SHY Entrepreneur.com

Tag: Resource Management

  • What Is Cash Flow Management And Why Should You Care?

    With the exception of volunteer organization cash is the life blood of every company. You know this reality more intimately than you may realize through the monthly expenses and income you experience. Are you living paycheck to paycheck? Or, are you making enough to cover your bills with some left over to put into savings? Being able to manage your cash is not an easy task but with time anyone can master it.

    Parkinson’s Law

    The difficulty of managing cash can best be understood by taking a look at Parkinson’s Law. The law states; “Work expands so as to fill the time available for its completion”. This idea of resource allocation is no different when it comes to cash. It I may be so bold as to restate the law in terms of cash flow; “Spending expands so as to fill the amount available to spend”. The reason for this I believe is because of the irrational and emotional nature of people. As much as I may not want to admit it my decisions are often based on emotions. People in general have a hard time holding back when they don’t have to. This is also the reason startups with less capital have a higher probability of success over startups that have more than enough capital available to them. The less you have the more intentional you have to be.

    Cash Flow Game

    Managing your personal finance is no different than managing the finances of a for profit organization. Money comes in and money goes out. Through this cycle either a standard of living is maintained or a profit is produced. Individuals and small businesses alike should understand that cash flow needs to remain positive. To help you with this there is a great online game provided by Rich Dad Poor Dad. I recommend you take a few minutes and try your hand at it.  Here is a screen shot:

    I have to admit I didn’t do well my first time around, in fact my first two tries were not successful. I did however manage to break out of the rat race and complete the game successfully. It isn’t a perfect simulation but it is enjoyable and teaches a few ideas on leveraging. The biggest take away is of course cash flow management. To win the game you must learn to obtain and maintain positive cash flow.

    It was interesting to play this game having executed a few of its principles earlier this year through the purchase of our first rental house. Without knowing Mr. Kiyosaki’s model we obtained an asset that basically pays for itself. Just as the voice overs say during the game this takes place when you purchase not when you sell. We were fortunate enough to intercept a property that was about to be seized by the county for auction. We purchase the property and then spent 6 months remodeling. When we finished we had a rental with positive cash flow.

    One of the other things I like about the game is that as a player you have both an income and expenses. As the game goes on both will fluctuate as cards are drawn and “life” happens. The pace of the game is of course faster than what one could expect in real life but I believe the principles are sound. If you see a game in there titled “ShyEntrepreneur.com” that’s me!

    Much can be said about cash flow and personal finance but all I wanted to do here was point out a tool the illustrates the importance of cash and maintaining a positive cash flow situation. My people currently live outside of their means and can’t quite figure out how to progress towards financial freedom. The solution is simple but it is not always easy.
    I hope you guys find the game as entertaining as I do and be sure to post comments at the end so others can learn from your experience.

  • Chaos Vs. Bureaucracy

    You may not realize this but as an entrepreneur one of your main functions is finding the balance between chaos and bureaucracy. If you take a look at successful organizations you will see they have somehow found a happy medium between these two extremes. It is this balance that allows organizations to flourish and will be required if you want to take your company to the next level.

    My first exposure to this dynamic came as I was trying to push a product line in an organization didn’t share my same directive.  The problem was that the product line required formal processes in order to continue to scale up but the organization as a whole operated on the “get-er-done” approach. Talk about frustrating, how is one supposed to facilitate the exponential growth of variability through putting out perpetual fires?

    This lead me to a book that gave me a new perspective on managing growth. The book was

    No Man’s Land: Where Growing Companies Fail.

    I enjoyed the book in that it helped me communicate my dilemma but a few assertions it made could be discounted by the now non-existent financial organizations it referenced to.  One exert that I especially appreciate was;

    “The resources and approaches that allowed for growth in the first place can be insufficient or an obstacle for growth in the future.”

    This is so vital to long-term success. Understanding organizational needs change with growth is huge. This begins right after startup and continues through each stage your company passes through. The book focuses on one significant stage referred to as “No Mans Land”. This is the point at which a company is too big to be small and too small to be big.

    So how does the size of an organization tie to the balance between chaos and bureaucracy? Generally speaking smaller organizations have fewer formal processes and operate under a flat management infrastructure. Larger organizations have more formal processes and operate under a hierarchical infrastructure. A deeper discussion on this and the small business advantage is discussed in the article The Advantages of Small Business. The balance however is not an easy one to find.

    Small businesses on the “Chaos” side of the spectrum have a great flexibility and agility to fulfill the customer’s changing needs in a moment’s notice but don’t have the ability to handle large volumes. Larger businesses on the “Bureaucratic” side have the ability to facilitate a common need over and over again at a high volume but lack the ability to change to accommodate a custom need. Too much towards Chaos and you will find yourself with a lot of waist, rework, and similar inefficiencies; too much toward Bureaucracy and you will find yourself buried in formalities, paperwork, and pointless meetings.

    So what is the answer? In short it is finding the right people. The intricacies of your business are known only to you and your people and they are the ones that will make the day to day decisions that will allow you to not weigh your organization down with bureaucracy while simultaneously avoiding excess chaos. To be honest with you this can be a hard answer to swallow, it means we need to trust and invest in people. If you are able to do this however you will find your life and business begin to operate at a higher standard.

    So, you have the right people and your company begins to grow so much so you now find yourself approaching “No Man’s Land”. This means you are faced with the challenge of making a leap forward from a small business paradigm to a large business paradigm. You have hundreds of customers, thousands of products and simply can’t keep up given your current infrastructure. What do you do? If you are a restaurant perhaps you head towards franchising, if you are a designer perhaps you create a proprietary line or product, and if you are a manufacturer perhaps you simply gear up to handle a worldwide market place. That is if you are willing to make the leap. As Doug Tatum mentions in his book making the leap may not be the best choice for you and your organization.

    What should you take away from all of this? Most of all understand that you won’t have all of the answers. Building a business is iterative and each step changes the game. You begin the learning cycle, build upon your intuition, keep the things that work, and get rid of the things that don’t. I would advise younger organization and entrepreneurs to simply dig in and work hard. A sole proprietor needs simply to push and push out of the gate and refine his or her game plane as the knowledgebase grows. Good business is meeting your customers’ needs it is not having immaculate paper work or flawless products. You will mess up but everyone does. Cater to your customer (within reason) and you and your company will have a bright future.

  • Iterative Development Model

    I have heard a lot of talk lately about lean and iterative startups and I must say I fully agree with the approach. People seem to jump in with both feet before they even know if there is water in the pool. Starting small and releasing a product as quick as possible cuts out a lot of variables. The biggest of which is “Does a market exist?” The thing to remember as the provider of such a product or service is that even though you haven’t fully tweaked your offer you are still providing value. An iterative development model is a good safe way to explore new possibilities.

    Small businesses are especially susceptible to losing a lot of time and money by chasing an idea that is not substantiated. It isn’t that difficult to raise enough funds to launch a business or new product line but if you are leveraging yourself you better know there are profits in your future.

    I would not be surprised if part of the reason small businesses see such a high failure rate is in part due to the dynamic of; “Ready, Fire, Aim!”. I get it, the zeal many entrepreneurs have push them to action before they fully know what they are in for. The longer I study the world of business the more I have witnessed the reasoning of companies to or not to go after additional ventures and it has proved to me that there are often many hidden reasons why NOT to go after a given market.

    Perfection Vs. Completion

    Another benefit to the iterative approach is that projects get completed. We are currently working on the release of a new product and I find myself wrestling with making things perfect verses wrapping it up and getting it out there. I have to remind myself that absolute perfection will never exist and that I may be wasting time by not getting the product to the market. I know it is a successful habit to focus on one project at a time but If I am perfecting something based on a false assumption no matter how “perfect” I make it no one will care.

    Often times a future concern may not be apparent until the product is in the final users hands. Your customers are your ultimate litmus test. They will tell you in a heartbeat if you are on point or not. Don’t view this as a bad thing, it is an opportunity to engage in dialog and find out what they really need.

    An example: I was working on a proprietary ERM project and needed to create a back ordering feature that would allow the sales staff to enter the parts shipped and create an automatic back order. This was an easy enough task but the ERM software was so involved that I couldn’t possible account for every third and fourth order effect. I produced the feature and launched the new version as quickly as I could. Come to find out a date that needed to be updated which the sales staff “always” updated was not populated and production thought the sky was falling. Word got back to me and I fixed the hole. The point is I could have combed the complete ERM suit for a year and would have never found out about this issue as it was related to the user’s mode of operation. By releasing it the use of the software brought the bugs to the surface.

    Everyone Changes

    Both the markets and the providers are not static, everyone changes. I heard that on average a company can change its direction as many as 5 times before it finds the path that leads them to fortune and fame. Microsoft for example got its start in monitoring traffic. Their needs for an IC lead them into computing and ultimately operating systems. Remember there are usually many markets that can be served by your existing set of core competencies.

    As you provide your product or service keep the dynamic nature of the market at the forefront of your mind. If you are not ready for a looming change and it hits there are ten people behind you waiting to pick up your market share. Don’t look at this as a negative reality embrace it and work with it. It is from this dynamic nature many opportunities will pop up. If you adopt a constant state of change as a normal business practice you will be hard pressed to find yourself outdated.

    Change is constant and how you react to each change will determine your ultimate success or failure. The new buzz words are lean and iterative but these models have long been in effect; take a look at the software and book industries. There is always a newer version or release around the corner. Wait a minute, I never looked at the current version as incomplete, I always looked at the newest version as improved. Aha, perhaps now you can turn your work in progress into an early release and offer each fix as a new an improved version, at a premium of course.

    If you found any of the above information to be helpful leave us a comment and let us know. We also love to hear your perspectives.

  • Small Business Inventory Management

    Managing inventory variability is a constant struggle in business one tool to help manage this is a regression analysis. A regression analysis is a statistical assessment of date that seeks to identify a general overlaying trend. It defines a sample set of date as a line. Like all statistical tools a regression analysis has limitations and without an intuition of the sample data a regression analysis is useless. The following is a sample of how a regression analysis could be used in small business inventory management and how knowledge of the real world implications was taken into account.

    As an operations engineer of an aluminum and bronze casting facility that produces a proprietary line of electrical transmission components it was my job to address product requisitions, generate quotes and do what I can to make the fulfillment of orders go smoothly. One of the dilemmas that we faced was providing parts with a minimal lead time.

    More often then not customers came to us looking for parts they needed quickly, and in the world of power transmission a day can mean thousands upon thousands of dollars lost. We did what we could to get the needed parts out as fast as we could but if a part was not on the shelf there would most certainly be a delay. It isn’t practical to maintain a large inventory all the time due to the carrying costs involved so, as an alternative we kept a select inventory of our most popular parts available.

    As our name grew and more people heard about the product line, our market share also saw growth. This selective inventory model worked nicely for us but with the continual rise in sales comes a need for more parts on hand. The question became; at what rate should we continue to add to our selective inventory?

    Each part had a separate demand so for the sake of this exercise I focused on only one item. I have gathered the quantities sold of this part over a 34 month period. The data is as follows:

    Monthly

    date By Month

    Sum Of qty
     

     
    January 2003

    245
    February 2003

    186
    March 2003

    55
    April 2003

    326
    May 2003

    510
    June 2003

    329
    July 2003

    110
    August 2003

    52
    September 2003

    677
    October 2003

    100
    November 2003

    37
    December 2003

    362
    January 2004

    1014
    February 2004

    45
    March 2004

    136
    April 2004

    186
    May 2004

    196
    June 2004

    60
    July 2004

    213
    August 2004

    239
    September 2004

    191
    October 2004

    151
    November 2004

    32
    December 2004

    190
    January 2005

    1003
    February 2005

    100
    March 2005

    361
    April 2005

    154
    May 2005

    161
    June 2005

    561
    July 2005

    338
    August 2005

    135
    September 2005

    820
    October 2005

    1259

    Now that we have the data we can plot a regression and see our trend. Using Excel QM we find the definition of this trend line to be Y=8.52X+160

    As you can see our quantities are all over the place but there is an indication that we were experiencing an upward trend in our average volume.

    This regression suggests that we were selling 8.52 additional parts every month. If this were the case it would be wise to add 8.52 additional parts to our on hand inventory every month to compensate. The result would be an out put that doubles roughly every 2 years.
    A product that doubles in sales every two years is a great for a company but lets look at the over all sales for each year to see how they match up. Taking a step back to make sure we see the full picture proved to be prudent.  

    Yearly

    date By Year

    Sum Of qty
     

     
    2003

    2989
    2004

    2653
    2005

    4892

       The data that we used to generate our regression shows a dip in sales in 2004 and a spike in 2005. It would be wise to take note of this as the deviation in sales is a good indication that the demand is not constant. If our demand isn’t constant we need to be careful about producing more parts then what we can sell.

    One way to combat this is to make the on site inventory a function of the prior month’s sales. Knowing that the ratio of standard orders to rush orders was about 7:1 we could determine a good starting point for our inventory to be 20% of the prior month’s sales. While this may result in a larger on site inventory then what is required for rush orders, it is more then likely not going to exceed the quantity that we will sell for the month.

    Every bit of data helps us determine what tomorrow might bring but no extent of data will ever insure us as to what tomorrow will bring. The regression analysis provided an indication to our macro rate of change while a quick look at our over all sales showed us that the distribution of sales was not uniform.

    A good practice would be to continually run the regression analysis for different time periods and see if perhaps we could identify potential cycles or seasonal trends that we could later exploit in order to maximize profit.

    I hope this illustrates how a tool like a regression analysis can be helpful but could lead to making wrong decisions if the practical circumstances are not understood. Many people right out of college have a great deal of tools under their belt but often do not know how to properly us them in the real world. My hope is that this illustration will push you to better understand your problems before spouting off a potential solution.  

     

  • How to Manage a Business Successfully

    I recently had an interesting conversation with a business owner on the topic of how to manage a business successfully. We concluded that all businesses are working towards further growth and that a primary management concern is growth strategy. So, to manage a business successfully, one must manage growth successfully. How is this accomplished, and what considerations should be made?

    Neil Churchill has an amazing write-up titled “The Five Stages of Small Business Growth.” In it he discusses the characteristics of small business types and what to expect at each stage of development. He defines five stages of development: 1.Existence, 2.Survival, 3a. Success-Disengagement, 3b. Success-Growth, 4. Take-off, and 5. Resource Maturity.
    As you can imagine, the concerns at each stage differ, and conflict can arise simply from people’s perspective of a company’s position. If a company is in stage 3a but a manager is under the impression that they are in stage 4, the decisions made could have negative ramifications. At the very least, having management on different pages will result in contention among management. So, the first thing that must be established is a defined company position.  Secondly, the direction the company is headed must be agreed upon and communicated to all. Churchill’s framework is only one model, but it can be used as a starting point. If the industry you are in has a better model, use it.

    An Example of Differing Management Directions

    As my conversation with the business owner progressed, he explained to me how some of the management was inclined to seek slow growth strategies, while others wanted to be a bit more aggressive. As a TOC practitioner, I know there are assumptions pushing each view, and before I gave my thoughts I needed to thoroughly examine each perspective.
    The company has been around for a while and is diversified into roughly 5 industry types. The positioning and market share in some of these industry types is more mature than in others. The trend has been that change does not arise until a good deal of “pain” is felt from not changing. In other words, until there is an instant return on investment, change won’t occur. For the mature segments of the company, this is not a problem, but for the younger branches striving for growth, this is quite the headache. Without an established presence in an industry, a younger business cannot afford to move at the pace of larger, pre-existing businesses. Can you see the dilemma?

    Opportunity Cost vs. Over-Extension

    Opportunity cost is the cost of an opportunity not taken. For example, say you had a dollar to invest and the choice of two investments: A or B. You invest in A, which returns 10%, while investment B returns 15%. The opportunity cost of A is the 5% gain that was not realized because B was not chosen. This dynamic shows up in managing growth in the area of resource utilization. A company can either step up their capacity before demand exceeds it or after the demand exceeds it.

    Benefits of Stepping up Capacity Ahead of Demand

    Knowing when to step up capacity allows a company to manage its resources appropriately so that its internal capacity is not exceeded by the demand of the market. The idea is that the opportunity cost associated with having less capacity than market demand is quite significant.

    A retail example:

    This season’s highly anticipated new Nike shoe is the best thing since sliced bread. It is all the rage and every shoe store needs to have some of these on their shelf. Mom & Pop Shoe Co. put in an early order for 100 pairs and eagerly await their arrival. These new shoes are so popular that if an early order wasn’t placed, there would be no chance of receiving them before the end of the season. The season comes and Mom & Pop sell out of the shoes in the first month. The season is 3 months long, which means that for 2 months Mom & Pop have to turn away potential customers looking for the new shoes. At first glance, one might consider it a victory to sell out of the stock so quickly, but the unrealized loss is the 2 months of sales that could have been if Mom & Pop had ordered more shoes. Demand has exceeded capacity, and the unrealized sales could be as much as 3 times the sales of the first month.

    Benefits of Stepping up Capacity after Demand

    On the other side of the coin, the amount of risk assumed by Mom & Pop Shoe Co. was less than what it would have been if they had decided to preorder more than 100 pairs of shoes. Had they known the demand was going to be so great, they could have extended themselves out a bit more, assumed a bit more risk, and ultimately reaped a greater reward. Over extending one’s self is a function of the available financial capital. A business with a good deal of reserves can extend themselves further than a company with fewer reserves. Most Mom & Pop shops don’t have much money behind them, so avoiding the risk often times takes precedence over greater potential gains.

    Allowing the demand to “pull” on one’s resources may also be desirable for a company that is well-established and wants to maintain conservative growth. In other words, a large organization with the ability to extend themselves out a great deal may ultimately choose not to because the potential of larger gains at higher risk does not outweigh moderate gains at a lower risk.

    Conclusion

    So, given the above dilemma, which direction is best? The answer of course is a function of the organization.
    Smaller businesses are advised to maintain as fast of a growth curve as possible without overtaxing their current resources and without assuming too much additional risk. This means working up to the point at which the business is around 70% of its total capacity. A small business doesn’t want to exceed this because they will begin to see a drop in their ability to deliver on time. One’s due date performance is critical and should never be compromised for the sake of quick profits. It is also prudent to maintain cash reserves so as to carry the company through the unavoidable market downturns.

    Larger organizations with greater cash reserves and more resources have their choice on which course to take. As I mentioned earlier, they may choose to go with a slower curve because they don’t feel the additional risk is worth the potential reward. Or, it may be determined that a faster curve is ideal to pick up market share at a time when competitors may be hurting because of a downturn.

    It is assumed that all companies pursue growth, but the question is how best to manage growth? I would love to hear your thoughts and experience with this dilemma. Leave a comment or shoot me an email.

  • Drum Buffer Rope (DBR)

    Drum Buffer Rope (DBR)

    The Drum Buffer Rope (DBR) approach is a management tool used in the Theory of Constraints and follows the five focusing steps when assessing a physical process. With a physical process there exists and input, an output, and interrelations between work cells or departments. DBR provides a means to manage the throughput in pursuit of achieving 100% due date performance.

    The Drum in DBR.

    The Drum is simply the constraint of the process. It sets the beat of the system and is used as your single point of control. In many cases the constraint will be obvious, but as it is elevated it is possible for it to move. Lets say a machine shop has a specific machine as the constraints, once identified DBR can be put in place. If that machine shop however decides to purchase another one of the constraint machines and doubles the capacity at that location, it is quite possible the constraint could move. If this happens, the new Drum must be identified in order to continue managing according to the constraint.

    Having the ability to move the Drum means that an organization can strategically place the drum in any location they choose.  This can be greatly advantageous depending on the plant type. An “I” style plant can have a number of locations that would work for the constraint and location will depend on specifics of each plant.

    “V”,”A”, and “T” style plants on the other hand have optimal points of control.

    A “V” style plant would be one that often starts from a single raw material and produces many parts. A foundry, or an injection mold facility may fit this plant type well. In any case, the location for the constraint is best suited at the base of the “V”. If the base of the “V” can be controlled, and all aspects beyond the vertex have excess capacity one could expect exceptions due date performance.

    Plants that follow more of an “A” flow would look as follows

    The Drum in this case is again at the vertex, but the vertex is now the last point of the process. With an “A” plant one only wants the work in progress to be that for orders placed. Taxing the system with anything other than orders received puts a load on the system as a whole that will decrease the due date performance. Coordinating assembly efforts, and accounting for variability before the Drum may be a task in itself but the best results will come with the Drum at the top. The buffer in this case may be a shipping buffer which contains finished products.

    The last flow style I will touch on is the “T” style plant. The Drum in a “T” plant is best placed at the T.

    This could be a plant that customizes their product to fit personalized requests. Much of their products are the same but require a quick modification at the end of production to make them ready for a specific customer. A wooden sign shop would be a good example.

    The Buffer in DBR.

    The Buffer is put in place to insure that the Drum always has work to do. Additional buffers are often incorporated throughout the process but the original Buffer was put in place to protect the Drum. It is not uncommon to see material buffers, assembly buffer, and shipping buffers in a fully integrated DBR solution.

    Buffers are required to account for the variability that will no doubt show up. Machines break down, people get sick, and sometimes it snows. Having strategic buffers will minimize dependences that may disrupt the production process. Placement of buffers will change with plant flow just as the Drum placement did.

    The Rope in DBR

    The Rope is the release timing mechanism that informs prior processes when to start producing. It is the pull if you will of down line operations to up line operations. The Rope operates in real time and signals for material as it is consumed. The Rope is what allows the release of material to stay in sync with the Drums production. This is similar to Kanban.

    Simplified Drum Buffer Rope (S-DBR)

    Simplified Drum Buffer Rope came out of a need to address the system when the market is the constraints. When the market is the constraint the DBR approach can be simplified to having the Drum be the orders from the customers, a shipping buffer at the end of the process, and the Rope is also dictated by the demand of the market. In other words the internal capacity is greater than that of the market. The goal is to meet the needs of the market as they exist.  The S-DBR approach allows the company to fulfill instant demands as well as longer lead orders.

  • Small Business Resource Management

    As an entrepreneur or small business owner there is constantly a demand for three primary resources. The three resources are human capital (knowledge), financial capital (money), and time. Entrepreneurs have to find the balance on which to use in place of the other often a conflict can exists between spending time or spending money?

    With many home based business operating on a small budget at some point you will have to decide if you should work directly on the issue yourself or pay to have it taken care of. The nature of the issue and your specific situation will determine this but I strongly suggest that if other people’s time and talent can be leveraged at a reasonable rate to go that route.

    The majority of the tasks you will need to tackle can be taken care of by just about anyone, hire it out, don’t waist your time on simple tasks. In his book “The 7 Habits of Highly Effective People” Stephen Covey identifies the following time management matrix.


    First Quadrant

    This is where activities related to the daily grind are found.

    Second Quadrant

    This is where preparation and planning take place

    Third Quadrant

    This would include interruptions and distractions

    Fourth Quadrant

    Activities not directly related to your current situation.

    Identify the tasks you take part in according to this matrix, and hire people to handle the matters found in the high urgency column. Other people can often be leveraged to handle these matters which in turn leave you free to spend more time planning and strategizing.

    You are the captain of the ship. You are responsible for directing the ships course. A single individual can manage a row boat but many are required to manage an ocean liner. Entrepreneurs often start in a row boat but soon realize a larger vehicle will be required to get them where they want them to go but a larger vehicle demands many hands.

    Your business is the manifestation of your vision; no one knows your vision better than you. Remember, many people can file papers, answer the phone, and do data entry often times faster than you can.