Traditional Companies
Through New Economies:
The Next Big Thing
A few distinct forces need to be realigned to allow for progress and higher profits.
Excerpted from the book The Forces of Progress.
By Kobus van der Zel
A new management strategy is allowing traditional, “old economy” companies to grow their earnings at rates previously only associated with those of high tech, “new economy” companies. This new strategy recently allowed one Toronto company to increase their monthly revenues from $2 million to $8 million in one year, and another company to reduce their order lead time from five days to less than a day.
At the root of this simple new business strategy are a few distinct forces that need to be realigned in a specific sequence to allow for progress and higher profits.
Growing lean
Traditionally, managers push their people for increased production. It’s a natural force that will be with us as long as Wall Street or company owners demand higher returns. But the Japanese have taught us that we need to stop all of our people from working all of the time by using Kanban cards. For example, Kanban control ensures that parts are not made except in response to a demand. Think of a supermarket: Only the goods that have been sold are restocked on the shelves.
The problem today is that many companies believe they are pursuing lean systems while in reality they are not. In fact, the vast majority of corporations have inventory turnovers under ten times per year – turning over their inventories less than once a month. A truly lean company has inventory turns 16 – 100 times per year. Why are more companies not able to become truly lean?
The second force – measurement
The harsh reality is that as soon as a company confronts and overcomes the first pushing force by going lean, they will encounter the next force – measurements. Operational lean improvements will have a negative impact on a company’s income statement. A management guru once called cost accounting “public enemy No.1 for productivity improvement”. Cost accounting recognizes inventory as an asset and allows an increase in work-in-progress (WIP) inventory to increase profits. A reduction in WIP will therefore have a negative effect on profits. It does not matter that it is merely an accounting loss,
and that cash flow and customer satisfaction are both way up – this force is still strong enough to stop the company’s improvement efforts for good.
Scientists like Newton and Einstein changed our lives forever by proving that the complex world of physics is ruled by a few distinct forces which obey simple laws. This new strategy has the potential to do the same for business.
Misalignment
The few companies who have the perseverance and courage to overcome both the natural pushing and measurement forces will soon encounter the third opposing force – misalignment with the needs of their people. Utilizing the first two forces, a company should be making money from increased customer service levels, by outperforming competitors and by growing its market share. But it will not be long before the union will come knocking on the door to remind management of this third misalignment – the needs of their people. The company’s natural reaction will again be to oppose this force, but the result is guaranteed to be a lose-lose compromise. The company should rather use this force in their favour by aligning the needs of the company with the needs of its people through sharing of the profits.
Purpose
A company that is able to overcome this third force will experience unusual financial success and will feel that the time has come to bask in the glory. But to stop here would be a failure to reaching their full potential. A company has now encountered the fourth and final opposing force – purpose.
However, a profit-sharing plan as a first step to increase productivity can be devastating. Without a pull system across departments and correct measurements, people will naturally feel that pushing more work downstream is good for profits – and we know now that this is wrong. Paying a profit share of 2% of payroll at the end of the year isn’t great. Everybody has forgotten what they did to earn it. To get a sustainable change in behaviour these payments must be immediate – monthly, and significant – at least 10% of people’s take home pay. This alignment will turn your performers into heroes and will highlight the underperformers overnight.
A lack of purpose can be a terrible limiting force for a company or for a person. Luckily the opposite is equally true – a clear purpose to achieve one’s full potential can energize a company and its people. The key is to select a purpose that is beyond your imagination – for both the company and for every one of its people. For years, companies around the world have embarked on a growth strategy called a “Viable Vision” – to turn their sales into their profits in four years. Most traditional company CEOs will agree that this is beyond their imagination. But what strategy should be used for their people’s purpose and growth? The purpose of each individual may be unique, but there is one thing that every person needs in order to achieve their highest purpose – money. By using an employee share ownership plan in the right way, every person in the company has the opportunity to become a millionaire, if the company achieves its “Viable Vision” – a true win-win situation.
“The Forces of Progress” (available at www.lulu.com/Globalturnarounds) shows how to identify and overcome each of the four distinct forces in a business and set the aim of the company and each one of their people as high as their imagination will allow.
Kobus van der Zel has over 15 years manufacturing management experience including business improvement and turnaround engagements. He is a Certified Turnaround Professional (CTP). Contact him at 416.359.9395 or via email at Kobus@globalturnarounds.com
2600 John Street, Unit 207, Markham, ON L3R 3W3 T: 905.475.5222 F: 905.475.6369
