Succeeding As A Modern Business Owner
We are living in an extremely interesting time. The entire business landscape across every industry has become like the Wild West. Brick and mortar stores are getting unceremoniously beaten to a pulp by their online counterparts and Google and Facebook are the two most powerful companies in the world. If you peel back the layers of the onion, there’s a very simple pattern that’s emerging that separates the haves and the have nots.
My Good Friend Poor Richard
If where we are today in terms of modern business were an onion, Ben Franklin’s “Poor Richard’s Almanac” would be the core of the onion. His core principle contributions as the godfather of modern business operations are:
The importance of not wasting time: "He that idly loses 5 seconds worth of time, loses 5 seconds, and might as prudently throw 5 seconds into the river." Wasted time is non productive time. Non productive time that the business ends up having to pay for in some way shape or form.
Saving money on costs can actually generate more money for the business than garnering new sales: "A penny saved is twopence clear. A pin a-day is a groat a-year. Save and have." The first documented beneficiary of the knowledge of this concept was a man named Frank Gilbreth. At the time, brickmasons had to bend all the way down to pick up a brick and place it along a wall or structure as they moved along. So, he invented a simple contraption that placed the bricks at waist level on wheels that the brick mason could cart along with them. This resulted in a threefold increase in efficiency.
Net Operating Cost
Henry Ford often cited Benjamin Franklin as one of the key inspirations for his assembly line system of manufacturing. The assembly line, took the principles laid out in Poor Richard’s Almanac and gave them steroids. The concept of net operating cost is simple, in order to arrive at your true cost of goods, you take your fixed costs and add in your variable costs. In the case of building a car, the fixed costs would be all of the parts and raw materials. The variable costs would be all of the expenses associated with putting all of those parts and raw materials together (labor and machines) as well as all of the costs involved with running the business and selling the completed cars (factories, offices, marketing, support staff, pencils, etc).
The great leap forward with the assembly line is that it brought variable costs down to previously unheard of levels. This concept created larger and more efficient manufacturing companies than ever before. Companies that put a focus on lowering their Net Operating Costs by investing in assembly line style advancements giants that are still in existence today. The reason why is extremely fundamental. Fixed costs are going to be relatively the same for everyone (with the only real variable being quantity purchased).
Here’s a simple analogy; If I want ten widgets from ABC corp. to manufacture into whose-its and you also manufacture whose-its, we’ll pay the same price for the raw widget. Let’s say $1 per widget. Let’s also say these widgets are put together by hand and each person making them can make 3 whose-its an hour and they have a salary of $3 an hour. The net operating cost for each whose-it is now $2. Now, let’s say that I rent a machine from someone for $1 an hour that can turn 10 widgets into whose-its an hour. All of a sudden, my net operating cost is $1.10 and yours is still $2.00. I could sell at $1.90 and still make a cool profit and you’d go bankrupt, and you did if you didn’t innovate.
Toyota Lean Manufacturing
The next layer of the onion brings us to the Toyota Lean process. The goal of Toyota lean manufacturing is simple, to eliminate waste at every point in the manufacturing process. The initial analogy used for this concept was tightening a bolt with a wrench, “only the last turn of the bolt tightens it-the rest is just movement.” Toyota set out to eliminate all manufacturing processes that did not lead to a direct result (turning a bolt does not lead to a direct result, tightening a bolt leads to a direct result). This principle defines three types of waste:
Muri: Waste caused at the preparation and planning levels.
Mura: Waste caused at the implementation level.
Muda: Waste caused at the systems, equipment, and delivery level.
Muda waste is the one that is most heavily focused on and the one that I want to spend more time discussing in this post. Toyota identified 7 initial ways in which Muda can occur within the manufacturing process:
- Transport (moving products that are not actually required to perform the processing)
- Inventory (all components, work in process, and finished product not being processed)
- Motion (people or equipment moving or walking more than is required to perform the processing)
- Waiting (waiting for the next production step, interruptions of production during shift change)
- Overproduction (production ahead of demand)
- Over Processing (resulting from poor tool or product design creating activity)
- Defects (the effort involved in inspecting for and fixing defects)
The final layer of the onion. I really don’t think I have to go deep into what the original Moneyball concept is at this point. From a business perspective, this concept has caught on like wildfire, beginning about 10 years ago. When Burger King hired a 29 year old CEO, I knew the concept had fully arrived in the corporate world. I’ll frame my feelings on this concept the same way that I frame it when I’m having discussions with Executives on the topic. IT is no longer a department within the modern business or corporation, it is the nerve center of the business or corporation. The modern business world is being reshaped and upended by this concept as we speak and the new haves will be the ones who fully embrace this concept and the have nots will be the ones who cling hard to the old ways of operating their business.
Within the IT world, there is a management concept being used across Silicon Valley and in other places called Agile management. Agile is essentially the Toyota Lean Manufacturing process converted to IT. Within large corporations, the big holy grail at the moment is to completely eliminate your onsite IT department. I have a client in the Oil and Gas industry, which is on average, about 10 years behind every other industry and it’s on a downward trend in terms of growth. 5 years ago, they made a commitment to do everything possible to drive down their Net Operating Costs. This involved some unheard of things within the industry such as; utilizing a CRM, implementing a sales process, using ROI based marketing principles, replacing all factory software systems, and a slew of about 50 other systems and process changes. They’re now enjoying their 4th straight year of record profitability and are about 3x larger than when they started the whole process (growth through acquisition).
On a smaller scale, I have a client that operates a 10 person business (2 manufacturing, 8 sales and operations) that pushes over $15mm per year of physical product. On a typical marketing blitz, their campaigns generate 10,000 warm leads and they are now the biggest player in their small niche, having unseated a 65 year old 100 person company for that spot. Their secret sauce is simply that literally every single aspect of their business is automated. Getting into their sales funnel triggers a series of automated emails and ads the prospect to digital ad custom audiences. Once the leads are warm enough, these become the leads that sales reps call. Once a customer places an order, everything from a software standpoint is handled and triggered from one system, including invoicing and emailing the customer and dispatching the order for assembly. Assembly is kept to a last bolt standard and with predictive analytics software, inventory turnaround is less than 24 hours. Their business hums like a well oiled machine.
This is your primary competition in the modern business environment. Business success is not being defined by being first to market, it is being defined by who can operate most efficiently. If you can wrap your head around this concept, you will dominate your industry, no matter what it is. If you want to know the true secret to increasing your sales and making sure that your business thrives, it’s lowering your costs.