by Bert Shlensky | Sep 1, 2016
Operations and logistics are frequently viewed as secondary functions that can be handled by someone else, but in reality they are the foundation that all other processes are based on. They present a huge opportunity for a business to become more efficient and differentiate itself. A simple definition of these two functions is:
The process of planning, implementing, and controlling the efficient, effective flow of goods, services, and related information from point of origin to point of consumption for the purpose of meeting customer requirements and expectations.
Just as with large business, small business requires effective logistics and operations planning to produce products or services and deliver those products or services to the end user. The process starts with determining key issues, understanding tradeoffs and developing goals and standards. Below are a series of different business circumstances where operations and logistics come into play and are important. Business owners need to consider these circumstances during their operations and logistics planning: [pullquote]Effective logistics and operations planning starts with determining key issues, understanding tradeoffs and developing goals and standards.[/pullquote]
In service businesses
- scheduling staff, services, and supplies correctly to meet customer needs without incurring excess expense is critical. We hear about the challenges of pizza parlors planning super bowl halftime deliveries but every business faces those issues on a lesser basis every day.
On the internet
- many retailers have integrated 1-3 day direct ship from suppliers to consumers to reduce both their inventory investment and risk. Suppliers reap the benefit of consolidating inventory and expanding their customer base.
Dealing with in-store customers
- Customers who wait or walk out of a business because of delays generate the most complaints and represent huge lost opportunities for increased sales.
Managing inventory
- Balancing and managing inventory to serve demand and reduce closeouts can be critical to success. Reducing lead times, improving flexibility and planning can improve effectiveness and lower costs.
Applicability of the 80-20 rule
- Many operations experts have shown that as a rule, 80% of a company’s sales are derived from 20% of its products or services. However, suppliers continue to proliferate styles, colors, sizes, models and features presumably to better serve more customers and provide more features. A Harvard Business Review article analyzed numerous business examples and found that businesses seldom increase profits by increasing offerings beyond a certain point. Businesses often waste time, money, and frequently add confusion by putting in place too much complexity.
[pullquote]Inventory management and delivery should include:
- development of a merchandising product or service plan and,
- the development of an inventory forecast.[/pullquote]
To better manage your inventory and improve delivery to your customers there are a number of critical steps businesses should follow:
- Step One – develop a merchandising product or service plan.
- This plan details each product or stock keeping unit (SKU) in a description. It allows buyers and sellers to understand the parameters and limitations of a program. The description requires detailed spec sheets that in essence become a bill of materials for suppliers and shippers.
- In a service business this would be a description of training, services and requirements for every function.
- The spec sheet will tell the scope of the project and the expertise necessary to carry it out. The most important aspect of the spec sheets is to be detailed to ensure all components are accounted for so you don’t miss a component and your costs are accurate.
- Step Two – Develop an inventory forecast
- While planning and forecasting are like the proverbial chicken and egg, startups need a forecast model to consider all the parameters of their business. In the beginning, this includes an estimate of potential volume, pricing resources required to meet that volume and potential constraints.
- It is critical to develop a forecast backed up by the necessary attendant resources required. Businesses often fail if they can’t afford the necessary inventory or sufficiently don’t have the time to perform the services necessary to survive. Business owners frequently expect to drive their revenue through personal sales calls. The reality is when you add up the time they would be required to spend, there aren’t enough hours in the week to generate the income they need.
Supply Chain and Timing Considerations
Effective operations and logistics
Supply chain and timing considerations can be critical performance and cost saving factors. There are multiple considerations in making distribution decisions:
- shipping and receiving points;
- lot sizes and shipping quantities;
- reduction of lead times;
- using similar part components;
- scheduling components to reduce bottle necks;
- shipping and warehouse charges.
The decisions you make must balance customer fulfillment needs, inventory risk, terms, ownership, and replenishment.
All of these functions are essential to excellent service. Remember: “Let’s face it, anyone can put product in a store or pictures on the internet and attempt to sell it. It is the differences in service that frequently differentiate.”
Modern operations are becoming increasing complex and integrated. Two processes help develop excellence in addition to all the technical tools that are available.
- Open systems, in general, reject bureaucracy, authority, hierarchy, and closed decision processes. An open system in general is a management system that is capable of self-maintenance on the basis of throughput of resources from the environment. Open systems encourage participation, diversity, new rules and to some extent chaos.
- One requirement of open systems is the collaborative decision model. As decisions become more complex, the need for diversity, internalization, innovation, and expertise are expanded. Collaborative decision making is not the old group-think, consensus building or “we have always done it that way” mentality. It requires reaching out to the organization, its suppliers, customers and outsiders to develop exciting energy and new solutions. It is linked here to the open system process.
In summary, operations and logistics, and other operations should be viewed as a critical opportunity to improve sales, profit and competitive positioning. While there are some technical aspects to its proper implementation, it is the thinking and integration of the components that can lead to success.
by Bert Shlensky | Aug 3, 2016 | Operations
In helping hundreds of small businesses and startups at Startup Connection (www.startupconnection.net ), I have learned that improving forecasting is frequently your best path to success. This includes financial, sales, marketing, operational, internet, human resources and other forecasts (which include models, plans and budgets) that help understand and improve business. A few fairly simple recommendations can make the process much more effective:
Commit to the process
You need to commit to the process of forecasting and not be limited by the natural fears and frustrations that can occur. Even if you never forecasted before, there are lots aids. Here are two:
First, just take a peek behind the curtain and see forecasting for what it really is. It’s a process like anything else, and simply participating in this process and understanding the mechanics of it are often just as important as the actual numbers. Frankly, the numbers always change and require constant development, testing, measurement and adaptation.
Secondly, follow Nike’s advice: JUST DO IT! I have developed hundreds of forecasts, and the more clients take charge, understand the variables and suggest changes, the better the forecasting is. For example, last week we helped a client allocate their inventory to better stock their shelves and improve productivity. In this case, simply having to add a fixed inventory goal at 100 percent made noticeable improvements.
Dynamic forecasts: or the art of understanding that life changes
Many forecasts are based on simple relationships, a few variables and one point in time. In reality, truly helpful forecasts require integration, change and have interaction among factors. For example, pricing, marketing and sales all affect one another rather than being separate. None exists in a vacuum. That may seem obvious, but most off-the-shelf models do not deal with them together. Similarly, forecasts that simply grow future sales by a percentage can be less effective because sales, marketing and costs do not all vary simply by volume.
Many planning programs put financial plans at the end of the process. Startup Connection helps client’s starts as early as possible with a forecast and then revises as programs develop and relationships change. For example, companies need to determine sales, growth, profit, and cost parameters and interaction while they are developing programs.
The plans that ignore financial and performance realities end up with the proverbial “hockey stick” graph of explosive revenue growth. Entrepreneurs frequently detail initial programs and assumptions they will then assume 20-50 percent growth rates (the hockey stick with little analysis of assumptions, resources or programs). It may look nice on paper, but it usually gets pretty ugly in real life.
Simplify wherever possible so you do lose sight of the forest for the trees
How do you make forecasts simple and still be dynamic and integrated? Focus on what’s important. Follow the 80-20 rule where 80 percent of your sales will almost always be represented by 20 percent of your offerings or customers.
We have helped saved clients over $2 million in the last two years by simply reducing slow-selling items and conversely being in stock and focusing on the most effective marketing programs. How many times have you been to a grocery store sale where the basic items are out of stock in a few hours and the weird stuff is there forever?
Simple also relates to the characteristics of your forecasts. Focus on factors that really affect your business so you can understand them and estimate factors that are not as significant. For example, look at aggregate costs and administrative expenses rather than trying to forecast small items like telephone, utility, and insurance costs on a monthly basis. Also, forecast on a quarterly or annual basis and then break down months only if necessary.
Bias: Whether we admit it or not, we all have biases
The biggest problem with forecasting is bias. Analysists love to discuss mathematical formulas and measurement in affecting bias; however, most bias especially in small businesses, is simply human. Your assumptions, analysis and data can all unknowingly affect results. Variances in political polls are the obvious example but there are many others. For example, analysis of different age groups like millennials and baby-boomers can vary simply by using different starting and ending birth years.
Because we love to be right, we frequently will go to extraordinary lengths to make sure that we’re proven correct. Many times we don’t even realize we are doing it. A simple suggestion is to develop failing, realistic and optimistic forecasts and examine the reality and probability of the differences.
Keep the goal in sight: improving your decision-making
The goal of forecasting is to improve decision-making and identify great alternatives. Focusing on satisfying investors, suppliers, employees, etc. is simply an invitation to long-term problems. Similarly, you need to understand the goals, timeframe and precision in your forecasts. Are you simply trying to make a living in a short time or build a giant business that you know will lose money in the first few years?
One of the crucial aspects of decision-making is risk and outcomes, which are greatly affected by probability and information. Predicting results where there are significant and consistent historical data can be fairly simple; however, predicting results for new programs or with little or inconsistent data requires developing educated estimates.
Just remember that it is a process, and you will make mistakes. The goal is to learn from them and continue to improve. In summary, more consideration of the some of the issues above will lead to better forecasting. In general, I also believe we are overly concerned with the consequences of mistakes than the potential of risk. Thus, don’t be afraid to test new ideas and adapt to their results. This approach is well stated by Sheryl Sandberg in her comment, “What would you do if you weren’t afraid?”
Dr. Bert Shlensky (Bshlensky@startupconnection.net ) and Startup Connection (www.startupconnection.net) help entrepreneurs and small business owners maximize their capabilities and opportunities. We empower clients to understand and balance the risks of failure and the rewards of success.
We provide entrepreneurs with tools and recommendations to facilitate operating a business. Our focus is on understanding and analyzing the dilemmas and challenges to help entrepreneurs have better results, avoid mistakes, have greater efficiency and become profitable in less time.
by Bert Shlensky | Feb 19, 2014
Small Business Tools
Before you consider starting a business, there are many key items to consider and plan for. These articles will help you learn some of the key items you must consider and plan for when you begin the path of entrepreneurship. They include articles on: are you ready to start a business; passion and reality in starting a business; and developing an elevator speech or sales pitch.
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Learn about importing, patents, trademarks, copyrights, and even how to purchase another business in this section.
