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The one sentence description of time based competition or competing as time is giving your customers what they want when they want it, where they want it, faster than your competitors can do it. That's George Stalk Jr.
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He's spent decades advising companies how to turn their failing businesses into competitive forces.
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Now, George is sought for his understanding on what makes a business thrive in uncertainty.
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In this episode, Shane and George discuss the most ignored factors that give businesses a better advantage and the ugly duckling of retailing is returns.
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Zappos was one of the first companies I ran across where they used returns as a marketing opportunity.
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Dive into the insights from his book that Tim Cook makes all his management read.
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not looking at time as a measured variable, value is only being added between a half a percent and 5% of the time.
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Explore one of Amazon's biggest shortcomings.
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What's surprising about Amazon though is they haven't gotten into the Ticketmaster's business.
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I still don't understand that. And more.
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It's time to listen and learn. George, welcome. Hey Shane.
1:03
I've been looking forward to this.
1:06
You said that winners in business play rough and don't apologize for it. That's right.
1:10
Where does that come from and what does it mean?
1:14
I wrote this book called Hardball.
1:16
And it was a the subtitle was are you playing to play or playing to win?
1:20
And I wrote it out of frustration and maybe anger cuz I was I thought the business press was misleading mainly MBA students and middle managers in the thinking business could be played nicely.
1:33
That co-opetition was one of the big words at the time and the Europeans were masters of co-opetition.
1:38
You might as well call it collusion.
1:40
But the notion was cooperate with your competitor, don't fight them.
1:43
Well, all my clients were either winning and trying to preserve their winning position or they were having trouble, maybe even losing and trying to survive.
1:52
So, that was a very very much a survival mode whether they were winners or losers.
1:57
So, as I mentioned Boeing depending on the year is either number one to Airbus or number two to Airbus.
2:03
So, to them competition is day-to-day.
2:06
Komatsu versus Caterpillar. Ford versus Toyota.
2:10
Toyota versus Honda and Nissan.
2:12
And there is no time to stop set back and take your breath and relax.
2:18
It's a continuous battle.
2:18
So, the book had uh I 12 strategies that always worked, but they're hardball strategies.
2:26
And we just they were based around a client's experiences and uh I think almost all of them we had clients' permission to use their names.
2:35
And these companies put the edge in competition.
2:37
And the results showed in terms of their bottom line, their growth, and in their market shares.
2:42
What are some of those strategies?
2:43
What are the ones that are most valuable?
2:47
Uh the one that always works is know your cost better than your competitors know their cost.
2:52
Cuz most people don't know their cost. They think they do.
2:55
They know the cost that gets between the revenues and the profit line.
2:59
But they don't know what it happens behind and those are all averages and they don't go behind the averages.
3:05
And if you go behind the averages what what what people will discover is that some things cost more than they thought they did and some things cost less.
3:13
And some customers are more profitable and some are less profitable.
3:17
Um and if you know your cost better than your competitor know their cost, you could do nasty things.
3:22
Mainly, you could gain market share uh because you would understand how the costs work, your costs work, and not what the volumes mean.
3:30
So, what may appear to be a uh uh less profitable cl- customer is actually the high volume customer produces a whole bunch of economies of scale and reduces costs, but it that all gets lost in the averages.
3:41
So, that's that's a big winner.
3:44
One that works very well is be faster than your competitors at providing your customers what they want when they want it and where they want it.
3:54
And if a company can do that two or three times faster than its competitors it'll usually grow two to three times faster and it'll be twice as profitable.
4:05
And that was the story of Walmart versus Kmart for many years.
4:07
That's the story of Toyota versus most of the rest of the auto industry except BMW and Mercedes which have retreated into the high end.
4:17
So, those were some of the ones.
4:18
Hardball M&A was another one.
4:18
Um uh buying companies to to round out a competitive position or extend one after the one client uh was in the medical devices business the second best competitor uh was beginning to grow and so they just bought him out.
4:37
Now, there are people in Washington and Canada that are paid to stop that kind of stuff from happening.
4:43
Uh and indeed the clients that we've worked with that do do that usually have to justify it pretty carefully.
4:51
Uh but at least people should start thinking about that.
4:52
They shouldn't assume uh that they can't get away with it.
4:58
Uh so it's it was things like that um that made a difference.
5:03
But it required a mindset that says we got to win.
5:07
There's not things you can do in a relaxed way.
5:09
As you're saying that, I'm thinking sort of about corporate culture, too, and we we sort of have this notion that the workplace is like a family.
5:19
That's part of the softening of business.
5:21
I mean, an analog to family is a tribe and people understand what part of it what part of what organization they're a member of.
5:29
And I can tell you people at Caterpillar know they're competing with Komatsu.
5:32
Komatsu has a sign that says "Baru Cat" over its uh headquarters door.
5:37
Baru Cat means encircle Caterpillar.
5:41
And that becomes part of the culture.
5:41
It doesn't does it become the whole culture.
5:46
Um but it becomes a very good part.
5:46
I you know, I think Amazon's a good example where Jeff Bezos says uh your gross margin is my target.
5:54
And people are expected to find businesses where they can basically reduce the gross margin grow by fewer prices and move in.
6:02
That's why they moved out of books and all the things they moved into.
6:05
What's surprising about Amazon though is they haven't gotten into the Ticketmaster's business.
6:09
I still don't understand that.
6:12
Cuz the margin at Ticketmaster's are huge and the business is amenable to uh the internet.
6:19
Um but that that creates a culture.
6:21
Do you think that cultures are the ultimate source of competitive advantage? I would say yes and no.
6:29
Uh on the yes part, it's hard if you if one's losing in part because one's culture is not competitive to an opponent's.
6:37
Uh trying to make the culture competitive is really difficult.
6:39
And I've been caught in situations like that where from a technical standpoint I know how to beat the number one competitor but the organization doesn't have the culture for doing that.
6:49
In that situation we the CEO decided to sell it.
6:50
But it's not the starting point.
6:54
I think it's it's necessary to bring in bring culture into the equation if there's a a transformation process going on uh that one needs to cement the outcome.
7:06
Uh at Federal Express Fred Smith had came up with this phrase called the world on time.
7:12
And so FedEx thinks a lot about time.
7:15
And the organization thinks a lot about time.
7:19
Um and ideas for you know, improving time performance come from all over the organization.
7:24
That's a cultural effect.
7:27
Um but if you know, he was able to start that culture because he'd already had a culture that was oriented around speed. The next day delivery.
7:35
How do you think about sort of a culture that um you mentioned sort of competing with Caterpillar and encircling Caterpillar, which is outwardly focused, focused on the competition versus one that's inward focused, which is maybe serving the customers the best and letting that take care of itself?
7:54
Well, if somebody says my culture is built around serving the customer best and I'm working with this company, they have to prove it to me that relative to competitors they can do that.
8:05
Uh people often use these descriptions of a culture without any quantitative representation.
8:11
Uh so, the first part of your question if you know, if the culture is not being responsive and so one of the fastest way to make them responsive is to do the competitive comparisons and demonstrate to people that somebody is doing what they think they're doing well much better than they're doing it.
8:26
And that's usually a big wake-up call.
8:27
And if people observe that wake-up call and take the actions and follow through uh they could produce pretty dramatic results.
8:36
Uh but that's not an easy path I just described.
8:37
We had a case with a company called Wausau Paper.
8:42
And Wausau Paper is based in uh Wausau, Wisconsin.
8:46
Uh small paper bill basically uh the owned by a family trust under-invested in the equipment and ended up in the wrong place in the paper business.
8:56
And that place is too many small, narrow, slow machines and a high cost position and chronic loss of money.
9:05
Um but no no turnaround plans for that.
9:07
And it was the trust that brought us in because they were afraid they'd have to close the bill.
9:13
And the last thing they wanted to do was close the mill that created the trust.
9:17
So, they said, "Can you find a way to fix this thing?" Um and we did.
9:23
Uh the way we found a way to fix it is we made this company able to make specialty papers in small volumes and deliver them next day within the greater Midwestern area.
9:35
In the end, that was maybe 20% of the effort uh because even though the organization didn't have any any options uh they couldn't bring themselves to implement that strategy.
9:46
So, for example, the sales manager was not at all interested in changing his merchant relations business distribution relationships.
9:56
And for this company to give up on the commodity papers and focus just on specialties, they had to have a broader distribution.
10:02
To to produce the volumes they needed.
10:04
So, that that scared the hell out of him. He didn't want to go.
10:06
But I mean, the hardest thing the worst thing about finding a new customer is having to go back and tell your old customer that it's been done.
10:13
The logistics guy hated it cuz we we said, "Okay, uh the deal here is the truck goes out whether it's full or not."
10:21
Now, this is an industry that's been operating at a cost.
10:23
And so, less the truck loads is not something you do. All trucks go out full.
10:26
All trucks carry 40,000 lb. That's a lot of paper.
10:30
Most people don't buy 40,000 lb of a specialty grade paper.
10:35
Um but we had to do that cuz we were promising people next-day delivery.
10:38
And the reason we were promising them next-day delivery is we could change their economics.
10:40
We changed the merchant's or distributor's economics.
10:44
Cuz next-day delivery meant they could operate with less capital.
10:45
That You talk about competitive advantage.
10:47
At that point for a competitor to knock us loose, they would have to be as fast as we are.
10:55
Um and they'd have to get the the the their merchants to invest capital in their business that already been invested in ours.
11:01
Now, the logistics manager wouldn't do that.
11:05
He would not send a truck unless it was full cuz he's always measured on that.
11:09
He just would We had to retire that guy. It was awful. But it worked.
11:13
Wausau Paper for many, many years created the highest shareholder value of any paper company in the world until it ran out of capacity.
11:19
But it it took a new CEO, took a new sales manager, took took a new logistics guy.
11:25
Uh it did take a new manufacturing person because once the person understood it the manufacturing person understood that we would put the equipment in he needs to be flexible and be able to handle short order nights, he was happy.
11:38
So, one has to take on the culture.
11:38
And now, Wausau, if you read their annual report, I mean, they got it.
11:43
It's like BCG never existed.
11:46
It's in their It's in their their genes at the moment.
11:50
So, that's a really nice win when that happens.
11:52
How hard is it to take an existing culture that's headed for certain doom, in this case, and then pivot that to an uncertain future?
11:59
It sounds like a lot of people were holding on.
12:04
They would rather the certain doom than the uncertain potential of surviving.
12:07
I mean, to a layman to me, if you've run out of options and and the remaining option is bankruptcy, you'd think there should be no argument here what we do on Monday, but there is.
12:19
People just can't bring themselves to make that change.
12:23
Um so, the size of the crisis has to be big enough for management to be willing to take on the organization, take on the culture.
12:30
I had the experience of turning around a a client's factory to prove that uh it could be made more flexible and much faster at It was hospital beds.
12:37
Making hospital beds than their competitors.
12:39
In the end, uh 80% of management turned over cuz they couldn't handle the changes.
12:49
They couldn't run smaller batches.
12:51
Um they couldn't more more frequently schedule a facility.
12:53
They just didn't believe it would work.
12:57
Um and that's another example.
12:57
A company was on the verge of going out of business.
13:00
It was a Canadian company, by the way.
13:02
And so, the culture is the hardest thing to change. It needs to be changed.
13:06
Um it needs to be changed to to freeze the benefit of a new strategy.
13:14
Um but one can't start there.
13:14
I think it'd be very difficult to start by at Wausau Paper and say, "We're going to be the most flexible company in the world making the greatest product, greatest amount of specialty products and not being in the commodity business."
13:25
Which is exactly Every one of those things is against the the the the mentality of anybody in the paper business.
13:33
I want to talk a little bit more about time-based competition later on.
13:35
Before we get to that, what are some of the advantages um relative between private companies and public companies?
13:45
What can private companies do that public companies can't?
13:51
Uh for the last 10 years, um my client work has almost been exclusively for owners of family companies.
13:58
So, I've been deep deeply immersed with the families and the owners.
14:03
Um And so, what have I learned?
14:06
Um The owners of family companies uh are most worried about their reputation being s- smeared by not poor performance.
14:16
That's their number one concern.
14:18
The second concern of owners is how will my children do?
14:24
I mean, all of them are afraid their children becoming playboys.
14:28
And after that, kind of trickled down to a bunch of different things.
14:29
But a few years ago, uh we did a project uh where we looked at uh family companies that were publicly traded and had publicly traded competitors.
14:42
So, like in Canada, Rogers uh Communications is you know, the owners own that one share that owns 100% of the company, but there's a a second second or or there's a class C stock uh that's owned by the public, but no voting rights.
14:55
And so, you could compare Rogers to a a family company to a non-family media company.
15:01
But you could do that a bunch of industry.
15:02
Like Nestle, you could compare a food company with Nestle.
15:08
And when you look at the literature about performance of family companies versus public, what people will often say, first thing they'll say is family companies have longer time horizons. I'll come back to that.
15:20
The second thing they'll say is family companies are more profitable than public or somebody will say they're public are more profitable than families.
15:28
So, we did a project where we said, "This is wrong.
15:29
You know, people aren't doing this the right way."
15:31
Cuz what they're doing is they're looking at it at a point in time.
15:35
And it really should be looked at over the a business cycle.
15:39
In fact, we looked at it over two business cycles.
15:41
And what was really interesting that came out of that was the family companies were were not as high-performing on profitability in the upturns of the market, but nor were they as poor-performing as public companies in the downturns.
15:59
So, you didn't have a lot of this this behavior by management to exercise stock options that are driven by quarterly stock prices or yearly stock prices.
16:05
You had a culture that was based on, "Let's keep the business surviving and growing and being healthy."
16:13
So, if you take those two curves, you take one curve which is the public company's goes up really high and it goes out really low.
16:18
Um and then management gets changed down here.
16:21
And a public company doesn't go up that high, doesn't go that low, and management doesn't change.
16:25
Uh the area under the private company's performance is greater than the public company's.
16:30
So, my answer in that respect is the private companies are more profitable.
16:35
And not because it's longer term, but because they're very they're much more risk-averse uh than I see public companies uh the managers of public companies being.
16:45
So, I think that's the biggest challenge for a public company against a private company is how can I manage the risk How can I in a public company maintain a risk profile that's easy for a private company to be in take cuz they don't have to explain to anybody.
16:59
One of the eye-opening examples I saw was a very large family company.
17:03
Uh no publicly traded shares.
17:05
But the non-family management, which was like 99% of the population cuz they're the family had all taken their money and gone to their vacation homes and thanks.
17:17
Um they decided to put the 99% on a a phantom stock performance plan, which converted them into a quarterly business behavior to meet their own internal goals to get their stock price up.
17:27
So, you can actually wreck a family company's orientation by making it behave like a private company.
17:34
Excuse me, behave like a public company.
17:38
And actually, I think if you if one of the not very discussed things in business today is you have the number of companies traded on the uh US stock exchanges that are public are down by half.
17:50
Half of these companies are gone in numbers.
17:52
And they've been taken private by the LBO firms.
17:54
So, what people like to call private equity firms. That's a polite phrase.
17:58
But they're leverage buyout firms.
18:00
And so, the the private model of ownership is becoming the predominant model of ownership.
18:05
If one steps away from Canada in the US, the family own ownership profile is the most characteristic ownership around the world. Not public companies.
18:17
The closest to Canada and the US is is England.
18:21
Um I work a lot in Brazil.
18:24
Uh there's a public market, but the predominant wealth uh of businesses in Brazil are owned by families.
18:32
And even those that are family-controlled sometimes have this second stock trading.
18:37
Go to Argentina, which I've done.
18:37
Very few public companies. They're all private. Go to Asia.
18:43
The Philippines and Indonesia, there's very, very few public companies. It's all families.
18:47
The oldest companies in the world are family companies.
18:51
Uh in Japan, Kikkoman is hundreds of the family-owned companies hundreds of years old.
18:58
A lot of good things have to happen to last 100 years. Not just being family.
19:04
Um but it's rare to find public companies that last that long.
19:07
There's a couple things you said there that I want to follow up on.
19:12
A- And one of the observations I made as you were talking is it seems like during the the you said two life cycles. Two business cycles. Two business cycles.
19:22
On the upswing, private companies are always underperforming.
19:26
They underperform the public companies.
19:27
Underperform the public companies.
19:31
And they can do that because they're private companies in a way. Exactly.
19:34
I mean, nobody's Nobody's insisting on ever greater returns, which will force the management of public company to I mean, returns are a risk-reward.
19:48
And if one wants higher returns, one usually has to take a bit more risk.
19:52
And so, when the management of a public company is rewarded for for taking risk that produces returns, that that works.
20:00
Um but it usually comes from leverage, usually comes either from financial leverage or leverage of management talent, um or financial risk.
20:10
Uh so, when it goes into the downturn, the the price for taking those risks comes home to roost.
20:17
And as I It surely does with the family companies.
20:19
It doesn't happen as deeply and as bad.
20:22
So, it's almost like they're trading a little bit of tomorrow or in in the what That's a better way to put it.
20:26
The family companies will trade uh uh performance today for long-term performance in the face of adversity.
20:37
And it almost seems like public companies try to predict the future.
20:39
So, they maximize for like going all in on what's working right now, assuming that the environment won't change.
20:48
Whereas, I think a family company is positioning for a broader range of possible futures and never sort of like putting all in on a certain particular future.
20:58
My experience with family companies is from a business operation standpoint, the management and the owners of family companies behave like the management of public companies um in many many respects.
21:17
Um It's the owners that that that demand the caution of not getting too too extended.
21:27
And it's the owners that uh batten down the hatches so things don't go as bad as quickly. Um not the management.
21:35
Um So, if a family has an external manager, they're going to behave differently, but the family acts as a counterbalance? Yes.
21:43
If the family has an external manager, they still own the company.
21:47
Uh and the manager, unless we have this phantom stock program going on, the manager is working to build wealth for the family.
21:54
And the family, if they're smart, most of them are, will reward their their their their non-family management.
22:01
That's one of the big issues with family companies is is are we an operating uh family or are we an owner family only?
22:10
Uh and that usually is a a debate that occurs by the third or fourth generation.
22:15
Do people want to be in the business or not?
22:18
You want to get to Caterpillar's biggest problems right now?
22:20
Is most Caterpillar dealerships are family owned.
22:23
And Caterpillar's dealership franchise gives them cuz Caterpillar the right to to okay change of ownership.
22:33
And change in ownership is something that happens when somebody wants to retire. And it's true at Ford.
22:39
It's true at a number of companies.
22:41
Uh Sherman Williams is like that.
22:45
Um but when the problem at Caterpillar right now is is if your father is a Caterpillar dealer and you want to be a lawyer, the last thing you want to do is stop being a lawyer and go be a Caterpillar dealer, even though it's a pretty lucrative thing to do.
23:01
And so, the families grow out of the business.
23:04
And and for Caterpillar, it's hard to get people today in today's world, it's hard to get them to commit to continuous family ownership of the business.
23:13
Uh so, that's a two-edged sword. The ownership is it.
23:18
Uh the family grows out of the business.
23:20
Is it important that those are family operated and owned or why wouldn't Caterpillar just take control and like hire somebody to run those stores?
23:25
In Caterpillar's case, what they want their family ownership to represent as a value in the relationship with the customer.
23:36
And they want the the the dealership and the family owned dealership to put the customer first and not have to worry about reported earnings.
23:44
I mean, there's a what the the largest non-family Caterpillar dealer in the world, I think, is Toromont here in Canada. That's a rarity. The rest are all family.
23:53
So, they they want that steady hand.
23:56
I wouldn't call it long-term perspective.
23:57
I'd just call it steady hand, not too not too high return, not too low return in the business.
24:03
But to to to return to the problem, the problem is getting the offspring to do it.
24:10
By the third or fourth generation, the offspring often loses interest in the business.
24:12
I want to go back to something you said about time horizons.
24:14
Can you tell me more about that?
24:17
Specifically as they relate to um say public companies with professional management versus family companies perhaps with or without professional management.
24:33
Well, I should clarify something.
24:33
Family companies that bring in professional management fall into two groups.
24:40
Uh one is uh a uh an involved owner group and one is a non-involved owner group.
24:50
In the involved owner group, I may bring in non-professional managers, but I'm watching them closely cuz I still own the business.
24:56
I still want to see the business do well.
24:59
In a non-involved ownership group, I might just be very happy to let turn this whole thing over to to person A and let them run run the business.
25:08
Uh and I have to find a way to reward them to keep them from being hired away by a public company. But it's doable.
25:16
In terms of time horizons, I think the the family involved business expects to see them last more than one generation.
25:25
Expects the next generation to take over the business.
25:27
When you say that, when one says the next generation, one's talking about 40 years.
25:34
Cuz manager generations are about 20 years.
25:36
So, you get at least 40-year time horizon.
25:40
Um if you expect it to go a third or fourth generation, we're saying, "How do we keep this thing going for 60 to 80 years?"
25:47
And what that does translate into is a is I may want to get that investment in certain type of business or asset um because it will have that longevity.
25:59
I think that's why you see so many family companies in shipping.
26:03
Cuz these ships last 20 years.
26:05
Um and their investment decisions uh that one one makes to buy a ship that's going to be with you for a while. Or you sell the ship.
26:12
And so, people expect to make their returns over the longer cycle.
26:17
And public companies, I would say with with only a few exceptions, people's time horizon is about 3 years.
26:25
Manager's time horizon is helping.
26:27
The average CEO tenure is less than 5 years right now.
26:31
Um and so, they're looking for their investments to produce rewards that they can be compensated for in a shorter time horizon.
26:40
Which increasingly puts them trading tomorrow for today. Today, exactly. Right?
26:44
It's like when a new coach takes over a team, they'll often trade away um players in like um or trade away draft picks to get players to win now, but they're setting themselves up for the future or they'll sign free agents at incredibly lucrative contracts in order to boost the performance of the team next year, but they're setting themselves up for an increasingly difficult position over the life of those contracts.
27:10
Now, this is where I mentioned that the disappearance of the public company is so important because the businesses aren't going away.
27:17
It's the ownership that's changed.
27:21
And for many years, I always thought if if my client had a competitor that did a did an LBO, that was the time to pound on the competitor because they'd be paying off debt.
27:30
They have limited financial flexibility.
27:34
Um and it's easier it's easier to fight somebody that can't fight back cuz they don't have flexibility financial financially.
27:42
But today's world, I think the LBO firms excuse me, the private equity firms today actually do have a longer horizon than the ones did in the '80s and the '70s and '80s.
27:50
And they're all in the stick with the business longer.
27:51
So, somebody goes private and I'm public, I'm going to have a competitor that's going to make investments that I might not make.
27:59
And these investments could conceivably hurt me.
28:03
And if I try to do something about it, I could conceivably hurt myself in terms of compensation and my own wealth creation.
28:10
So, what people like to call the agency problem starts to take over.
28:11
So, you know, if I'm in a public company, who am I working for?
28:14
Myself or for the company?
28:17
Now, in the family involved ownership model, the family is watching you pretty carefully.
28:22
You know, and we're talking a lot.
28:24
Uh so, we could prevent the non-family management uh from going off in their own direction of to meet their own financial goals.
28:33
Uh because we can you know, we control it. We can decide.
28:35
Now, the world's becoming more like what I just described than it has been in the last 50 years.
28:41
Because more you know, more and more companies are private now.
28:44
Not necessarily family owned, but private. Uh than are public.
28:47
Just within the the the Fortune 500 or the Fortune 1000.
28:55
Um Now, in general, there's there's frankly cuz it's the family ownership model is the predominant worldwide ownership model.
29:03
Um you know, it is the ownership model that people have to compete with ultimately.
29:09
Toyota is a family company.
29:12
It's also a you know, public company.
29:14
But when things go wrong at Toyota, the family gets involved.
29:18
It's not the whole family, but usually it's usually started with a T in the in their name.
29:24
It sounds like what what's really happening in a lot of cases, not all cases, is that you're matching the timeline expectations of the shareholder to the management.
29:34
So, if you take a company private, you can take a longer horizon and by the nature of the investment vehicle and being a shareholder, it's harder to exit.
29:43
There's almost very little liquidity.
29:46
So, you can lengthen the time horizon that management has to operate.
29:48
And you can take a 10, 20, 30-year view, whereas with a public company, like you said, you're operating on these cycles of quarterly.
29:57
But if you're a new CEO, you know you have maybe 2 years to start showing results before the pressure starts building. That's right.
30:06
And shareholders have a an increasingly even short time horizon, where they're expecting management to make these investments that last 10 or 20 years, but they're holding shares for like a week or two.
30:18
Well, Clayton Christensen is who was a professor at Harvard.
30:22
He's dead now, unfortunately.
30:25
Um made some really strong arguments that you perform to the shareholders you want to satisfy. Mhm.
30:29
And so if the shareholders I want to satisfy are willing to trade my my stock in a moment's notice, I have to have a short-term performance orientation.
30:41
If they're going to, you know, buy and hold, uh I'm I need to understand that, so I can have a longer-term view of the business.
30:49
Um now, what is longer term?
30:49
You know, Japan stands out in its own category.
30:54
And, you know, profitability of companies are something once a company's profitable, they can decide when they want the profits.
31:01
Do I want them now, or do I want them Do I want a certain amount now, or do I want a bigger amount later?
31:09
And if I want a bigger amount later, it's because I believe I can grow the company, I can bring my cost down, and increase my margins.
31:15
Uh make more money in the future than I can make now.
31:17
So, I'll forego it now to take it in the future.
31:20
You know, what happened in the '60s, '70s, and '80s, and '90s with Japan, is the Japanese didn't want to be profitable right now.
31:27
They Well, they wanted to be profitable, they wanted to grow the business, but they didn't want to be profitable at at an obscene level.
31:33
And you butt that up against a system uh that has public shareholders, they want their profits sooner rather than later.
31:41
Or they're going to trade the stock.
31:43
The two systems work perfectly well together.
31:45
Cuz the Japanese take they get the growth, they invest to get the growth, and they they public usually American companies give it up.
31:55
Um and eventually they become less profitable, and the Japanese become more profitable.
32:01
So, that model I don't see very often elsewhere in the world, where people say, "I can take my money now, or I can take it later."
32:05
And if I decide to take it later, it's because I expect it to be a bigger pot later.
32:10
But family companies are perfectly positioned to make that decision.
32:14
I mean, some of the I would say half of the family companies I work with uh take a very little out of the business. They keep a lot in.
32:22
In fact, I'm always amazed to look at it at at some of these companies that the level of the wealth exhibited by the the family members doesn't match the dividend flows.
32:31
So, they're not sustaining a lifestyle on dividends.
32:33
What they're really doing is is taking advantage of the wealth creation that will happen over over time.
32:38
Now, a dark side of the family business that is rarely seen in the literature, but it's not seen It's only seen in literature I've helped write with my colleagues, is that families grow exponentially.
32:55
Businesses don't grow usually exponentially.
32:59
And so there's many cases where the pie gets bigger, but but but the per-person share of the pie actually in absolute terms goes down.
33:07
Cuz the business isn't isn't growing fast enough to take care of the family.
33:10
Uh that's a challenge that family companies face if they want to have um what would you call it?
33:18
Uh ownership distributed um uh what people inherit.
33:25
Now, they don't have to do that.
33:27
I mean, your business doesn't have to go to your two children.
33:32
It doesn't have to go to their eight children.
33:35
Um it will most likely it will go like that, but it doesn't have to.
33:39
And you can begin to say, "No, we're going to split the ownership group into two parts.
33:42
One that keeps the ownership concentrated, one that has an economic play in the business, but it doesn't have any ownership."
33:50
To try to break that that model, we can try to grow faster.
33:54
But you basically have to grow about uh 50% faster than the family's growing to keep the pie big enough.
34:02
I want to go back to something you said there about how a lot of the family-run companies aren't taking out as much capital as they could be taking out in order to compound it.
34:13
Why do you think that that philosophy exists in private companies, but not necessarily in public companies?
34:16
Well, I think we touched on it a a moment or two ago, is that the the managers of a private public companies are being compensated on current performance.
34:28
Sometimes they're compensated on multi-year performance, but not very often.
34:34
Uh where the family companies are compensated on current performance, uh but there's a big chunk of compensation waiting to be taken in the future uh through inheritance or or sale of the company.
34:47
And so that puts people in in two different time horizon plays uh right away.
34:53
Um And it also positions them completely different, right?
34:55
So, if you're uh if your company has a lot of capital, in the public market that might be considered like a bloated balance sheet, but in the private market, that's positioning for multiple possible futures.
35:07
If we have a lot of cash on the balance sheet, we can go where the wind's going, instead of be forced into positions.
35:14
You know, one of the phrases I I hear a lot in family companies, but rarely hear in public companies, is we got to keep our powder dry.
35:23
And when I hear that phrase, what they're really saying is, "I got to keep money in reserve for contingencies."
35:31
Both positive and negative contingencies.
35:32
Well, it's so interesting to me, because if you look at history, I mean, most of the successful companies, if you go back to Carnegie or Rockefeller, they were always playing offense.
35:41
So, they always had dry powder. Yes.
35:46
went into negotiations with a lot of money.
35:48
They inevitably waited for downturns, and then took advantage of them. And then go.
35:52
And they knew they were coming, and so they would build up their balance sheet, then they would go all in during the downturn, they'd build up their balance sheet, and go all in during the downturn.
36:01
But we don't seem to be able to do that today.
36:03
Oil companies be a great example, right?
36:05
We know this commodity changes prices, and yet during the good times, we distribute all the cash flow, and during the bad times, we cut distributions.
36:17
It's interesting you bring up oil companies.
36:18
Oil companies are up because they do invest in long term.
36:21
Because to develop an oil field can take a decade.
36:25
Now, they may rate it at some point, but they are unusual in that factor.
36:29
They they're longer-term investors.
36:32
Well, especially now, cuz you have a 5-year planning cycle, I would imagine, for a lot of these assets to even get online.
36:39
And for now in the energy business, that's true.
36:40
Um but the Irvings in Canada are in the petroleum business.
36:43
I'd be interested to watch how they play out.
36:45
I think what's implicit in what we're talking about is I think public companies are under-invested in understanding how private companies compete, and therefore they're vulnerable to private companies behaving differently than they do, because they have a view of the world, or they possibility cuz of the dry powder, to take advantage of circumstances that public companies uh don't.
37:09
If they see it, they don't want to act on it, because they can't afford to take the personal risk financially that it would take to act on it.
37:16
It's almost like any disruption is good if you have dry powder, and any disruption is bad if you don't.
37:21
Yeah, now's the time to be in the housing market if you got money. Yeah.
37:25
You you wrote a book, this is how we ended up getting connected.
37:28
You wrote a book called Competing Against Time.
37:32
It was uh to my knowledge, it's the only book that uh Tim Cook has recommended all of all of the Apple executives read.
37:42
And I'm wondering, can you talk to me a little bit about Competing Against Time? What does that mean?
37:47
I think the the one-sentence description of time-based competition, or Competing Against Time, is giving your customers what they want, when they want it, where they want it, faster than your competitors can do it.
37:59
So, that's where the speed part comes in.
38:00
It starts with the customer and says, "How do I get what they want to them faster than competitors?"
38:07
Um that's the essence of Competing Against Time.
38:11
Uh then there's a whole whole bunch of fallout from that.
38:12
That most people, I would say more so 10 years ago than today, if I was to go through an annual report, the only time I would see in the annual report um would be the the time of the income statement, you know, start and stop, and the date of the balance sheet.
38:31
There may be a lot of yacking about responsiveness, but they're not really managing time.
38:35
Um if one introduces time as a manage something to be managed alongside of cost, uh then a whole bunch of things pop out and gain visibility that don't when time is not included as a variable.
38:47
And those things can be things like um uh the price premium a customer will pay for faster delivered, the uh as it turns out, the the lower capital requirements uh that result in.
39:01
If I compare two factories, one that is twice as fast as another factory, the one that's twice as fast usually has faster working capital turns, has higher productivity, and lower cost.
39:13
And people get to that point because they looked at cost and time.
39:17
It's not time instead of cost, it's cost and time.
39:19
In fact, it's cost, time, and quality, because if one is looking at an organization through the through the lens of time, one will see where the quality problems are.
39:30
Uh because anytime one has a quality problem, whether it's manufacturing or in a uh an information business, it means rework.
39:37
Anytime you have rework, it means lost time.
39:42
And so for people to be faster than competitors at the other they have to be higher quality.
39:47
Cuz they don't get they won't don't get to speed.
39:50
Remember talking to the CEO of Motorola who was one of the earlier users of time as a weapon.
39:55
He says uh we sell the organization on quality but we're actually taking time out, which is true.
39:59
You know, a lot of people say, "Whoa, you know, why do I have to do things faster?"
40:03
And they assume doing the faster is walking faster, you know, completing things quicker.
40:09
It's actually just taking out all the dead time.
40:12
Most organizations if you if we look at at the time required to produce an output, either an insurance policy or or a manufactured product, if they're not looking at time as a management variable, value is only being added between a half a percent and 5% of the time.
40:26
95% of the time and more is wasted.
40:29
And people don't see that unless they start measuring time.
40:34
And in that 95% is a whole bunch of costs that go away if one starts taking time out.
40:39
So, time is is a very powerful lens uh to look at how uh productive one one can be and then and the outputs are just astounding uh when you get a fast competitor up against the slow competitor.
40:54
What are some of the things that get in the way of velocity in organizations? There's a long list.
40:58
Uh let's see, the most obvious ones are batching.
41:03
Uh I do things in batches.
41:03
You know, batches usually thought of as manufacturing can also be uh in white collar in in in knowledge business as well.
41:11
I I manage a business on a set cycle.
41:15
Uh batches are the result of what people consider to be economic order quantity.
41:19
And of that 95% of the time that's wasted, about a third of it goes to being in a batch.
41:25
About a third of it goes into being in a batch that has isn't being worked on yet, but it's been scheduled.
41:31
And a third of it goes into managing all the batches.
41:35
And so if one shrinks back the batch time, uh one one goes through multiple goes through cycles of batches faster.
41:44
Batch ABC happens faster if they're smaller batches.
41:48
And you can't do that unless one organizes the factory floor or the back office uh to handle small batches.
41:56
But when one can do that, uh that last third of the time, which is managing the flow of batches through the organization, goes away.
42:04
So, I went to Tokyo for BCG in 19 probably 1981, long time ago, 1980.
42:13
Just before I went, the the uh the founder of BCG, guy named Bruce Henderson, pulled me aside and said, "I we need to know something about Japan that we don't understand, George." I said, "What's that?"
42:24
He So, he pulls out this paper.
42:27
And it's done by the Ford Motor Company.
42:29
It's done by Ford Europe, actually, comparing uh good factories at Ford with good factories at Mazda and Toyota.
42:38
And there was one chart in particular where the Japanese factory was a third the size of it of the Ford factory, had three times the product variety, and was twice as productive.
42:53
And Bruce said, "If we can't explain that, we're not giving our clients good advice because at the time we were telling clients there's two things you need to go for.
43:03
You need to be go for scale Yeah.
43:03
and you need to stay focused cuz uh scale produces a continual reduction in in variable cost and focus removes complexity and overhead.
43:16
So, the focus factory the focus factory that's big was the winning factory.
43:21
And in this example we had a Japanese company a factory that was not as focused as the American factory, didn't have the volume of the American factory, and was twice as productive.
43:28
He said, "This does not compute. We got to find out why."
43:34
And what was really interesting at this isn't in the early 1980s, people attributed the Japanese productivity advantage to their culture and to the worker management relations.
43:47
And if I looked what we did, I looked into the numbers, all the productivity advantage was in overhead.
43:54
It wasn't in the line workers.
43:54
And it wasn't just a little bit overhead, it was a lot of overhead.
43:58
It was like 1/10 the overhead.
43:59
So, these companies were simpler to manage even though they were smaller and more complex.
44:05
And so, very very often the the the the bulk of the productivity advantage a Japanese factory might have comes from pro comes from overhead productivity.
44:13
It doesn't come from direct direct labor.
44:16
There is some direct labor productivity.
44:19
Um and so that got us to say, "You know, we got to understand this."
44:26
And what we did when we got to Japan, when I got to Japan, is I figured out how they did it.
44:30
Um and if one if one just you know facilitates small batch production, if they have short set up times, uh you have to have limited uh material movement, you have to have on the floor scheduling.
44:49
Um and if you can put all those things together, a whole bunch of costs come out.
44:53
And a whole bunch of working capital comes out.
44:57
And it produces the basis of somebody that could be a time-based competitor.
45:01
One doesn't become a time-based competitor just by taking time out.
45:02
You become a time-based competitor with with a I use my time and gets to competitor.
45:08
And that's when the fun starts.
45:10
Cuz the competitor you said doesn't know what's happening to him.
45:13
Uh in the case of Wausau, it took I I saw it happen.
45:15
It took 10 years for the leaders of the paper company paper industry to understand what Wausau was doing.
45:21
In part this as you mentioned earlier, they they were too inwardly focused.
45:25
They really didn't see what was happening.
45:26
Or they dismissed it as a as a side show.
45:29
That's another great strategy for uh for hardball.
45:30
It's what we call anomalies.
45:36
Anomalies are things that happen in the business that management explains away.
45:41
Cuz 90% of the business doesn't behave that way.
45:44
An anomaly might be the anomaly in Wausau's case was uh Wausau had a fairly high share of its paper business in Chicago.
45:56
And with one particular merchant. And that didn't compute.
46:01
And so we went and talked to the merchant.
46:02
Oh, we went and talked to the sales guy.
46:03
Remember I mentioned this guy earlier.
46:06
His response was, "Well, the salesman in in Chicago has a great relationship with the paper merchant."
46:12
Remember we're in turnaround situation.
46:13
So, great relationships are not useful in turnarounds because they take a while to build.
46:18
So, we went and visited the merchant.
46:20
And we said, "Tell us, why are we doing so well with you here in Chicago?
46:25
We're told that our salesman has a great relationship with you."
46:29
And the guy says, "Yeah, it's a great relationship.
46:30
I tell the salesman, if there's a truck at my dock tomorrow morning, we're friends.
46:35
If the truck isn't at the dock, we're not friends."
46:37
And that was the beginning of understanding, "Oh, there's a fast sup uh uh satisfaction cycle here that we could take advantage of."
46:44
Or can we can we scale it across the whole company? And we could.
46:50
But it was sitting in an anomaly.
46:52
Uh so, anomaly is always a great opportunity to find a new way of doing business, but most management teams don't take the time to understand anomalies.
46:59
They just explain them away.
47:03
Another anomaly was uh one what it was a office products company uh that that had its own service force.
47:10
And one customer insisted on all service being done between midnight and 6:00 a. m.
47:17
That's an anomaly cuz that's not the way we schedule service.
47:19
But for this company, the local people did that.
47:24
And it turns out that company that wanted overnight service wanted it because they didn't want their production interrupted. Mhm.
47:30
Or they used the equipment interrupted.
47:33
Um and in those situations, this client had a higher share of the business.
47:40
In a medical device business, the anomaly was uh the European competitor always had a sales a scu he always had a service representative on site at the hospital. It's a medical devices.
47:52
That looked like a high cost thing to do. We didn't do that.
47:53
Our client had a service force that was moved around hospitals as needed.
47:59
But it turned out the uptime for the equipment that this on site uh uh service person was taking care of was higher.
48:08
And it turns out that the the share of new business uh that this competitor got was higher.
48:14
So, we have an anomaly here.
48:16
You know, he's doing something.
48:16
Doesn't make sense, but if we start looking at the numbers, it does start to make sense.
48:20
So, anomalies are a great way to find a new way to do business.
48:23
It's a great way to find growth.
48:25
Cuz usually they're small.
48:28
And the question of Wausau was, could we make it big?
48:31
You still have to answer the question.
48:33
You mentioned earlier that Walmart sort of attacked Kmart with velocity.
48:38
Can you tell us that story? The Walmart story.
48:40
Walmart story as it was described uh early in the years of Walmart was about uh a local five and dime competitor uh grows in boondock markets, has greeters at the door to make people comfortable and help find their way around the store, uh has a narrow product offering, and that's their success.
49:09
That's just the tip of the iceberg of what was Walmart was doing.
49:13
Walmart was uh actually a logistics company.
49:16
They concentrated on how fast can we move product from when our supplier gets it to us to when it leaves our store.
49:26
And they organized around that, how to be faster.
49:30
Um and they did that by having their own trucking, not not outsourcing it.
49:35
They did that by scheduling uh uh deliveries once a week instead of once every 2 weeks or once a month.
49:42
Uh they did that by incenting their suppliers to uh deliver to a very strict owner's schedule by paying the suppliers faster than their competitors paid them.
49:54
They did it by having very big stores.
49:57
Um in fact, it wasn't until recently that Walmart began to change its model on store size.
50:03
Uh because people They found that big stores were lower cost.
50:07
And people weren't willing to drive 30 miles to get lower cost.
50:09
They're not willing to do that today.
50:12
Actually, it's more expensive to do that today.
50:14
So, behind the scenes was a little different model at play.
50:16
And it was amazing how how long it took Kmart.
50:17
I don't think that Kmart actually ever figured it out.
50:20
They They They began to see some of the the the surface differences, but they never They always outsourced the trucking.
50:27
They under-invested in IT.
50:31
Um Actually, it was doesn't have to be Walmart used to have the store managers fly into Bentonville every weekend.
50:40
Uh or excuse me, it was every 2 weeks.
50:42
And talk about what's going on in the business so they could make adjustments.
50:47
Kmart did his, you know, out there in Troy, Michigan.
50:48
You know, back in Michigan, they decided what was going on inside the stores.
50:53
And so, Walmart was able to change its mix of product much more quickly to local market conditions than Kmart cuz at at Kmart, you had to go up the hierarchy, get some decisions, come back down the hierarchy.
51:06
And at Walmart, the hierarchy was it was flat and distributed into the store managers. So, they didn't get it.
51:14
And then Walmart went into a warehouse stores. Sam's is their version.
51:20
And warehouse stores are actually like what most people thought Walmart was, which is it's a a narrow offering, very high velocity.
51:29
Um but the big difference in in uh what warehouse stores is is the way they get paid.
51:35
Because they their their customers need to pay cash or credit.
51:39
And so, you get almost instant accounts non-existent accounts receivable.
51:42
In fact, you get negative working capital.
51:45
And that was part of the model that Walmart discovered going in is that they could have a negative working capital business.
51:51
But so could the other competitors as well.
51:54
Now, it's interesting watching them today cuz you cuz you have Walmart versus Target.
51:57
And I think Target has found a way to move itself to the side.
52:02
But I think very much I think if there's an analogy in Canada, it would be Loblaws versus Sobeys.
52:09
Where I think Sobeys has positioned itself as slightly more upscale, slightly more of a uh a specialty retailer shopping experience than a Loblaws.
52:21
Now, I don't know the business well enough to say which one's the winning strategy.
52:23
And in fact, they probably both could be winning strategies cuz I think Target will find a way to coexist with Walmart.
52:29
I think Walmart's biggest competitor problem right now is with Amazon. Not to Target.
52:32
How would you compete with Amazon? That's a good question.
52:35
I do know for a fact that people tried to compete with Amazon in the obvious way.
52:43
Which is okay, Amazon is a logistics for First, you order online.
52:49
Second, then the logistics system kicks in.
52:52
And now, if you're Walmart trying to catch up with the distribution system of of Amazon, I can't really use much of my current distribution system cuz it's made up for dealing with large volumes selling large volume stores.
53:06
Um and I have to come up with a distribution system that has much more distribution centers.
53:09
I don't know if you've noticed what how many distribution centers there are around small towns and they're Amazon distribution centers.
53:18
That's a very expensive thing to replicate.
53:21
So, how do you compete with Amazon?
53:23
I have to think about that.
53:24
All right, we can come back to that later.
53:25
What What's the relationship between focus and time? Between focus and time? Yeah.
53:33
Well, it's a very direct relationship between Imagine two factories.
53:36
One factory has 10 product lines and one factory has 50 product lines.
53:42
So, one factory is much more focused than the other.
53:45
If I'm going to speed speed up both factories, if I want to be twice as fast, it's actually more it's more doable in the 10 product line factory than it is in the 50 product line factory.
53:57
There's more complexity in the two product line factory. There's more batches.
54:01
There's more distinct processing uh steps.
54:05
Uh and so, a focused factory is always more easily made faster.
54:11
More focused organizations Factories are basically organizations.
54:12
Like people tend to think you have factory, non-manufacturing.
54:16
In both businesses, you have people running the businesses.
54:21
And so, people running the 10 10 product line business have a easier job than people running a 50 product line business.
54:28
And so, most of our our very successful time-based competition situations, one has to start with focusing the organization deciding which products we want to focus on.
54:42
Wausau, we decided we're going to focus on specialties. Yeah.
54:45
We could have decided to focus on com- commodities.
54:47
We would have gotten killed.
54:50
You know, we just in the paper, you know, the big paper companies that Wausau was getting killed by uh were quite happy to focus on the commodity business.
54:56
That's why they they took them 10 years to figure out what Wausau was up to.
55:00
Cuz they didn't like that business.
55:03
And I suspect with Amazon, the the winning formula is going to be picking a part of the business that uh Amazon doesn't really want to have.
55:13
So, automatically once setting yourself up with for a smaller business.
55:19
But there's something funny about retailing.
55:20
And it's something we call the heavy spender phenomena.
55:25
And heavy spender phenomena is that 20% of the customers at a retail store account for 80% of the volume.
55:28
And what's so special about those customers?
55:33
Turns out those customers have a different need than the 80% of the customers that account for 20% of the volume.
55:37
Those 20% of the customers that account for 80% of the volume want more choice.
55:41
They want more understanding of the product.
55:45
Um they want a positive touch feel with the consumer.
55:50
And if I can do that, um I attract what we call the heavy spender.
55:54
And every retail category has a heavy spender. You What's your hobby? Huh? This. Yeah, your hobby. No, this. Oh, you're doing this. Doing this.
56:02
No, I mean, what do you spend your money on then?
56:04
Uh let's say ski equipment. Ski equipment. Yeah.
56:08
Is there a special place you shop? Yeah.
56:11
Are you a preferred customer of that at that place? Yes.
56:16
So, you're probably in that 20% that accounts for 80% of that outlets business.
56:20
And they know how to take care of you. Yeah.
56:22
And they know your name when you walk in and they Yeah.
56:24
And I doubt you buy your ski equipment from Amazon. No. No, no.
56:29
Do you even look at ski equipment on Amazon? No. I don't either.
56:33
So, I don't know if they have any.
56:34
I My reckless spend of money is on model airplanes.
56:36
I I build these gigantic radio control airplanes.
56:39
And each plane can cost thousands and thousands of dollars.
56:46
And so, there's only a few places I can find the stuff I want to purchase these airplanes.
56:49
And I buy a lot from them.
56:51
So, I'm a heavy spender in that category.
56:52
I had a woman that worked for me that was a heavy spender in shoes.
56:55
This is very very About 20% of the women account for 80% of the shoe sales in Nordstrom or The Bay.
57:01
Those people have the needs I just described. They do selection.
57:06
Uh they need to be the product explained to them so they're buying it for the right reasons.
57:11
Uh they need to be treated well.
57:14
Um which means if they bring back the shoes, it's not it's not a griefs- driven experience.
57:20
It's a pleasurable experience. In fact, remind me.
57:23
There's one woman who was a big spender in shoes.
57:25
She spent 20% of her disposable income on shoes.
57:28
And uh she had this great She said, "George, you know, I was interviewing her about this cuz I when I heard about it, I said, "Here's a who spend her money on more."
57:37
She said, "If I was in a bar and some guy walks up to me." She's a pretty woman.
57:42
And says, "I love your shoes."
57:42
He gets an automatic 20 minutes.
57:47
She said, "Most guys I send away right away."
57:50
So, shoes was a big part of her life.
57:52
And so, you can think of all sorts of retail cat- cosmetics.
57:57
Shoppers has been so successful with cosmetics cuz they actually set it up for uh the heavy spender, probably the middle income category on cosmetics.
58:06
It's been very successful for them.
58:08
Automotive parts another one heavy spenders.
58:09
I Virtually every category has a heavy spender segment.
58:15
And that's probably, you know, that my my model airplanes, which are have a huge amount of electronics in them.
58:21
I look at the electronics on Amazon. I don't buy from Amazon. Right.
58:24
Cuz you want somebody to talk to.
58:27
Uh they actually don't have the selection that I need.
58:29
Selection, reliability cuz they're niche, right?
58:30
So, they also have They have all the things that you're looking for.
58:34
Probably answer the phone when you call, too. Yep. Yeah.
58:36
Talk to me about cost and time.
58:39
How does that How do those two things relate?
58:41
If you come back to the Japanese import example, you had a Japanese factory that was uh three times as complex, half the size, and twice as pro- productive.
58:52
The I didn't mention the time dimension.
58:54
The The product went through that factory 10 times faster than through the Ford factory. 10 times faster.
59:03
You know, the 20% productivity advantage was about about a 20% cost advantage.
59:07
That was a big number for a automotive component.
59:12
But the time advantage was 10 times.
59:14
That's what triggered our thinking about strategy.
59:17
Cuz up until then, BCG was predominant strategies were based on cost.
59:20
How do I have lower cost than your How How do I help you have lower cost than your competitors?
59:26
And that that as I mentioned drove us to scale and focus. Uh but here's time.
59:32
Here Here's something Here's the next another dimension people aren't managing.
59:37
And what could you do with 10 times the speed?
59:38
That was the question we started asking.
59:40
How could you compete with that?
59:43
Well, SAS was one of the early applications of that, which is I could compete uh with next-day delivery versus delivery every 2 weeks.
59:51
And if I can have next-day delivery to the merchants, that allowed the merchants to order more frequently and operate with less capital.
59:57
That's how That's where the advantage kicked in.
1:00:01
And so that's where cost and time worked out.
1:00:02
We had We added cost to the process to get time out the other side.
1:00:07
But the time benefits were so overwhelming uh that the cost didn't really matter anymore.
1:00:13
But most often, what we see is that if you could speed up a factory or any kind of process by a factor four, in other words, it take 20% of the time, 25% of the time it used to take, productivity is about cost position is about uh 20% lower. Cuz I take out overhead.
1:00:32
Overhead doesn't speed things up.
1:00:33
Overhead slows things down.
1:00:35
But overhead comes out because I'm being intelligent about how I manage, not because I'm just slashing the overhead.
1:00:42
I just These factories are simpler to manage even even though they're more complex because the management's pushed down onto the floor.
1:00:50
There's a lot of autonomy pushed down onto the floor because it's organized and managed to run by itself.
1:00:56
There There's not a big central scheduling.
1:00:58
There is central scheduling, but it's not a big department.
1:01:02
In a traditional factory, there's a big scheduling department that tells every single piece of the factory what to do when.
1:01:07
In a Toyota factory, that scheduling is pushed out on the floor.
1:01:11
And so the the By producing one product, another part of the factory discovers the need to replenish.
1:01:17
And so overhead comes out, so cost come out.
1:01:21
And so if people have a cost problem, we often introduce the the dimension of time to figure out how the processes could be set up differently to take time out.
1:01:30
And usually what We usually eliminate cost in doing that.
1:01:34
Almost always eliminate cost.
1:01:37
In fact, the costs are almost always enough to pay for whatever it takes to get the time out.
1:01:40
Is there a way to use your balance sheet strategically to create a time advantage?
1:01:46
And what I'm thinking by that is maybe you sell commodity parts.
1:01:50
And those those parts are just back and they're widely available.
1:01:57
But most people don't have the inventory.
1:02:00
So that So the depth going back to your model airplane, they don't have all the components.
1:02:03
So if you had all the components you had them in stock, your balance sheet's going to be bloated because you're going to have a huge inventory level.
1:02:10
But you're probably able to sell them even if they're not high velocity parts, but you could sell them at a huge premium because you would be even if they're less frequent sales.
1:02:22
Are there other ways to use the balance sheet to sort of compete with speed? Give you an example.
1:02:27
We've done this quite a bit with chemical companies.
1:02:31
Now, when I say chemical companies, you imagine big production facilities, a lot of steam coming out and everything.
1:02:38
We've taken that We've looked at the company at cost, of course.
1:02:42
We looked at the company quality, of course.
1:02:45
We looked at the company at time, how does it deliver?
1:02:48
But one of the interesting things that we often do is look at something called working capital productivity.
1:02:50
And I just Let me define working capital productivity.
1:02:55
It's accounts receivables uh plus accounts inventories minus accounts payables. So cash isn't in there.
1:03:05
But actually, I use something called absolute working capital productivity, which is accounts receivables plus inventory plus payables.
1:03:10
Cuz people can get their productivity of capital up just by delaying payment to their suppliers.
1:03:19
So I don't give them credit for that.
1:03:21
So I put the three numbers together.
1:03:24
And it turns out if you take a look at an organization's working capital productivity and find out where it's being dragged down, almost always it has something to do with time.
1:03:33
They can't ship the product on time.
1:03:36
Uh why can't they ship the product on time?
1:03:39
Uh cuz it's not All parts of the product order aren't available.
1:03:40
So we have to hold the order till they're available.
1:03:44
And so once they're digging into this layer at a time through the lens of working capital productivity, it then finds opportunities to do things that are balance sheet related that improve productivity and improve the performance of the balance sheet.
1:03:55
What if we don't want to improve the performance?
1:03:58
We want to use the balance sheet strategically to improve the business competitive position.
1:04:03
Like an example of that would be maybe I'm going to pay all my invoices in 24 hours and I'm going to let my accounts receivable go out 90 days instead of like trying to rein that in, I'm going to actually lengthen it, which means I'm I'm requiring more capital to operate the business, but now it's harder to compete with me. You're dead on.
1:04:23
I mean, the example I described with Walmart, which is they pay their suppliers faster than Kmart, or we're paying them.
1:04:31
And they were paying them faster because they wanted a different level of performance from the supplier.
1:04:35
Which is exactly what you described.
1:04:35
And you would find that by looking at the working capital productivity.
1:04:38
You could say, "Well, jeez, you know, I have all this inventory because here's here's my replenishment standards.
1:04:48
But I can afford to pay them faster if I can reduce the inventory."
1:04:53
That's one way to use the balance sheet.
1:04:54
Another way to use the balance sheet and we we skated right on by it is if if one's big and one's already low cost, one can carry more variety at a lower penalty on the balance sheet because the volume's there.
1:05:06
So and here's example of skis.
1:05:06
If that local distributor or retail store is big enough in the business that you're interested in selling, they can actually have more more available.
1:05:15
So their balance sheet, you might say, "Well, gosh, they have a lot of inventory lying around."
1:05:20
But they're turning it a lot faster because they're they're selling it to customers who buy a lot of stuff and buy it frequently.
1:05:25
That's another way to use it.
1:05:30
I'm currently doing a lot of work on inflation right now.
1:05:31
I'm actually worried about protecting the balance sheet, not using it.
1:05:36
That's why I'm hesitating.
1:05:36
How How How does speed transfer from the factory floor to software companies?
1:05:46
Well, first, let's talk about what's similar.
1:05:48
What's similar is they're both people.
1:05:51
And they have organizations.
1:05:54
What's similar is they add value.
1:05:56
What's similar is they take time to get things done.
1:06:00
Uh what's dissimilar is that factory I can see things happening.
1:06:06
Uh in software, I can't see things happening cuz it's all happening in the ether, people thinking.
1:06:14
Um but I've done a lot of work in speeding up software organizations.
1:06:21
And for many many of the same reasons that factories are slow, software companies can be slow.
1:06:27
Um they can be compartmentalized.
1:06:30
Just like factories can have uh manufacturing centers based on process processes like a heat treatment and stamping.
1:06:38
Um they have quality problems which slow things down just like these have quality problems.
1:06:43
Uh they have batching problems which is they they they say our development process is going to be 18 months when it really could probably be three, four month periods.
1:06:49
In fact, the whole agile thing that's going on is very much of a version of time-based competition at the factory translated to software.
1:06:56
That's what I was thinking because like so much of this is planning and forecasting, like what the world's going to look like in in, you know, 18 or 24 months. You have no idea.
1:07:06
And the further out you get, the less less certain you are.
1:07:08
So if you're planning all that planning is just sort of I wouldn't say wasted, but it's definitely not very productive.
1:07:14
And then you have a whole cohort of people who make a career out of planning.
1:07:18
And so then they justify the planning and they sort of And like the factory, they're people.
1:07:27
So that's why I I perceived over the years that people say, "Well, you We're a different business.
1:07:30
We're not manufacturing."
1:07:32
I felt like that's something I said to be honest like.
1:07:36
But the fact of the matter is a software development facility at software very much behaves like an operate a people operating system in a factory.
1:07:45
The The version of batching in software would be major changes to the offering.
1:07:50
That's That's the equivalent of large batches.
1:07:51
The time-based version of batching in a software company is is the agile version, which is I don't have the minimum acceptable product and then improve on it.
1:07:59
That's like small batches.
1:08:00
And I think people get there the same way.
1:08:02
So I look at a factory through the lens of time, I see a different set of things that are important.
1:08:07
If I look at a software development process through the lens of time, I see a different set of things that are important than people normally manage themselves to.
1:08:17
So I'm no I stopped worrying about the differences of many many years ago between factories and non-factories.
1:08:23
Well, one of the advantages I would think to software is you can get your feedback.
1:08:28
The time from shipping to feedback can be instantaneous.
1:08:35
Whereas with a factory, you got to ship it, it's got to go somewhere, the customer has to look at it, use it, come back to you.
1:08:40
It could be weeks, months before you're getting feedback that the part isn't good or the quality is not right.
1:08:46
With software, you can get this feedback within seconds.
1:08:48
I'm surprised you say that because, you know, most software releases are followed by another release.
1:08:56
And the second release is not instantaneous.
1:08:57
Well, the reason for that though is the variety of devices that it's going to, which is one of the reasons that I think that Apple's has started to sunset some of their their older devices because you can't releasing an update that works across technology that was invented like 12, 15 years ago is really hard.
1:09:15
And the testing cycle for that is inherently hard, too, because each of these devices also has their own unique configuration.
1:09:23
So you're really testing a billion unique circumstances of which there's probably only 10 variables that really matter, but those that's I think that's why we we get some of these Oh, here's another update.
1:09:35
Cuz here's an edge case that we didn't see happening or planning on happening.
1:09:39
But you're But you're actually talking about policy.
1:09:41
Upward compatibilities the phrase that's usually attached to that.
1:09:46
And it's very difficult on the long term to maintain upward compatibility.
1:09:50
And man- And managing a transition from one platform to another because I can no longer make the up- the original platform upward compatible. It's very hard to do.
1:10:02
And it usually results in uh offering an older product right alongside of a newer product. Yeah.
1:10:08
And it usually happens with the newer product being priced at a premium over the older product.
1:10:12
So, people don't abandon the old product altogether.
1:10:16
And then one's left with how do I help people who are are stranded because they have the older product.
1:10:20
I'm going through this right now.
1:10:23
Cuz my Apple iPad uh has lasted me years.
1:10:27
And I just got a notice from the Boston Consulting Group IT department that it's no longer it's no longer for security reasons it's no longer have upward compatibility. Yeah.
1:10:36
And they're going to cut me off the system.
1:10:37
Go And go And their answer is go buy a new Apple. Yeah.
1:10:40
My answer is how can I divide my world so I don't have to go buy a new Apple? Yeah.
1:10:43
But I'll probably end up buying a new Apple.
1:10:47
So, it's a policy decision.
1:10:47
And and it's hard It's hard to do it in a way that makes the customer feel good. It's not impossible.
1:10:53
You know, the example I was thinking of is a a medical devices uh medical robots.
1:11:00
And you got to make the new platform so much more attractive that people pay higher price.
1:11:08
And the people that don't want to go to the new platform will feel like they're getting a good value by staying with the old platform.
1:11:12
Now, you're still up for the downstream problems at some point we don't want to support the old platform anymore.
1:11:18
Uh I think Apple sort of plays I don't really watch Apple that closely, but I think they have a trade-in policy. Yeah.
1:11:23
Which means if I really go back to them and so I want to buy a new Apple, but I have this perfectly fourth generation one that's working fine. Yeah.
1:11:29
They'll give you something so that you feel good for it. Yeah. I feel good about it.
1:11:32
So, it requires thinking this through.
1:11:33
It How do I make the customer feel like they're not being abused?
1:11:37
And respecting them, right? They They purchased it.
1:11:40
They put their money into it and you're sort of nudging them to upgrade.
1:11:42
And at time period they might not be ready for.
1:11:48
A couple years ago I had a project I called the ugly duckling of retailing.
1:11:52
And the ugly duckling of retailing is returns.
1:11:54
And returns actually are are a very large part of a retailer's business. Yeah.
1:12:02
Um It's like some online stores I guess it's like 20% or something. huge. It's huge.
1:12:06
But uh that's where I was heading is Zappos is one of the first companies I ran across where they use returns as a marketing opportunity.
1:12:17
Whereas other people like if Yeah, that at that point in time if you go to Walmart look at their return policies, I mean it was astoundingly complex. Yeah.
1:12:23
And it didn't look very customer friendly at all.
1:12:29
And Zappos was buy what you think you need and send the rest back.
1:12:34
In fact, I was in a UPS store in Palm Springs or Palm Beach, Florida mailing something back to the office and I noticed that all the boxes behind the counter of all the boxes behind the counter about nine out of the 10 of them were Zappos boxes going back.
1:12:51
And so, they found a way to use uh a return as a way to make the customer take the risk of buying Yeah.
1:12:57
Well, now there's no uncertainty. Yeah.
1:13:03
I know worst case I just go back and I return them.
1:13:05
And they have the return labels.
1:13:06
And it's easy to do versus Walmart where you you go and you stand in line for like 45 minutes to an hour.
1:13:13
And so, if you if you factor in a cost of time for you to return something, it's I don't return it. I give it away.
1:13:19
It's not even worth returning half the time.
1:13:21
When I When I did the ugly duckling work there was a couple interesting examples in Canada.
1:13:25
Um I interviewed a bunch of women uh about different kinds of products.
1:13:29
And Sears, which I never thought of as a woman's place to shop, was picked out as a place these people like to go to because they had a a great return policy.
1:13:38
Made it easy to return products. Yeah.
1:13:40
Zappos is in that category.
1:13:40
But we don't even do this on the internet now.
1:13:42
Like you can buy a New York Times subscription in like 3 seconds online.
1:13:48
But if you want to cancel it, which is effectively like a form of return, it'll take a week or like 2 hours on hold with customer service.
1:13:56
Like it should be a click of a button. Like it's that simple.
1:13:59
If you bought it at a click of a button, you should be able to get rid of it at a click of a button. Yeah.
1:14:01
Well, hopefully somebody listening to this New York Times can do that.
1:14:05
But the point of the ugly duckling work is how do I make returns a marketing advantage?
1:14:13
And Zappos is one of the earliest examples of how to make it an advantage.
1:14:18
But we have buy now, we could have cancel now.
1:14:19
Like we could literally have one-click cancellation.
1:14:21
That would be a marketing advantage if you're the Economist or the Wall Street Journal or the New York Times.
1:14:28
But there's some mathematics that they're going through where they're like, you know, that would make sense to a certain cohort of customers, but you know, probably say it's probably two departments. Yeah.
1:14:36
Just like two different parts of the factory. True.
1:14:40
So, it's not my department.
1:14:40
So, you got to go to this department.
1:14:43
I hate it when they say that to me. Yeah. Nobody's responsible. Yeah.
1:14:48
I like people to say I own your problem. Yeah, we'll all fix it.
1:14:51
Or I will take ownership of it and I'll get you a resolution. I Go ahead. Go ahead.
1:14:56
I was going to say what what I thought what are the the the the least expensive innovations I've seen is when people say, "If you don't feel like wait waiting, leave a number."
1:15:05
That almost That's almost satisfying. Yeah. A call back number? Yeah.
1:15:07
The problem is I'm not always ready to answer my phone. Yeah.
1:15:10
Like I wouldn't want to answer my phone right now. Yeah.
1:15:13
So, I'm not sure when I'm going to get called back.
1:15:16
I did that once at Air Canada.
1:15:16
They called me at like 3:00 a. m. Oh, no. I was like, what?
1:15:20
Like Um I I want to mix a few subjects together in in sort of like talk about this um in relationship to each other.
1:15:28
So, like uh lean manufacturing, just-in-time inventories, balance sheet, which we talked about and how it can be used as a weapon, and the supply chain crisis that we're sort of currently undergoing.
1:15:41
And I'd love to hear your thoughts.
1:15:42
Let me break that down in a couple parts.
1:15:45
Lean manufacturing and just-in-time are from my experience are described in the same phenomena.
1:15:54
The small batch uh minimum material handling self-scheduling uh manufacturing process that Toyota pioneered in the '50s.
1:16:05
And interestingly enough, it was a solution that Toyota had to come up with to compete with Nissan.
1:16:10
Cuz in the '50s Nissan was Japan's largest car company.
1:16:14
And Toyota was just getting into cars.
1:16:16
So, they didn't have Toyota didn't have scale.
1:16:17
They didn't have the breadth of product line offered.
1:16:19
So, they had to figure out how to compete at low scale.
1:16:23
And with with more complexity than I might want to use.
1:16:26
So, they created the just-in-time system.
1:16:29
Ford had just-in-time system as well, but it was it was high volume focused Model T's type of stuff.
1:16:33
Those two are very similar.
1:16:35
The effects of them being together but the effects of them on the organization do show up on the balance sheet.
1:16:40
They show up on higher uh asset productivity in the form of higher working capital productivity and higher productivity of plant equipment. So, those are together.
1:16:49
I've been looking at supply chains as a source of strategic advantage for about 15 years now.
1:16:53
And I just finished a paper for the Harvard Business Review uh that was originally titled How to use the supply chain crisis against competitors.
1:17:04
And I'm go- I'm explaining this because I want you to understand my perspective, which is I really don't care about the supply chain crisis.
1:17:09
What I care about is how do I use the crisis in a way that puts my competitors at disadvantage.
1:17:16
Cuz I can't as a company or an individual I can't fix the supply chain crisis.
1:17:22
I have to figure out a way to live with it.
1:17:24
And live with it in a way that creates advantage for me.
1:17:29
Uh and there are several ways you can do that.
1:17:31
Uh First of all, I have to recognize that the supply chain crisis is a system phenomena.
1:17:37
We have a very complex system that was working fairly smoothly and then it was disturbed.
1:17:44
Uh it was disturbed by government lockdowns.
1:17:47
Um and when a system that's complex is disturbed, it has uh a response that's often called the bullwhip effect.
1:17:57
But basically, all parts of the system start to oscillate.
1:18:00
And the the factory overproduces and underproduces.
1:18:02
Inventories become stockouts and overstocks.
1:18:07
Um And one can try to fight that on the ground or one can try to fight that in the air.
1:18:13
And fighting the air says um the way to minimize the impact of supply chain crisis on me that results in me being a higher performer than my competitor are often things that people don't want to do.
1:18:28
Cuz they look like they cost more.
1:18:30
So, for example, one thing I can do is I can order more frequently.
1:18:36
And pay whatever penalty it takes to get that.
1:18:38
Um I can And this has been happening.
1:18:39
I can uh accept I can I can arrange containers that aren't full.
1:18:48
So, that container's not waiting to be filled up before it comes.
1:18:49
I'll pay the difference a premium.
1:18:51
I can pay a premium when it arrives to get off the ship first.
1:18:55
I can pay a premium to be loaded last.
1:18:57
I can pay a premium to put the the the box onto a train that doesn't stop.
1:19:03
And there There are companies that do this.
1:19:04
And it goes straight to New York without stopping from the West Coast. That takes time out.
1:19:11
It turns out the time in the supply chain crisis is is incredibly important cuz the longer is the supply chain time, the more exposed it is to these oscillations.
1:19:24
And so, if I can become more time-based in my my supply chain, I did basically insulate myself relative to my competitors. I still have problems.
1:19:33
They're not as bad as my competitors have problems.
1:19:35
So, some of the things I described are with the existing supply chain air freight.
1:19:40
You know, the the the the the the logistics cost of a TV set um that is shipped by ocean to Best Buy is about 5%. That's pretty damn good.
1:19:55
Um if I ship it by air, it's it's going to cost me like 12%.
1:19:58
If I have a stockout on a flat screen TV, it could cost me 50% of my my margin.
1:20:07
If I have a overstock, it could probably cost me all my margin to get rid of the product.
1:20:12
If I can find a way to make all that cycle happen faster, I'm less exposed to the supply chain oscillations, and therefore I end up having higher in stocks and fewer out of stocks, um which the customer likes, um but I make more money.
1:20:26
And as soon as I can get the thing to a point where I'm making more money than my competitors, I can use it against my competitors.
1:20:32
And so, much of the supply chain work I've been doing has been around how to take time out of the supply chain.
1:20:38
Um and very often the fight with management is over uh not what the benefits are, but who gets the benefits.
1:20:48
Shouldn't they just go I mean, if you put them to the customer eventually, if most of them accrue to the customer, then it becomes this uh a flywheel almost, doesn't it? True.
1:20:58
I The The answer that The The executive's concern starts with the customer.
1:21:04
You know, if I if I can get so much time out of this process, I produce for my retailer what fewer stockouts and fewer overstocks, that makes him uh happier.
1:21:13
But that that there's a cost associated with that. Yeah.
1:21:16
And so, where does that cost occur?
1:21:18
And what uh some of those costs occur within my four walls.
1:21:22
Some of them occur outside my four walls.
1:21:23
That's where the problem starts to come up.
1:21:26
Is um where the costs are.
1:21:29
Uh but if one if one starts building into the profitability analysis of the product, the cost of overstocks and the cost of understocks, uh you can actually accept the fact that I'm going to pay more for my step in the supply chain, so it somewhere further down I get the bene- the benefit shows up, and I get a premium of some sort.
1:21:48
That's the hard part to get people to do that.
1:21:52
I worked for a women's lingerie manufacturer at one point.
1:21:56
And it took them weeks to get the product from Asia where they sourced it to uh uh their retail stores.
1:22:04
Um Their gross margins on these products, excuse me, I got Yeah. are 90 to 95%.
1:22:11
On a women's uh lingerie.
1:22:14
The on ocean shipping cost, terminal to terminal, is about a percent and a half of sales.
1:22:22
Air freight's about four.
1:22:25
So, if I'm willing to it accept almost a factor of three increase in my shipping costs to avoid a 95% cost of a stockout, I end up being a more profitable chain.
1:22:36
And it ends up being faster.
1:22:36
And so, that's what happened.
1:22:38
They they went from being It was actually 20% oh I got to have it right away Yeah.
1:22:45
to put it on a plane to 90% always on a plane now. Yeah.
1:22:47
And so, we've taken out the ocean shipping now way down.
1:22:53
And because the the benefits of avoiding stockouts and overstocks is so high, we can afford to pay the cost of the air freight.
1:23:00
There's so many ways to strategically use your supply chain, your access to raw materials, all of this stuff, but it always in in the moment it usually never looks like the right decision cuz it's costing you more.
1:23:13
Like if you're a manufacturing company and say you had a year of raw materials on hand before COVID hit, you can keep pumping through even though there's a supply change and you're the only one in business.
1:23:24
You're going to make more money in that 12 months than that inventory ever cost you uh to hold and acquire, but you don't want to do it because you have investors, they have a different timeline, it looks like bloated on the balance sheet, looks like inefficiency.
1:23:37
How do you sort of like weigh those things against each other?
1:23:44
It's a difficult thing to do.
1:23:44
It requires that people look at the entire system.
1:23:49
And and optimize the system performance first before they figure out what their portion of that optimization is is that they're going to keep or accrue.
1:23:58
Stanley Black & Decker was one of the companies that early on in COVID lockdowns that got put together as lockdowns that produced the problem of COVID.
1:24:07
Or I guess I COVID produced lockdowns.
1:24:09
Um decided they were going to stock up.
1:24:13
And it paid off immensely, but it's a it's a bet.
1:24:15
In my experience, um the longer the supply chain is in terms of time, Mhm.
1:24:22
the riskier it is for the company and the consumer to source from it.
1:24:32
So, a a really wonderful example is Dell versus Dell computers versus HP.
1:24:37
Uh Dell's famous for its fast delivery. Um HP's not.
1:24:45
But one of the interesting issues is Dell was because it had uh fast throughput times for its equipment, could could offer products with the latest technology um sooner to the end consumer.
1:24:56
And you have declining inventory.
1:24:59
I mean, every day of inventory it's declining in value, right? I I missed that.
1:25:02
The technology is like it's declining in value.
1:25:05
The prices are going That's where I was heading was because of that uh Dell could update the technology in its product offering while HP was still trying to get the older technology through its supply chain.
1:25:17
An example of using the supply chain against a competitor would be Dell versus HP in the um say the 2000-2015 time period, where because their time consumption of the supply chain was so much shorter than HP, uh Dell could be introducing products with more up-to-date technology while uh while HP was still trying to get products from the old through its supply chain.
1:25:44
Um and begin to make the HP products look old.
1:25:47
Once your product looks old, but they don't want to in high tech, you could sell it at a lower price.
1:25:54
And so, that works very well.
1:25:56
And but it does it puts back to time.
1:25:56
I like again, I don't I set sound like I'm addicted to time, but it's just so powerful that if one takes a look at supply chain to through time, one sees real opportunities to do a bunch of things differently than can be done if one doesn't take advantage of time.
1:26:13
The one big unknown, which probably won't become prevalent management theory for another 10 years, is what I call uh variance analysis.
1:26:27
And if one looks at a supply chain that has a much faster flow-through than a supply chain that has longer flow-through, not only is it faster, but it's less variable.
1:26:37
Uh so, there's less distribution of outcomes in the supply chain.
1:26:41
Um if you take two supply chains, uh one that has an 8-week time and one that has a 2-week time, uh the variability of the output at the one that's 2 weeks will be about 1/8 the variability of the other.
1:27:01
Um so, there's a high variance advantage that's possible.
1:27:05
Uh just a footnote on that is that variance it comes from two sources.
1:27:11
Uh it comes from changes in the out outer world, outside world.
1:27:15
In the case of an airline, it comes from a storm, something like that. Airport closure.
1:27:20
Or it could be self-generated.
1:27:22
And it turns out the supply chain that has a high high amount of time and high variance cuz they always go together, even if the outside world doesn't change very much at all, it'll generate its own turbulence inside.
1:27:36
And and turbulence equates to cost. Yeah.
1:27:39
And so, a supply chain that's fast and low variance is much a higher performing supply chain that's that's slow and high variance.
1:27:47
And again, I don't have to fix the supply chain problem.
1:27:48
I just have to make mine better than that than my competitors so I can do nasty things to them.
1:27:55
Uh I say it's going to take a while to to flourish it because most people don't think they can manage the variance of the supply chain.
1:28:02
The answer is you can manage the variance of the supply chain.
1:28:03
Canadian Tire is a perfect example.
1:28:07
They use something called flow casting at Canadian Tire, which means on a daily basis they're looking at each element of their supply chain and trying to figure out how it's doing, where where the variances are, and then where they have problems, they throw people at it and get it fixed, even though they don't own that step in the supply chain.
1:28:22
So, managing variance is a mindset that's is going to be very challenging for people to achieve if they haven't achieved the time mindset to begin with.
1:28:33
But it's a it's the next I think it's the next wave.
1:28:35
And you're writing about that now, right? Am I writing about that? Yeah.
1:28:41
Uh well, you know, since I I took the work uh because you know, a lot of people, for example, the reason I did the work, every time Toyota has a glitch, uh the management press trashes the Toyota production system. Mhm. Now they've had it.
1:28:55
Now they're going to write it up worldwide.
1:28:57
They had something called a J valve factory in Japan burn down.
1:29:03
And it cuz it just it it it supplied 95% of the J valves, which are part of the brake system of Toyota cars worldwide, and they couldn't make cars.
1:29:09
Yeah, so the press said, "You can't make cars, you're dead."
1:29:13
Uh they They this thing up and running again in 2 weeks.
1:29:17
And we don't don't care to take the time to explain how.
1:29:20
But they have a time orientation at Toyota.
1:29:22
They found they had ways to do it. They did it.
1:29:25
Uh and they were up in 2 weeks.
1:29:26
At the same time that happened, there was an airbag factory in Ohio that burned down.
1:29:31
This this company that owned the factory supplied 90% of the airbags to Ford.
1:29:37
Uh Ford ended up making cars that with at the auto they call put it against the fence.
1:29:44
Semiconductors this year were missing, so people built cars that semiconductors and put them against the fence.
1:29:49
And when you have the semiconductors, you went back and fixed it.
1:29:50
You know that's expensive.
1:29:53
Uh so Ford started doing this.
1:29:56
The airbag factory that burned down in Cleveland never came back on stream.
1:30:00
And the consequence of that was this particular supplier whose factory burned down went from supplying 90% of airbags to Ford to supplying like 30%.
1:30:06
Cuz they felt they had to diversify their supply base. Yeah.
1:30:13
So customers are very sensitive.
1:30:15
Can be very sensitive to variance.
1:30:17
Now, so I did this analysis and it showed that the distributor production system recovers much faster from a disturbance than does a traditional supply chain manufacturing system does.
1:30:29
I put all this work together.
1:30:29
I took it to a company called WW Grainger.
1:30:34
Uh WW Grainger is a leading industrial supply company.
1:30:38
Basically a distributor of industrial supplies.
1:30:41
Huge range of offerings from from mops and gloves to electric motors and stuff. It's really amazing.
1:30:45
So I was talking to the head of Grainger Canada cuz I figured these guys got it. A complex distributor.
1:30:54
A high performing business.
1:30:56
And the notion that he could manage variance in a supply chain was just more than he could handle.
1:30:58
He said, "George, you know, I like what you're saying. I know it's right. I can't do it."
1:31:04
So so at some point somebody will say, "I like what you're saying. I know it's right. And I'm going to do it."
1:31:09
Southwest Airlines, that's why I mentioned Airlines earlier.
1:31:12
Um has very low variance and is performing. Yeah.
1:31:16
Low variance in in schedules they have low variance in and the planes they operate they have low variance in the crew assignments.
1:31:23
Uh they've taken a lot of the variance out.
1:31:25
They recover from disturbances much faster than than the other competitors.
1:31:28
So they're they're on the way. They'll figure it out.
1:31:31
Uh but I don't think I'll in my lifetime I'm going to see a company step back and say, "Okay, now I got cost, quality, time, and variance under under control."
1:31:41
At this point I said that's only maybe Amazon, Walmart, and Toyota are three companies I can imagine that are even close to that being able to do that.
1:31:49
But it's the next big To me, it's the next big wave is variance, but it's so far out.
1:31:52
I think the Grainger guy said, "Come back in 10 years" or something like that, which is about I figured it was going to take.
1:31:58
So I put it back on the shelf for a while.
1:31:59
I'll send it to you if you want to see it. Yeah, I would love to.
1:32:02
That's a great place to end this conversation.
1:32:03
I want to thank you for your time today. I really appreciate it. Great questions. I enjoyed them.