Making the Short List(s): Credit lessons on the mountain
May 4, 2004
Editor's Note: This is the fifth episode in a mountaintop dialogue that Gerald has been having with a "wise business guru." They have been talking about throughput and the time line of money.
"Now that you know the main events in the time line of money, your chore is to figure out how to make each event more efficient. The goal is cash flow. The danger is inventory. The guiding light is throughput," my business guru said.
"You know, before I met you, I thought that throughput was all about customer service," I said.
"Short lead-times and all of that. I am beginning to think that throughput is more important to my business than it is to my customer."
"Well, duh!" he joked. "You have let your lead-times stretch out to several weeks. Cut that in half, and your cash flow automatically gets better, your customers get happier, and the impact on profitability will help your accountant to relax."
"Gurus don't 'well, duh,'" I complained.
"My guru rule book says that I am allowed to 'well, duh' if the student is a sponge brain."
"I am not a sponge brain!"
"Prove it," he challenged. "Analyze the time line of money, and break it down into major events. With that in mind, we will be able to find ways to improve your throughput," he hinted.
"First," I began, "we process the raw material, then we mail an invoice "
He pressed his hands to his ears. When I paused, he patted me on my head and smiled. Then he propped a marker board against a boulder and handed me a dry-erase marker.
"Think about this problem in terms of when you start spending money," he counseled me.
"Like when we place an order for the raw material?" I asked.
"More like when the customer calls to get a price quote," he replied.
"Why start there? I have not spent any money by just taking an RFQ, have I?"
"You pay for a telephone, a desk, and wages for someone to process the RFQ. We are interested in any cash outlay that is specific to processing a project, job, or work order. Include all of the activities that lead up to the delivery of the invoice and processing of payment—if you expect to get paid for them," he suggested.
I started writing my processing "short list" on the marker board: "Request for quote. Bid. Purchase order. Work order. Packing list. Invoice. Bank deposit."
"That is not too bad. Indeed, those are the activities that your company takes on in direct response to a project. As a manufacturer, do you purchase goods and services from your suppliers?" he prompted.
I nodded emphatically and offered, "Actually, this order-processing activity list here on the board also could apply to every item we purchase. The only difference between the way we process a customer order and the way we generate a purchase order is that we generate the RFQ instead of the customer and we write a check instead of depositing one."
I jotted another column of activities to describe our procurement of raw materials.
"Now you get to define the processes that your shop provides as services to your customer," he suggested.
I started writing: "Shearing. Punching. Laser cutting. Welding. Grinding. Forming. Plating. Painting. Screen printing."
"I am sure you could include more processes to cover quality control, packaging, shipping, machine control programming, and so forth," he observed.
"Sure," I answered. "We also act as a subcontractor for some projects. We may send parts out for heat treating, electronic subassembly, and centerless grinding. It all depends on what the customer wants."
My final list dealt with the collection and disbursement of money.
After I composed my four short lists, my business guru retreated into the shade of the bristlecone pine to give me a moment to contemplate how to shorten the lists on the time line of money. I stared at the marker board where I had written my lists—processing customer orders, materials procurement, manufacturing services, and money management. A chilly gust of wind broke my reverie.
"Dude, it is getting cold up here," I exclaimed. He tossed me a windbreaker. It seemed that he had no limit of useful stuff at hand.
As I slipped into the jacket, I said, "All of these business activities are critical to our mission. We can't omit or skip any of this to increase our throughput."
"Let us consider a few facts about your business situation, statue at the board, staring. You are short on cash, your business volume has declined, your customer base is at least changing, if not shrinking, and your equipment is aging. If the way you are managing your business cannot be improved, then the business will collapse. The only doubt is how soon the door will be padlocked," he warned.
"Well, I know I'm not perfect. That is why I hiked up to the top of this mountain to get help from you," I retorted.
"Return to calm! I am trying to help you. For now focus your attention on your business activities that demand the greatest amount of cash and the greatest amount of time.
I thought for a moment about our procurement of raw materials. Raw materials burn up cash, but most of our suppliers deliver within the same week that we place an order. That did not seem like a primary candidate for time and cost reduction.
Then I considered the payment habits of our customers. Nearly all of them pay within 45 days. I did not think I could do much about how our customers pay anyway.
Estimating and order processing required great attention to detail. In fact, our attention to detail was one of the hallmarks of our reputation as a manufacturer. That left the manufacturing process as the most likely candidate for rapid improvement.
I shared all of those thoughts with the guru. His fits of giggles and snickers were slightly contagious, and I felt a sheepish smile creeping into my expression.
"I guess we could get better at yelling at the workers to get them to push the parts through the shop faster," I joked.His smile disappeared. He wagged a bony finger at me as he scolded, "The only reason you have a business at all is because your manufacturing crew is good enough to support all of the chaos and mayhem in your administrative madness."
I stood appalled before his wrath. He went on.
"Do not misunderstand me. Your manufacturing can be improved, but it is not the root cause of your cash flow problem."
"OK, OK. What is?" I pleaded.
"All else is!" he snapped. "Look at your contract period, for example. It is uncontrolled! You waste days, if not weeks, in the way you evaluate contracts."
"What do you mean by 'contract period'?" I queried.
He fired up his printer and ran off a copy of ISO 9000 for me. I guess I shouldn't have been surprised that a mountaintop guru would have a high-speed printer on hand.
"You can read the formal definition of 'contract period' later. Focus on those activities that are specific to getting an order awarded to your company. This includes all of the policies, processes, and procedures involved in negotiating the terms and conditions of a project."
"Holy smokes! We are just a little job shop. What you are talking about applies only to big companies!" I protested. "We don't need all of the bureaucracy and formality of an international quality program." I could tell by his expression that he disagreed with me.
"Your business will be stronger once you have implemented a clearly defined process for evaluating contracts. Right now your salespeople do not know what they are selling."
He paused, waiting for my customary argument. We have sales. I could not figure out what he was knocking about now.
"Not only do your salespeople miss the idea that they are buying the project from the customer, they think they are selling holes, or bends, or little painted metal doodads. They worry about how many seconds each operation will take, or what the shop rate is, or what the competitor's bid was."
Now I was really worried. I thought that was what my sales force was supposed to do. And what did he mean by "buying the project"?
The saga continues in next month's issue.