In other words, how to create business suicide!

No.1 You have been operating on a low, M1 profit margin (sales minus variable direct costs of labour and materials) which just covers the fixed costs of the business making a reasonable profit.
a. Your cash flow seems ok, although from time to time you do worry whether you will be able to cover all the government taxes as well as pay people and suppliers on time. But up to now, somehow, things went reasonably well!. Now you really have a difficult scenario. Customers are delaying payments,
b. Suppliers are screaming they need their money now,
c. Employees are worried, you have at least 25% of your people off on sick leave. One shift has been quarantined.
d. You need to know what is your direct cost of labour & material for one unit calculated per each SKU/Index you produce.
e. You need to see what discounts you have been giving clients on orders.
f. If you don’t have the direct costs of one unit, right now, consider this quick-check calculation.
g. Divide the number of employees (full time equivalent – FTE) you employ by the sales value (excluding VAT) you generate.
h. For example. If you employ 700 employees and generated 20m euro turnover in one year, you will arrive at a figure of 28,571 euro of sales per FTE. Now consider,
i. Your nearest competitor for the same sales value of 350 employees. Their sales value per FTE will be 57,143 euro/FTE.
j. You both operate your businesses in Western or Central Europe.
k. Your arguments that labour is cheaper in Poland compared to your competitor in the UK or Germany has no logical foundations. If your foreign competitor has much higher costs of labour, but has significant lower FTE/sales, then this is a very good indication that your competitor is far more efficient in running their business.
l. In reality it means you are operating like a charity for some 30% to 40% of your employees.

No.2 You don’t really have a good management reporting system which distinguishes between M1 and M2 and M3 and M4 and M5.
a. In other words, variable costs and various fixed costs are all mixed into one bag.
b. The consequences will be that understanding your business from a management perspective is going to be based on hide and seek.
c. A Tom and Jerry scenario right under your nose. Your employees hide the costs and you seek them out.

No.3 Your business does not have a monthly balance sheet.
a. Even if a full reconciled balance sheet is not readily available, then at least you should have a fully reconciled monthly working capital schedule,
b. Backed up with full analysis. Not having a simple working capital business model with some basic KPI’s presented each month, is no different to driving a car with no dials and gauges.

No.4 Your accounting team provide you with a full set of management accounts later than 7 working days after the close of the previous months business.
a. Why is this important?.
b. Imagine you receive your financial reports on the 21st of the following month.
c. What does that mean in practice!.
d. It means, after you close last months accounting period, your business was blind as to how badly or how well the business was run for that last month.
e. Worse still, for the following 3 weeks you continued to work as you did in the previous month as you still did not have the results for the previous month.
f. Your reaction time is delayed by at least two months.
g. Use Lean Accounting Visual Management principles to know where your business is at any given moment in time. This will drastically improve your timing for decision making.

No.5 Has your management team been working hard and consistently on reducing the materials and direct labour costs as part of your optimisation activities on a daily basis!
a. If you employ say 100 people you should have anywhere between 2 and 5 open projects (or initiatives) which are directly related to some form of improvement, often called, although not always understood, as Kaizen.

No.6 You have been making surplus product which the customer does not need right now.
a. The main arguments being, its cheaper to make in bulk, and, the client may need a sudden large quantity and we will have it ready to deliver for them.
b. Finally, your client most likely is not paying you more for this stock readiness and,
c. Is not paying for taking up your warehouse space.
d. This is not leadership, this is hiding from the problem and your employees, I am sure see this is happening.
e. Stand up for your business, either get the client to pay for stocking up and warehouse space or make arrangement for just-in-time deliveries.
f. It is almost guaranteed you will need advice on how to move to a JIT system of taking sales orders, planning production and realising production. In other words you will need an effective Sales & Operational Planning (S&OP) system in place.
g. Don’t be surprise if you increase your production capacity by 40% if you go down this road. I’ve seen it happen many times.

No.7 You do not regularly review with your Top Team your client debtors and supplier creditors at least one a month.
Looking at over-due debtors as a %, as well as a monetary value to the total value of debtors.
b. Analyse also the age of the debtors.
c. The results will show you who you are financing.
d. Managing your debtors on a daily basis or at least on a weekly basis is standard common sense.
e. You provided the product, get the cash into your bank account.

No.8 Paying suppliers too much or paying them too early.
I would never advocate paying suppliers later than is agreed.
b. This is both unethical and immoral.
c. This is not the behaviour of a lean leader or of any leader worth keeping company.
d. However, you do need to be aware of how your debtor and credit cycles are working with respect to each other.

No.9 Analyse your stock (inward goods) warehouse levels.

a. How much is in stock in monetary terms?.
b. How quickly does the stock rotate?.
c. Are we buying in bulk so as to get a better deal but in-fact you are draining your cash flow.
d. How is the purchasing department rewarded for their work. A tricky question.
e. If its just buying price, I can guarantee you this is not the cheapest price.
f. You need to factor in quality of product, defects, re-work, time delays, delivery times, profit for your supplier and many other factors.
g. You need to work with suppliers as partners not as the killer who hunt and slaughters the supplier.
h. Finally, look at standardising the design of your products. This will reduce the range of components and raw materials you need to stock.
i. Too many businesses hold stock which they no longer used in current product production. This is a classic case of leadership. Who pays for that?.


My next article will focus on the challenges today’s leaders are experiencing during this COVID-19 crisis.

The title of my next article is:, “The Loneliness of the Long Distance Leader”.

The article will address the loneliness, anxiety, frustration, stress and uncertainty many Business Leaders are facing today. Many of the elements in the article are derived from the 12 Habits of Lean Leaders Way Master Class programme.

This article has been produced with the support of the Lean Leadership Way Institute, within the YOKOTEN principles of sharing best practices.

If you have found this article valuable, please let us know.

Mark Forkun

Right now, we cannot visit our clients and Genba, “Go and See” and advise. What we can do instead is use the internet for online solutions to “listen and advise”.

We can: Perform Virtual Genba walks, listen and advise on your Problem Solving issues.  Talk to you through the chaos and sort out what can be visualised, controlled and standardised and what is non-standard and needs a different approach. We can coach, mentor, advise and do training.

On-site work: Prior to entering onto Client premises we go through all the necessary Health & Safety.