Thursday, August 19, 2010

Logistically Speaking

The greatest problem retailers, especially convenience store retailers face today involves logistics.

You may have heard the idiom, "You can't manage what you can't see."

If you have from two to eight locations you may have a problem. If you have more than eight locations you're probably sitting on a powder keg. It's virtually impossible to effectively manage multiple retail locations from a central office if you are not connected.

There are various forms of connectivity that result in varying degrees of effectiveness:

  1. Assigning a supervisor to oversee a group of stores
  2. Retrieving and sending data to the stores electronically
  3. Creating a network which includes the office and the stores

For the most part, most independent retailers employ the first option, a few have adapted the second, but very few retailers have actually created a network consisting of headquarters, the back offices in the stores and the point-of-sales devices inside the stores.

If you are using option two, the receiving and sending of data to the stores electronically does not constitute having a 'network'.

The true definition of a 'network' is a seamless computerized environment where it is virtually impossible to draw a line between one node in a network and another.

The following are two examples of networks:

The Internet is the world's largest network. If you are connected to it, you have a kind of connectivity to the world. If you want to know what the weather is at this instant, you can go to a site like http://www.weather.com and check on the weather anywhere in the world. (You can use your back button to come back here). However, if you download and install the Weather Channel Desktop, you will find the current temperature is displayed in your task bar in the bottom right hand corner of you screen according to the zip code you entered during the install process, and as the temperature changes, so does the temperature on your desktop.

Now click on the following link:

http://www.crsys.com/cgi-bin/SR102C.PGM?AAZ01.0115

Here you will be able to watch sales as they are occurring at one of our customers' stores. This page is set to refresh every five minutes, but can be updated in real time by refreshing your screen.

The important thing is, that in neither case, I am required to perform any manual operation to get the data onto my desktop.

HOW IMPORTANT IS THIS?

By connecting the stores and the POS devices to our network over the Internet, we are able to record the sales in real-time, scan new items into our inventory in real-time, and audit the stores' inventories in real-time.

By tracking sales, purchases and audits in this way, we are able to automatically see the number of units of each item of inventory in our store within the past few minutes. By setting a re-order level for each item, a supplier is able to see what he needs to load in his truck, and we can track the incoming items from the supplier's warehouse to the store. This is possible only because we do not need to download the data. The status of the individual items is always available in our network for any authorized person or entity to see and use.

Price changes can be made for any item located in any store in the network. And since the retail price is network to the POS device, the next time an item is scanned, the POS will charge the customer the current price.

There are many other advantages associated with this type of network (cloud computing) that I will talk about later.

Thursday, August 12, 2010

Little things mean a lot

We've all heard the favorite political joke from the eighties – "A billion here, a billion there — pretty soon it adds up to real money."

Well, there's a lot to be said about that. In the convenience store business, I've seen 'a penny here, a penny there add up to big profits'. Did you know, if you increase the retail price of everything in your store by $.05, with an average turn rate of only one-per-day, it comes to an increase in profits of $54,750 a year? It's not a whole lot, but it pays the salary of two employees. It would also make my house payment for thirty months. While some convenience store operators are showing net profits of less than three percent, pennies do matter, and with a few simple exercises, I hope to get you excited about it.

Let's say you raise the price of an item by a nickel that moves five time per day (like Snickers), that comes to $91.25 in increased NET profits. Fast movers are less subject to being affected by increases of a few pennies. If you can do that with all the fast movers in your store (say 100) it comes to $9,125.

But that's only the beginning. If I can find an item in your store that's been collecting dust for the past year and replace it with an item that turns five times a day at a $.30 profit, it adds up to $547.50. So we can easily see how a single item that sits there feeding your mice is costing you lots of money.

Now here's the real killer. If you have 3,000 items in your store, I'd be willing to bet you that 300 of them are just sitting there gobbling up space. By replacing those 300 items with items that move only twice per day and produce a $.30 profit, it comes to $65,700 a year in additional profits. Do that in ten stores – nearly $658,000 a year in profits that you might enjoy if you had a way to track and manage your inventory. So confidentially, how much would you be willing to invest a year to increase profits that much? $20,000? … $48,000? How about only $4,800? But like they say on television, "Wait there's more!"

There are thousands of little things you can do if you have the tools to do it effortlessly. Think of every item in your store as a tiny little machine that generates cash. How much cash it generates is determined by how well it performs. Like machines, if you could find a broken one would you allow it to just sit there in your factory leaking oil on the floor? Of course not. You would have it replaced, or fixed and brought back into service. But the one thing you would not do is stick another broken one right next to it. Why do you allow your suppliers to put broken cash generating machines on your shelves? The time has come for convenience store operators to take the position of Walmart and other big box retailers. Sit down and talk with your suppliers and make them understand that you're in this business to make a profit, not to serve as a warehouse for their slow moving merchandise.

The more things change, the more they stay the same

In 1965 I had my first meeting with a convenience store executive. 'My God has it been that long?' It was at the Southland Corporation (7-11) offices on Fairfield Avenue in Shreveport, Louisiana. I was in my early twenties, green behind the gills and trying to sell the guy some radio advertising for KJOE, a station where I pulled a morning shift on the air and sold commercials in the afternoon. He loved to talk about the convenience store business and he couldn't stop himself from spouting out figures I had no way of understanding; but one thing he told me stands out above all else. He said, "At the cash register, if I could get my cashiers to ask each customer one simple question, 'Do you need anything else', I could double the profits in every store."

A couple of years later, while working for the L.M. Berry company, a company that sold telephone directory advertising for Southern Bell in New Orleans, I called on a business that sold prescription drugs and health and beauty aids directly out of a warehouse to the retail market. This elderly gentleman had a huge, Yellow Page advertisement, a bank of secretaries answering the phone, and six motorcycle riders to deliver the customers' orders. When a customer placed and order, he trained the ladies to say things like, "Mrs. Smith. We have a special on Kleenex today – two boxes for one dollar. Would you like me to have the delivery man add two to your order?" Or, "While I've got you on the phone, why don't you look in your medicine chest and see if you'll be needing any toothpaste, aspirin," etc., etc. This guy had a one of a kind business plan and was making a ton of money.

We all know the 7-11 story, and I didn't keep up with the drug store owner over the years, but I'll bet you a dollar to a doughnut-hole — he died a millionaire.

We all have a calling. Either we find it, or it finds us. I rambled around for fifteen years selling advertising for radio, television, newspaper, city directories and telephone companies — I even made a pretty good living selling check writing machines for the Paymaster Corporation; but when a young man visited my computer sales office in 1978, I met my second convenience store operator. Not only did he have twenty or so convenience stores in the Denver, Colorado area, his father was an oil jobber and he told me all about the horrendously complicated federal, state and local taxes on gasoline, and how some were paid to the supplier, some later to the state, and some after the fuel was sold. I must confess, I didn't have any idea what the dickens this guy was talking about. But two years later, in 1980 I sold my little company and started working for a man that had written a computer software program for 'oil jobbers'. For those of you who aren't familiar with that term, and oil jobber (later called an oil marketer) is a company that sold gasoline, diesel fuel, oil and lubricants to farmers, factories, gas stations and government agencies. The majority were branded — Exxon, Mobil, Texaco, etc. and others were independent, like Ride-A-Rose.

During the next year I had the most fun in my life, traveling all over the country talking to jobbers and selling computers, then I struck out on my own, writing my own software and selling IBM computers for IBM. The main reason I decided to resurrect my computer business is because the fellow I was working with, the guy that wrote that oil jobber software, didn't have any software for convenience store management and almost all the oil marketers I met and spoke to had two or three convenience stores on the side and they were having the devil of a time doing their books.

So, I began working with convenience store operators in 1981. I thought then, as I do now, that their greatest problem was controlling the purchasing, sales and tracking of inside items like groceries, cigarettes, beer, health and beauty aids, etc. But profit on gas and groceries were so high, no one seemed to care much about that.

I remember one time while working with a customer in Texas, I was auditing the store's inventory and I found a quart of Mobil oil that had no price on it, so I asked the guy at the station (I'll call him 'Jim') how much it sold for. I will never forget what Jim told me. "I think Leroy charges $1.79 for it, but I usually get 89-cents."

Flash forward to just last week in a store I was setting up for inventory control. I hauled a jug of some off-brand drink out of a cooler and asked two clerks what the retail price was, and you know what? I got the same answer from them that I got from Jim twenty-five years ago. The bottle wasn't priced and they had no clue. Isn't it strange how the more things change, the more they stay the same?

Well I have startling news. There is no profit in gasoline anymore, and suppliers are raking off all the profit from groceries. Where does that leave you? Isn't it time you started paying attention to what's going on on those shelves?

Wednesday, August 11, 2010

Disruptive Technologies

  • In 1978 IBM viewed small computers as electrical toys, a fad that would never be accepted by the mass market.
  • Edison clung to his direct current (DC) model for electricity as he claimed Telsa's alternating current (AC) model was too dangerous to be accepted in the market.

The above are two examples of 'disruptive technologies'; also known as 'paradigm shifts' for your guys that survived the techno-bubble. Venture capitalists love disruptive technologies because they present unlimited opportunities for making hay at the expense of someone else's grief. But we're not concerned with why Microsoft stole the small business computer market right out from under IBM's nose, or why the compact disk laid waste to the phonograph industry. What we are concerned with is how disruptive technologies affect you the convenience store operator.

'Category Management' is more of a methodology than a technology for the reason that it is generally concerned with a method of managing inventory rather than a device to assist in inventory management. However when you consider that companies like Walmart and other large retailers use an entirely different kind of methodology to manage their inventories, it can be described as being disruptive.

The definition of Category Management is a marketing strategy in which a full line of products (instead of the individual products or brands) is managed as a strategic business unit. It is based on the concept that a marketing manager is better able to judge consumer buying patterns and market trends by focusing on the entire product category.

Millions of dollars are at stake in the battle to save Category Management, as it places the emphasis of control directly onto the supplier. In the convenience store industry the general belief is that the lowly, store manager is incapable of managing their own inventory, so the supplier will decide what and how much inventory is placed in your stores. The problem with this way of thinking is that your suppliers do not know your customer's needs any more than I would, as customer needs are constantly changing based upon a plethora of parameters that are unique to your specific location, the time of day, the day of the week and the season.

Some examples are:

  • How can a supplier know about a specific store's competitive situation?
  • How can a supplier take into account the fact that a store located near a high-school enjoys an influx of teenagers every day at 3:00?
  • How does a supplier know that for whatever reason, some products simply do not sell in your particular neighborhood?

If a supplier possesses any knowledge whatsoever, it is generally related to a wide geographical area.

Having given up on controlling their own inventories, large convenience store retailers are moving toward becoming more like restaurants. This is unfortunate because they haven't exhausted the opportunities that convenience stores offer. I guess they think it's too hard, above their capability, too time consuming to be profitable, etc., etc.

Using scanning to build an environment of just-in-time inventory control is the disruptive technology that will destroy the category style of management. It focuses the analysis down to the item level, not the category level, and forces each product to justify its position on your shelf.

Take tobacco for example. While many brands are offered for sale in a convenience store, less than ten probably deserve to be there — about 10% or less. It is not in the interests of the tobacco suppliers to have you scrutinize items. That's the reason we have buydowns and rebates on cigarettes. Cola suppliers don't want you to track items. That's why they demand 75% of your cooler to offer you a decent discount on products.

The problem is these poorly selling products are crippling your sales. It would be like suppliers firing 90% of their pre-salesmen (not a bad idea) yet keep them on the payroll. Their overall sales would plummet but their payroll would stay the same. That's insane, but that's exactly what they expect you to do.

Suppliers do not want to change, but they have no choice. Either they must find better ways to help you manage your inventories or they will have to expand into other areas – like the restaurant market — because in order for the convenience store industry to survive it will have to change, and if it changes, so must the suppliers.

Individual product control will happen sooner or later. It will one day force Category Management completely out of the picture. When suppliers finally realize that their customers are going broke because of it, they will be forced to change as well.

Friday, August 6, 2010

Critical Success Factors (CSF)

"What can we be doing here that isn't already being done well elsewhere?"
From "When you're up to your a** in alligators … It's hard to remember you're original objective was to drain the swamp." —Mark Stairwalt, 3-12-2010 Politics

I ran across this quote strictly by accident, but I think it rings true with just about every customer I've talked to during the past thirty-two years. In our rush to automate, businesses have created, and are hoarding, tons of useless information so that long after we are gone our heirs will add it to what they accumulate until their offices burst at the seams. If not managed properly, computers tend to create an overabundance of extraneous 'BS'. The problem it creates elevates the blood pressures of upper-level managers to dangerous levels and only adds to already high frustration levels. We have met the enemy at it is us.

Consider an article I found recently that pretty much sums up additional problems created by the Internet Age:
The Internet generation's capacity to conduct multiple Instant Messenger conversations while listening to an iPod, using Google to research a PowerPoint presentation, shuffling among multiple open screens in Windows, talking on a cell phone, e-mailing a Word file to a colleague, all the while watching this week's episode of "The Office" on TV, is taking multitasking and attention spans to unprecedented levels. Scientists at organizations such as the Institute for Neurological Disorders and Stroke are studying the impact on multitaskers' cognitive abilities, social skills, creativity, downtime, and general perceptions of the world around them. Some researchers regard the new era of digital multitasking as an advantage while others warn that such cognitive juggling could lead to loss of the ability to concentrate and cause mental restlessness.Source: "The Multitasking Generation." TIME.com Sunday, March 19, 2006.

Well that pretty much sums it up for me. Just reading it makes me dizzy. How about you? Somewhere in the glut of data mentioned earlier lies the answer to everlasting life, but your quest to find it may be as complicated as the vastly complex machinery that generated the data.

To be honest, there are but a small number of pieces of data that are especially critical to a manager's job and a surprisingly small number of decisions that are particularly important. We need to establish a procedure for drilling down through the cacophony of information to find what we're looking for; but first, we have to be precise in defining what we are seeking … and why.

We do this by analyzing the critical success factors (CSF) of a business and its management. I was surprised to learn that there is only a handful of really important stuff that's critical for an executive to know in order to effectively manage an enterprise, and if they think about it, management can generally provide us with good candidates for immediate resolution.

After you have identified the CSFs of the enterprise, the next step is to have each manager, in the order of their hierarchal position in the organizational chart, add to the list, based upon his or her specific needs, the information critical for their specific jobs. Allow three hours for each executive to respond. If they need more time, then obviously they are having problems defining their jobs — also good information to have. Once you have established the CSFs of each manager in the enterprise, you can begin to sort out what information is absolutely critical for the tasks expected of them. This exercise forces management to concentrate on their specific needs, rather than the needs of the enterprise as a whole, and it helps to identify the information they feel is critical in helping them do their jobs. This technique is an exercise totally independent of computers. Computers turn the technique into a control mechanism converting business strategy planning into information strategy planning.

A manager's goals are the targets he will aim for. CSFs are tools that he will use to get where he wants to go. CSFs at one level may become goals at another level. For example: At the corporate level a CSF might be to 'maximize profits in the stores', while at the store level it becomes a goal: 'Develop a schema to put colored dots on slow movers and return them after ninety days'.

CSFs are far from being permanent. In fact, they may come and go, switch positions in their level of importance, be divided and split in two, or discarded all together — depending upon changing factors in a business. They may be geographical in nature, within the overall enterprise or for stores located in an urban environment which may be remarkably different for stores in rural locations. CSFs are particular to a specific entity at a specific period of time. From these you can develop strategic planning tools, various reports, track critical information and develop critical assumption sets, all resulting in critical decisions.

To set up a CSF study, you might consider putting together a two-person team to identify and rate your company's CSFs. One individual should have extensive knowledge of your industry. The other might be a temporary consultant that's familiar with CFS studies. The better the understanding of the industry and the jobs of the executives to be interviewed the better the study.

A CSF study should proceed from the bottom up starting with the lowest-level managers. James Martin suggests the following three questions are paramount.

  • What are those things you see as critical success factors for your job at this time?
  • In what one, two, or three areas would failure to perform hurt you the most? Where would you hate to see something go wrong?
  • If you were isolated from the business for two weeks, with no communications at all, what would you most want to know about the business?

Things a CSF interviewer should NOT do:

  • Do not lead the witness
  • Do not limit the list to those CSFs that are appropriate for computerization
  • Do not overlook externals CSFs
  • Do not limit to short term CSFs
  • Do not overlook CSFs that have been stated in multiple ways

Try to prioritize the CSFs. This may require a best-guess methodology because some CSFs are difficult to prioritize. Determine ways to measure the effectiveness of CSFs and hold a top level meeting to allow for debate with the objective of achieving top-management consensus of CSF identification.

More than likely, a CSF operation may be the most important thing an enterprise can do in order to restructure their company. It often produces immediate results and should be acted on immediately. A temporary decision-support system can easily be built using Excel spreadsheets.

Goals and Problems

"Everybody talks about the weather, but nobody does anything about it." Charles Dudley Warner – Hartford Courant of Connecticut – August 27, 1897

The analysis of goals and problems is probably the most exciting and fulfilling exercise in business reconstruction. Goals are a basic element of the human psyche and we simply cannot get along without them.

When you and I started our businesses, we each embarked on a quest to reach a goal that we felt capable of accomplishing. It might have started as a small spark or it might have been a bonfire, but the majority of goals never turn out quite as we expect. Why? Because the brother of 'goals' is 'problems' and we seldom find one without the other.

I learned the hard way there are three rules for goals: The first one is obvious —it must be attainable. I will never walk on the moon, so it would be ridiculous for me reach for it. I will never be rich beyond my wildest dreams because it's too generalized. Therefore the second rule of goals is that they must be specific. The third and final rule is that everyone involved in reaching the goal
must understand it thoroughly. So there you have it — attainable, specific and understandable.

You can't operate a business without goals. They are the control mechanism for an enterprise. An enterprise that has lost sight of its goals will spin out of control and commit suicide. Goals should focus on results, be associated with departments of a business, and be decomposable into work that has to be done.

Objectives are generalized statements about where we want to go. Goals are specific targets that have a time-fuse built into them and may be composed of multiple objectives. A mission is a high level statement of objectives, and strategy identifies a pattern of goals, policies, and plans that determine how a business should function over a specified period of time.

One strategy in a convenience store environment might be to enhance the shopping experience of its customers. An objective might be to increase overall profitability, and a goal might be to eliminate slow moving stock and replace it by the end of the year with items having a higher turn-rate.

Goals should be categorized as short term and long term, with short term being two years or less and long term extending out to a lengthier period.

Short term plans might include: What is our targeted gross sales for the next fiscal year? How can we eliminate the errors on purchase orders by July 20th, 2011? How do we implement price books and scanning in all stores by December 17th? All the while, creating budgets and quotas and building these into financial models. Short term planning tracks sales and expenses, comparing them to targets, and provides for adjustments required to achieve target revenues and profits.

Long-term planning addresses such questions as: What will our revenues be five years down the road? How will we achieve that growth? To what policies must we adhere to prevent suppliers from sneaking inventory in through the back doors of our stores? How can we insure our shelves remain full without opening the door to supplier abuse? How can we work with suppliers to help them live up to their contracts of removing unsellable or spoiled stock?

The highest level objectives must address the following questions:

  • What is our business?
  • What will our business be?
  • What should our business be?

The above are questions top-level managers should be asking constantly. This is vital. And don't forget about your customers.

  • Who are they?
  • Where do they live?
  • What are their needs?
  • What will they buy, and why?
  • At what price?
  • How do we go about attracting them?

An enterprise must translate its customer's needs directly into a hierarchy of goals. Else it may develop forms of internal politics that serve no purpose.

In most convenience store operations, goals (if they exist at all) are generally not found in written documents. Rather, they are being carried around in someone's head and may change from day to day. This is why most businesses fall prey to rumors and views from so-called experts that end up being nothing more than sale's pitches to buy something — get a discount, a rebate, or a free trip to play golf in Hawaii. Without a well-documented list of goals that are shared and fully understood by management, management is subject to being taken in by everybody and anything. An enterprise that operates in this fashion is simply an accident waiting to happen. Each manager should set their own goals and insure they are conducive to those of the enterprise. This is where assumptions come into play.

Assumptions are a belief or thought that guides us through our day-to-day activities. In the convenience store industry we might assume that customers are turned away from stores that have bare shelves, so we are much more agreeable to ordering a shipper with 2,000 new candy bars that no one has ever heard of, because it agrees with our assumption that it will make our gondolas more attractive.

Assumptions may guide us into believing that all employees steal after the first six months and lead to the enforcement of a policy aimed at treating all employees as thieves from day one. An assumption that vendors are gods who know what's best for us, helps us to look the other way when they cram a nine month supply of an unpopular brand of beer in our cooler. An assumption that a specific software product is best because 'everybody' else uses it, may guide us into haphazardly reorganizing our company to function like the competitors we want to be better than.

Assumptions are by far the most dangerous element that exist in the minds of top management. Let me give you an example: While attending a seminar at a meeting hosted by a national association the CEO of a twenty-unit convenience store operation is convinced, if his company is going to survive, he must grow his operation. On the plane coming home from the soirée, the CEO decides building a brand new store in a new and up-scale section of his city will attract more revenues and conform to his newly formed assumption that 'a business must expand or die'.

Being a small company, the lone operation's manager feels the investment necessary to meet the codes of the new area is too high, he already has more stores under his control than he can manage, and he doesn't have the employee resources necessary to staff the new, remote location with employees who will need to make a forty mile-a-day round trip to and from work. His assumption is 'the boss may not always be right, but he's always the boss'.

What do you suppose will be the outcome of this scenario?

The assumptions held by the boss, top-management and employees must be constantly under scrutiny. Else the enterprise may be working against itself, causing friction and fueling internal politics.

Every business has problems that impede its progress toward reaching its goals. A matrix should be created to associate goals with problems. Goals and problems should then be mapped against departments. Then, management must sit down and hash out what problems exist that prevent them from reaching their goals, what the possible solutions to these problems are, what departments could be used to assist in reaching these solutions, and what their part should be.

Goals and Problems should be ranked according to their importance: Are they so critical they should be assigned a rigid timetable? Is solving them critical to supporting the enterprise? How critical? Do they simply fall within the category of 'wouldn't it be nice if'?

A meeting should be held with the owner or CEO, the managers that answer directly to him or her, and a third level (if applicable) that answers to the second tier. The event should be announced beforehand, providing each manager time to think about the goals and problems he or she would like to bring to the meeting.

Be sure the group understands the purpose of the meeting and the tools that will be used. A member from the IT department should be present to answer questions and field suggestions as to a timetable for creating the tools necessary to track the charts and matrices that will be used in the study.

There are several good books available to assist in this effort. One of my favorites is James Martin's Information Engineering trilogy. Many of the ideas in this blog have come from twenty years of research including excerpts and ideas appearing in Martin's books.

Goals and Problems should be revisited annually to see if they still exist, are still in the process of being solved, or need to be completely removed from the list. Interviews with selected managers should be held periodically so they may report on progress made on the solution of goals and problems that were assigned to them specifically. You might consider incentives and compensation for solving problems and reaching milestones in a timely fashion.

On the other hand, if you are happy with the way things are going in your business, think again. Things are not always as they seem to be.

Thursday, August 5, 2010

Thinking About the Corporate Structure

Departmental activities tend to expand with no knowledge of what is occurring in other areas, resulting in redundant and oftentimes conflicting procedures and processes. Before computerization it really didn't matter much as each department was responsible for its own paperwork. But when departments begin to share information it can become a real problem. This problem is no more apparent anywhere than in our health care industries and government offices, and we all know what kind of mess they've created. So in many ways we are conducting business in much the same way it was done fifty years ago. Computers have just provided many of us with a method to 'speed up the mess'.

One of the main outcomes of strategic planning is to eliminate duplication of information. Charts mapping the sharing of data between departments, not only identifies redundancies, but it provides the solution of how to end it once and for all.

Departmentalizing and Functional Decomposition

An important step is to create a spreadsheet, departmentalizing your business. For example:

XYZ Convenience Stores

 

-

Corporate Division

 

-

-

General Accounting

-

-

-

Accounts Receivable

-

-

-

Accounts Payable

-

-

Legal

  

-

-

Marketing

 

-

-

Personnel

 

-

-

-

Human Resources

-

-

-

Payroll

 

-

-

Planning

 

-

Stores

   

-

-

Store Management

-

-

-

Store#1

 

-

-

-

-

Inventory

-

-

-

-

-

Audits

-

-

-

-

-

Purchases

-

-

-

-

-

Sales

-

-

-

-

Maintenance

-

-

-

Store#2

 

-

-

-

-

Inventory

-

-

-

-

-

Audits

-

-

-

-

-

Purchases

-

-

-

-

-

Sales

-

-

-

-

Maintenance


 

Start off simple and expand it as needed. Eventually, we will expand each line in the spreadsheet to identify location, goals, and critical success factors.

Functional decomposition is the process of resolving a functional relationship into its constituent parts so that it may be reconstructed. A 'function' is defined as what has to be done to operate a business while 'procedures' define how it is done. Procedures may change as technology changes while functions might not. Processes are accomplished by procedures. A function may be carried out by many departments and a department may carry out many functions.

A functional area might be described as 'inventory' while a business function might be described as 'purchasing'. Going down the scale we may determine the processes involved in the business function 'purchasing' are 'creating purchase orders' and 'maintaining supplier information', while 'maintaining supplier information' might be further decomposed as 'recording supplier performance data', 'analyzing supplier performance' and 'selecting a supplier'.

If at this point you are thinking, 'how in the dickens can anyone keep track of all this?' —think about it. Somewhere in your organization at this very minute, people are doing all of these things, but how they are accomplishing these tasks may be a complete mystery to you. In fact, it may be a complete mystery to them, and when they get sick, retire or die, because no documentation exist to spell out exactly what processes they were using to accomplish these task, you might find yourself it hot water.

Preparing a matrix of business functions against top management is an excellent way in determining who's responsible for, involved in, has authority over or has technical expertise in specific business functions. A few examples of business functions in a convenience store operation might be: Planning, research, forecasting, territory management, selling, administration, ordering, purchasing, receiving and inventory control.

Prioritizing Business Areas for Study

The building of the overall information architecture can take years and you should get started as soon as possible. Obviously, you can't do everything at once. The first step is to prioritize business areas and work on them one at a time. The decision on where to start should be obvious. It is the department that will benefit the most.

In the convenience store business I would chose the management of in-store inventory first, because it has the greatest potential for realizing immediate profits. I have often said that the proper management of retail inventories will double the profits in every store within the first ninety days. This may be hard for many of you to swallow because you don't have the tools and experiences in seeing the results first-hand. Also, few convenience store operations have a department for the management of inside inventory, having left most of those decisions up to your suppliers. But regardless of how you feel about my opinion or the opinions of top management, you will need to make this decision before you choose an area to start.

Nevertheless, the first area to work on should be the one that has the greatest potential to increase profits. For years most operators have spent too much time on efforts to reduce cost, but it's been my experience that reducing costs has been literally beaten to death. Once you have identified some top-ranking choices, choose the one that has the shortest completion time. The reason for this is simple — it gives the team a quick success. It will give them confidence and enthusiasm as they begin to tackle the more difficult ones, and it will help them answer the question: How long will it take?

You should begin to see results immediately without waiting for the first study to be completed. In the absence of more professional tools such as decision support software and executive information systems, spreadsheets can be designed to assist in the analysis process.

Certain systems might need to be implemented immediately. There is always a tradeoff between the implementation of a temporary change versus long-range completion of a new business structure and this should be taken into consideration before making permanent changes. There is however no reason why separate teams cannot be working on different projects simultaneously. This of course will depend on your resources.

Organizational Restructuring Techniques

Information is power. Without it you're running a ship without a rudder. With the tools available to us today, there is no longer a valid excuse as to why critical data cannot be made available in a timely fashion at everyone's desk. Don't take the previous statement lightly. If your people are telling you otherwise, ask them why.

The next question is: Where should decisions best be made? The answers to this question will undoubtedly change the structure of an organization. So the concern is not only how the organization functions, but how the organization needs to be restructured.

Rather than being concerned with today's activities, management should be concerned with what is important now and what will be important in the future. At this point, don't make things harder than they need to be. If management doesn't have the information they need to make decisions, that's one thing; but if management doesn't know what it needs to make decisions — that's a different story entirely.

Management should be made aware that a rethinking of the organization's goals may change corporate procedures and the organization's structure. If they know this going in, they most likely will take a greater interest in the study.

It is often difficult for management to take an outside view of the organization. They are too involved in their own problems, emotions and company politics. K-Mart fought technology tooth and nail until they found themselves in an inferior position to the rest of the market. 'Change' can be terrifying and the need for 'change' may not be recognized by individuals involved in procedures that, in their view, have worked for years. You might consider hiring an outside consultant to work with management and provide a buffer zone for the hashing out of failed assumptions based solely on emotions.

Outside consultants may have expertise in different fields, experienced with critical success factors, technology impact analysis, strategic systems vision and/or data modeling; but one thing's for sure — they must work well together, move fast and professionally and operate in an atmosphere of respect and mutual cooperation, and above all, have the full support of top management.

Wednesday, August 4, 2010

Studying the Enterprise from a Management Perspective

Most companies are far too complicated to study as one entity. Think of a wristwatch. A watch is a single entity that functions through the operations of many moving parts; each part being directly linked to another, which is linked to yet another, and so on and so forth. A business can never be understood at this level. In order to study an enterprise, the company needs to be broken down into departments and then later integrated into an overall picture that can be managed.

An enterprise is composed of separate departments that may function like a watch but pass their information through entirely different levels. For example, the accounts receivable and accounts payables departments make up parts of an accounting system and have no direct relationship, yet they integrate with a common entity – the General Ledger. The results from each department help to make up the Financial Statement. Therefore, in the end, all departments that integrate to the General Ledger must produce results that are understood by the General Ledger but may not be understood between the departments that generate the data. How the unique departments relate to one another is unimportant at this level.

This environment is necessary but leaves open the possibility that one department may be functioning in such a way that is in direct conflict with other departments in the enterprise. Analysis of processes within departments forces us to identify conflicting actions that may interfere with efficiency. We will talk about this later.

Because of logistics, the convenience store industry provides us with an excellent model of how not to create an efficient enterprise. For decades the solution to this problem has been out there, but the chances are that it will take two more decades before these solutions are implemented. Why? — Because it requires change that will generate threats to management. Meanwhile companies such as Walmart will continue to reap the benefits of our sluggishness. The companies that are successful in adopting new technologies first are the ones that will benefit the most from their use. But first, you must understand how these new technologies will affect your overall enterprise.

Information technology people have trouble getting top management to take an interest in planning because their approach is too technical, so new systems are usually bought, paid for and implemented, not because they will satisfy the goals of an enterprise, but for the reason that management believes that something good will come from it, which will force the enterprise to change. It rarely works that way. It's like crashing into a wall to see if the seatbelts work. Meanwhile, departments that feel the effect of the new technology, scramble to catch up in an atmosphere of confusion and discontent, greatly crippling the results of implementing the new technology. Drastic changes to an enterprise should never be undertaken until management knows how it can be used to make the enterprise run better, to provide new opportunities, and to make preemptive strikes against the competition.

Critical Success Factors (CSF's) are things that must occur in order for the enterprise to be successful. They go far and above obvious things such as meeting payroll and paying taxes. Take an hour and sit down and make a list of things that are critical for the success of your enterprise. The building of an adequate information system, hiring a new accounts payable clerk, adding a new section to your current offices or moving to a new area of town entirely, getting rid of dead stock, making better use of your purchasing power, etc. — anything and everything that you feel will make a positive impact on your operation. Document, document, document.

The importance of analyzing goals and problems cannot be overemphasized. It is imperative in providing control mechanisms and relates to setting the objectives of selected managers. What goals do you wish to attain? What are the problems you may encounter in reaching these goals? My goal may be to own a new Porsche, but I may encounter a problem paying for it.

Consider ways as to how new computer systems can be used to change the ways your company does business and how they may be used as strategic weapons against competition as well as how they may be used as tactical weapons to fend of attacks from various competitors.

These interests can be important generalities and can be understood by top management. The techniques by which we accomplish these exercises are forthcoming.

Enterprise Restructuring – Step One

This is the first in a series of articles aimed at the reinvention of retail business for the 21st Century. It goes beyond computers and technology and offers insights as to why many retailers have failed and why they will continue to fail unless they take action to reinvent themselves while there is still time.

In order to do this, a person has to first revisit the past. For some of you that may be only a few years, but for others, it may go back to your parent's and even your grandparent's time when they began in the business you inherited. The probability is that most of you may be operating under business plans that if created today, might seem ridiculously inadequate for the current times; and here's the problem: As your business has changed, your business 'plan' has become obsolete.

What is a Business Plan?
It's a mistake to say a business plan is a document to get financial backing for a new venture.

A Business Plan is a living document and guide for running operations once the enterprise is started and on its way, with the express benefits of pulling the management team together and forcing them to more fully appreciate the task ahead of them.

It's been my experience that when turning businesses over to their sons and daughters, one of the biggest mistakes parents make is to suggest policies, which worked well in their day, will also work equally well after they have gone. The fact is that every business will face a crisis every three to five years, and plans that worked well a decade ago are obsolete and desperately need to be changed.

The first cars were called 'horseless carriages', because they resembled a horse carriage, without the horse of course. The first radios we called 'wireless' because they suggested some resemblance to telegraphy without the wires. It wasn't until years later that they were renamed when someone realized 'cars' bared no resemblance to horses as 'radios' bared no resemblance to telegraphy. Both of the above technologies have been called 'disruptive technologies', not merely because they replaced existing ones, but more importantly, they demanded a complete restructuring of the enterprises that created and used them.

A quarter of a century ago, small to medium-sized enterprises (those with less than 500 employees) began to introduce computers into their environments and a forced restructuring of businesses took place without well thought out plans to make the transition. The obvious reason being that most business owners had only heard the word 'computers' and really had no idea what they were going to do with one. I know, because when I began selling computers in 1978, I would ask people what they expected to do with them and I watched their eyes glaze over. I actually remember more than one customer telling me they just wanted to put it in the front office so their customers would see they had one.

It's impossible to imagine what you can do with a new technology until you understand its capabilities. More often than not, when you acquire a new product you may go for months or even years before you exhaust all of its capabilities. By then it's already obsolete and it's time to learn something new. For example, in the eighties I had a good friend who bought a VCR because everyone he knew had one and he thought he should have one too. After several instructions on how to insert a tape and play it, that was the extent of his total knowledge about VCRs.

When not knowing how to use a new product becomes an obvious liability, for example when a competitor starts using the same technology to make your life miserable, a person may panic and make matters worse by trying to make the product perform in ways other than which was designed.

Companies that once relied on fifteen office employees soon reduced their staffs to five, or less. The decision to 'computerize' was not based on the idea that it would eliminate employees — quite the contrary. In fact, even suggesting that computers would replace personnel was considered politically incorrect. But looking back, that's exactly what happened.

Very few, if any small businesses planned for their transition into data processing. Without proper planning, many invested in the wrong technology and went belly-up. The primary reason for most all business failures can be traced back to the lack of planning – probably at the rate of 95 percent would be a conservative estimate. Conversely, most business victories were a direct result of proper planning. Surely there is always 'dumb luck', but it's usually temporary. The successes attributed to Walmart's planning are legendary. Sam Walton was an expert at planning. If he had not done so, the name Walmart would not be known today.

Planning can and should result in the perpetual restructuring of a business, and the bane of restructuring is often the resistance of management. Attempting to use a company's own management to construct a plan is difficult if not impossible, mainly because it will require a change of the jobs and responsibilities of the planners, and we are all painfully aware of our inherent rebellion against anything new. Oftentimes, as in Walmart's case, a plan must come from a single individual within an enterprise with the vision, determination and authority to see a plan through to its end, else it will be consciously or subconsciously sabotaged by those who see it as a threat.

Having said all that, how does one go about creating a plan and maintaining it throughout the restructuring process? Believe it not, it's deceptively simple. You should start with two or three simple aims:

  • Make you company more profitable through the use of technology
  • Become more competitive
  • And/or make the enterprise grow faster

That's it. The most important step in planning is to start with two or three simple goals. Later, you can break these goals down into objectives and processes to make them a reality. A plan started with three simple goals can quickly become a thousand pages, but for now, don't waste your time with more grandiose plans such as 'building ten new stores in the next twelve months', or how you will reach those goals. All of this will come into play as the plan develops.

The next step is to create an overview model of your business. This is a step that is frequently skipped and will result in the plan coming apart before you even get started. A thorough understanding of the current structure of an enterprise is important prior to a discussion with management regarding restructuring.

Here are the basic steps that follow:
(Don't worry if you are not familiar with these terms. We will get deeper into them in future blogs.)

  • An analysis of goals and problems
    • Identify the current goals and problems and how they are associated with each department
  • Critical success factors
    • Things that must be accomplished in order to succeed
  • Technology Impact Analysis
    • Chart the rapidly changing technologies and the opportunities and threats they may introduce
  • Strategic Systems Vision
    • The restructuring of a business and the way it does business without regards to automated systems that already exists
  • Overview of the functions of the business
    • Map the business functions hierarchically associated with departments and locations
  • Entity-Relationship modeling
    • Associate entities with business functions in a matrix and cluster to find naturally cohesive groups of entities and functions

A thorough understanding of the structure of a business is desirable before dialogues with top management regarding restructuring. The process of analyzing goals, problems, critical success factors (CSF's), technology impact, and strategic opportunities will most certainly cause a refinement of the business model.

The 'business model' is a living document and we will constantly revisit the business model to determine what alterations need to be made to meet our goals.

Next to the formation of a living business model, the most important factor in restructuring is gaining the commitment of the participants. Without a fully committed management team, the plan is dead in the water before it even starts.