-Linus Pauling

Nice quote. To the average person this may seem legit. Do better unto others than you expect them to do unto you. Add it to the list of things that I should do but don’t, like eat better and save more money. Now imagine that you’re a small business owner with P&L responsibility. What are you to make of this? Most will tell you to ignore it. Nice guys finish last or something like that, but let’s take a closer look. What may appear on the surface to spell your undoing may hide the secret to your success.

Why twenty-five percent better? Fair is fair, so why would you need to do twenty-five percent better? It seems masochistic, almost un-American. As Pauling states it’s for error or as others have said subjective error. From a psychological perspective this would be a self-serving bias. What seems fair to you may not seem so to me. Isn’t that why we make compromises? Isn’t that what price discovery is all about? Imagine you have P&L responsibility and all of your customers are demanding a 20% discount and all of your suppliers, including labor, are demanding a 20% premium. Probably not hard for many of you.

A customer once told me how much he hated it when salespeople used the phrase “value added.” I thought sure, it’s a cliché, nobody likes cliches, but looking back I think there was more to it. For him as a manufacturer, “value added” has a specific economic meaning; namely, price minus cost. For the typical salesperson it refers to additional features that go beyond standard expectations. There’s nothing very specific about that. In fact without the specifics, the phrase could be so abstract that it loses all relevance. “A free steak taco dinner with every purchase!”

As a thought experiment let’s suppose that you could somehow deliver 25% more value to your customers than they were expecting. In addition suppose that you could also pay 25% more to your suppliers. Ta-da! You are now giving all your customers a 20% discount and all of your suppliers a 20% premium. Pretty neat trick if you could pull it off. Well, as a small business owner, this is probably what you should be thinking about every day; otherwise, you may soon find yourself back in line selling your skills for money.

Not that there’s anything wrong with that. There are plenty of self-respecting professionals who do very well for themselves this way, but that’s not your way. You create value where there was none before. You are the entrepreneur who combines the factors of production in such a way that at the end of the day you can honestly say that you did unto others twenty-five percent better than you expected them to do unto you. You understand the economics of “value added” as well as the benefits to your customers and suppliers alike, including labor. While others may say you’re doing it wrong, I say at least you’re doing it.

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Chicago, Illinois (PRWEB) July 13, 2012

Vulkans Forge Consulting Ltd., also known as Vulkan Forge, announced that Ground Floor Partners, a Chicago-based boutique management consulting firm, has been selected as a strategic partner in the area of marketing training.

Ground Floor Partners will work closely with Vulkan Forge on the development of the marketing training modules, with a heavy emphasis on promoting marketing best practices, including metrics and benchmarking.

Vulkan Forge recently negotiated a contract with the City of Chicago Department of Housing and Economic Development to deliver management training to six eligible companies through its TIFWorks program. One of the first companies selected is a local architectural metals firm with over 30 years of experience.

According to Dylan Tuttle, founder of Vulkan Forge, “We chose Ground Floor Partners for their expertise in marketing and market research. The principal’s technical and scientific background is aligned with our focus on process improvement. We intend to jointly develop content that is relevant and compelling to professionals seeking a competitive advantage.”

TIFWorks stimulates the success of local companies by promoting innovation and continuous improvement. The Vulkan Forge training curriculum includes four modules with a focus on three areas: Operations Management, Business Marketing, and Cost Accounting. Vulkan Forge takes a systems approach that works on the tactical and strategic levels of the organization. To ensure that benefits are realized, they also benchmark results through long-term monitoring of appropriate metrics.

While the principles of process improvement have their origin in manufacturing, they have been successfully applied in transportation, warehousing, wholesale trade, and construction. Success requires the integration of concrete metrics from beginning to end.

Vulkan Forge links operational metrics to financial performance and aligns business processes with strategy, adding to their clients’ bottom-line through practical process improvement.

Ground Floor Partners is a boutique Chicago management consulting firm specializing in market research, analysis and strategic planning.

For the original version on PRWeb visit: http://www.prweb.com/releases/prweb2012/7/prweb9691397.htm

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No, not at all. To be sure resources are stretched thin in almost any small business, but conceding this point would be like saying that improvement in general is futile. Setting aside issues with start-ups and their failure rates, we can be sure that for the established company strategic and operational improvement is the most certain way to achieve organic growth and outperform the market.

If this were not the case, then there would be little if any economic incentive for the entrepreneur to expand beyond self-employment. To our friends who still subscribe to the labor theory of value, it may come as a surprise that employing others does not necessarily result in profitability. On the contrary the risk associated with employing others often exceeds the potential rewards.

Only those businesses with a solid strategic and operational plan for improvement can justify the capital investment required for growth. Otherwise the entrepreneur would be better off remaining self-employed and investing their savings in a retirement fund or in the case of an established business foregoing expansion in favor of investment elsewhere.

Benchmarking like any management tool is intended to facilitate strategic and operational planning. Does this mean that benchmarking is for everybody? No, typically you wouldn’t implement a full benchmarking study until process stability has been achieved through standardized work. This is why standardized work is the foundation of just about any improvement plan.

Without a baseline for measurement there can be no meaningful improvement. What if anything has prevented you from fully standardizing your business processes? Benchmarking is not a silver bullet, and there are plenty of alternatives. How have you defined your competitive advantage? What management tools do you use?

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It’s hard to argue with Mr. Deming’s logic, especially if you sympathize with the cause of quality, but at any point in the chain, one could ask “is the causal link sufficient to affect the outcome?” There’s no need to bore you with the difference between a necessary and sufficient cause, but when you’re talking job creation, especially in the manufacturing sector, we can afford to be a little skeptical.

The weakest link in Deming’s Chain Reaction is that increased productivity leads to increased market share. It has been noted by many that his logic at this point is a little flawed. It assumes that improved quality at a lower cost is the only way to increase market share. That murky concept of “value” again rears its head. Value is defined by the customer, so improved quality at a lower cost does not necessarily lead to increased market share.

This is probably not as devastating to Deming’s argument as it may appear because as others have pointed out Deming’s concept of quality is broader than what is commonly understood by the term. In his usage it could be understood to be interchangeable with value. What is more likely to derail his train of logic is the failure to account for the cost associated with increased market share and new hires.

Even in the case where increased productivity has led to excess capacity, there is a cost associated with putting that new found capacity to work. It requires capital. Even what might appear to be a relatively cheap marketing campaign requires some expenditure, and in some cases may have to go through a capital planning and project approval process.

Capital budgeting is a mysterious process in spite of all the financial equations used because the most important variables usually depend on market forecasts and confidence in those forecasts. Most business owners don’t have a team of statisticians that they can put on this problem, so in most cases we guess. We hope it’s an educated guess, but it’s still subjective and prone to error.

The bottom line is that increased productivity does not necessarily lead to increased market share or job creation. What it does do is set the table for capital expenditure at an attractive rate of return, which leads to increased competitiveness and higher wages. It’s not a panacea to all the world’s problems, but it’s what maintains our standard of living, and in a global economy that’s not so bad.

The post Setting the Table for Deming’s Chain Reaction appeared first on Vulkan Forge.

We have developed a curriculum designed to address both the revenue and cost side of the profit equation. Think of it as an alternative investment in your most valuable assets. Operational and strategic improvements have a substantial ROI that continues to pay off for years to come. Our assessment tools will identify specific opportunities for improvement and set expectations for the project. Generally applicable these practices create value across a wide variety of industries.

Our curriculum includes four modules with a focus on three areas; operations management, business marketing, and cost accounting. We take a systems approach that works on the tactical and strategic levels of the organization. We expect to be held accountable for results, so we are only interested in working with you if you are committed to benchmarking and long-term monitoring of appropriate metrics. No, this does not mean we require a retainer agreement. The following is a brief description of the four modules:

• Demand Chain Management to reduce the effects of variability on manufacturing operations and supply chains and promote visibility and velocity through the integration of sales and marketing and supply chain management;
• Operational Excellence to define customer value, visualize the current state, and identify and eliminate waste from business processes;
• Leadership Development to successfully implement strategic initiatives and sustain behavioral change in the workplace; and
• Process Benchmarking to make the business case for change and define measures of success.

We have developed our management training program to be both comprehensive and flexible so your business will benefit from exposure to relevant best practices while only applying those that are appropriate to your particular circumstances. Project-based learning activities that target specific problems in the workplace for measurable improvement will ensure the practical application of the content.

Competitiveness can only be sustained through continuous improvement in productivity. As an entrepreneurial organization with a keen eye for opportunity, we are eager for the chance to apply that spirit to your organization.

Vulkan Forge is grateful to the City of Chicago for this opportunity. For more information about TIFWorks, contact Workforce Solutions at 312-744-0042. Contact Dylan Tuttle at Vulkan Forge to learn more about our management training program, 312-666-8639 or dylan@vulkanforge.com.

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We could carry on about who these stakeholders are and what right they have to tell you how to run your business, but that wouldn’t change anything. You could instead be aligning these multiple expectations with the needs of your customers, ensuring that your business rides smoothly through the business cycle. As much as we value our independence, we also can’t underestimate the importance of stakeholder engagement.

Your accountant may be able to handle the IRS and your creditors, but what about your other stakeholders? Besides what do those financial documents really say about the health of your business? It might be difficult to get a straight answer on something as simple as breakeven sales. It’s a cliché, but “you don’t know what you don’t know.” Benchmarking is a popular tool for managing this risk.

Who has time for management tools? Budget constraints are real, especially when it comes to overhead, but risk is real too, and the loss of a key account or operational under-performance can be the beginning of the end. At what point do you decide to allocate resources to a problem? Benchmarking is a scalable solution that can help you prioritize your problems.

It won’t solve your problems, but benchmarking will put your problems into context and give you a sense of what you need to start measuring if you’re going to do something about it. You might decide to do nothing after doing the cost benefit analysis. On the other hand benchmarking alone might reveal opportunities big enough that investors would be glad to participate, offsetting much of your costs.

Marketing strategy is an important factor. For a small supplier that is basically a niche player, benchmarking may seem useless. Similarly benchmarking has fallen out of favor with those who advocate the relentless pursuit of perfection. Even so regardless of your marketing strategy, success, and by “success” I mean financial stability, will only come with improved operational efficiency and increased sales.

Benchmarking will point to the best practices that if implemented appropriately will help you achieve that balance. If done well, it can also align your metrics with customer demand and stakeholder expectations, taking the sting out of your costs and putting you on track to better performance. A disciplined approach to problem solving gives you peace of mind so you can always rest assured that you gave it your best.

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Ideal firm size is a theoretical concept. It is defined as the most competitive size for any company in a given industry and at a given time. The long-run average cost curve suggests that there is a level of output where economies of scale and diseconomies of scale even out and per-unit costs are at a minimum. Per-unit profit would presumably be at a maximum.

Sounds easy enough, but like a lot of things, the devil is in the details. More likely than not you compete in several lines of business, which may or may not be defined by a single six-digit NAICS code. Even if your industry is well-defined, there are no commonly accepted methods for measuring economies or diseconomies of scale.

Economies of scale are usually attributed to factors such as buying in bulk, managerial specialization, lower interest rates, and technology. Diseconomies of scale are less well understood, but two major forces are the increased cost of communication and the increased non-value added cost of the managerial function. Compound this with the need for monitoring and it becomes clear why the unintended consequences of growth gives pause to even the most intrepid business person.

Manufacturing Productivity by Employment Size

If we compare revenue per employee to employment size, this should reflect economies or diseconomies of scale. We would expect to see increased productivity with economies of scale and vice versa. Data from the manufacturing sector suggests that there are increasing returns to scale, meaning that with increased inputs you would expect disproportional increases in output.

This confirms the idea that advances in technology are the main driver behind the production function. Again the devil is in the details. What is true for manufacturing in general may not be true for your specific industry or at least it doesn’t tell the whole story.

Saw Blade Productivity by Employment Size

Saw blades and handsaws show a much different picture. Rather than steadily increasing returns to scale, we see a roller coaster ride; rapidly increasing returns to scale followed by rapidly decreasing returns to scale only to be followed by even more rapid increasing returns to scale. It’s certainly not for the faint of heart.

What is the driver behind this pattern? If we look at payroll as a percentage of revenue, we see that the slump in productivity corresponds to a spike in payroll not to be confused with labor content. This suggests that from the 20 to 99 employee level the increased cost of the non-value added managerial function outweighs the benefits of managerial specialization. That puts a real kink in the long-run average cost curve.

Saw Blade Payroll Percentage by Employment Size

Where does that leave us? Here are a few conclusions:

• Be skeptical of aggregate data. It may not reflect your circumstances.
• Approach growth with caution. Top-line growth doesn’t give you a complete picture.
• Let the private equity firms monitor the professional managers. Small may be beautiful in your industry.
• Know your local cost structure. Without a baseline for comparison, you don’t know what the optimal mix of inputs is or how to compete in the global marketplace.

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It’s ironic because I started this business for all the small business owners I’ve met over the years. They all knew what they needed to do. They just didn’t have the time to do it themselves. Well they must be doing something right, because many of these same businesses have been around for generations.

These small asset-based businesses have survived shakeouts in the past, so who has any business telling them how to run their business? In spite of the cries for job growth, these businesses don’t need to be sold on growth strategies, especially if they involve uncertain margins or hiring a management team that spends more time making excuses for the sudden loss of productivity than earning their keep.

The problem is that with globalization we’re seeing increased volatility. For suppliers far from the end user, the variability in demand can be extreme. This is one reason why public corporations outsource functional areas. They don’t want to be the ones that have to manage the layoffs and subsequent hiring required by the business cycle. It’s the giver and taker that creates opportunity and imposes hardships.

Ironically most of the business owners I know would rather take the hit than let go of a good employee. As one owner-operator told me, “my job is to make sure all these other people have a job.” Return on assets isn’t even in their vocabulary. These people would rather put their assets to work for themselves, their friends, and their family. I don’t know of any stocks or bonds with that kind of return.

So more than growth, these companies need stability. Financial stability makes meaningful planning feasible, but like the chicken and egg, which comes first? Planning for stability sounds nice, but who can really deliver on that promise? Well just like you, we wear a lot of hats. We may not be the best at any one thing, but we’re pretty good at tying it all together and getting the job done.

Our integrated approach to cost accounting, operations management, and business marketing tells you not only what to focus on but when so you’ll always know what you need to be doing and how to get it done. We offer a full spectrum of services from training to consulting to implementation tailored to your level of expertise and budget.

I’d like you to think of us as your sales and operations help desk ready to step in whenever necessary to get things back on track. Together we can leverage the opportunities and cost structure for your industry and location to work towards your ideal firm size and maintain. How does that sound?

Well if you’ve read this far, you’re probably asking yourself “who does this guy think he his?” You can read more about me in my bio, but if I had to describe myself in a few words, I would say that I’m an itinerant student of the economy. Having traveled many paths my current position is that small asset-based businesses are the engine that drives regional growth and the key to community wealth creation.

I’ve designed this business and its services to be aligned with the needs of your business. Even if I do happen to understand your needs, the obvious question is “what value can I deliver?” As a new business all I can say is that I’m willing to work at least twice as hard as the next guy to win and keep your business.

Success for me is helping you find stability in the change that defines our age. I look forward to the opportunity to learn more about you and your business. And remember, “if you’re not having fun, you’re doing something wrong.”

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