Evolving Excellence

Net Nonsense - hilarious commentary

2013-05-17T22:42:16-07:00

My Net Nonsense post from a couple weeks ago on the evils of large companies trying to force long payment terms on suppliers received considerable coverage, including being reposted in Quality Digest this week. However the best - and funniest - commentary was by the editors of Quality Digest in their Quality Digest Live video.

For ten minutes, beginning at about the 13:20 point, they savage some well-known companies like DuPont, Procter & Gamble, Kimberly Clark, JC Penney, and more. Check out their review of the hypocrisy of the mission statements of these companies. Ha! No kidding. Actually rather sad.

Enjoy!

Net Nonsense

2013-04-25T19:34:55-07:00

By Kevin Meyer

A few months ago I told you how, in my past life as president of a medical device company, I had two reliable leading indicators of a potential customer relationship. Basically if the customer demanded automatic annual price decreases, or if their payment terms were greater than net-30. Those few customers that offered to pay faster would become strong partners as they knew supplier financial stability is in their best interest. Those that tried to insist on longer terms just considered suppliers a necessary evil. The correlation was nearly perfect.

Luckily my company supplied unique components, so we also had leverage. Upon receipt of a request for long terms I'd fire back a letter saying that in my book the oft-forgotten "respect for people" pillar of lean also applies to suppliers (and customers for that matter), and trying to turn a relatively small supplier into a bank for a Fortune-50 was an affront to a productive relationship. Our terms would remain net-30 or less, or we wouldn't take the order. Occoasionally I received more pushback, including from a very large multinational, coincidentally in the news lately for "discovering" lean (in 2012...) and moving their appliance manufacturing back to the U.S., asking for net-120. Sorry, still net-30 to you, buddy.

So imagine what went through my mind when The Wall Street Journal reported last week how many companies like Procter & Gamble are pushing to lengthen terms even further.

Procter & Gamble is planning to add weeks to the amount of time it takes to pay its suppliers, a shift that could free up as much as $2 billion in cash for the consumer products giant. P&G could use that cash to fund investments in new factories overseas or to help pay for stock buybacks.

Obviously there's another party to that transaction.

That added flexibility, however, will come at the expense of the companies that supply P&G with materials or services. The suppliers will have to tie up more of their own cash in receivables or eat the interest costs charged by banks to bridge the gap until P&G pays its bills.

Yep, that's partnership. Turn your much smaller suppliers into a bank. And sure, it could "free up" $2B in cash for the large customer, but obviously that reduces by $2B the cash those smaller suppliers have to develop new processes and technologies. So who really loses in the end?

The moves are creating ripple effects. Companies that hold on to cash longer create deficits at suppliers that have to find financing, raise prices or squeeze other firms along the supply chain. Smaller companies with little bargaining power and less access to credit ultimately could see their costs rise, pinching funds that could otherwise be spent on hiring or investments.

And speaking of banks...

To help suppliers deal with the changes, P&G is working with banks that will offer to advance cash to suppliers after 15 days for a fee, some of the people said.

Wait... so not only are they sucking cash out of suppliers so they can't invest in the innovations that presumably their customers - and end customers - will want later, they are adding to overall supply chain cost by giving banks a piece of the pie. I bet some of these companies even have the gall to call themselves "lean."

I was stewing over this when our friend Bill Conerly wrote a fantastic rebuttal to this nonsense in Forbes. If I was the CFO of P&G I'd feel pretty ashamed, or just plain stupid, after reading it. Not that most CFOs understand the real world anyway.

Procter & Gamble is about to lose money thanks to CFO hubris. It won’t be the only large corporation, however, to get caught up in false economy. The Wall Street Journal reported that P&G will extend its payment terms to suppliers. This sounds like normal corporate practice, and it is. But normal is not always good.

Bill then digs in...

I understand working capital management, but many of these corporations don’t understand. P&G has a Aa credit rating on its bonds. It can probably float 60 day commercial paper for 0.10%. Small companies with bank lines are often borrowing at 3.5% to 4.5% interest. Many small businesses, though, are not eligible for bank lines. They may use finance companies to factor receivables, or even the owner’s credit card. So 4.0% is very conservative as an estimate of borrowing cost for small business.

Let’s say that the small business sells the large corporation $100,000 of materials. Instead of paying in 10 days, the corporation demands 75 day terms. OK, that extra 65 days save the corporation $8. (60/365 times 0.10% times $100,000). What does it cost the small business to let the payment wait an extra 65 days? $329. (60/365 times 4.0% times $100,000). So the big fish saves $8, costing the small fish $329.

Yep, that's partnership. Have I said that before? But here's the kicker: the stated reason for this nonsense is to "free up cash." Is sticking it to the suppliers really the best way?

The idea mentioned in the article was to “free up cash,” but cash is readily available from cheaper sources. Perhaps Wall Street would rather see “accounts payable” on the balance sheet than “commercial paper outstanding.” After the recent financial crisis, one can get nervous about commercial paper becoming unavailable. However, any company dependent on its suppliers needs to also worry about the suppliers’ credit being jerked away. History is full of examples of small businesses losing access to credit, to the detriment of their customers.

Bill then reaches a conclusion that the truly lean company will understand:

The focus of both parties to each supply agreement should be how to provide better products at lower cost. When one party gets too focused on getting the better side of the bargain, then the joint effort is less likely to succeed. If one of the parties in a transaction has to borrow, it should be the party with the cheaper debt cost.

Amen. So next time a customer asks you for long payment terms, perhaps you should just ask them why their financial situation is so difficult that they want to use a much smaller supplier as a bank, risking your financial solvency let alone investment in new and improved processes, instead of tapping a much cheaper line of credit. Fools.

A Lesson on Leadership from Marrakech

2013-04-09T00:53:52-07:00

By Kevin Meyer

My wife and I are currently in Marrakech, Morocco, on one of our increasingly frequent trips to explore new locales. Truly a remarkable place, and with the tall snowcapped Atlas Mountains only an hour away in one direction, and the ocean in another, I'm convinced it's destined to become another mecca for sports enthusiasts similar to Queenstown, New Zealand. The people are exceptionally friendly - just three weeks ago CNN ranked it the third most welcoming country to visitors, coincidentally right after New Zealand. The craziness of the souks in the medina provide an interesting diversion.

One of the reasons my wife and I enjoy traveling so much is because we've become convinced of the importance of first trying to understand differences before making judgments. I guess we're sort of going to the gemba on our worldview. One example from right here in Morocco is how Islam is practiced as a positive, inclusive, compassionate religion - and they are appalled at how it has been corrupted to the contrary by the fringe fundamentalists. Gee, sounds familiar. As a side note, I've found the djellaba robe to be exceptionally comfortable, and I even bought one. Not sure I'll wear it to Walmart when I get home though.

The influence of Islam is pervasive, and one way it's readily apparent is through the Adhan, the "call to prayer" that you hear the Muezzins chant five times a day, usually via loudspeakers high on the minaret in every mosque. You might think that's a bit annoying, but aside from issues resulting from poor amplification, it's actually quite beautiful. Here's a YouTube version with English subtitles.

But think about this from a leadership perspective (yes, I finally got around to that...). Five times a day Muslims are reminded of their faith and are asked to reflect on it. And practicing Muslims will, whenever possible. Upon hearing the call at one point yesterday, our tour guide asked for a moment, found a corner in a private room, and performed the ritual. It only took a couple minutes. Five times a day the distraction of daily chaos (especially in a place like Marrakech!) is realigned to a larger ideal and purpose.

Leadership can be tough. Lean transformation and hence lean leadership even more so. One of the greatest difficulties is keeping both the leader and the team focused on what can be counterintuitive goals. Moving forward while grenades and distractions are being lobbed from all sides, trying to pull you back into a short-term mindset.

Take the time to discover and define the true purpose of the organization. Translate that into a long-term strategy with short- and intermediate-term objectives. Then communicate and reinforce that purpose, strategy, and thinking... over and over and over.

At least five times a day.

The Last 100 Feet of Walmart's Supply Chain

2013-03-26T11:15:16-07:00

By Kevin Meyer

I've written a lot about Walmart, in particular their supposedly glorious supply chain. To be honest, they execute a traditional supply chain exceptionally well. They source from cheap labor countries, put it on big ships, and distribute it to thousands of stores incredibly efficiently. For a traditional supply chain. They still run into issues with too much inventory floating on slow-moving ships, arriving after that particular style has lost favor. And they beat the crap out of their suppliers to get every last penny of margin out of them, and then claim they deliver that to their customers.

If they actually get the product to their customers. Something Walmart is apparently forgetting is that the supply chain is not complete until the product is in the hands of their customers. That last hundred feet from the store's big back room to the shelves has become an issue.

During recent visits, the retired accountant from Newark, Delaware, says she failed to find more than a dozen basic items, including certain types of face cream, cold medicine, bandages, mouthwash, hangers, lamps and fabrics. The cosmetics section “looked like someone raided it,” said Hancock, 63. “If it’s not on the shelf, I can’t buy it,” she said. “You hate to see a company self-destruct, but there are other places to go."

As I mentioned, it's only a hundred feet away. If that.

It’s not as though the merchandise isn’t there. It’s piling up in aisles and in the back of stores because Wal-Mart doesn’t have enough bodies to restock the shelves, according to interviews with store workers.A thinly spread workforce has other consequences: Longer check-out lines, less help with electronics and jewelry and more disorganized stores, according to Hancock, other shoppers and store workers.

At the Kenosha, Wisconsin, Wal-Mart where Mary Pat Tifft has worked for nearly a quarter-century, merchandise ready for the sales floor remains on pallets and in steel bins lining the floor of the back room -- an area so full that “no passable aisles” remain, she said. Meanwhile, the front of the store is increasingly barren, Tifft said. That landscape has worsened over the past several years as workers who leave aren’t replaced, she said.

Of course Walmart has a different perspective...

“Our in stock levels are up significantly in the last few years, so the premise of this story, which is based on the comments of a handful of people, is inaccurate and not representative of what is happening in our stores across the country,” Brooke Buchanan, a Wal-Mart spokeswoman, said in an e-mailed statement.

A lot of good that does you if you can't get it onto the shelves. Perhaps that spokeswoman should talk to some Walmart execs.

Last month, Bloomberg News reported that Wal-Mart was “getting worse” at stocking shelves, according to minutes of an officers’ meeting. An executive vice president had been appointed to work on the restocking issue, according to the document.

Ouch.

“When times were good and people were still shopping, the lack of excellence was OK,” said Zeynep Ton, a retail researcher and associate professor of operations management at the MIT Sloan School of Management in Cambridge, Massachusetts. “Their view has been that they have the lowest prices so customers keep coming anyway. You don’t see that so much anymore.”

Shoppers are “so sick of this,” said Ton, whose research, published in Harvard Business Review, examines how retailers benefit from offering good wages and benefits to all employees. “They’re mad about the way they were treated or how much time they wasted looking for items that aren’t there.”

In Walmart's eyes it's apparently those pesky workers again. What a "cost"...

Retailers consider labor -- usually their largest controllable expense -- an easy cost-cutting target, Ton said. That’s what happened at Home Depot in the early 2000s, when Robert Nardelli, then chief executive officer, cut staffing levels and increased the percentage of part-time workers to trim expenses and boost profit. Eventually, customer service and customer satisfaction deteriorated and same-store sales growth dropped, Ton said. “When you tell retailers they have to invest in people, the typical response is: ‘It’s just too expensive,’” Ton said.

Wal-Mart is entangled in what Ton calls the “vicious cycle” of under-staffing. Too few workers leads to operational problems. Those problems lead to poor store sales, which lead to lower labor budgets. “It requires a wake-up call at a higher level,” she said of the decision to hire more workers.

As opposed to the cost - and not just in sales - of empty shelves.

Like the rest of us, even Walmart is only as good as the last 100 feet of its supply chain. Sometimes all it takes is the "cost" of another human or two.

The Postal Service Forgets the Customer

2013-03-12T00:05:00-07:00

By Kevin Meyer

A recent CNN article pretty much describes the problem at the US Postal Service, although that wasn't really its intent. You see, there's this new startup called Outbox that is working to digitize traditional paper mail, and our beloved USPS is having a bit of a conniption about it.

I think this is a terrific idea as I've been trying to make more and more of my life electronic - and thereby location independent. A few years ago I subscribed to a voicemail service that emails me the voicemail so I don't have to be near a phone. Last year that service even began transcribing those voicemails (with remarkable accuracy by the way) so I don't even have to listen to the audio file - I can just rapidly scan the "voice"mail. For the last year I've also been able to take a photo of checks with my phone and deposit them to my business or personal bank accounts. Another app on my phone lets me photograph documents, sign, convert to PDF, and email or fax them to a recipient. No more going to banks, fax machines, or sometimes even a computer. I can work just as efficiently from home, the car, or Tahiti. In your face Marissa Mayer!

Almost. The missing piece has been incoming paper mail. But with Outbox and a couple of other competing services, that may soon be resolved. Unless the USPS gets in the way.

A driver of a white Prius with a giant, red plastic flag affixed to its side is rolling through the hilly streets of San Francisco, undelivering mail from mailboxes. The driver is not a thief. He and the car are part of a startup called Outbox that is attempting to pick up where the embattled United States Postal Service leaves off -- by digitizing physical mail.

He collects the letters, bills, magazines and advertisements that were deposited there by official postal workers and delivers them to a warehouse. There they are opened and photographed, and the resulting digital files are sent electronically to the recipient through the Outbox website or iPad or iPhone apps.

The company already has more than 600 customers in Austin, Texas, and starting Tuesday it's rolling out in its second city, San Francisco.

And it all costs $4.99 per month. Even with the USPS standing in its way.

Creating a shadow, reverse postal service may not be the most efficient way to improve the struggling mail system, but Outbox is unable to intercept clients' mail any sooner in the process. The company has met resistance from the United States Postal Service, which has refused to collaborate with Outbox or let its workers pick up mail directly from local post offices.

Why does the USPS have a problem?

"The Postal Service is focused on providing an essential service in our mission to serve the American public and does not view Outbox as supporting that mission," the USPS said in a statement. "We do have concerns regarding the destruction of mail -- even if authorized by the receiver -- and will continue to monitor market activities to ensure protection of our brand and the value and security of the mail."

And that statement describes why the USPS is a sinking ship. "Protection of our brand and the value and security of the mail." But what about the customer? I mean the home customer, not the providers of bulk junk that is increasingly the primary revenue source of the USPS.

Imagine a different path. A postal service that is focused on increasing value to its customers rather than protecting its "brand." Instead of fighting startups like Outbox they'd be creating that innovation themselves, converting paper mail to electronic digital formats for folks like me that immediately scan and shred anything we have to keep anyway. Or maybe they go even further an enable the sending of original mail electronically, instead of trying to entice companies to remain paperbound to create "demand."

But no. That would mean thinking of value from the perspective of the customer. And that's apparently not as important as the brand - whatever value that has anymore.