Know your instrument panel well

BY RICH SCHMITT

Management specialist

Last month I discussed the need to run your company like a pilot operates his aircraft. It is always a challenge to balance the time spent looking at the instruments and the time looking out the windshield. I covered the “looking out the window” part of the process last month. This month I want to give you some ideas about your instrument panel. In flying, there are core instruments that are critical to the safe operation of the airplane. Pilots must scan these instruments more often than others. There are a lesser group of instruments that must be scanned regularly, but not as often. This prioritization is what allows pilots to fly safely even though the array of knobs, dials, switches and lights has increased 100-fold since the early days of aviation.

So let’s turn to your company’s instrument panel. I believe there is a group of operating reports that allow you to keep your finger on the pulse of the company while maintaining your focus on running the company. But before we get into specific reports I will outline some general thoughts regarding reports and their use.

You must train your team in how to interpret and respond to reports

Pilots are continuously drilled in procedures that ensure they know what each instrument and light means and, just as important, how to respond to various situations that might occur. In wholesaling, some leaders give their team briefings to explain reports. But most companies just start distributing new reports in the hopes that their team will somehow naturally determine what the heck to do with them. Many times, managers will delegate any briefings to the CFO or controller since they are “numbers” people. This can be like having engineers explain instruments to pilots:

Engineer -- “Well that light indicates that the B3 squat switch is in the open position while in a landing configuration.” 

Instructor -- “Drop your landing gear or you will crash.”

I have nothing against engineers or accountants, but I think operating managers should be tasked with understanding and training their people in the use of any operating report distributed within the company. Their job is to drill their team in what the measures mean and what to do, operationally, with each measure. When line managers cannot explain how a report is to be used, there is a reporting problem or a training problem -- or both. 

Each report should have a written set of instructions

The report reader can then refer to these instructions whenever there are questions. I can almost guarantee that your line managers don’t understand some or all of the reports they receive. Think about it: the reader may or may not be trained. Any training might have been years ago. Many in our industry have little or no formal business training (not that it would help with some reports); and they only see some of these reports on a staggered basis 12 times, 4 times or once a year. 

Each time they see a report, they have to try to remember what all the data means. Further, most people are unlikely to ask their manager or the cfo any questions about a report, fearing that they will look stupid or be teased. You will note that most industry performance reports have an extensive attachment that explains each of the measures -- and some even provide interpretations of the numbers for the reader.

You must identify and prioritize reports

Some reports are both important and urgent to the operation of the company, while others are important but less urgent. Ideally, I like a header summary for each report or document that is distributed: 

• A simple title explaining what it measures. Old data processing reports used to have informative titles like  123456-7. 
• A print date and the reporting period that is covered in the report.
• Level of confidentiality. Many companies assume that people know this is confidential information. I think all internal correspondence, including phone lists, and reports should be labeled “Confidential.” This leaves no confusion about whether giving your phone list to a head-hunter is wrong.
• Who should read it?
• Priority --
  • Read immediately, you will always be expected to know the contents of this report. There may be a pop-quiz.  For example, every branch manager should know his sales, gross margin and expense numbers whenever asked without referring to a report or the computer. Of course, not to the penny, but with reasonable precision.
  • You should read this within __ days of receipt. This is important but not urgent information. While not reports, educational materials fall into this category. If you provide materials that educate or expand your team’s horizons an expected “read-by” date should be provided. In others words, don’t deluge your team with tons of B reading material because they already have a lot on their plate.But if you provide this type of material, reading it should not be optional and should have a completion date attached.
  • Informational -- This was a trick priority. Don’t clutter your team’s lives and don’t let your staff clutter your team’s lives with “informational” junk.  Generally speaking if there is no action attached to the document don’t send it.  Your team probably already has enough on their plate. 
  
  

Focus on actionable reports

You must always focus on reports that lead to proactive, real-time or corrective actions. Leaders must personally develop this kind of focus and, possibly more important, they must abolish stupid, time-wasting reports from their organization. These non-essential reports can cause your team to take their eye off the ball because you have distracted them with other garbage. 

In a past life, working in a large organization, I watched thousands of man-hours being squandered as line managers were provided with meaningless reports. These managers dutifully read the reports and lived under the constant fear that there would be a pop-quiz about the information. No one had the guts to ask, “Why are we wasting our time reading this crap?” This simple question might have caused the report to be discontinued or the company executives could have educated the team about how and why the report was to be used within the business.

While I am a fan of openness in running a business, some companies have gone overboard and are overwhelming their team with “informational” reports that divert focus from real operating issues the team should be addressing. 

Focus on areas that the reader controls

I often see branch manager reports that contain a mix of branch expenses that the manager does control and expenses or allocations that the branch manager does not control. These non-controlled items either aggravate the manager or become a distraction as the manager argues with HQ about the size of his allocation for the customer trip to Timbuktu and whether HQ really needs 2-ply toilet paper. 

I have seen countless hours wasted in manager meetings as people rant about and focus on the wrong issues.  In some cases, I think the “ranters” are using this information to get HQ off their back by creating smoke-screens that divert attention from their real operating problems.

Create reports that focus attention on the problems or opportunities

Many reports do not bring proper focus to problems so an individual spends a disproportionate amount of time digging through crud to identify a problem and thus has less time to actually address the problem. Look at your processes and reports and then ask, “What does the reader really need to know in order to do his job properly and more effectively.”

An example: I like inventory managers to get a report every morning that gets their day focused on their most urgent challenges. As background, most wholesalers stock a small number (200 to 400 SKUs) of high-priority products that I call Never-Be-Out-Of (NBOO) items. (These are the ones that cause a contractor to think you are stupid when you stock out of them. When you stock out of one of these products, they also assume that they cannot count on you as a reliable one-stop supplier.)

So when you stock out of 1/2" copper 90s, a contractor might gaze around your counter area and say, “This is a really good location for a supply house, I wish somebody would put one here.” So your inventory team must code these products in your computer as NBOOs. These NBOOs might have higher levels of safety stock and be managed more vigorously.

So here is a helpful report that would be available to the inventory manager upon arrival every morning. (Why would you have him run the report when he gets in? It delays his work and probably loads up your computer during the morning rush. Most computer systems have a way to create the report at night while the computer is mostly idle.) The report would have the following groupings:

• NBOO items out of stock. This is an emergency! With all the special handling for NBOOs, the replenishment process has failed. (One client’s president had a printer installed in his office that shot out a page every time a location stocked out of an NBOO product. This allowed the president to call the branch manager and “encourage” the expedited replenishment of the product.) The expected action is to get someone in a truck headed out to acquire the product even if it requires buying the product from a wholesale competitor or, even worse, a home center. I say, “even worse” since someone may have to peal all the little UPC labels off any fittings you buy so the mistake isn’t as obvious and embarrassing.
• Normal stocked items out of stock. This is not great, but stocking out of a reducing tee is not as embarrassing as that unforgivable 1/2" copper 90.
• NBOO items that are forecast to stock-out. These are situations where the GOH is not sufficient to cover the forecast demand over the replenishment lead time. This is worse than simply being below order point. It means even if you order it today, you probably won’t receive it before you stock out of the item. While this is bad, there may be some time to expedite a purchase order as a way to recover and avoid a call from the president. Most reporting treats “forecast stock-outs” and “below order point” items the same, but I think we can do better.
• Normal items forecast to stock-out. Same as for nboo items but probably not as critical to address.
• Stocked items below order point. These are the normal replenishment items that must be addressed promptly so they don’t get “promoted” to one of the higher priorities due to inattention.

Think about the focus this brings to an inventory manager’s life. With all the computer power that is available these days, you would be stunned at the number of dedicated inventory managers who must page through a thick printed report to avoid a disaster. The less-dedicated ones either over-stock or stock-out because they just don’t take the time to review the report any more. There are similar ways of distilling and sorting information that can help each area in your company.

Focus on measures that help your team to manage

These are the triggers that help them to address or, even better, avoid problems. While each company is different, the following are some thoughts for consideration.

• Expense measures. In a tough economy, controlling expenses is critical.
• The most critical measure, in my mind, is expense vs. gross margin or operating profit/loss. When dollar margins are going down, you must be reducing expense dollars as fast or faster, since margins create the pool of cash out of which expenses are paid.
  • Expenses as a percentage of sales. Watching this percentage over time and balance within total expenses can catch problems and opportunities.
  • Expenses compared to unit sales. This is a less-traditional measure, but situations like inflated metal cost/prices and the 13-seer changeover can lead to inappropriate increases in expenses to deliver the same or less units of product.  (Some companies have been lulled into expense increases based upon higher dollar sales. So far, nobody has convinced me that expenses to deliver a box of fittings is in any way related to the price of the fittings. (Of course, we might soon be delivering copper fittings in armored trucks and that would cause me to reconsider my view.)
• Receivables. When contractors’ work is slowing, they tend to pay more slowly, so it is critical to stay on top of each customer’s situation.
• Inventory. When the economy slows, your challenges are getting inventory down to a proper level and keeping the inventory in a balance of fast-moving vs. slow moving. Many wholesalers are sitting on too much of the wrong stuff leaving them vulnerable to stocking out of bread and butter items. I think that a simple inventory stratification report that sorts products by importance showing sales, gross margin and inventory levels can help your team quickly identify balance problems in your inventory. For a sample and some additional information on this type of report, e-mail me at rich@go-spi.com
• Turn & Earn. I have always liked the simplicity of a single number that measures the balance between your pricing management and your inventory management. Compare your performance to similar high-performing companies in your industry and then work to be in that top group.
• Pricing overrides at the time of sale and exception pricing for customers. These can highlight flawed pricing (your normal price was out of the market) or flawed selling (your normal price was correct but your team gave the customer a discount because your team was weak, got snookered and/or are undertrained.)
• While you should have budgets so you can monitor performance vs. budget. It is critical that you manage epenses down as sales decrease. Even if you don’t have budgets, you do have what is sometimes called a “run-rate.” The unofficial definition is your current rate of selling or spending. So your rate of spending based upon your headcount, rent, utilities, etc., is a dollar amount per month, week or day.

Your sales revenue is also running at a specific rate as is your gross margin production. You should watch for changes or trends in gross dollars and percentages of each measure over time. Year-to-year comparisons can be very enlightening as you monitor various measures both in gross dollars and as a percentage of sales or total expenses.

Of course, you will have other financial and operating reports that you need to monitor, but the above are several of my favorites.

You and your team will do a better job of “piloting” your company with focused, well-understood reporting and with pre-determined processes for addressing specific situations. I know it is tough to achieve balance in wholesaling, but spending time in the field with your team and monitoring your numbers can really give you the best shot at a pleasant flight and help you to avoid any disastrous crash landings.

If you have questions or comments about field visits or reporting, e-mail me at rich@go-spi.com.