEOs and CFOs start asking when they’ll see results and eventually lose interest in the process.

Tactical consultants work on spot improvements that make things look and seem better, but often those improvements don’t translate to improved value for the customer, or profit and revenue growth for the company. Why? Because the company didn’t implement lean in the context of an operations and business strategy.

Lean and other improvement processes must be done for a reason, contextualized by vision and strategy. Management should create a strong vision before embarking on process improvement journeys. That way, people will understand why they’re doing what they’re doing, which is part of the “respect for people” that is a foundation of real lean improvements.

© – 2015 – Rick Pay – All Rights Reserved

Simplify

Many companies start Continuous Improvement initiatives with 5S, workplace organization. This reduces clutter in offices, warehouses and manufacturing floors and creates quick, visible improvements to jump start employee engagement in the process.

Another way to jump start the effort is through simplification. For example, companies can reduce the number of suppliers, the number of SKUs (stock keeping units, or part numbers) and even the number of approvals required to do just about anything in the organization.

When I first started in my prior position as VP, Operations at a rapidly growing manufacturer, I had to approve all purchase orders for manufacturing materials over a certain dollar amount. One day as I sat there signing a pile of POs, I asked myself, am I not going to sign any of these? Will I shut down production because I won’t sign a PO? Is there a better way to control the flow of materials than inserting myself as a roadblock?

From that point forward, I never signed another PO for production materials. The rule was, if the PO is within the plan, issue it. Make sure there are processes, reports and measures in place to be sure we aren’t building inventory or buying parts we don’t need, but otherwise, let it flow.

Even reducing authorizations helps increase flow, and cut costs and lost time. To start continuous improvement, simplify in every facet of operations and supply chain. That way you can begin to accelerate profits and growth.

© 2015 – Rick Pay – All Rights Reserved

Surprising Ways to Get the Best Pricing From Your Suppliers

Many companies start a supplier relationship with tough negotiating, driving down the price and asking for “give-aways to sweeten the pot,” like free freight. In my role as VP, Operations at a manufacturing company, our goal was to be our key suppliers’ most profitable account. But wait, isn’t that giving away money?

Not at all. Our suppliers gave us world class pricing, often much lower than our competitors. Here’s how we did it…

1) We researched industry cost structures to understand the components of cost – materials, labor, overhead and profit. We strove to leave profit alone (and actually added to it over time), but we were relentless in driving down the other costs through concurrent engineering (including the supplier in product design) and detailed understanding of shifts in commodities prices.

When we found savings in the product, or commodity prices moved in the market, we split the benefits with the supplier 50/50, so our profit and theirs would go up while bringing the overall cost down.

2) We required our suppliers to provide detailed cost structure information so we could both work on improving profitability. This required a high degree of trust, which is the foundation for mutually profitable partnerships. During frequent face-to-face meetings, we worked together to reduce total cost of ownership (TCO) of the item, again splitting the benefits between both parties.

Over time, the profit numbers grew while the total cost shrank – a win/win in a true supplier partnership. As a side benefit, when we needed extra effort from our suppliers, they were more than willing to go the extra mile because we were their most profitable account.

What kind of partnerships does your company have with its suppliers? Do they give you world class pricing?

© 2015 – Rick Pay – All Rights Reserved.

How Can I Make Things Easier?

When asked, “What one thing, when you do it, makes everything else easier?” my mentor Alan Weiss responded, “There are several things: speed, courage, lack of self-censorship and abandonment of perfection.” These are things that apply to business situations as well, particularly in leadership, operations and supply chain.

Embracing speed (and avoiding procrastination) prevents bad situations from getting worse, allows you to beat the competition and provides excellent customer service. In my Executive Command Center™, speed is the big dial on the dashboard and is the most important element of performance.

Act with courage. Know that you might make mistakes, but as long as you learn from them, don’t worry.

Remember: success, not perfection. Keep your eye on the vision or future state of how you want things to be, how processes should work, the results you’re trying to achieve. Trying to be perfect simply delays things.

Business should be fun and things need to keep moving toward the vision of the team, organization, partnerships and community. Speed, courage, and abandoning perfection will make things easier and help you enjoy the journey.

© 2015 – Rick Pay – All Rights Reserved

Growth is Number One

Did you know that growth is the number one factor in determining company value? I recently discussed the importance of growth with someone from a large Northwest capital firm that enables mergers and acquisitions. Growth has the largest impact on the multiplier used to determine a company’s value; businesses with high growth will generally enjoy a higher multiplier than slow growth companies. As you might expect, competition among buyers has the second largest impact on company value. Companies with $10 million in EBITDA generally have higher multiples than companies with $5 million EBITDA.

Are you considering selling your company in the future? It’s best to start planning how to raise your company’s value at least five years before you want to sell or transition, in order to have time to develop a strong track record of profits and growth.

What’s the jet engine for that growth? Operations and supply chain. By improving your margins, cash flow and capacity, you can increase your EBITDA, which is the foundation for company value. Often the resources for growth are right under your nose.

How do you plan to ignite the fuel for growth in your business? What resources have you discovered?

© 2014 – Rick Pay – All Rights Reserved