Author name: Sam Gupta

In this episode, we have our guest Amanda Prochaska, who discusses why managing people through change with large ERP transformation projects and continuous monitoring of emotional response is absolutely critical for the success of such projects. She also shares several stories related to emotional response and what she did to get these projects back on track and to bring positivity to the culture. Finally, she talks about what leaders need to do to identify the underlying symptoms of compliance culture and how to engage with vendors hired to help you manage this change.

Chapter Markers

• [0:16] Intro
• [2:54] Personal journey and current focus
• [5:29] Perspective on growth
• [6:55] The impact on the culture of an ERP implementation while managing people through change
• [14:04] Emotional response-driven ERP implementation
• [18:54] Why technology alone can’t help managing peple through change
• [20:35] Poor ERP adoption due to Compliance culture
• [27:04] How to build consensus and build trust in the ERP team?
• [28:01] Advice for leadership to work with external ERP consultants
• [32:22] Closing thoughts
• [33:52] Outro

Key Takeaways

• Change, even in our personal lives, is hard. And there’s always an emotional response to it. So when I think about ERP implementations, these implementations are big and hairy. They touch all kinds of people in the organization. There are integration points that link people together. They’re not used to now all of a sudden. You’re sharing metrics, and you might have organizational changes that go on, in addition to just the technology one.
• So many times the ERP implementations fail while the technology works perfectly, and they have perfect process maps, and they saw through all of this. If they don’t focus on the people and the emotional responses, those people won’t get the results that they hoped and because of this issue, the adoption is likely to be poor.
• An engagement team is critical to make sure that we don’t ignore the emotional response within the organization and that we can hear that and respond to it effectively.
• When you talk about engagement when you do that, people feel heard, they feel appreciated, they feel understood. And then what they’ll do is they’ll start collaborating, they’ll start innovating, they’ll start leveraging the technology that you just deployed in different ways that you never even knew were possible because they were brought along with the change.

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About Amanda

An accomplished executive, Amanda Prochaska is known for her extensive leadership experience driving change, and her curiosity to always find ways to improve upon today’s standards. From MGM to Kraft Heinz to Kellogg to ConAgra – these companies are just a small sampling of her Fortune 500 16 year journey in procurement and supply chain.

She left corporate 2 years ago to become the Chief Wonder Officer at Wonder Services and the Chief Shimmer Officer at Global Women Procurement Professionals. Amanda’s motivation is to help your existing internal leadership increase your ROI through effective adoption of change and uplift women in procurement in their careers.

Resources

• Connect with Amanda
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• Connect with Wonder Services
  • Website | LinkedIn | YouTube

Full Transcript

Amanda Prochaska 0:00  

While the technology works perfectly, and they have perfect process maps, and they sat through all of this, if they don’t focus on managing people through change and the emotional response of those people, they don’t get the results they want.

Intro 0:16  

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:51  

Yeah, everyone, welcome back to another episode of the WBS podcast. I’m Sam Gupta, your host, and principal consultant at a digital transformation consulting firm, ElevatIQ. 

There is always so much at stake with ERP implementations. One plus one is perhaps 11 when it comes to deploying ERP. They are never just technology deployment. The companies that promise the world to their teams based on the overstated claims from technology sales professionals might encounter varied emotional responses from their leaders, leading to a compliance culture. 

This culture often produces the exact opposite effect of what you intended to achieve with your technology. In today’s episode, we have our guest, Amanda Prochaska, who discusses how to prepare for change with large transformation projects and why a continuous monitoring of emotional response is absolutely critical for the success of such projects. She also shares several stories related to emotional response and what she did to get these projects back on track and to bring positivity to the culture. Finally, she talks about what leaders need to do to identify the underlying symptoms of compliance culture and how to engage with vendors to help you manage this stage. 

Let me introduce Amanda to you.

Sam Gupta 2:00  

An accomplished executive, Amanda Prochaska is known for her extensive leadership, experience driving change, and her curiosity to always find ways to improve upon today’s standards, from MGM to Kraft Heinz to Kellogg to Conagra. These companies are just a small sampling of our fortune 500, 16-year journey in procurement and supply chain. She left corporate two years ago to become the Chief Wonder Officer at Wonder Services and the Chief Shimmer Officer at Global Women Procurement Professionals. Amanda’s motivation is to help your existing internal leadership increase your ROI through effective adoption of change and uplift women in procurement in their careers. 

With that, let’s get to the conversation. 

Hey, welcome to the show. Amanda.

Amanda Prochaska 2:49  

Thank you so much, Sam, for having me. This is amazing. I can’t wait to talk about the topic today.

Sam Gupta 2:54  

And I’m so excited to talk about today’s topic because ERP implementations can have further implications. And typically, nobody sees this from the culture perspective. So I’m super, super excited to jump on that topic. But before we do that, do you want to kick things off with your personal story and current focus?

Amanda Prochaska 3:14  

Oh, yeah, absolutely. So my personal story is one I like to describe as one of an adventure, a sense of wonder I’ve kind of meandered through my career. But what grounded me in my 16 years in procurement was leading large-scale transformation. 

So I started out in my first journey right out of school was implementing a new travel agency program online booking tool, all the way through three SAP implementations, many Coupa implementations, whatever in the procurement space, I was typically leading those large digital transformations, but then I was opening properties, and doing M&A integration, which is a huge cultural impact. So what underpinned it all was this concept of change in how to lead change effectively, and really what works and what doesn’t work, because I’ve had plenty of failures along the way. 

Sam Gupta 4:16  

Yeah, we have not had anybody saying that they have not had the challenges during the implementation. If they otherwise, most likely, they are lying, right, Amanda?

Amanda Prochaska 4:23  

Oh, absolutely. So what happened was my dream job at MGM, and I built a team from scratch. I was leading their best P2P transformation, having a ton of fun. And then I got the opportunity to go out on my own, and I’ve always wanted to be an entrepreneur, and this was about two and a half years ago, and really in the back of my head, I think I can help managing people through change through these initiatives, and not only get through them effectively but actually have a positive impact on the culture. 

As an outcome, because I was the one thing that I felt was lacking was we would, we would tell people, hey, this is the technology change that’s going on. And people would just kind of take it in the chin. Instead of looking at this as okay, I have an opportunity not only to enable my organization with but also, let’s just say, a new technology, new ERP deployment. But let’s actually take the opportunity to build engagement, build an innovation culture. So that’s what I set out to do. And that’s the mission that I’m on right now.

Sam Gupta 5:29  

That’s amazing. So obviously, it’s going to be a super, super exciting discussion, in my opinion. But before we do that, we have one of the standard questions that we ask all of our guests, and that is going to be Amanda. What is your perspective on growth? What does growth mean to you?

Amanda Prochaska 5:44  

Oh, my gosh, it’s like the whole purpose, why we’re here on Earth? What it means, like, every single day, I was on a call, I was on a clubhouse room the other day, and they were talking about failing forward. And I was like, Oh, my gosh, I feel like I fail in little ways every single day. But I’m okay with that. 

Because growth is all about reflecting on the world around you, watching what other people are doing, and saying what works and what doesn’t work. And really, every single engagement in my mind, like we’re just interacting here today and with your audience, is an opportunity to learn. So that’s really what it’s all about. And that’s what drives me every single day is growing. 

And if I’m not growing, then I need to go do something else, right? And growth is not always fun, like going out and starting my own business. Oh my gosh, not fun at times. Like there’s been extreme highs, extreme lows, but I want to trade it for the world because I’m growing every single day. So I love this question. 

Because we shouldn’t be afraid of growth, but we also know we can also realize that growth is hard at times, right? It’s not always sunshine and rainbows. It’s hard. Its blood, sweat, and tears, it’s energy that you have to put into it. But at the end of the day, it’s so worth it. 

The impact on the culture of an ERP implementation while managing people through change

Sam Gupta 6:55  

Yeah, and this is what I tell everybody. If anybody thinks that either growth is easy, or digital transformation is easy, or entrepreneurship is easy. They just don’t know what they’re talking about. So on that note, you are going to have tons and tons of stories around the impact on the culture due to ERP implementation. 

So do you have any stories that you would like to share? The more you share, the more my audience is going to love it. We love stories around here, Amanda.

Amanda Prochaska 7:27  

I love telling them to, so can I actually start with a non-ERP story? This is actually a personal thing that just happened to me this week. So I’ll start there because I think it sets the framework of what’s going on in a macro picture of ERP.

Amanda Prochaska 7:53  

So, my daughter, she’s nine, okay. So last week, on Fridays, they don’t have school, we homeschool them. And so they have Fridays off. And she was really super excited that day because we were planning on taking her to the roller rink and perhaps a movie. 

And she was going to do this with her sister. And she has all these plans in our head. And by eight o’clock in the morning, all of those plans changed, okay, they changed because her sister had to be across town at a dance competition. And we didn’t plan effectively. Let’s just use this put it that way. 

So I literally crushed her dream. Like she came into my office and was sobbing. She was just totally distraught because she thought she was going to be doing one thing. And in a matter of minutes, it changed. And her reaction was to cry.

Amanda Prochaska 8:52  

Other people’s reaction, like the one that I had later on in the week, was anger. Yeah, so I was invited to a webinar. And I was supposed to host a breakout session and that breakout session, so I was going to be on screen. So working from home, I had to put on makeup and do my hair and get all ready. 

And I was highly prepared, really excited about the topic, like just really amped up to talk about this and lead a conversation of women through the topic. So we get to the point of the breakout room, and I get put in the wrong room. Oh, wow. And the other moderator in the room was like, Well, I’m moderating this room. I don’t know what’s yours. 

And I was so mad because I thought I was going to be doing one thing. And now I’m not, and I did all of this preparation. I was super excited about it. And it just didn’t turn out the way that I had hoped I would remain, so when I wrote and I actually called a friend, and I said I am really mad about this right now and give me a perspective of how to manage this because it’s not right to be mad, but I am.

Amanda Prochaska 10:03  

And I just need to work through it. And her advice was to call them back and ask for time, one on one, to do a webinar just with them about the topics that you were passionate about. So that’s what I did. And it worked out, we’re getting on a schedule, and it’s actually going to be better than I think what it was to it originally. 

So I share these stories because change even in our personal lives, like when changes, plans change of expectations is hard. And there’s always an emotional response to it. And so when I think about ERP implementations, these implementations are big and hairy, right? They touch all kinds of people in the organization. There are integration points that link people together. They’re not used to now all of a sudden. You’re, you’re sharing metrics, and you might have organizational changes that go on, in addition to just the technology one.

Amanda Prochaska 10:57  

And what I learned throughout my career is to never forget that emotional response. And that’s why I think so many times the ERP implementations fail while the technology works perfectly, and they have perfect process maps, and they saw through all of this if they don’t focus on managing people through change and the emotional responses, those people, they don’t get the results that they want that anymore. Right? 

I saw a post that you made today, and it was you reflecting on people, processes, and technology for ERP implementations. And that to me, and we put managing people through change first for a reason. But sometimes, in the change management world, we start focusing on the technology and the technology changes. And when people want me to do when the system versus having an honest and open conversation about the emotional response that they might be having to that.

Sam Gupta 11:53  

Yeah, so you started with the technology, then the most recent ones are going to be pretty bad. That’s what I can tell you. 

Amanda Prochaska 11:59  

Yeah. So I have a current situation going on. And it impacts the sales team. Okay. So they’re moving from a process where they’re getting today. They’re getting phone calls from their customers for orders. Yeah. And tomorrow, those orders are going to go through an e-commerce type of solution. 

So very, very interesting. And the salespeople are really excited about the change, right? They’re like, Yay, finally ecommerce, right? But what’s the emotional response, though? Initially, we might be excited about something. But as we talked about, at the very beginning, exactly. Change is hard, right? Or whatever. If you’re growing, it’s hard. So initial response might be like, yeah, I’m starting my own company, and then you dive into it two days later, and you’re like, holy crap, it’s hard, right?

Amanda Prochaska 12:52  

So that is like, the thing that we’re concentrating on with the salespeople is like, we don’t want to leave a void. We don’t want to leave that void of Okay. They’re no longer contacting their customers the way that they used to. 

So what do we want them to do? Do we want them to proactively reach out to those customers and continue to build a different relationship with them? What are they going to do with their time? If they’re not answering phone calls? What are they going to do instead? How are they going to feel about compensation? Is there going to be any compensation impact on that? And how are they going to really feel about that and react to it? 

And so even though they’re excited, yay, about e-commerce, you have to think through that response. And we don’t want to leave a void. And we don’t want to leave fears in people and acknowledge that they have those emotions, and then figure out how to approach it and make them understand the big picture. 

And then the small picture, the micro picture of how it is impacting them. But at the end of the day, the conversation I wanted to have today around that cultural impact and how you can look at this as an amazing opportunity to engage your organization in a different way.

Emotional response-driven ERP implementation and its importance while managing people through change

Sam Gupta 14:04  

Yep. So I’m a big fan of emotional response-driven ERP implementations, and I’m actually going to steal that phrase. Okay, so now, let’s talk about the emotional response-driven engagements that you have done. And in some cases, I can almost guarantee this, Amanda. When we get into the ERP implementation, there are going to be some very strong emotional responses in terms of anger. 

So tell us some stories where either you did something because somebody got angry and they got angry for a reason. As you mentioned, we need to acknowledge that, right? So tell us any story you have where there was real anger, and then you had to manage that change through the process. 

And finally, I mean, there was some sort of excitement because any change is going to bring some positivity to the culture. So tell us some stories where it was real anger, and you had to manage the situation. And then there was a positive change towards the end that they understood and appreciated it.

Amanda Prochaska 15:06  

Yeah. So I actually have two stories in mind. So one of my pet peeves, one of my biggest pet peeves, are leaders who over-promised during these implementations, yeah. So you go out there. And as a leader, you want this to work, right? You want it to have a positive impact. 

But there’s also this kind of line that you can craft around over-promising. So often, I’ll go into different companies, and they’re like, this is going to save world hunger. And this is going to, like, the tool itself, right? Like, it’s going to do all this stuff. And I’m like, let’s pull back that scenario and try to be authentic. The authentic story is, this is going to have benefits. And these are the benefits that we’re expecting.

Amanda Prochaska 15:53  

But we also know that change is hard. And this is what you can expect on this journey. You can expect to have fears. You can expect to have those emotions. So that’s the case. I’m usually walking into where you have someone who hasn’t thought through that. 

And then in these organizations, like one of my clients right now, where it leaves organizations not believing their leadership, right, you do that. And then the next change, they’re angry, because they didn’t see the tool saved world hunger, does start not believing what the leaders have to say. 

And so the next change comes down. And what happens is, they just were like, tell me what to do. And I’ll do it. And it leads to this compliance culture, where I’m just now an order taker. And I’m not thinking through how I can innovate now because of this technology or this change. I’m not looking at how I can collaborate with other people. 

I’m just waiting for leadership to tell me the next story that I’m not going to really believe anyway. And that’s what I call the compliance culture. Like that is not what you want. That’s the siloed that is the people who are just waiting for the next shoe to drop. And ultimately, you are never going to get the results from your ERP implementation. 

If you have a culture like that. And that’s driven by fear that’s driven by anger. Yep. Right. That is where those and I feel for him. I’ve been there like I’ve done it to people. Sam, I remember somebody, one of my first implementations, large P2P implementation.

Sam Gupta 17:30  

On that point, you are not the only one. We all have been there. Right.

Amanda Prochaska 17:37  

And I reflect on it now. And Sam, I’m like, Oh, it’s so not the right thing to do. Yeah, it really wasn’t. But I think it was a lack of perspective, maybe. But I was implementing a P2P and promising that this was going to be a silver bullet. Everyone and never talked about what it takes to get there. 

Yep. I just talked about the future state. And it led to post-implementation, what happened was you had people who were like, well, are we really getting the results that we wanted, and they just started questioning, oh, this is a lot harder than we like what you the picture that you painted, like, okay, and you don’t want that type of response. 

You want to be transparent and open, and honest with people about how you bring them along on that change. So number one thing if we can avoid that compliance culture and avoid over-promising and avoid just telling people what they have to do, and expecting them to do it instead of understanding that emotional response change would have such a better impact on the overall ROI that is expected within that ERP deployment and then also have a positive impact on the overall engagement of the organization.

Why technology alone can’t help managing peple through change

Sam Gupta 18:54  

Yeah, and I could not agree more with that story, and especially I’m super sensitive towards these buzzwords and these disruptive things, and as you know Amanda, I do a lot of podcasts here right, so I get a lot of it how their technology is so amazing. It’s going to change the world, and I’m like, Okay, get me the real story. 

Be specific on how it is going to help me, or I’m gonna hang up on you. And that is the only time when I hang up on anyone as I find this slightly disrespectful. In my opinion, when you say that and you’re absolutely right that you know you are really claiming that you are going to change the world when you are actually not going to change the world. I can promise you that. It’s going to be really hard to do that, by the way.

Amanda Prochaska 19:40  

Yeah, well, and especially so right now and of one of my engagements I’m actually like, the truth fair because they’re trying to select a technology, a P2P technology right now. And so they’re getting sold to all day long by the salespeople. So they listen to the salespeople, and then they come to me, and they’re like, what’s real? That’s a reality because it’s like the technology itself without any of the people or the process changes or the organizational changes, the policy changes. Without all of that happening, technology is not going to solve your problem. 

And it’s like, Now guys, like, let’s, let’s think about this differently. And yes, we can take it, we can understand what the salesperson is coming from, and they have an incentive to sell that technology. But we have to have reality. And we have to know that this is much more than just technology deployment.

Poor ERP adoption due to Compliance culture

Sam Gupta 20:35  

Yep. So I mean, let’s talk about compliance. So in my experience, I think 90% of the organizations are probably going to have a compliance culture. This goes back to the way we communicate, let’s say, the change or vision of the organization. The state of the majority of the lifestyle businesses, in my experience, especially when you look at the manufacturing and distribution landscape, it is the reality. So what can you do? What specific strategies that you could use to change that compliance culture in your experience.

Amanda Prochaska 21:10  

We actually start maybe at a different spot than most people. And when you take a step back, and the first question that we ask organizations is, why are you doing that? And most of the time, Sam, just like you just said, most of the time, it’s 90% compliance culture. 

Most of the time, the reaction that we get is everyone else is doing it. Why are you doing? Because everyone else is doing? And it’s like, no. What specific problems are you trying to solve in your organization? So we started there, we started by putting the technology aside, and what problems are you trying to solve for the organization. It’s not just the leaders that get to talk about what problems you are solving. We go out and actually ask the people who are doing work, what problems do you want, followed by this initiative? And more importantly, Sam, we also ask the question, What don’t you want to be changed?

Amanda Prochaska 22:07  

Yeah, right. Because some people like I have one instance right now, where we interviewed this individual, he’s the managing of a very important team within the change initiative. And he actually said, I don’t want anything to change. That’s really important to know. Because if he doesn’t want anything to change, well, he’s like, number one resistor on my list of we need to, we need to have a conversation about why he doesn’t think anything needs change, is there fear there? 

Is there a comfort level that he doesn’t want to move from? Is he a couple of years from retirement, and he just doesn’t want to live through it again? I don’t know, but we need to dive in there. So we start there. But then we also have a conversation with the leadership team about, okay, this might be one of many changes, or an ERP implementation, it could go on for many, many years. And there could be other things that are associated with that ERP implementation that needs to happen.

Amanda Prochaska 23:03  

So you don’t want to have the situation where, hey, I’m doing an ERP implementation. But oh, by the way, to do that effectively, I need to deploy a new WMS. And I also need to change how I manage all of my master data. If you don’t, if just those three things alone, if you don’t connect all those dots for people, people will make their own stories, that’s an emotional response, they will make their own conclusions, they will make their own story, and then they will start sharing that with other people. 

Amanda Prochaska 23:46  

So rather be reactive and then have that collective story. So we spend a lot of time there. And that’s before the project, most of the time is before the project even kicks off, which people think about change management. 

Like it sometimes happens during blueprinted design. So that’s how we position ourselves differently to from the get-go. But one more important thing that I would highly recommend everyone to do is build an engagement team. And what I mean by that is, across all levels of the organization, you need to understand who your influencers are whom people trust, and they may have led change in the past or maybe not, but they have the ear of people within the organization, you understand who those people are, again, at all levels of the organization because you need that particularly middle management because the people in middle management get there like the black hole of change. 

Amanda Prochaska 24:40  

Typically people have done a really good job at the leadership level and at the people who are doing the work level. But that middle management needs to be focused, so you identify who’s the influencer, who are advisors. They’re not the people that are out there, influencing others, but they have their ear to the heart of the culture. They have the ear to the heart of what, where people are emotionally responding. 

And those people will return that information to you. So you know what’s going on. Right? Then you also have your typical people like, hey, these are the people that do the work, and they do a damn well, and we need to involve them. And here are the leaders that need to be involved because they’re going to help influence at a different level. So we build out that kind of well-rounded team. And then, we feed them different information throughout the process.

Amanda Prochaska 25:32  

For instance, we’ll have talking points for certain people, will have formal presentations for other people, will have one on one casual conversations that were needed to help him within the organization. So that engagement team is so critical to make sure that we understand that emotional response within the organization and that we can hear that and respond to it effectively. 

So that and when you do that, Sam, when I talk about engagement when you do that people feel heard, they feel appreciated, they feel understood. And then what they’ll do is they’ll start collaborating, they’ll start innovating, they’ll start leveraging the technology that you just deployed in different ways that you never even knew were possible because they were brought along with the change. 

And that’s all underpinned by passion has to be authentic, right? That if you develop a story that connects all the dots, but it’s not believable, it’s not going to go over very well. So that is what I love to do day in and day out. And what I love to see from a leadership perspective, Sam is a lightbulb starting to go off when you have these conversations. 

You’re like, oh, okay, so I need to have this collective story. And I need to have a better answer than everyone else is doing it, which is just fried me every single time. But that’s how you do it day in and day out.

How to build consensus and build trust while managing people through change?

Sam Gupta 27:04  

Yep. So we are going to discuss the compliance culture from a different twist or perspective since I mean that you have been on many large engagements. Now you are a consultant or VP, you have done them with very large corporations, and you will have hired the consultant the vendors as well. 

And let’s look at it from the retail leaders’ perspective. Let’s say if I’m the manufacturing executive, I am the manufacturing CFO, right? I have had people in my organization for the last 20 years. And as you mentioned, everybody has their own fears, everybody has their own aspirations, everybody is driven by something, and that is their personal bias. 

And everybody has that. If somebody says that no personal biases don’t exist, and everybody’s going to move to the organization, the personal biases need to be aligned to the organizational goals to be able to get the maximum or optimum output from these people. But let’s say if I’m the manufacturing executive, I have had these people for the last 20 years, and obviously, I trust them.

Advice for leadership to work with external ERP consultants

Sam Gupta 28:01  

And that’s the reason why they were with the organization for the last 20 years, all of a sudden. I’m hiring a consultant or a vendor when he or she is promising me the word that I’m actually going to change the organization. 

So obviously, it is going to be very difficult for the consultant, right. And as a leader, for me, it is going to be very hard for me to trust this consultant, whether he or she is right, my people are right, and I’m even more confused now. Okay, and then what I’m going to do is most likely, what I’m going to do is I’m not going to listen to the consultant as you are, let’s say proposing the changes that.

Okay, I’m going to change the world, and then all of a sudden, you get into that hard phase, and things don’t work out. And then what happens is the vendor that you hire or the consultant that you hire, he or she becomes compliant, right? In the customer-vendor scenario, he or she is going to lose the deal, so then we are going to be compliant with people doing so obviously, because of that, you are not going to get the results. So in this scenario, what your advice for leadership is?

Amanda Prochaska 29:05  

Oh my gosh, yes. So it happens all the time. So in my experience out, oh, a contrast to experience is actually so I was doing a system implementation. And actually, it was kind of an interesting situation. But I was coming in at kind of the end of it. 

And there was a third-party consultant, a system integrator who was helping us out on the project, and they were at a state where they were just taking orders. I was told that we were supposed to configure the system this way, or I was told that we needed to do it this way. 

And they weren’t offering a fresh perspective around. No, guys, this is really how you should do it. And don’t go down that road you need to turn left instead of right, but they were just reacting to what the client was asking them to do because I think they were more motivated by trying to keep every one column and keeping that relationship going into the next project, versus truly trying to make a positive impact on this particular project. 

So it happens all the time. The reverse of that, you also don’t want to have a third party necessarily solely driving a boat, either, right? You don’t want them to be the captain.

Amanda Prochaska 30:21  

So there has to be this nice balance of asking questions and iterating on things. So I’ll give the example of what we did at MGM because I thought it worked really well. When I was still in the practitioner space, we actually had a third party on-site for two years, helping us with our source or patron information. 

And the way that we worked that relationship was that we had this really good banter of questioning, and I think questions have such a powerful impact when it comes to this type of relationship. They would question, I would question back, they would question again. And we would go round and round until we both felt comfortable with the solution that we were providing it. 

Also, I would ask them, like, this is what I feel but what’s best practice, what could be the best thing that we could do, and then let’s think about why that couldn’t work for us. So that type of banter back and forth, I think, is very, very healthy. And it should be actually sought after in these types of relationships. Now, that’s something that I’ve learned through my engagements. Now, as I’m on the other side of the table, right?

Amanda Prochaska 31:29  

I find myself as more of an advisor, like, I’ll get on calls and just ask questions. Have you thought about this? Have you thought about that? What are you going to do about this? How are people going to react to that? 

And typically, when you do that type of line of questioning and an invite, but that advisor has the leaders all of a sudden start having those lightbulb moments, and they come up with a conclusion that they believe are best through that line of questioning, and I’ll continue to question if I don’t think it’s the right thing to do. 

But that’s I think the way to get through that I feel like I’m never really telling them what to do. And let’s say you particularly asked me for my opinion, and that my role is more about hey, have you thought about this? Have you thought about that? Why would that happen? Or how would they react and I think that works very, very well.

Sam Gupta 32:22  

Okay, amazing. Amanda, this was a powerful conversation. Do you have any last-minute closing thoughts, by any chance?

Amanda Prochaska 32:28  

So I would say if you are a leader facing change, which so many leaders are, I know in the procurement space, the average length of a CTO term in the role is three years. So if you can only imagine if your CTO is changing every three years, the strategy’s changing whatever is going on in your organization is changing at least every three years. 

So you are facing change day in and day out. So if you are one of those leaders, remember that people come first. There will be an emotional reaction, and you need to understand what that is so that you can be effective in your change that you can drive adoption and ROI. 

But they can also have a positive legacy within your organization, and bring your organization together, and have that true engagement from your team. So that is my number one thing I can leave your audience with is that remember that the people really matter and understanding that emotional response is key.

Sam Gupta 33:31  

Okay, amazing. And my personal takeaway from this conversation is going to be any transformation, irrespective of whether it is ERP or any other transformation, don’t lead with technology or solution. Lead with an emotional response. On that note, Amanda, I really want to thank you for your time. This was a very fun conversation and super insightful.

Amanda Prochaska 33:50  

Thank you so much for the opportunity. Sam.

Sam Gupta 33:52  

I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you’ll learn something new today. 

If you want to learn more about Amanda or to meet Alice and learn more about how to become a change warrior, head over to wonderservices.net. Links and more information will also be available in the show notes. 

If anything in this podcast resonated with you and your business, you might want to check out the related episodes, including the interview with Carol Marzouk from Leadership ‘n Soul, who discusses how to uncover and correct lingering toxicity before it extends your business growth. Also, the interview with Erin Koss, CPA from Syte Consulting Group who brings a unique and fresh perspective on how to manage large transformation projects in an environment with unexpected disruptions. 

Also, don’t forget to subscribe and spread the word among folks with a similar background. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I hope to catch you on the next episode of the WBS podcast.

Outro 35:02  

Thank you for listening to another episode of the WB s podcast. Be sure to subscribe on your favorite podcasting platform so you never miss an episode. For more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guest Andrew Deutsch, who discusses pricing strategies for companies. He shares his thoughts on how to shift from the transactional mindset to value-driven pricing. Finally, he touches on several other pricing-related topics, including organizational alignment on pricing, channel conflict issues about pricing, pricing-driven customer experience, and promotional pricing.

Chapter Markers

• [0:24] Intro
• [2:55] Personal journey and current focus
• [3:39] Perspective on growth
• [4:43] Who is responsible for driving pricing strategies?
• [7:59] Breakthrough point for pricing strategies
• [12:36] How to justify the price for complex products?
• [20:06] How to differentiate when competitors overclaim their capabilities?
• [26:02] Pricing strategies with potential channel conflict
• [31:33] The need for systems and architecture to achieve centralized pricing strategies
• [40:37] Closing thoughts
• [41:16] Outro

Key Takeaways

• When it comes to working on pricing strategies, typically, the marketing team is the one who’s out looking at the competitive analysis of pricing to begin to understand it. And then also, as you’re building that go-to-market strategy, incorporating that information into what you’re doing.
• Marketing helps determine what does the market currently pays. Or what’s it willing to pay for that product. It’s not a cost-plus, which is again one of those things that can lead to disaster in any business.
• If you can provide a level of service that changes the way that your customer does business, pricing is not as important as the fact that you’re never going to have to shut down production because you’re doing business with me.
• Price sensitivity when you have the ability to answer and solve their problem in a way that nobody else really can, is when pricing is no longer the issue that it would have been if you were just comparing prices.
• If you’re a salesperson who’s just taking orders and in transaction mode, pricing is everything, if you have the ability to truly show a value, whether it’s the product, whether it’s delivery of the product, whether it’s post service, whether all of those things to create where that value prop is, then pricing is not the final decision-making point it rarely is.

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About Andrew

Andrew Deutsch is a strategy-first multilingual global marketing and sales consultant who has successfully driven business growth in more than 100 countries. He studied both International trade and psychology building his unique methodology focused on converting everyone a company touches into brand advocates as a strategic base for sustainable growth. He has traveled for work extensively all over the world including his 10-year stint living and working in Brazil where all his training led to his unique skill set and his bold and innovative methods.

His company Fangled Technologies helps businesses in 5 integrated ways: 1) Strategy first strategic marketing consulting and fractional CMO programs 2) Advanced sales strategy and coaching 3) Creative design including print, digital, video, and more. 4) Global trade and development 5)Innovation and product development

Resources

• Connect with Andrew
  • LinkedIn
• Connect with Fangled International
  • Website | LinkedIn

Full Transcript

Andrew Deutsch 0:00  

Pricing becomes a very important factor because you’re basically out there fighting in that red ocean of blood for the best price. If I can provide a level of service that changes the way that you do business, pricing is not as important as the fact that you’re never gonna have to shut down production.

Intro 0:24  

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:59  

Hey everyone, welcome back to another episode of the WBS podcast. I’m Sam Gupta, your host, and principal consultant at a digital transformation consulting firm, ElevatIQ. 

Product pricing strategies is more than just the dollar amount printed on the packaging or price labels. It drives consumer behaviors, affects the customer experience, and impacts the bottom line. Right pricing strategies could catalyze your growth and provide a competitive advantage. On the other hand, overly promotional pricing strategies could be counterproductive and increase operational complexity when it comes to pricing. It’s the balance that matters. 

In today’s episode, we have our guest, Andrew Deutsch, who discusses pricing strategies for companies. He shares his thoughts on how to shift from the transaction mindset to value-driven pricing. Finally, he touches on several other pricing-related topics, including organizational alignment on pricing channel conflict, issues about pricing that ruin customer experience, and promotional pricing. Let me introduce Andrew to you. 

Andrew Deutch is a strategy-first multilingual, global marketing and sales consultant who has successfully driven business growth in more than 100 countries. He studied both international trade and psychology, building his unique methodology focused on converting everyone a company touches into brand aggregates as a strategic base for sustainable growth. 

He has traveled for work extensively all over the world, including his ten-year stint living and working in Brazil, where his strategy led to his unique skill set and his bold and innovative methods. His company Fangled Technologies, helps businesses in five integrated ways strategy first, strategic marketing, consulting and fractional CMO programs, advanced sales strategy and coaching, creative design, including print, digital video, and more Global Trade and Development, innovation, and product development. 

With that, let’s get to the conversation. 

Hey, Andrew, welcome to the show.

Andrew Deutsch 2:53  

Hey, thanks for having me on. 

Sam Gupta 2:55  

Of course, my pleasure. Just to kick things off, do you want to start with your personal story and current focus?

Andrew Deutsch 3:00  

Sure, my background is actually in global trade, helping companies in the US and abroad find markets and create a story that makes sense for them to grow their business globally. 

My company, Frangal technologies, is a strategy first marketing consultancy where we help companies in the US and abroad figure out and really understand who their customer is, what their needs are, desires, pains, all of those wonderful things we talk about in business, and then how we help our customers differentiate in a way that speaks to and answers and solves those challenges in ways that none of the competitors can come close to. 

Sam Gupta 3:39  

Okay, amazing, so we are obviously going to be discussing the pricing strategies today because that is one of the Ps of marketing. But before we do that, we have one of the standard questions here that we ask every single guest, and that is going to be your perspective on business on growth. When you think of growth, what does it mean to you?

Andrew Deutsch 3:59  

That’s a big subject. We could take the whole podcast just talking about that for companies to grow. They have to grow in a way that makes sense and is sustainable to who they are as a brand. The idea of just growing for the sake of growth without considering all of the other aspects, including stability and the future of the company, is a recipe for disaster. 

So what we want to do when we help companies grow is to truly look at where they are now. What are those needs and desires that their customer base has, and how they’re going to best serve them going into the future? So that as they continue to grow, they have the facility and the ability to do it and become that person. It actually is going to feed quite a bit into our conversation about pricing strategies.

Who is responsible for driving pricing strategies?

Sam Gupta 4:43  

Yeah, amazing. So let’s talk about pricing strategies. Right, so one of the trends that I typically see, especially among SMB manufacturers, is pricing, discount loyalty coupons. When you talk about these terms, they are typically driven by finance, but from my perspective, when I look at from the pricing, as I mentioned, towards the beginning of the conversation, the P of price is supposed to be for marketing because you have to consider the external factors when you determine your pricing. So from the strategy perspective, and what do you think should be driving the pricing? Should it be finance? Should it be marketing?

Andrew Deutsch 5:20  

Well, everyone in the organization is involved in marketing. I consider whether you’re the guy who’s cutting the grass in the parking lot to the operations division. All of those people are the face of the brand of the company. So when it comes to working on pricing strategies, typically, the marketing team is the one who’s out, looking at the competitive analysis of pricing to begin to understand it. 

And then also, as you’re building that go-to-market strategy, incorporating that information into what you’re doing. I’ll give you an example of pricing strategies that has nothing to do with industry but relates to our conversation where I live. I’m very close to the Amish community. And I have great friends in that community, of which one is a farmer who creates produce. Yeah. And his name coincidentally is the same as mine, his name is also, but we’ll call him Andy, for this purpose, so that he understands.

Andrew Deutsch 6:10  

So I would go out on a Saturday to buy, and certain items were always sold out first thing in the morning. And I would say to him, why don’t you have, for example, let us so well, people come out and they buy it all up right away? Yeah. And I said, well, that’s because you’re not charging enough. 

And he said, What do you mean, I charge a fair price, I said fair, to who? There’s a strategy behind pricing. Yeah. So we did an experiment, everything that sold out before noon, raise the price by five cents, and continue to do that to every item, by five cents every week, until afternoon, you still have one or two items left. 

And he said that it’s crazy that people don’t want to pay that. And they don’t want to pay it. You’re going to find out immediately because you’re going to end up with a huge surplus. 

Andrew Deutsch 6:57  

But nonetheless, Andy would like every week. He was raising it five cents per item, and for some of the items, he raised 10 and then was doing fives. And at the end of the year, he looked at his bottom line. And he realized that really it was old supply and demand, which of course, an average guy doesn’t learn when he goes to school until eighth grade, what that really means. 

But the strategy behind his pricing was, am I fair to the market? And am I fair to my customer, am I fair to myself? Yeah, he was continuing to sell almost all of his products had a little bit leftover at the end of the day. But when he did his books for the year, his expectations for earning, he made almost $25,000 more in one season than you’d ever made before selling his produce. So is that marketing? Is it financial or otherwise? 

Well, marketing helps to determine what does the market currently pays. Or what’s it willing to pay for that product. It’s not a cost-plus, which is again one of those things that can lead to disaster in any business. It costs me $1 to make or sell for $1.50, even though all the competitors are at $5.

Breakthrough point for pricing strategies

Sam Gupta 7:59  

Yeah. So let’s talk about this fear of pricing, right? So when we look at these smaller businesses, so let’s say if we are doing the experiment with pricing stategies, sometimes, at least in my experience, I have seen that businesses are afraid of losing those customers losing the relationship and have this fear that if they start charging more, then they are going to come across as unfair. Right. 

So as you mentioned, your comment about being fair, but there is a relationship play here, right? There is a little bit of fear. In your experience, what should business owners do to alleviate this fear? Let’s say if you increase the price, you might end up losing that customer, that customer might end up talking over social media, that this particular business is charging more than it is bad. 

So how would you approach this? Why do you still increase the price, even if you are probably going to lose the customer? Just because you are going to come across as unfair?

Andrew Deutsch 9:06  

Well, I want to deal with that by unpacking it a little bit. Because Yeah, people say, Oh, I’m afraid that if I raise the price, that could happen. My question is, why aren’t you afraid that you’re leaving money on the table, and people are looking at your business transactionally as opposed to the value that you provide? 

And I’ll give you an example in the steel drum industry, which I did quite a bit of work in a while back. I worked for a company that did not have the lowest prices on their drums in the market, nor did they ever intend to because the real cost in that industry is what happens when the supplier can’t bring them to me on a timely basis. What if a company could guarantee delivery and that personal touch to deal with runs in your production?

Andrew Deutsch 9:53  

What would happen if I wasn’t able to fulfill that and your factory had to shut down because you had no packaging to put your products in. So if you look at it, as I’m selling you a commodity, you need a drum, I got a drum, then pricing strategies becomes a very important factor of it because you’re basically out there fighting in that red ocean of blood for the best price. 

If I can provide a level of service that changes the way that you do business, pricing is not as important as the fact that you’re never going to have to shut down production because you’re doing business with me. An example would be an industrial supplier I worked with. They are never the lowest price guy in the market that I’m aware of, especially in the industrial space yet, but if you talk to buyers, there’s a mantra among buyers about doing business with 3M. They’ll tell you, well, I know you’ve got an alternative to what they have, and your pricing is a little bit better.

Andrew Deutsch 10:44  

But you know what, no buyer ever lost his job for buying from 3M. In other words, no buyer loses their job by taking the safe route. Because we know with 3M we’re getting what we get, the quality is going to be perfect. You’re not going to shut down my plant. It’s going to be here on all of those things, and I hope that it’s as good. 

So as soon as you can get folks out of the mindset, what you make is a commodity, the way you do business is commoditized. And it’s just a transaction. As soon as you can get past that into that true value sell, the pricing isn’t as important. Now on the other side of it, if doing business with, say example, for example, 3M product from 3M costs you $100. And there’s an alternative solution that costs five. All of a sudden, that huge difference in price makes that value prop a lot harder to prove.

Sam Gupta 11:37  

So in your experience, let’s say obviously, if you have some sort of bundle around your product, then it’s going to be easier to prove the price. And I am actually going to tell you a story from yesterday about the pricing. So vendors have to differentiate themselves and improve the price. And in this aftermarket and this could be very applicable to the manufacturing product as well. So in the software market, you have a sort of fear of being invisible because it’s very hard to prove the value prop. 

So even if your product is going to be superior, sometimes it just harder to communicate. And I like the, let’s say, the consultant or the technical expert, or people to let someone know that one product is probably superior to the other. But let’s say if you are looking at a person who has never bought the software, the value is going to be much harder to prove. The same goes for your hardware or manufactured products, right?

How to justify the price for complex products?

Sam Gupta 12:36  

So in the case of manufactured product, let’s say you’re buying a machine, and if the machine is very complex, now, if a buyer who is not as sophisticated in buying that machine, for them, it’s machine one versus machine two, it’s going to be just your CNC machine. 

So how do you still prove the value and justify your price? In my experience, that’s extremely hard. So do you have any stories where you were able to, let’s say, prove the value of the product and convinced that the price should be, let’s say, one point, point two, five, or 1.5x, of what the competitor would charge?

Andrew Deutsch 13:11  

Sure, there are sort of two different examples. Let’s talk first about the software space. Yeah. And then, I’ll give you an example in the industrial space. So when really high-quality marketing people are involved in that software as a service or other software sales, they have to have histories of accomplishment. 

So, for example, in your space where I know, you’ve got more expertise than most people that I know, which is the ERP space, what would happen if I was the salesman and I was able to share data, showing that our implementations happen in half the time as my competitor, or I have evidence that productivity changed in my clients by this much data-driven accomplishments to show the value if one was an investment is a $500,000, to get the ERP up and running. And the other is a $750,000 cost.

Andrew Deutsch 14:04  

So there’s a difference there. But the 750,000 can prove that they’ve done 20 applications where they brought it in before the time. And these were the financial accomplishments of those companies. Whereas the company that’s 500,000 takes twice as long to implement. And they don’t have a list of people that can share the data of the effectiveness of that implementation. It would be a much more powerful sell because, yes, it’s more. 

But we’re going to get you in and half the time, and you’re going to be gaining and benefiting from it at a much faster case. That’s where the quality part of your accomplishments in the past and how you speak of your company, the brand of your company, the efficiency of your company make up the pricing not as important. 

So that’s kind of one example the other I’m going to take you back to when I was first involved. I was living in Brazil, and the US company that manufactured plastic strapping guy in touch with me and asked me if I could help them break the tobacco industry in Brazil.

Andrew Deutsch 15:05  

So when tobacco gets shipped, not cigarettes, but the actual process tobacco, it’s packed into these 150-kilo pallets that have multiple straps on the pallet that are held together with a plastic polyester. It’s a very high-strength strap that replaced steel in that market years ago. 

And they were buying a product locally in the market. That was about 35% less expensive than this American-made plastic strapping. So the thought was, how could we possibly break that market? Well, we did the research. And we discovered that the domestic made plastic strapping was having a failure rate of almost 6% and the equipment. 

So every time the strap wouldn’t automatically go around the box and seal, it would shut down production for a period of time. We were able to quantify what that cost is for everyone in the plant to wait for them to reload that machine to make that happen and quantified what that cost was.

Andrew Deutsch 15:59  

So it was determined that the difference in price for our strapping, which was a what was it 20 to 30% higher, actually would bring them half the cost that they currently have in packaging, and what it would save in the failure rate because our strap had a point 0001 failure rate in a day, they might have one failure, it was usually operator error, not the strap. 

So when we were able to show them, we could have your crew process more material every day. As a benefit of this much money, it was almost free to buy our strap at the pricing that we were selling it at. So again, when you take it off of the transactional mindset and bring it into the value mindset, the sensitivity of pricing sort of becomes the third tier of importance. 

Sam Gupta 16:44  

Yeah, so that’s a very interesting point. And I’m actually gonna touch your first story a bit deeper level, right? So let’s say, reducing the implementation time in case of manufacturing that could be reusing the installation time or reducing the total setup time when you move from one operation to the next. 

The problem as in the sales and marketing world, there is a lot of noise. Now, if you look at the software space, everybody’s claiming that they can implement the ERP in three weeks. We both know and view that the ERP can never be implemented in three weeks. There is no way anybody can pull that off.

Andrew Deutsch 17:18  

Okay, well, very rare. The difference between making a claim and demonstrating proof of what you’re claiming are two different things. Yeah, I mean, it’s kind of like, you’re gonna hire a guy to paint your house. Yeah, he says, I can get it done in a day. You have a mansion. 

And you go, dude, I appreciate the offer, but now I don’t believe you. So the fact that people make claims that happens every day, yeah, it’s the ability through proper marketing, and references and all of the things that are involved in building that marketing campaign. 

Don’t say it if you can’t prove it. And buyers are so much savvier, to get when someone is full of you know what to call you on your own nonsense. So you know that if you’re going to create a campaign to say we can implement it faster, you better be prepared to prove it, right.

Sam Gupta 18:09  

But these things are easier said than done. Right now, if you look at the market, everybody’s trying to blame, as I mentioned, right? And everybody’s claiming that it’s almost like a rat race at this point in time. If you ask any concept, then nobody would agree that any ERP can be done in three weeks. 

And a person who has implemented the ERP would never believe that it can be done. Because ERP implementation is more than a tool, you have to go through your change. You have to go through your change management. And then you can implement Yeah. The same goes for a complex machine as well. 

And because you’ll have to look at your process, you have to look at your specifications, the way the machine is actually going to change your production process. You have to make sure people are comfortable with you have to make sure people are trained with it. 

Andrew Deutsch 18:58  

What if you go back in your history, and I know you’re one of the kings in the ERP world? What’s the least expensive ERP implementation you’ve ever done? 

Sam Gupta 19:09  

Well, it depends upon how we are talking about because ERP implementation is different, right?

Andrew Deutsch 19:15  

So if I said to you, what would be the minimum dollar before you that someone would have to invest before they would talk to you? If I came to you and said I got a guy with a $10,000 budget, you probably wouldn’t even hold the meeting because that’s exactly is where is the bottom? That’s what I’m asking you.

Sam Gupta 19:31  

I would say roughly $100,000. 

Andrew Deutsch 19:35  

Okay, who is going to spend $100,000 responsible and accountable to their company, their board of directors, their stockholders, whatever that is? Without first going, I’m going to verify every single claim that these guys make. 

It’s part of the due diligence of a company, and quite honestly, if someone is silly enough to spend 100,000 plus on an ERP implementation and not do the due diligence to make sure that all of those claims are provable, shame on them. They’re exceptions there. There’s an exception to the rule.

How to differentiate when competitors overclaim their capabilities?

Sam Gupta 20:06  

But the problem in the market is, I mean, the whole market is doing the rat race, right? So I know that due diligence needs to be done. But at the same time, somehow, even the larger companies are actually getting into a rat race rather than educating the customers that it’s not real. They are not doing that. 

Nobody is doing that in the market. So sometimes that becomes a problem for a lot of, for example, manufacturers, I mean, I’m pretty sure it’s going to be the same in the manufacturing community as well, that everybody’s sort of getting into the rat race, and I can do it the faster end of the day, this is a manual effort, people are going to take what they are going to take.

Andrew Deutsch 20:43  

Yeah, it’s such a big-ticket item that properly marketed showing that value, unless the value that you’re showing isn’t something that your client actually values, in which case calling it a value is silly. But yeah, the price sensitivity when you have the ability to answer and solve their problem in a way that nobody else really can is when pricing is no longer the issue that it would have been if you were just comparing prices. 

And I’ve seen it when you have been through an ERP implementation. And many of the times, I can’t think of a single DRP implementation I was involved with where the final decision was, well, it’s going to be between these two, but once cheaper, so let’s go with it. It was always that the salespeople involved were able to show a value of what that could do the best and all the other ERP implementations that were in the market, and the choice was made. 

So I think that the price sensitivity thing, as I said from the beginning if you’re a salesperson who’s just taking orders and in transaction mode, pricing is everything, if you have the ability to truly show a value, whether it’s the product, whether it’s delivery of the product, whether it’s post service, whether all of those things to create where that value prop is, then pricing is not the final decision-making point it rarely is, in quality sales, people always beat the transactional guys, where there’s a true value that the customer can see.

Sam Gupta 22:08  

Yeah, so let’s talk about some of these highly engineered components. And in my experience, typically, the pricing bribes, the customer experience, if you price right, then your sales cycle could become shorter, you could have less friction, with your customer interactions, you could make the whole process very smooth and seamless. 

But especially when we look at the highly engineered components, and I’m sure you have disagreements as well, especially when you’re talking about, let’s say, highly engineered manufactured components or some sort of construction machinery, right. 

So in their particular case, the majority of the time, how these companies are going to operate is let’s say if they have the court process, in case of court process, they are going to get a design from the customer, they are going to let’s say find the code based on the material based on the labor, then they are going to send to the customer, it’s going to take a very long time before a code can be approved, finalized. 

Obviously, for customers, it’s very painful because they have to go through these interactions all the time. They have to look at everything. So tell us some of these strategies that you have seen in reducing the friction in designing the pricing model in a way that actually improves the customer experience. This expedites the sales cycle,

Andrew Deutsch 23:36  

okay, well, like for example, if you’re selling into the automotive space, you’re selling into the high tech, imagine you’re selling an adhesive that’s used for manufacturing iPhones some sort of a date that holds there’s a lot of different things that you take into account. 

So when you can get to where your product is, there are a few that can meet all of the specification criteria. For example, in the adhesive tape industry, for things that were going to the landing gear of airplanes, the silicone adhesive that you’re using has to perform at 30 below zero, and it has to perform y at 130 degrees Fahrenheit, and all of these different things that come into it, the more unique or closest to being unique that your product is to be able to solve the challenge in that highly specified area. 

Again, less pricing is important. I was involved in a project years ago in Brazil, where they were selling traffic signaling equipment, the lenses that flash on the highway.

Andrew Deutsch 24:38  

And the goal of all of those companies was to get the highway regulators to create a specification to eliminate all the competitors. So if you needed to provide X number of lumens per millimeter squared at a distance of whatever, if you were able to meet that spec and nobody else could, all of a sudden, pricing didn’t even matter because they had to buy the equipment.

And If you’re the only one who can make it, it’s your business. Now, if you created a pricing structure that was so ridiculously expensive, they couldn’t afford it, they would have to go back and say, What do we really need the spec. So there are all sorts of odd strategies and things that are done when you’re at that highly specified engineered product, part of the market to where, where you want to design in a way, and it’s one of the reasons people seek patent protections on certain technology. 

If you’re the only one who can make it, and people have to have it, that’s a very different pricing model than I’ve got to compete against 100 people who can meet the spec.

Andrew Deutsch 25:32  

But now I have to figure out a value to be able to get the pricing that I want, where they can’t deliver it or perform or service it in a way that I can all of those things factor. There’s no cookie-cutter answer to that question. Each strategy is unique to that specific market, the players, the needs, desires. And that’s why as a company, we take all of our customers back to understanding their core strategy before we look at how we build pricing models and all the other tactical tools to go forward.

Pricing strategies with potential channel conflict

Sam Gupta 26:02  

Okay, so let’s talk about the customer groups. So obviously, the majority of the organizations are going to have some sort of customer groups, let’s say, if there are going to be some loyal customers, then you are going to be slightly friendlier with them in terms of pricing, let’s say if your employees are buying the goods from you as well, then you are probably going to be slightly friendlier, just because you want to encourage them to buy the products from you. 

And then let’s say if you have the distributors involved, then your pricing model is going to be fairly different. And let’s say if you have the mix of channel plus direct, then you are going to have channel conflict issues. So tell us some of the strategies around how to identify these customers groups. What are some of the pricing strategies that you might be able to use? And if you have any stories around these customers groups, how you have done it, what kind of challenges you have faced in designing the pricing model?

Andrew Deutsch 26:51  

The question is kind of doesn’t have a cookie-cutter answer. But let’s start with employees. If you have employees, who are also consumers, or potential consumers of what it is that you make, yeah, you absolutely want to entice them to with pricing or strategy even rewards to be advocates for your brain because everyone in the building should become a voracious advocate for what you do. 

So they can get everybody they need to be that way. So that’s why for example, if you’re a boy, you have, say, Honda motors, you can get a great discount when somebody shows up at the plant and drives through the parking lot. And they see Honda cars everywhere they go. Wow, these people really love what they make if the employees want, there’s some real marketing benefit there.

Andrew Deutsch 27:31  

But the employee, part of it is the least important in terms of pricing, when you start to look at, if I’ve got a product line that I sell at retail, through and the retail is Director retail, I’ve got distributors who sell them to the small mom and pop shops, I’ve got manufacturers reps who are out there who can sell directly to end-users, you have to balance all of that.

So that you don’t have those channel conflicts, no direct retailer who’s buying directly from you should be able to buy from when you go to distributors for a better price, and they buy from you directly. 

And this is where that the finance people have to be directly involved in the actual implementation of that strategy to make sure that as you build that model, Now certainly quantity discounts. And volume should have a play in most consumable products that are out there. If you’re going back to the tape industry, you’ve got to target the guy who is buying a roll of tape. And you’ve got to target a guy who’s buying cases and a guy who’s buying truckloads.

Andrew Deutsch 28:26  

All of those pieces have to fit together to make sense. So there’s no cookie-cutter answer to that, except that it has to be well thought through. Totally. Before you start taking action. It’s much easier in today’s world to lower prices than it is to increase. 

At the same time, you have to build your strategy also around where pricing might go because raw materials change. I know right now if you’re in the industry that uses steel to make your products, you’re going absolutely nuts. Because there’s a shortage of steel, there’s a crazy increase in prices. 

If you look at the data, if you sold items three months ago that you’re not going to be delivering until the end of the year, you might be making those products at a loss because the index has changed so much. And you’re when you calculate your cost. Your raw material cost is very different than what the end-user is going to be.

Andrew Deutsch 29:14  

These are all things that are outside of the realm of the marketing decision. But why do marketing and operations and purchasing always have to be in alignment? If you’re using volatile cost raw materials, the pricing strategies have to be on a different basis. You have to warn your customers in advance. I know in the drum industry, we typically would alter our pricing quarterly based on certain indexes and a calculation that all of our customers understood because you couldn’t guarantee pricing for a year. 

And of course, the manufacturers who were buying the drums wanting to use them would want you to know annual pricing strategies, and it could. It just couldn’t happen because steel’s as crazy as a teenager in high school. You never know what they’re going to do next. So, I’d love to give you. Hey, this is what you do. And what you do is you have to be alert, aware, and understand the volatility of your specific market to then build your pricing strategies around? What are the channels to market that you have and the volatility of those prices?

Sam Gupta 30:06  

So do you have any stories or examples about how you would balance this?

Andrew Deutsch 30:11  

Sure, I’m gonna go back to the tapes industry we had as a manufacturer. We, for the most part, made what were considered master rolls of material. So that huge jumbo of an adhesive tape product would go out to what was called a converter. Yeah, and converters have customers who will say I want that product to die cut into pieces like this. 

I want that product slid into rolls one inch wide with 100 meters on it. They all have these different ways that they do it. Now, if we had an end-user who required truckloads of a finished product, we also could sell them directly. The trick to doing that is making sure that when you do it, you’re not making the distributor feel like, Oh, so you get the big fish, and I get all the scraps.

Andrew Deutsch 30:54  

So you would have to competitively price even the end-users in a way that wouldn’t inhibit your distributors from being able to pick up some of that business also, and it became quite a balancing act for the product managers to create pricing strategies so that we weren’t giving ourselves an unfair advantage over distributors and giving them the opportunity to do work. 

Then we started to get into some of the retail space with some specialty items that we came with, which then required a different set of pricing because it involved labor and packaging and other things that weren’t part. So to be successful, you’ve really got to understand the needs of each of the ways that your product goes to market.

The need for systems and architecture to achieve centralized pricing strategies

Sam Gupta 31:33  

Okay, so since you mentioned retail, right, so we are going to be talking about, let’s say if you have the pricing scheme that you are promoting to your different systems, because let’s say if you have a retail outlet, that’s probably going to use some sort of POS system, right. 

And then you might have the e-outlet that is going to use some sort of e-commerce system. And then your customers might be calling you and your customer service reps, maybe fulfilling your orders, let’s say from the ERP system, or maybe the customer service system.

Sam Gupta 32:01  

So sometimes this could be challenging to number one, make the pricing consistent in all of these systems. In our case, I mean, we have seen with our customers that there are scenarios of, let’s say, double-dipping, especially when you talk about these promos or coupons because the customers have figured out that your systems are not really synced. 

And they might be, let’s say, going to first the ecommerce outlet to get the discount, and then they might go to your POS system, then they might go to your customer service reps, right? So companies might lose a lot of money because of that. So have you seen similar issues in your space? Do you have any stories where there were issues with respect to pricing, and there were real pricing loopholes that customers could utilize and have something to prevent them?

Andrew Deutsch 32:48  

Well, I can give you an example of one that’s really blatant in the market. So if you if you’re a hobbyist woodworker, and you go to one of the great retailers out there like Rockler, or Woodcraft, or otherwise, that sell hardware, even Home Depot, and you buy European hinges for making cabinets, for example, and you look at the pricing there, and then you go to a wholesaler who sells to actual cabinet manufacturing companies. 

The retail price of a hinge at a retail store might be $3 a pair, and it at the wholesaler, they’re a buck. Yeah, and if you’re an experienced woodworker who makes a cabinet every once in a while, you’re going to go to pay the $3 a hinge because of the convenience and the simplicity.

Andrew Deutsch 33:32  

And the big wholesalers aren’t going to just sell you what they’re interested in. You know they’re not set up in a way to make it convenient for you to purchase, and if you buy from Woodcraft, or otherwise, with a bunch of other things that you’re buying, the freight is covered because they have a minimum whereas, with a cabinet, they’ve created a way of doing that so that cabinet makers can get wholesale pricing and be able to manufacture cabinets that they can resell and make a profit where the hobbyist doesn’t really have access to that market. 

And there’s a lot of products that are that way. In the strapping industry, the packaging industry, most manufacturers have truckload pricing to huge consumers of their product. They also sell through distributors. So imagine if I’m a card, a corrugated box manufacturing plant, I’m going to get a truckload of strapping to strap all the bales and strap the pallets.

Andrew Deutsch 34:21  

Maybe once or twice a month, I’ll get a truckload. If I’m a guy who needs a roll of strap, I don’t have access to that from the manufacturer, you can call it, and they’re not going to sell it to you. They’re immediately going to refer you to a distributor. 

And that was what we had set up when I was in that industry. So if I was looking to buy a pallet of product or a couple of pallets, I was only able to get pricing and purchase directly from a distributor because that’s how distributors make money as they buy large quantities of things, break it up and sell it in that form, also from a service component. 

If you were buying truckloads of material, you’re not going to get the same level of service if you have a challenge with that strategy. When you’re dealing with a distributor who’s selling you that strap, they’re selling you tape. They’re probably selling you staplers, everything else that you need.

Andrew Deutsch 35:07  

They have that customer service edge that you’re paying for when you’re buying from them. That gives you an advantage as a company. You know who to go to when you have a problem. The big manufacturers typically don’t have that level of service because their assumption is if you’re buying that volume, you know what the heck you’re doing with it.

Sam Gupta 35:23  

Yeah, so let’s talk about this problem from the marketing versus finance perspective, right. So let’s say if we look at some of the promos, or coupons, or loyalty, from the marketing perspective, these two or three things would be different because typically, these are driven by how consumers are going to perceive these offers or promos. 

So, for example, buy one get one could have a very different perception, then throwing a product as part of a bundle of three because you are trying to promote that specific product. Right. So now, let’s look at it from the finance perspective. 

So typically, if you look at the majority of the AP systems, or accounting systems, they don’t want to overcomplicate this process. And they typically don’t recognize, let’s say, the promo or loyalty. For the most part, they are probably going to have just the pricing and discount. 

So in your experience, if you were to recommend somebody, let’s say if you have a retailer or the manufacturer, and they are trying to design their promo or coupons, what will be some of these strategies to simplify the promo so that number one, they work, but they are not over complicated? At the same time, so that it could be confusing.

Andrew Deutsch 36:29  

Yeah, I had this conversation many times about companies that have coupons themselves to death. Yeah, I’ll give you an example of Bed Bath and Beyond, who’s really in financial trouble. Now, there was a time where you would get in line there, and the person in front of you had a stack of 100.

Yep, 20% off coupons. And if you went into a Bed Bath and Beyond because of the history of couponing there, and you went in and said, You know what, I just want to buy, I don’t know, hangers for $2. And you get to the counter, and you don’t have that coupon. You leave the store feeling like you got ripped off. 

Yeah, and you know what’s funny? You’re feeling ripped off because you didn’t save the 25 or 30 cents that you would have gotten if you had a coupon. Yeah, it’s the same back in the day, when fast food even back in the 70s and 80s, when 1970s and 80s, when fast food was really growing, there were certain chains like Kentucky Fried Chicken, and which is now KFC, that if you went in there and you didn’t have the coupon, you felt like you’re getting ripped off.

Andrew Deutsch 37:24  

Yeah, so that’s one end of it. Now, a lot of times, there are certain times of the year where the coupon might make sense. For example, if you’re a retailer, and you’ve got inventory that is seasonal, and you want to create a promotion to get rid of it after the season’s over, you don’t have to store it until the next year. 

That makes sense. If there’s a competitive advantage or a product line that you want to finalize and get out to move on to the next thing, the end of model your clearance, those kinds of things, it makes sense. 

But when your company has a history of constantly having those promotions, it can kill you. We in my we have a side project called the virtual presenter course, which is a training website. And most of the people who go on there get to buy through one of our affiliates.

Andrew Deutsch 38:06  

And if you go on the website with an affiliate link, it gives you a discount in the cart, which is basically the true street price, is the discounted price. That’s what we charge. We never discount below that now we don’t have a place on the website for someone to put in a coupon code. And we did that on purpose because like you’ll listen to the radio and they’ll say, hey, if you go to my place, and as a radio hostname is a john. 

So when you go to the website to buy this product, put my name, John, and it’ll get you a discount. Yeah, well, we discovered there’s a lot of data out there to prove it. If you go on an e-commerce website, and there’s a space to put in a discount code, and you don’t have one, people will stop the transaction. They won’t close the cart. They’ll go online and spend time searching Yeah, or that discount code and may never come back to the cart and make the purchase.

Andrew Deutsch 38:53  

So what we decided was to experiment with a link only if you go on our website. You don’t see a coupon space because we don’t want people to go out searching for it. We want them to complete the cart. Yeah. And it helps easily streamline how we do business. 

I don’t think that in the last two months that we’ve had a single transaction that wasn’t with the affiliate discount, we haven’t had anyone organically go to the website and pay full price, which is really not really the full price to see it’s the elevated price of that person get a discount. 

But the couponing idea has really changed, and sort of cheap, and you know it’s interesting during COVID there’s Costco. Costco sends out a coupon book now so that you know where the discounts are yet because you’re a Costco member, those coupon codes are already in the system, you’re going to get the discount whether you remember to clip them or not. 

So it’s basically these things are on sale this month, and you should go buy them VJs on the other hand, now if you want to use the virtual coupons, you actually have to go on your phone or on your computer and go item by item by item electronically clipping each of those coupons before you go to the store or you don’t get the discount.

Andrew Deutsch 39:57  

So what they basically did was they forced them to spend 20 minutes to 30 minutes going through their app, clicking on the things that they wanted. So what happens now and the behavior that I’ve heard from some folks involved in that organization is the average consumer who wants to discount hands the phone to their kid and says, hey, let’s play a game, Jimmy, go through and click every free one of these little coupons for me. 

And when you get done, I’ll give you some candy. So it’s completely turned it upside down. So people don’t even know whether they did or didn’t clip. They’ve looked through the book, and they know what they want. But what they’ve done is they’ve created a job for the consumer that I think is totally counterproductive to people understanding the brand of VJs and the convenience and the discounts that you get by shopping there.

Sam Gupta 40:37  

So, Andrew, that’s it for today. Do you have any last-minute closing thoughts, by any chance?

Andrew Deutsch 40:42  

I didn’t have any opening thoughts. So, no, I don’t have closing thoughts. 

Sam Gupta 40:48  

Always trying to make up for that. I did not give you a chance to do the opening thoughts, and all you can do is the closing thoughts.

Andrew Deutsch 40:55  

So shame on you for my friend.

Sam Gupta 40:57  

Shame on me.

Andrew Deutsch 41:00  

That’s it interview is over. No, I really had a great time. It’s always fun to kind of get off and discuss the topics that I usually don’t get asked about. Yeah, so I appreciate the exercise and the kindness of bringing me on the show to talk a little bit about pricing. This was a great experience. I really appreciate it.

Sam Gupta 41:16  

Okay, thank you so much for your time. This has been a fun conversation and very insightful, and thank you. I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today. If you want to learn more about Andrew, head over to fangledtech.com. Links and more information will also be available in the show notes. 

If anything in this podcast resonated with you and your business, you might want to check other related episodes, including the interview with Kirk Thompson from Chief Outsiders, who discusses how team alignment may be necessary to align with your customer experience strategy. Also, the interview with Mark Jaffe from Strategic Growth Consulting who discusses how macroeconomic trends impact consumer behaviors. 

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I hope to get you on the next episode of the WBS podcast.

Outro 42:19  

Thank you for listening to another episode of The WBS podcast. Be sure to subscribe on your favorite podcasting platform so you never miss an episode. For more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guest Brian Sommer, who discusses why legacy ERP systems and artificial accounting practices need to change with time. He also shares several ERP Expert Witness and litigation stories in antitrust cases. Finally, he shares several nuances and stories of how businesses must be approaching an ERP or digital transformation initiative and why it is crucial to understand contractual obligations.

Chapter Markers

• [0:19] Intro
• [3:19] Personal journey and current focus
• [4:07] Perspective on growth
• [5:47] Brian’s Diginomnica journey
• [9:23] The ERP expert witness cases and ERP litigation
• [14:36] The nuances of ERP contracts
• [18:36] The evolution of accounting periods and the idea of continuous close
• [24:19] The implications of inaccurate product costing
• [28:58] The underestimation of efforts with ERP implementation
• [30:58] Closing thoughts
• [33:38] Outro

Key Takeaways

• A lot of clients spend an incredible amount of time and energy doing those software selections, yet, then they go tell somebody in their in-house counsel group, okay, we’ve picked the package now go deal with the contract. And actually, that’s a mistake. They should have been doing the two things together. And they never should announce who’s going to get the business, because there’s a lot of stuff you got to watch out for in contracts.
• You might think that you’re buying a subscription, and you are, but in addition to that, they’re also going to charge you extra money for every scanned document that comes into the system. They want to charge you extra for every connection you have to a CRM system that isn’t part of that vendor’s package. And so on.
• Most clients are stunned to realize that a software contract even though it’s priced. This is as a subscription. It generally goes one way up. It never goes down in price unless you really beat up the vendor pretty good to get the right kind of mechanism in there.
• Don’t throw out your old software until you absolutely know the new software is working well. You need to have a plan B, just in case the new technology isn’t going to cut it.

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About Brian

Enterprise software industry analyst Brian Sommer covers the ERP, finance, and HR sectors for Diginomica and other publications. Brian began his career running Accenture’s Global Software Intelligence organization where he advised hundreds of clients on software selection and shared services initiatives. He continued to lead digital transformation and ERP software selection/negotiation projects and is sought out as an expert witness or consultant in major ERP and antitrust cases.

And he has won Software Advice’s Authority Award – ERP Expert and numerous ERP Writers’ Awards. He was recently named a 2019 & 2020 Top 100 HR Tech Influencer by Human Resource Executive magazine. Brian has also published books on digital transformation, software selections and technology negotiations.

Resources

• Connect with Brian
  • LinkedIn
• Connect with TechVentive
  • Website

Full Transcript

Brian Sommer 0:00  

These toll charges can get quite significant. And one deal I was reviewing the other day, the subscription was going to be because they were buying everything this vendor had was going to be about $100,000 a year, but the toll charges were going to be around $800,000.

Intro 0:19  

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:55  

Here everyone, welcome back to another episode of the WBS podcast. I’m Sam Gupta, your host, and principal consultant at digital transformation consulting firm ElevatIQ.

ERP contracts are inherently crafty. If you don’t have experience buying an ERP, you might want to get your contracts reviewed with a consultant who has several years of experience reviewing ERP contracts. You might think of purchasing an ERP as a subscription package. But any ERP system implementation has more nuances in the form of data ownership, ongoing support, and bandwidth usage. So you might want to understand these critical details before you are locked in a contract and might end up paying eight times what you had forecasted. 

In today’s episode, we have our guest Brian Sommer, who discusses why legacy ERP systems and artificial accounting practices need to change with time. He also shares several litigation stories related to his experience being an expert witness. Finally, he shares several nuances and stories of how businesses must be approaching an ERP or digital transformation initiative and why it is crucial to understand contractual obligations. Let me introduce Brian to you.

Sam Gupta 2:11  

Enterprise software industry analyst Brian Sommer covers the ERP finance and HR sectors for Diginomica and other publications. Brian began his career running Accenture’s global software intelligence organization, where he advised hundreds of software selection and shared services initiatives. 

He continued to lead digital transformation and ERP software selection or negotiation projects and is sought out as an expert witness or consultant in major ERP and antitrust cases. Brian has won the software advises authority award ERP expert and numerous ERP writers award. He has recently been named a 2019 and 2020 Top 100 HR Tech influencer by the human resources executive magazine. Brian has also published books on digital transformation, software selections, and technology negotiations. 

With that, let’s get to the conversation. 

Hey, welcome to the show, Brian.

Brian Sommer 3:15  

Well, good to be here. Or, as I’m more apt to say Howdy. 

Sam Gupta 3:19  

Howdy Brian, you spent a lot of time in Texas, and I’m fairly used to that. So thank you so much once again for your time. Do you want to start with your personal story and current focus, Brian?

Brian Sommer 3:29  

I’m just one of these simple country boys who ended up covering the Big Bad world of ERP technology for a long time. And before that, I was a consulting person. I did 18 years with the firm Accenture. And I even ran their global software intelligence function for a decade when I was there. 

So I had about 65 buy-side analysts, and we advised people what to buy and what to run away from when it came to big-ticket software. It’s how I ended up traveling all over the world, to put it, to put it mildly. Anyway, it’s been a great ride so far. 

Sam Gupta 4:07  

And the software selection stories are always fun to discuss because there’s a lot of drama associated with them. I’m super excited to discuss those. But before we do that, we have one of the central questions that we ask all of our guests, and that is going to be your perspective on business growth. Brian, what does growth mean to you?

Brian Sommer 4:25  

I think growth means getting uncomfortable and that things keep changing, and people hate change. And I learned something years ago when my kids were newborns. I was reading a child book, and it said something that I’ve never forgotten. 

It said that if you’re the parent that always takes your child to like Saturday morning soccer games, and you switch off with your partner that upsets children, they crave consistency. They like a routine and what I’ve learned with clients and with company employees. He says that they’re nothing more than older children. They hate change too. 

And that’s one thing about the ERP projects when you’re trying to drive that kind of change in there, it can be very uncomfortable, and growth will trigger change, it has too many of your listeners have probably been if they’ve been at a company for any period of time, they’ve probably realized their firm has outgrown, maybe their starter systems or their older systems have gotten a little long in the tooth and are no longer technically relevant. 

And in this pandemic, they can’t grow and scale their firm if they have solutions that are still tethered to an on-premise server or computer center. So growth is something I actually enjoy. I love to see and learn new and different things. But I realize not everybody’s that way.

Sam Gupta 5:47  

Okay, amazing. And I want to take a little bit deeper into your background. So obviously running this division at Accenture to then writing for Diginomica. And obviously, Diginomica is a very trusted brand. I like your insight a lot. You guys keep it super real. So how did you start on the journey of Diginomica? What is your involvement there recently? A Guest writer or contributor or a partner there? Can you tell us a little bit about that?

Brian Sommer 6:15  

So Diginomica was actually founded by three or four folks that I know well, and I’m probably gonna miss one. So guys, just don’t shoot me for this. But Jon Reed, Dennis Khaled, Phil Wainwright. And I think Stuart might be the fourth one right there that was one of the original founders. 

I knew Dennis all the way back to about the mid-90s when he was writing for a company called Computers and Finance. I don’t have any ownership interest in that in diginomica. But I’ve been one of their longer-form writers, and I specialize in what’s called long-form pieces I write for CXO. That’s who my kind of target reader generally is, like a CEO or CFO. 

And my stuff is basically built around what I learned in running client projects. And what you may not know is, every year, I’m involved in big software selections, software negotiations. I even get pulled in occasionally for some very notable pieces of litigation that take place in the ERP space. 

So it’s that background and dealing with clients in the real world. That’s what shapes and forms my content on what I put out a Diginomica also do two pieces for other publications as well. But to me, the writing is a rounding error in my financial statement or books every year with the company. I mostly do it because it’s a cool thing to do. And it’s one way to kind of give back to the community in whether you agree with me or not, at least, hopefully, you get a little entertainment value and some education out of what I put together.

Sam Gupta 7:56  

Okay, so tell me a little bit more about your writing interest. You started this because you wanted to build your thought leadership in the market? Or was it more from the subject matter expertise of the consulting firm that you were building? What was the primary motivation for writing this content, and what do you aim to get out of it?

Brian Sommer 8:14  

So I always believed that everyone has a kind of responsibility to themselves to create their own brand. And before Tom Peters, the management guru had written an article for Fast Company in the 90s. It was called the brand called you. 

Yeah, before he pinned that, I was pushing my own people to basically make names for themselves to become, if you will, a noted subject matter expert or star, if you will, in a given area, take it to find it, own it. And yeah, I think it’s important for people to build and create their own brand because you never know what’s going to happen with your employer.

They could get acquired one day. Your job could be made redundant. Any want to be able to pick up your career somewhere else, just like that, you know, the snap of a finger, you want to be able to have the most portable and powerful career you possibly can. And one way to do that is to create a brand around yourself through writing, public speaking, what have you, you need to do those kinds of things. So people recognize you for the expertise that you possess. And that’s what it’s all about

Sam Gupta 9:23  

So let’s go back to your litigation. And I think you know. You are going to have tons and tons of stories there. So how did you get involved with some of these litigation stories? And this is something that nobody wants to see in the ERP journey. 

But this happens more often than we want to see it. So how did you start your litigation journey? What is your involvement there? How often do you get involved? And what is the scope of work that you typically put into these projects?

Brian Sommer 9:52  

Well, I’m under several protection orders on some prior litigation deals, and I can’t talk about them, but I will just generally tell you the following. This just sounds odd to say this, but I got my first subpoena that went out was back in 1992. It was based on the fact that I published a massive guide to the sort of like everything everyone to know about human resources software. 

One to three tech firms were suing each other over theft to trade secrets and those kinds of issues. And one of them decided that I’d be the perfect person to basically point out that they didn’t steal anything. It was just the way all these products work. Yeah, I have that framed in my office, believe it or not, that subpoena lawyers generally come and find me.

Brian Sommer 10:40  

And they find me because they read stuff about what I’ve written. And they think, well, this guy might know what’s going on. I’ve also sometimes some lawyers have, some lawyers will look through the case files of other similar cases and decide, I gotta, you know, we at least need to call this guy, if anything, just to be a consultant on our case, I’ve been pulled into any trust matters, there’s, and then I get the calls, the more frequent thing around is. 

Believe it or not, an ERP implementation has gone off the rails, and somebody is upset the customers upset because either they didn’t get the benefits they hoped for, or they’re in dispute with the vendor. And it’s gotten all tied up in knots, and it’s in a courtroom. And then once somebody come and review it,

Sam Gupta 11:31  

okay, so let’s talk about some of the stories that were sort of shocking for you in terms of the discovery that you made as part of these engagements from the litigation perspective, right? So do you have any stories where you didn’t expect, and you found something that was eye-opening for you?

Brian Sommer 11:46  

Well, okay, number one would be because of a litigation case. I’ve probably read over 10,000 software contracts. And my eyes are, it’s made me have to wear glasses. Now, I think a lot of clients spend an incredible amount of time and energy doing those software selections, yet, then they go tell somebody in there in House Counsel group, okay, we’ve picked the package now go deal with the contract. 

And actually, that’s a mistake. They should have been doing the two things together. And they never should announce, you know, who’s going to get the business, because there’s a lot of stuff you got to watch out for in contracts, some of the biggest areas of concern right now are, and this is even down to products that are sold even to small and medium-sized businesses. Some of the contracts have these toll charges in them.

Brian Sommer 12:39  

So you think you’re buying a subscription, and you are, but in addition to that, they’re also going to charge you extra money for every scanned document that comes into the system. They want to charge you extra for every connection you have to a CRM system that isn’t part of that vendor’s package. 

And in fact, the CRM system may charge you for any information they send to your accounting system, for example. And these toll charges can get quite significant. In one deal I was reviewing the other day, the subscription was going to be because they were buying everything this vendor and was going to be about $100,000 a year.

Brian Sommer 13:20  

But the toll charges were going to be around $800,000 a year. And the client didn’t realize that until or the company didn’t realize they weren’t a client of mine yet until they’d already decided we were going to buy that particular piece of software. 

So that’s one of the big aha is the big surprises that are out there. Another one is most clients are stunned to realize that a software contract even though it’s priced. This is as a subscription. It generally goes one way up. It never goes down in price unless you really beat up the vendor pretty good to get the right kind of mechanism in there. 

And where they really came to be important is last spring, when the pandemic hit, these companies were closing and laying off workers. They were stunned to find vendors actually raising prices, not reducing prices. And if you don’t understand all the weird math in it, then go get some help. I’m not bashing right now. I’m not saying don’t call me, but somebody out there who is going to help you and be your zealous advocate.

Sam Gupta 14:36  

So here’s my problem with that approach, or maybe the gap in understanding I should call it as opposed to the problem. So let’s say if I’m the customer, Brian, and let’s see if I sign the contract. Obviously, these contracts would be extremely crafty, as you know, right? And they could be tricky to understand for a customer who has never bought, let’s say, an IT system or even the fast system or newer clothes. 

System for them, it is a subscription model, they are thinking that it’s just going to be buying like QuickBooks, and then I never have to pay extra, the only time I have to pay extra is when I’m going to increase the number of seats in my contract. 

So obviously, these things are very well listed in the contract. They are listed in a very crafty manner so that the people who are reading it for the first time, it’s sort of unethical. In my opinion, it’s not very ethical. But if you look at it purely from the legal perspective, I don’t know if anything can be challenged in court. 

So what are these customers trying to accomplish as part of these litigations? Do they get anything out of it? Because obviously, it’s part of the contract, you sort of knew what you were getting. So what do customers get out of these litigation projects? Or are they simply wasting their money?

Brian Sommer 15:46  

No, I’m not saying no. There have been some, some new ones, some nice settlements. But here’s the deal, you got to ask yourself, if you get all the way to the point where you’re going to sue a software company, you’re gonna ask what it is, you really want that some people what they really want is they wanted the software to be installed and to work as described. 

Some companies, on the other hand, want to get a big financial payout? Yeah. And you got to decide where am I really on this. And vendors might actually be a little bit more willing to work with you to help you get the thing actually installed and working correctly if that’s what you want.

Brian Sommer 16:32  

A lot of people, though, by the time they get to litigation, things have gotten so adversarial between the two organizations that the company doesn’t want to go there. And then there’s a third outcome, sometimes when a system fails so spectacularly that it almost brings down the company. 

And there have been cases where an ERP system failed during a critical phase of production, and it caused massive economic damage to the company. That’s going to be one that the lawyer is going to have a good time with. I was involved in one case, by the way, where the legal firm fees from both sides approached a total of about $300 million. 

So it can get pricey. Yeah, so you got to ask yourself, why am I doing this? The other thing I tell clients is you don’t throw out your old software until you absolutely know the new software is working well. You need to have a plan B, just in case the new technology isn’t going to cut it. 

And finally, there’s always this ambiguity in these cases, where is it the fault of the customer, the vendor, or a third party like an implementer, and everybody’s going to be pointing fingers at each other? Back, it’s really hard to figure out who’s screwed up,

Sam Gupta 17:47  

If everybody sort of knew in the beginning about where the problem is going to be, then probably we would not have a problem in there are a lot of gray areas, especially when it comes to software implementation. 

It’s hard, and the more clients embrace that, it is going to be a hard journey. I think that could ease the pain a bit. So okay, so now let’s go back to your article. And I found it super fascinating. Just because I have questioned this myself, all in terms of the accounting principles, the way, they are designed, if there is anything that we can do from the user experience perspective or from the company experience perspective. And then, as I grew in my career, over time, I sort of started embracing the standards that are there just because they provide the necessary control.

Sam Gupta 18:36  

But you raised one of the points which resonated with me a lot, and which is going to be this notion of the accounting period and the continuous close. 

So why do you believe that the continuous close is feasible in the real world? Obviously, accounting periods are there for a reason. If you start closing on a daily basis, obviously, there’s going to be a lot more churn than closing it on, let’s say, on a monthly basis. 

So why do you believe that this is practically feasible to be able to do continuous close?

Brian Sommer 19:02  

Well, believe it or not, banks, financial institutions have been closing their books every day for ages. They have to settle up and know exactly what’s the value of their investments and so forth so that they can make sure that they have the business continuity, the cash flow, and everything else they’re supposed to have. 

So in a way, it’s not daily clothes is not necessarily a new idea here. And I’m not advocating. I’m saying, Let’s start with what’s happened with technology, technology that existed in the 1950s-60s, all the way through, even though the early part of the 90s. 

And a little bit beyond that. It was expensive. It was constrained. And it was a little difficult to use, but what it was mostly focused on was automating a manual task. That’s the purpose of it. Most of the big software packages were to take something you did manually and now make it available in an automated fashion and store it on a computer.

Brian Sommer 20:09  

What people didn’t do is they didn’t change how their processes like we, you know, we’re doing payroll and a lot of companies every week or every two weeks or twice a month, something like that, that’s been going on for years. 

Same thing with, we close the books, either every once every calendar month or on a quarterly basis, or what have you. And that’s been going on and on. And the way people did allocations for cost accounting, it’s been the kind of the same way, what’s happened now those we have such improved communication speeds, we’ve reduced the cost of data storage tremendously and improved how much storage is available, computing costs have plummeted. I have more power. I’m a form factor with more power in my apple smartphone than I used to have. And many of the big mainframes I worked on in the 1980s for clients.

Brian Sommer 21:05  

So we’ve got all this new power, new places to put data and everything else, all new kinds of information are being generated through sensors and IoT devices and other things. 

And yet, no one’s thought about really, why are we doing some of these accounting activities? This the way we’ve always done them? Should we update those? And the answer is absolutely. And I’ll give me a great example. There’s a company that makes very heavy products they take to think of food product that comes in by the tons. 

Yeah. And when you make it, why are they only looking at their water, electric, natural gas, and other bills on a monthly basis? And then they allocate the cost of that, across all the different products and batches of product that they make? Will they do that because that’s the way they always did it years ago? 

And that was because they had no ability in their own systems to capture 1000s of finite bits and pieces of data they didn’t. Now you have low-cost sensors, readers, everything else. They can measure at the beginning and end of every step in the production process exactly how much electricity in raw material or whatever is used at every step along the way. 

So they know and can know what is their cost of producing a ton of product or a batch or what it costs to film a specific customer’s order. And where that matters.

Brian Sommer 22:34  

I wrote about this in this article he referenced is there are some industries, an old client of mine makes metal alloys, and they located one of their facilities near a hydroelectric dam. That’s because if they melt metal at night. They get the electricity from next to nothing. 

Those batches are extremely profitable for them to make at that location at that time, you know, in the middle of the night, because the incremental amount of labor costs are paying a nightshift premium is nothing compared to the 1000s of kilowatt-hours of electricity, they’re consuming melting metal and 20-ton batches. And they get those savings.

Brian Sommer 23:12  

And it’s important to know that instead of using some kind of average cost over the month, or standard cost, which blurs profitability and makes it hard to know, are making money on these orders or not. And that’s just the first part of it. Because if you now know what the actual costs are for every batch in order, and so forth, and you can add to that the revenue you’re bringing in infinite levels. 

Now you can get true margin or profitability by customer or by order. And you can finally figure out, are we making money at this plant or another plant? Should we tell some customers we need to renegotiate the contracts because we’re not making money on their orders? Or do we readjust where we make products for specific customers to move it to plants, where we can make it and ship it to the customer for a lot less cost? 

Now that we have this precision in our data, what we have now is the opportunity to use more precise data to better determine the future of our company and our profitability for shareholders.

Sam Gupta 24:19  

Okay, amazing. So when we look at the product costs, in my opinion, especially in the SMB space that I see Brian, product costing it’s so important, and obviously you are talking about making it so precise that you really know what your product is costing and what your margins are, and whether you are competitive in the market and whether you are not losing just because you don’t know what your product costs. 

So this is the traditional model where you are simply going to allocate some of these costs, and you have some rough ballpark that maybe it costs as much. But in some of the cases, some of the SMB manufacturers didn’t want to even have protocols just because we don’t have a system. 

So what would he say to that, and if anybody is not using, let’s see here, the system, it’s very hard for them to be able to track product costs. And what they are going to do is they are going to use for more generalized model for their product costing, and they have no clue what their product cost is, and whether they are competitive with that they can probably provide more discount, and it’s a much bigger problem, then I can think of what would he say today,

Brian Sommer 25:20  

I’d say it is a very big problem. And I would tell you that there’s a couple of subtleties to this. Let’s go through it. When I walk through a manufacturing operation, and I see whiteboards, paper, clipboards, spreadsheets, whatever, I just start to cringe. 

And the reason is, I know this is a company that will not scale. Yes, because if they start taking on more orders, and they don’t know, if they’re even making money on the ones they have, I guarantee you, they’re probably losing money on some of them. And the losses will only get bigger because they don’t know what they’re doing yet.

Brian Sommer 25:57  

Now, in contrast, those same business owners and operators, they will tell me that they just know if they’re making money or not, I’m like really, and then they’ll tell me that I don’t understand their business because it’s really more of an almost like a craft or artists know, kind of business. And they have to be. 

It’s more important that they’re close to the product and how it’s being made, like a fine wine or cheese. And I understand that I’m not devaluing the role of someone who’s like a master chef or something that really just has a knack for what’s going on. That’s true. But even a great restaurant, they know what they’re making on every ticket, they know the profitability of a menu item, they know what the costs of the ingredients are, and every one of these things, it doesn’t have to be an all-consuming kind of thing, it just means that you actually took the time to figure that stuff out to make sure you’re not as a colleague calls it, you’re not feeding the dogs, you want to make sure you’re putting money into the products that are growing and making the company a success.

Brian Sommer 27:04  

But this thing about, I want to caution your listeners that if there’s one thing you remember about our conversation today is that nostalgia is not a strategy. You can put that on a bumper sticker if you want. And just remember that because a lot of people go like but Brian, that’s not the way great-grandpa set up the company in 1907. 

Or, but Brian, this is the way we’ve always done it. When I hear those kinds of defenses, those are excuses as to why they don’t want to change. And there are also reasons why the company can’t scale. Let me give you an anecdote. There was a great mid-sized company. And I knew the founder was my best friend until he sadly passed away at a young age. 

But he built this nice big company. I had to help him transition it to his brother-in-law to run. And I took the brother-in-law’s side. I told him that my good friend had a way of running the company.

Brian Sommer 28:02  

That was his way of running it. but it wasn’t scalable. And I go, you need to take a hard look. And like, do you have the right team? Do you have the right people? Do you have the right systems? And you need to do what you believe is the right way to run this company? Don’t try and do it. 

And second, guess the way your predecessor would have done it? Yeah. And I’m glad he took that to heart because, amazingly enough, within 14 months, the company was two and a half times bigger than what it was original. There is a deal about are you running a lifestyle business? That’s why I ask a lot of these SMB companies, or you are trying to run a business that’s going to create outsized value huge numbers of jobs and careers for people. 

Are you going to be a force in your industry? It is that if you want to do that, then you have to think about how do I grow a company to scale? Not how do I stay put where I’m at and stuck in one spot? 

Sam Gupta 28:58  

Okay, so there are two conflicting ideas that we typically see in the market. And I don’t know what your experience has been. So there is this notion that obviously, sometimes, these companies, and especially the lifestyle businesses, don’t want to change. 

Let’s say if they decide to change, there is this notion that technology is sort of easy. I’m actually going to bring a story from yesterday, and I was on a customer call. And there’s nothing against that. I think technical or business team, it’s just the understanding the gap and understanding in realizing what is required in creating these technology initiatives. 

So these guys were actually trying to create a new site in a South American country, and they had no idea basically how to do it. They had an ERP system, they had two sites, and they simply wanted to spin-off one more and just create an additional site for them. 

For the business community, it’s almost like clicking a bunch of buttons and creating another site in this. Let’s get rolling and do some business. But that’s where you need to do a lot more planning. So what would you say to this story? 

Brian Sommer 30:02  

I know of three companies that were SMBs and started to hit kind of hockey stick growth. And instead of putting in better systems of controls and what have you, they tried to keep going with what has served them in the past. 

And in those three firms, fraud showed up in a material way. Okay, you know, and so it’s great that you want to grow, but you need to grow in a very smart way. And you’re going to find that sometimes when you really start growing, the temptation is to let your eye off the ball. 

You’re not watching some of the aspects of your business as close as you can. And if you had some poor or underpowered systems in the past, the cracks in the holes are going to be so big that any kind of person with a fraud kind of background is going to find a way to exploit it. So be very careful.

Sam Gupta 30:58  

Okay, amazing. That’s it for today. Brian, do you have any last-minute closing thoughts, by any chance?

Brian Sommer 31:03  

Yes, I do want to tell folks that if you’re going to seriously looking at implementing any kind of new software for your firm, and probably like in the ERP package, you’re going to have to also look at who’s going to help you with the implementation, how you want to implement it. If I could give one piece of advice to folks, a lot of vendors out there make a lot of noise about having these rapid implementation methodologies. 

It sounds great. Why because finally, they’re going to come up with a low-cost way to implement software, and the customer is going to be the beneficiary that it’s not going to, you know, I’m not gonna get surprised. 

And so I admire the idea. But let me tell you why you probably don’t want to do that, in some cases, when we talked earlier on this call about the need to think about time in a different way. And having more precise data and more different kinds of statistical values that go into your accounting systems.

Brian Sommer 32:04  

Now, from these sensor and meters and other generated kinds of inputs, you need to rethink applications like cost accounting, inventory, accounting itself. The fast implementation method basically says, take the data out of the old software and map it to the new software. 

That doesn’t say anything about re-engineering anything. You’re going to end up with the same thing just in a slightly newer, sexier package. Yep. But it doesn’t fundamentally change anything about how you’re going to run your company. So what you need to find out, folks, is you need to find a balance, if you will, with a rapid known cost implementation that balances out with, are we pushing our company far enough and hard enough to really radically reimagine what business should be for us for the long term. 

Remember this, folks, that the typical ERP package is installed at companies longer than most people’s marriages last. And I know that’s a somber thought to ponder here at the end of this call, but that’s what you got to remember folks. So if you’re going to have it in longer than you’ve been married, then you might want to think about did we pick the right product? And are we putting it in the right way? 

Sam Gupta 33:22  

Yeah, I could not agree more, Brian, and my personal takeaway from this conversation is going to be nostalgia is not a strategy. So better think about it. On that note, I want to thank you for your time. This has been a powerful conversation.

Brian Sommer 33:35  

Thank you, Sam. Thanks, everybody, for listening in. I appreciate it.

Sam Gupta 33:38  

I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today. If you want to learn more about Brian contact me at contact@techventive.net or follow him on Twitter or LinkedIn. Links and more information will also be available in the show notes. 

If anything in this podcast resonated with you and your business, you might want to check out our latest episodes, including the interview with Bob Evans, who discusses what SMB customers need to know about cloud infrastructure providers. Also, the interview with Laurie McCabe, who discusses how technology can help struggling businesses be more efficient during downturns. 

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I hope to catch you on the next episode of The WBS podcast.

Outro 34:46  

Thank you for listening to another episode of the WBS podcast. Be sure to subscribe on your favorite podcasting platform, so you never miss an episode and for more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guest Chuck Coxhead from Procensis, who discusses warehouse mobility trends in the enterprise and SMB markets. He also describes technical details of several warehouse mobility technologies along with crossover between ERP and WMS systems. Finally, he has had a chance to touch on how manufacturers can evaluate mobility technologies and take advantage of the new trends such as Micro-fulfilment.

Chapter Markers

• [0:22] Intro
• [2:40] Personal journey and current focus
• [3:42] Perspective on growth
• [4:54] Warehouse mobility trends
• [7:26] Operational efficiency gains due to warehouse mobility
• [15:32] Warehouse mobility system architecture for SMBs
• [18:43] The role of industrial browsers for warehouse mobility
• [20:22] Pre-requisites and business process redesign for warehouse mobility journey
• [25:30] How warehouse mobility needs differ across industries
• [30:13] Micro-fulfillment
• [33:20] Closing thoughts
• [34:30] Outro

Key Takeaways

• They can’t afford to carry products and travelers across the floor to get to terminals. They need to go mobile and bring it to the worker while manufacturing is done with their hands. So folks need to be hands-free whenever possible. So the ergonomics becomes tremendous.
• Some of the self-hosted systems do operate in a browser, but many of them don’t. So the mobile technology really has to be able to address all of the different ERP and WMS systems.
• If you lose connectivity at your house, your video might hiccup if you happen to be watching videos, but if you’re doing that in an enterprise, and you’re doing that mid-transaction, well, you’re gonna have a problem.
• Where you have everything from small products, to large products, to large boxes, medium boxes, and everything in between, the kind of agility you derive from hands-free picking where everything is wearable is incredible.
• If you have a lot of different parts and if those parts are very small and you need dexterity, then a full wearable solution clearly makes the most sense.
• Those retailers can improve and increase their inventory level, and they can increase the diversity of their inventory and product availability, and that inventory is co-located or stored closer to the point of delivery in the point of use. So this micro fulfillment is an incredible trend.

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About Chuck

With over 30 years of experience in manufacturing companies, Chuck Coxhead has worked in all parts of the organization from the shop floor to Engineering, to Sales & Marketing, Operations, HR, IT, Supply Chain, and Warehouse. Chuck brings a unique cross-functional perspective to continuous improvement that began with his education and work as an Industrial Engineer and crossing over into numerous multi-million dollar Sales wins and business turn-around success stories.

Resources

• Connect with Chuck
  • LinkedIn
• Connect with Procensis
  • Website | LinkedIn | YouTube | Twitter

Full Transcript

Chuck Coxhead 0:00  

The pet food store right around the corner has about five different locations, and they’ve always maintained a reasonably large inventory. But how are they going to compete with Amazon and Chewy? Well, they have to significantly improve their inventory. And by the way, the cost of having a delivery service is a huge test to branch out. They never really did it.

Intro 0:22  

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:59  

Hey everyone, welcome back to another episode of the WBS podcast. I’m Sam Gupta, your host, and principal consultant at a digital transformation consulting firm, ElevatIQ. 

Warehouse mobility can increase the efficiency significantly of your warehouse, from automating your data entry to voice-enabled begging but how to plan for a warehouse mobility journey. Is it as simple as picking a bunch of barcode readers from the market and be mobile? Or do companies need to plan based on the size of the warehouse ergonomics? 

In today’s episode, we have our guest Chuck Coxhead from Procensis, who discusses warehouse mobility trends in the enterprise and SME market. He also describes technical details of several warehouse mobility technologies along with a crossover between ERP and WMS systems. Finally, he has had a chance to touch on how manufacturers can evaluate warehouse mobility technologies and take advantage of the new trends such as micro fulfillment. 

Let me introduce Chuck to you.

With over 30 years of experience in manufacturing companies, Chuck Coxhead has worked in all parts of the organization, from the shop floor to engineering to sales and marketing operations, HR and Supply Chain, and warehouse. Chuck brings a unique cross-functional perspective to continuous improvement that begins with his education and works as an industrial engineer and crosses over into numerous multibillion-dollar sales wins. 

With that, let’s get to the conversation. 

Hey, Chuck, welcome to the show. 

Hey, Sam.

Chuck Coxhead 2:37  

It’s so good to see you. 

Sam Gupta 2:40  

Of course, so just to kick things off, do you want to start with your personal story and current focus? 

Chuck Coxhead 2:45  

Yeah, sure, so I’m a 30 plus year manufacturing professional. I started out studying Industrial Engineering at Lehigh University. And I assume just about every role in a manufacturing organization that you can. I’ve been a CNC programmer, I’ve worked on the shop floor. I’ve worked in warehouse-driven forklifts. And I’ve been responsible for engineering, product design, operations, purchasing, finance inventory planning, but I’ve spent an awful lot of my time in sales and marketing, which has really been the focus of my career for the past 20 years. 

So currently, I’m working for Procensis. And we’re really focused on mobilizing MRP and warehouse management systems for warehouse and distribution centers. There’s tremendous growth in e-commerce and warehousing distribution. And there’s just an incredible push to improve productivity, decrease the time it takes to do mundane data entry, and also improve accuracy because on the other end of a missed package or miss shipment is a very unhappy customer.

Sam Gupta 3:42  

Yep. And we are going to dig into all of that. But before we do that, there is one standard question that we ask all of our guests, and that is going to be your perspective on growth. So Chuck, when you think of growth, what does it mean to you?

Chuck Coxhead 3:54  

Honestly, Sam, I think growth is a double-edged sword. Yeah, it cuts both ways. Clearly, there are so many folks out there who fantasize about hockey stick growth, and there are those who are content with just being flat and being fat, dumb, and happy. 

But honestly, it’s really more about can your growth match your business model. If the growth far outstrips your business model, the only thing you’re going to lose is loyal customers. The only thing that’s going to happen is you’re going to end up being dissatisfied yourself, your employees will be dissatisfied, and most importantly, your customers will be dissatisfied. 

So it’s really important to understand who you are, what you can really do, and then grow accordingly. Now, if you want hockey stick growth, adjust your business model, but if it’s healthy, organic growth that you can conquer in a very manageable fashion without terribly affecting your employees and your customers because, after all, the biggest challenge any organizations change management well then that’s really what you want to target is you want to target a nice healthy realistic growth.

Sam Gupta 4:54  

Okay, amazing. So obviously, we are going to be talking about now mobilizing the warehouse distribution centers. And we are going to be looking at what trends you are seeing at this point in time in the market? 

Are you satisfied with the manufacturers that you are working with? Do they have enough mobilization in their warehouses? Do they have enough automation in the warehouses? And let’s say if you were the manufacturing executive, what would you change in those warehouses?

Chuck Coxhead 5:26  

Well, it’s really interesting, the trends, we all know it’s really made it to the mainstream, and it’s made it to Facebook. Supply Chain is everything. Supply Chain has always been incredibly important. But it really took a pandemic, sadly, to make the supply chain cool. And to amplify the importance of it. Well, the universities got a head start on this year ago. I’m an industrial engineer. I studied almost 35 years ago or thereabouts. 

They added a supply chain aspect of the industrial systems engineering curriculum years ago. The business departments have added supply chain specialization, so they were way ahead of the curve, and they really knew what was going on. Well, now the rest of the world knows, and the e-commerce explosion and the delivery problems that we’re seeing will; this is all the new normal, we can expect to see this forever. 

And that is fueling a tremendous shift toward productivity in manufacturing warehouses and distribution centers. There’s an eye like there’s never been coupled with that the technology for it has for warehouse mobility for robotics, for AI, these things have all reached a critical point in their development where they are becoming more and more realistic to deploy to places that never would have considered it before.

Chuck Coxhead 6:40  

There are people that are working on an old paper for their data entry and just keep punching that is really considering technology solutions for the first time. So there’s really this amazing confluence that’s going on right now. 

And there are also a number of other things going on. There are improvements in MRP. And warehouse management systems. There are major upgrades in ERP and warehouse management systems. And one of the other things we’re seeing is that some of the customers deploy technology quite some time ago.

But now it’s time for the next upgrade. It’s time for the next iteration. And this confluence is happening all at the same time. We see these things in the grocery store from people picking orders for grocery delivery and e-commerce. We never saw anything like that. But it’s all happening exactly at the same time. 

Sam Gupta 7:26  

Okay, amazing. So let’s talk about some stories. Do you have any stories by any chance of the customers where let’s say, you might be engaged with where you have made some changes in the warehouse? And because of that, they could grow significantly? Do you have any stories that you might be able to share?

Chuck Coxhead 7:40  

This is kind of crazy; I’m actually going to start out with a story that’s kind of just the opposite. It’s a story about a president who was very frustrated with his own company. And in his own words, he says, We stink at implementing technology.

Chuck Coxhead 8:00  

This is a real thing. And his ERP system was three versions behind. He had no intention of updating it. He hadn’t even updated it for security. Yeah. And he was doing all of this data entry and keypunching, and he didn’t realize that you need to take the next level and technology implementation in order to get rid of all that non-productive time in order to get more out of the same people that you have. 

I don’t like to say more with less; I like to say more with the same. And I think that is all too prevalent. I’ve worked with other customers, and oftentimes it is.

Chuck Coxhead 8:35  

So I like the word you use, lifestyle business. Oftentimes some of the lifestyle companies where they don’t really fully understand the benefits of the technology to continuous improvement. Now we’re coming across customers right now that are engaging in significant updates to the WMS system. 

There are major version changes that have happened out there. And these things happen once a decade. And so we’re seeing a lot of folks that are doing that right now. We’ve taken these folks, and they’re having accuracy problems, big time, where they’re having 10% of their scans, 5% of their scans, or their pics are a problem. 

Well, that just results in these things being done all over again. So I’m not allowed to name the names. But we’ve literally taken some of these warehousing operations. And we’ve improved their accuracy from 85-90-95% up to 97-98-99% within days.

Chuck Coxhead 9:31  

And our focus is putting wearables, and it’s on putting mobile computing, and whether it be handheld or vehicle-mounted barcode scanners, into the hands of workers so that they can be hands-free so that they can be more mobile and the time savings on that we’ve done time studies on this and you can literally see a video on my website where we’ve saved 20% in one example. 

There are time studies where people are saving 30%. 30% in their scan time because they’re hands-free. And now these are household brand names, ecommerce companies that you have bought from that everybody listening knows these brands, and they’re making these moves. 

Now they have a lot to consider. We’re up against robotics. Robotics is cool. They’re also the stuff of sci-fi movies. Some of them aren’t all that happy. Some of them are, but they have a lot to consider. Now, we have worked with some of the largest companies in the country, and they’re all telling us the same thing. We really want to work with our people. We’re more interested in human intelligence than artificial intelligence now. Are there some people that are some companies that go that way?

Chuck Coxhead 10:41  

Absolutely. And their business models and their operations are designed for it. And I encourage it, but it’s not for everyone. And these customers, they see this, they see the ability to wear a mobile computer on their arm, they see the ability to mount a scanner to the back of their hand, they see the ability to shoot barcodes from 15 to 30 feet away without the mounting or dismounting the forklift. 

These are all real applications, real stories where these warehouses are realizing these amazing improvements overnight. Then we have a customer doorman products. They’re located in Pennsylvania. And this customer gave us a testimonial where these technologies, and this is a testament to human intelligence versus AI. 

They got the product up and running in 15 minutes, where other solutions would have taken hours or days, literally, because of the solution that we provide. The solution is not just mobile computing and wearable scanning. The solution is also customized user interfaces that are working right in with the ERP and warehouse management systems to make them intuitive, easy to use, wearable with a usable with gloves if you’re in a cold storage environment. So all these things are real technologies that are happening today. And we’re just honestly just having so much fun.

Sam Gupta 11:58  

Okay, amazing. So obviously, when we talk about the bigger companies, they have a lot of money. They have a lot of investments that they can make. And obviously, I don’t know if you’re seeing similar trends in these small to medium-sized businesses as well. So when we look at the landscape of the small to medium-sized businesses, at least in our experience, they are probably going to have just one ERP system, and they might have the barcode scanning. 

That’s a match that we have seen. So what are some of the trends that you see in the SMB market? Do you have any stories from the SMB market where the manufacturers or the distributors, or the e-commerce players have had significant efficiency gains because of the warehouse improvements?

Chuck Coxhead 12:36  

So in small-medium businesses, the gains are typically potentially greater as a percentage of the time because the small and medium businesses are maybe using old, outdated tech, or they may have never used these things in the past. And, for instance, in manufacturing, I have implemented entire inventory management systems, I have implemented cycle counting, and all of these different things myself. 

Yeah, I’ve put in inventory planning and implementing an ERP system or two. And what they’re seeing is these improvements in material handling that they never had before. The manufacturers, for instance, there’s actually also there were computing resources on the floor because some of the manufacturers have extensive documentation and plans that are on the floor for their folks to see, for instance, a machine shop or an assembly shop or something to that effect, or they may have compliance documentation that they need to complete in the process.

Chuck Coxhead 13:37  

So they have computing resources on the floor, but they’re still stuck with this data entry task of tracking time, traceability of materials, all of these things, that can take a tremendous amount of time, heck, receiving material can take an awful lot of time for this data entry. So that alone in the manufacturing space is tremendous. I had a fella one time who tried to sell me a product for tracking, and he wanted to pin it onto my ERP system. 

And what he told me was, well, it’s only going to be 30 seconds of additional time. 30 seconds. It’s not that big a deal, right? Yeah, except that my total cycle time for this product was two minutes, he was adding a full 25% additional time to my processing. Yeah, by implementing his solution, all that so that I could get more data for planning, which is wonderful. The data is incredible. And what’s been done with data structures and planning and forecasting, and that sort of thing is just the strides have been tremendous, but that barcode or the barcode reading and the time tracking and all of that is such a tremendous part of the process that they’ve got to knock that out.

Chuck Coxhead 14:42  

They just have to knock it out, and they can’t afford to carry products and travelers across the floor to get to terminals. They need to go mobile. They need to bring it to the worker while manufacturing is done with their hands. So folks need to be hands-free whenever possible. 

So the ergonomics becomes tremendous. There are also distractions. You’re in a manufacturing environment. You’re distracted. You’re injured. So low distraction is really, really crucial. And the small and medium businesses, it’s even more so because their volumes are low. So their profit margins are potentially lower depending on the market they’re in because they don’t have the benefit of volume and a tremendous investment in process improvement. 

So in these businesses, I’m thinking about manufacturing. From my history, these improvements are just crucial, honestly, just crucial if they want to continue to compete.

Sam Gupta 15:32  

Okay, so let’s talk about the overall system landscape of small to medium-sized businesses that you are working with. So I don’t know if they are always going to have a WMS application. And sometimes, there is always a crossover between a WMS and ERP. And then they have e-commerce as well. 

So in your experience, are these systems always connected? Would connectivity be a problem for any of the mobile solutions that these manufacturers might be thinking of utilizing? So how does the integration work between, let’s say, your mobile device, and then the WMS system and then ERP? And then they might have e-commerce as well.

Chuck Coxhead 16:10  

So separate WMS is clearly going to be for an organization that has a significant movement of product within warehousing distribution, but for small, medium businesses, and I confess a lot of our customers are medium and large businesses. But I have a tremendous amount of experience in small and medium businesses for 30 years. 

And most of those folks are going to have one system as opposed to a system that may consist of multiple parts that are integrated together. They’re really going to be one. So in terms of connectivity, there’s a big push to cloud computing. But there are still systems out there that are hosted, inside that, although some of those self-hosted systems do operate in a browser, okay, but many of them don’t. So the mobile technology really has to be able to address all of the different ERP and WMS systems.

Chuck Coxhead 17:03  

And that’s done in a couple of ways. We’re all of the browser-based systems, whether it be self-hosted or whether it be a cloud-based system. That’s really done with an industrial browser. This is not the kind of stuff that is done with Chrome browsers. Consumer browsers operate asymmetrically, where data entry is a really critical order of operation and things like that, as well as connectivity. 

If you lose connectivity at your house and your camera, your browser, and you’re on Facebook, no harm, no foul, your video might hiccup if you happen to be watching videos, okay, but if you’re doing that in an enterprise, and you’re doing that mid-transaction, well, you’re gonna have a problem. 

So that really requires an industrial browser, the cool part about the industrial browsers, and in our case, we’re working with Ivanti with their velocity industrial browser product. These allow both browser HTML sessions, and they also allow Telnet sessions.

Chuck Coxhead 17:53  

Telnet is not the kind of thing that is used out across the internet because it’s not a secure protocol. But it’s used inside for on-premises systems that aren’t using an HTML interface. So the mobile computers can connect with any system out there. And that is really what has required that kind of diversity of connectivity, that kind of diversity of interfaces required because we don’t know what system we’re going to come across. 

I’m dealing with a HighJump customer. I’m dealing with an SAP EWM customer. I’m dealing with Infor customers. I was on the phone with a guy working with ProShop. I’ve worked with E2 from ShopTech. So there is a myriad of systems. I’m working with somebody on Sage as well. Every one of those things has different interfaces. You really have to be able to adapt. Any industrial browser takes care of that.

Sam Gupta 18:43  

Okay, so tell us more about the industrial browser. And I’m not sure if I follow completely, and probably my audience is not very technical, right? So they are not going to understand this as well. So from their perspective, let’s say if they want to understand what industrial browser is and how it is going to impact them, can you tell me more about that?

Chuck Coxhead 19:03  

So the industrial browser, while you go out and download it, you won’t get it to work. It’s not designed for you to be able to type in addresses and go out and visit your favorite website. Okay, it’s designed with a single purpose for single-minded connectivity to a server or an application. 

And it’s configured as such. It does have all the same underlying engines that your commercial consumer browser does. It works with the same language. It works with the same basic, a Hypertext Markup Language, HTML, JavaScript, style sheets, all these different things. 

It supports all of that, but it’s just simply not the same thing in that it’s made for robust and continuous connectivity. So we’re not even talking about the same Wi-Fi that you have in your house you’re talking about, where we’re blind spots can really cause a problem within your building. 

So it’s there’s a big difference between industrial and consumer browsers. As I said, you can go out. Download it. I put it on my iPhone just because I could I wasn’t able to do anything with it. Because I had no system to which I could connect it technically.

Sam Gupta 20:07  

Okay, so is it fair to say that it is probably used for the device to device communication? Is that a fair statement?

Chuck Coxhead 20:13  

I would. Yes, it’s device-to-device communication, so many devices to one host, if you will, they’re all set up that way. But this one’s very special purpose-driven.

Sam Gupta 20:22  

Yep. So let’s talk more about warehouse mobility. So let’s say if I have this small to the medium-sized manufacturer, and I’m probably the executive of a small manufacturing company. And obviously, I have some problems related to picking. I have problems related to accuracy. 

And I’m actually trying to figure out if mobile computing can probably help me in that direction. So what would be your, let’s say, advice or recommendation for me in starting the journey on mobile computing? And what are the things that I need to get in order from the internal process perspective, from the system perspective, before I start the journey in mobile computing?

Chuck Coxhead 20:59  

Well, the very first thing you need to do is just that you don’t understand your process. Oftentimes, that comes with a step-by-step breakdown of what the typical process is. So what does my picking entail? What does the data entry entail? What happens in the material handling when I do so? Okay, am I picking a pallet? Am I picking a case? Am I picking a piece? 

Am I counting an inventory? Am I receiving all of those things that matter in your selection of what you’re trying to do? So, for instance, if I’m doing a pallet pick, I’m going to have a forklift more than likely or a pallet jack, which means that hands-free is not necessarily a big problem, because a lot of the time and it’s very important for me to drive the forklift safely, and not be distracted.

Chuck Coxhead 21:49  

Likewise, I can actually scan from a distance those pallets rather than having to dismount the forklift. I can scan from the seat, okay, so that requires a different type of barcode scanner, one that is mid to long-range. 

Now you can turn a mid-range bar scanner into a more long-range bar scanner with much bigger barcode labels. But realistically, you’re looking at a different scan engine. And that’s we represent Honeywell products, and their scan engine is amazing, their long-distance can be up to 30 feet. 

So you can imagine sitting in a forklift, okay, and being able to scan something that’s 10 feet away without moving and then maneuver the forklift, pick it up and go. Now you could also be working with teeny tiny little pieces, okay, where hand dexterity could be an issue.

Chuck Coxhead 22:32  

And in that case, you may want to do something that’s mounted to the back of your hand; we work with a company called ProGlove, which has one of the hottest scanners in the market. This allows completely hands-free scanning with full dexterity of your fingers, okay, and it’s actually a thumb press on the side of your hand to activate barcode scanning. 

So it starts with really understanding what I am doing and what do I really need to accomplish in case I’m picking up boxes. So it can be a little tricky. If I have a handheld scanner and a handheld mobile computer, perhaps they’re integrated, but it’s tricky, and that it has a handle on it, okay, and I can drop it, or I have to set it down and pick up the case and then set the case down, then pick up the scanner and walk with the scanner, and then move. So it really helps to understand what it is you’re doing.

Chuck Coxhead 23:20  

And there is a myriad of different choices. Now, these are all industrial products. Just as the browsers and industrial browsers, these are ruggedized products. We’re not talking about your iPhone, I love my iPhone, but it’s not a rugged product. These are products that if I do drop it, there’s no effect. 

If I do get it a little wet, there’s no effect. And of the other things you need to consider is honestly safety. And one of the biggest things in safety is the pandemic. So are we sharing devices? Well, how do we treat them? What do we do with them? How do we disinfect them? So depending on your protocols, there are disinfection-ready devices. 

I think you can imagine what it would be like if somebody came in with COVID. And everybody’s handling the same scanner. Well, that’s a real struggle. These devices are actually personalized. And indeed, they will assign someone at least by the shift, if not a device for each person, okay, a mobile computer with the amount on their arm, okay, or amount on their hand.

Chuck Coxhead 24:18  

Now in these mounts, the mounts need to be washable, okay, or you need to have a lot of the mounts or the gloves that onto which they mount so that each one has each person has their own individual. So there are so many things to consider. 

But honestly, it boils down to just a few choices, wearable versus handheld vehicle-mounted versus wearable mounted computer and scanner and then, of course, all the accessories that go along with them. One of the other things that you can integrate honestly is voice enablement. The system technology for European WMS has progressed to the point now where you just speak to it, and it speaks to you. 

The voice recognition is tremendous. And it’s really agnostic to most people. So I mean, Someone says my English is my second language with the slang I have from the South Philly influence. But in general, it understands you. In general, it just understands you. So you say, four pieces got it to go, and off you go. 

Once again, you’re using industrial headsets. It’s not your little earpiece you use for talking on your phone. So there are a lot of different things that you need to consider hands free safety, pallet, pick case, pick individual pick dexterity, all these different things. And then we make recommendations. 

Sam Gupta 25:30  

So yeah, so let’s make some recommendations here. Right, so let’s talk about some of the different industries that you are seeing in your experience. And let’s say the warehouse size that is also going to vary based on each of the sub-industry. For example, let’s say if I go to some of these high-volume ecommerce shops, maybe they have really large warehouses, and maybe they need specific types of scanners. 

But when we go to, let’s say, some of the food and beverage ecommerce players, they might not have a large warehouse, and they might not even need the barcoding, or maybe they might not even need the scanning. So when you go from, let’s say, sub-industry to the next, do you see any specific patterns where at some places a specific scanner is going to be used at the other places, the other type of scanners are going to be recommended. 

So talk about some patterns and trends that you see across the industries and how they are used, and what would be your recommendation along those sub-industries?

Chuck Coxhead 26:26  

Well, I’m going to get one out of the way right now because we focus on the human element. But it’s possible that you could have automated storage and retrieval. Okay, it’s a tremendous system. It has nothing to do with what we do. I remember working with my first automated storage retrieval when I was an undergrad in college decades ago. 

It’s a fascinating technology. The accuracy is amazing, the speed is amazing. It doesn’t take a lot of labor to operate them. But the capital expenditure is tremendous. So is that within the realm of a small-medium business, it’s highly unlikely. And it’s also the stuff where there’s a lot of volumes. And but with automated storage and retrieval, the mix doesn’t matter. 

As long as everything fits in the bins, it’s not really an issue, okay, and then you have robotics, and robotics is cool. But product recognition is a complicating factor.

Chuck Coxhead 27:18  

If you have a very homogenous design of the product, if everything is in the same size box, a pic with robotics is easy. In the scheme of things, it’s still expensive, okay to implement capital expenditure. But for the small medium-sized for e-commerce, the diversity of their products is massive, simply massive. 

Okay, you mentioned food and beverage, interestingly enough, so most of the cases are similar in size, similar shape, but they may be heavy things. So that may or may not be the thing of robotics. And this is why the focus on the human element, Amazon has said that they are interested in robotics, but they’re doubling down on the human worker for the foreseeable X number of years, by way of example, and again, there’s just this massive, massive difference in all of the products that they do and that they handle.

Chuck Coxhead 28:05  

So for someone like that, by way of example, where you have everything from small products, to large products, to large boxes, medium boxes, and everything in between, the kind of agility you derive from hands-free picking where everything is wearable is incredible. 

You literally can imagine, think about that person walking from part depart on there, they have a computing resource on their arm, it tells them where to go next. It may even be telling them in their ear. They walk there. It tells them what then to go to. It tells them what part to pick. They scan it, they pick it up, they’ve never, they’ve never lost the use of their fingers. They put it in, they go. 

Now someone who’s particularly high volume like that might benefit from an automated guided vehicle because why have those people walk all the way across that large, large warehouse, but it automated guided vehicles send it home, okay, again, they’re more expensive capital expenditure, they’re harder to implement.

Chuck Coxhead 28:58  

But that same thing applies to small and medium businesses if you have a lot of different parts. If those parts are very small and you need dexterity, then a full wearable solution clearly makes the most sense. But there are other things in between. 

So you have a vehicle mounted with a lot of forklifts, and you have the wearable. So again, it depends, and for any so for food and beverage, okay, food and beverage, they’re also fragile. There are spoilage issues, food, and beverage. You have to deal with the cold. So are these devices suitable to work in minus ten freezers? 

I don’t want to belittle the minus 95 degrees or whatever the number is cryogenic cooling has to go on with the COVID vaccine. That’s a very specialized sort of distribution and transportation, but just in a food fridge walk-in, they can be minus 10 degrees on a regular basis. 

So you have to have these devices that are capable of doing that. And again, with the food, they’re heavy cases, so it’s probably best for me to be hands-free so that I can pull that case of chicken breasts or your pizza sauce or cheese and take that to my customer. And by the way, I really need to get it right. Because if they’re expecting mozzarella cheese and you give them cheddar cheese, it’s not going to be your favorite pizza.

Sam Gupta 30:13  

Wait, yeah, that’s right. Do you have any other stories that you wanted to cover that you could not cover as part of this episode by any chance?

Chuck Coxhead 30:19  

So one of the great stories that I have is really about a rise in micro fulfillment. Okay, so micro fulfillment is an amazing new trend, a newer trend that arises again, out of e-commerce and convenience. And honestly, from retail struggles as well, there are malls across America that are being turned into micro fulfillment centers for local retailers. 

So those retailers can improve and increase their inventory level, and they can increase the diversity of their inventory and the product availability, and that inventory is co-located or stored closer to the point of delivery in the point of use. So this micro fulfillment is an incredible trend. 

Now we’re working with some customers in micro fulfillment that are making amazing strides in office supplies, and alcohol, and food. And these folks really couldn’t handle the kind of diversity that goes with that sort of fulfillment environment. Without the implementation of the technology, it would simply be too slow. It has to eliminate a significant amount of the cost. And that’s how these retailers are going to survive.

Chuck Coxhead 31:33  

Again, you can imagine the pet store down the road. And I don’t mean one of the big chains that have a distribution network. I mean, we have a pet store, the pet food store that is right around the corner, and they have about five different locations. And they’ve always maintained a reasonably large inventory. 

But how are they going to compete with Amazon and Chewy? Well, they have to significantly improve their inventory. And by the way, the cost of having a delivery service is a huge test to brand side to bring in house. They’ve never really done that before. Well, the pandemic has amplified the need for delivery services. 

So we’re all a lot of us are familiar with DoorDash, and Uber Eats, and other applications like that. So you can imagine bringing more delivery drivers in the gig economy into a system, these retail workers will this is real, Sam, and it’s not just happening in the malls of America, it’s happening in the cities, you have blighted buildings that are being repurposed into micro fulfillment centers, small warehouses, and again, it’s for e-commerce, but it’s also for local retailers. And this trend is happening all over the country.

Chuck Coxhead 32:43  

Heck, it’s happening all over the world, in the countries where these things have really taken off. And that’s a large majority of them. So these are some of the success stories out there and things that folks don’t really think about. 

But this fulfillment in this warehousing and the use of the mobile tech Now it may not be the stuff at the local pet store around the corner where I like to get my dog food. But all of a sudden, these resources are available to mom and pop shops, people who have no concept of these things, yet they’re going to be able to add these tremendous services, and micro fulfillment could be the savior of retail.

Sam Gupta 33:20  

Okay, that’s it for today. Do you have any last-minute closing thoughts by any chance before we close?

Chuck Coxhead 33:25  

Yeah, I think the important thing that I’d really like folks to take away from this is that technology is not scary. There are a lot of longtime employees in this business that aren’t comfortable with the technology, and again, change management is the hardest thing any of us have to go through as directors and executives of companies. 

But this technology is something that you use every day. I mean, even my grandmother is using a smartphone. So if my grandmother can do it, then some of these longtime employees can do it because it truly is. In essence, it operates the same way. And it’s very, very familiar. And honestly, time is now time to work on your business, improve the technology in your business and realize the savings and the benefits. 

Sam Gupta 34:08  

Yeah, I could not agree more. And my personal takeaway from the conversation is going to be technology is always going to be scary. So the best thing that you can do is just embrace the technology and start today. So on that note, Chuck, I want to thank you for your time. This has been a fun conversation.

Chuck Coxhead 34:26  

Thank you, Sam. It’s always a fun conversation with you, and I love listening to your podcast.

Sam Gupta 34:30  

I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today. If you want to learn more about Chuck, head over to procensis.com. Or connect with Chuck on LinkedIn. Links and more information will also be available in the show notes. 

If anything in this podcast resonated with you and your business. You might want to check out our later episodes, including the interview with Kevin Lawton from the New Warehouse Podcast, who discusses why standardization plays a key role in inventory planning. Also, the interview with Francois Jaffrey from Noviland, who discusses what manufacturers need to know about working with international suppliers. 

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform. Or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I hope to catch you on the next episode of the WBS podcast.

Outro 35:32  

Thank you for listening to another episode of the WBS podcast. Be sure to subscribe on your favorite podcasting platform so you never miss an episode. For more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guest Dave Meyer from BizzyWeb, who describes how marketing automation works and why that is important to understand customer journeys. He also explains how marketing automation helps engage with existing customers and find new-new prospects. Finally, he shares several stories related to growing businesses using marketing automation.

Chapter Markers

• [0:20] Intro
• [2:48] Personal journey and current focus
• [4:00] Perspective on growth
• [4:00] Is marketing automation suitable for every business?
• [10:00] How is marketing automation different for net-new vs exisiting customers?
• [13:23] Starting on the journey of marketing automation?
• [21:42] How to generate net-new business from marketing automation?
• [28:17] How marketing automation can help identify purchase signals?
• [37:36] Closing thoughts
• [39:09] Outro

Key Takeaways

• The barrier to reentry is much lower than if you’re trying to work with someone that you’ve never worked with before. And in most B2B, there’s a high trust factor. And so, once I’ve built up that trust by forging an existing relationship, it makes it so much easier to resell or to add additional services and deepen relationships.
• In a lead generation campaign, I’ve targeted a bunch of purchasing officers in a different level at a company, and almost like I’m targeting three or four different kinds of people at my target accounts, that’s called ABM, or account-based marketing.
• If I can say that 33% of this kind of marketing results in a lead that’s actionable for us and that our sales team can dig into, that’s a much easier new sell, or it’s easier to keep doing that particular activity if I know that that’s the kind of result that I’m getting.
• For companies that have a captive market and that are basically locked in, all they need to do is say anybody needs some, and everybody that needs some is going to say yes, inbound or automated marketing is probably overkill.
• For businesses that have a lot of options, or for businesses that the competition is strong, or there’s not a lot of reason for that company to be the choice, that’s when you need to have a more thoughtful and conversational outreach.

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About Dave

Dave Meyer helps “high trust” businesses entering their growth phase to attract, engage and delight their audiences to close more business. His company, BizzyWeb, brings leads and sales to clients using inbound marketing, optimized websites, and digital conversion strategies. He’s a speaker for Google’s Grow With Google program, and a Certified Trainer for HubSpot. He was named 2016 Entrepreneur of the Year by the TwinWest Chamber of Commerce in Minneapolis, and since 1999 his company has helped hundreds of clients Generate Buzz Without Getting Stung!

Resources

• Connect with Dave
  • LinkedIn
• Connect with BizzyWeb
  • Website | LinkedIn

Full Transcript

Dave Meyer 0:00  

The general rule of thumb is that people will click 80 links before they ever contact a business, whether that’s picking up the phone or submitting a Contact Us form. Our job is to give them as many of those ad clicks by letting them choose their path and having ready answers at every step.

Intro 0:20  

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:56  

Hey everyone, welcome back to another episode of the WBS podcast. I’m Sam Gupta, your host, and principal consultant at a digital transformation consulting firm, ElevatIQ. 

Have you had challenges engaging with your customers? Do you lose prospects just because you could not call them timely? Do you have challenges in finding net-new prospects? And do you have capacity issues in your sales department? How deeply do you understand how your prospects may be interacting with your website? These are the questions you will have if you are ready for marketing automation. 

In today’s episode, we have our guest, Dave Meyer from BizzyWeb, who describes how marketing automation works and why that is important to understand customer journeys. He also explains how marketing automation helps engage with existing customers and find net-new prospects. Finally, he shares several stories related to growing businesses using marketing automation. 

Let me introduce Dave to you. 

Dave Meyer helps businesses grow by finding ways to attract, engage and delight their audiences to close more business. His company BizzyWeb brings leads and sales to clients using inbound marketing, optimized websites, and digital conversion strategies. He’s a speaker for Google For Growth with the Google program and a certified trainer for HubSpot. He was named 2016, Entrepreneur of the Year by the Twin West Chamber of Commerce in Minneapolis. And since 1999, his company has helped hundreds of clients generate buzz without getting stuck with that. Let’s get to the conversation. Hey, Dave, welcome to the show.

Dave Meyer 2:46  

Thank you, Sam, so delighted to be here.

Sam Gupta 2:48  

Of course, it’s our pleasure as well. Just to kick things off, do you want to start with your personal story and your current focus these days?

Dave Meyer 2:54  

Absolutely. Well, I’m the owner of a company called BizzyWeb. We’re a marketing agency. And I’ve been doing this for 22 years. So it’s been a passion of mine for as long as I can remember, really, that businesses need help getting the connections and the leads that they need in order to sell. 

And there’s so much junk in the agency world in marketing. If you Google for SEO, or any of the big topics that people talk about in marketing, there are millions and millions of results. Not a lot of real detail. And not a lot of things are actually actionable, especially in the manufacturing world. 

And kind of that top-level where people can really get what’s happening. What it really means is it’s easy to bury the meaning of marketing and what you’re trying to do. At the end of the day, we’re just trying to get more business. We’re trying to get more leads; we’re trying to close those leads through a thoughtful process. And all of the other stuff that complicates it just frustrates the heck out of me. And that’s why I’m in business.

Sam Gupta 4:00  

Okay, amazing. So obviously, I want to dig deeper into each of them. We want to understand this at a deeper level. But before we do that, we have a standard question. And that is going to be your perspective on growth. Dave, what does growth mean to you?

Dave Meyer 4:13  

So growth, for me, is the act of moving forward in a thoughtful way that’s going to allow you to scale your business. So growth for most of my clients, right? And I’m in manufacturing, and I do the demand generation and conversion for those companies. 

Most of my companies are trying to go beyond what they’ve done in the past by doing something differently, right? What got you here isn’t going to get you there. And so they’re really looking for that inflection point. And for me, growth is that inflection point that lets me do more with the same or even less input into my system because I know that my system is doing my follow-ups for me, and I have a repeatable process. 

That I can use and that I can rely on to keep moving forward with my business through more leads through more contacts through more connections, and through better follow up. So long way to say, growth is more.

Sam Gupta 5:14  

Okay, amazing. So obviously, we are going to be talking about marketing automation in today’s episode because that’s your background, right. And we have to understand what you can do from the marketing automation perspective and how that might be able to help with the inflection point. 

But in your opinion, since you do a lot of marketing automation, and every company is going to be different, every customer is going to be different. And there is this notion of interaction with machines versus interaction with a human. Typically, sales and marketing are always best done with a human because you can provide a personalized experience. 

So why do you believe that number one, marketing automation, is going to be providing a better experience for the customers? And secondly, where is it going to be a fit? Do you believe marketing automation is going to be fit for all businesses? Or are there going to be certain businesses for which marketing automation would not make sense?

Dave Meyer 6:12  

Sure. Great question, Sam. And the answer is, you know, a couple of points as well. So I think for automation in general, it’s never going to be a one size fits all connection. 

And different businesses have different levels of interaction. They rely on conversation, right? You need to ask great questions in order to elicit the kinds of responses that are going to lead to a sales conversation. And so great automation is the act of asking those great questions and then providing information based on what those questions are. 

So I’m not setting up a chatbot that just has millions of inputs and millions of outputs. What I’m doing is I’m specifically working with my best script for my intended audiences, working from my marketing personas. And marketing persona is a fancy word for having an idealized customer in mind. 

So for a lot of manufacturing businesses, it’s probably purchasers or decision-makers in the C suite. What are those people really concerned about? And we try to get into the psychology of that.

Dave Meyer 7:29  

And based on what a CFO is looking for when they’re trying to find a better provider for one of my clients, then what do I need to ask in order to elicit that response? Those are the kinds of questions that you want to backfill. 

So what does a good sale day will look like for you? or What does the best customer you’ve ever had share with your next customer and try to figure out what those things are. And then it’s a conversation. And so my job and automation, when it’s done correctly, is asking those questions and then knowing what the answer is in advance. 

So it’s almost like choosing your own adventure. Do you remember those books when we were kids? And it was encyclopedia brown or whatever. You go to page three. And does encyclopedia brown want to go to what it does you want to open the door to the dungeon? Does he want to run screaming out of the house?

Dave Meyer 8:23  

Or does he want to insert option three? We want to have each of those three options for our customers. The customer wants to come up and say I’m interested in this tool. And then you ask them, Well, what does success look like for you? Is it more leads? Is it more connections? Or Is it saving money? Based on their answer, say if it’s saving money, you go into filling them up with information that is going to be additive instead of distractive. 

And so what I mean by that is, am I giving them more of what they’re looking for? Or am I trying to force-fit my product, my solution, into the conversation? And if you take it all the way back to let’s go to like an elementary school as an example. You know, do you want a red crayon or a blue crayon? 

Well, I want a red crayon. That’s great. Red crayons are the best for you because of XYZ. But that doesn’t really match what the customer is trying to do because I’m trying to force-fit the narrative instead. If I say that’s great, a lot of our customers have found that red crayons are helpful in these three directions. Does any of that resonate with you, and then offer up another path to go to additional engagement for most business-to-business communication? 

It’s the general rule of thumb that people will click 80 links before they ever contact a business, whether that’s picking up the phone or submitting a Contact Us form. Our job is to give them as many of those ad clicks by letting them choose their path and having ready answers at every step.

Sam Gupta 10:00  

Okay, amazing. So let’s talk about the whole journey. I think you are touching on a very important point there with respect to the journey of the customer. But let’s distinguish a bit because marketing automation could be for many customers or prospects, or it could be for the existing customers. 

And in my understanding and opinion, I think those two journeys are going to be very different, right? So let’s talk about which one are you talking about here? Are you talking about the net-new? And if you are talking about brand new, how is the net-new going to be different from the existing customer marketing automation?

Dave Meyer 10:32  

Yes, so great question. And the difference between a net new customer and someone that already knows you, perhaps an existing customer is, of course, the existing customer is ten times easier to close an additional deal on, and the traditional marketing funnel tends to forget about existing customers. 

If you think about the analogy of a funnel, what happens with the funnel, you pour lots of stuff in, and then a little bit of stuff comes out the bottom if you treat that funnel as a one and done the waters through the funnel, now I don’t care anymore, you’re missing out on a ton of opportunity. 

And so I like to try to shift with my customers. The analogy from funnel for marketing to the flywheel. And a flywheel is a matter of storing energy, right? It’s what Amazon did, by helping to lower the friction between each point, you know, they found great products, they made it easier and cheaper to get those products. And they made it easier for people to buy those products.

Dave Meyer 11:33  

And it was a self-fulfilling prophecy. We need to do the same thing with our customers. So we want to attract customers in new ways, new connections, and having the traditional marketing, the advertising, the pay per click stuff, the search engine optimization are helping you rank better on Google, all of those things fill up attract, but then you need to engage and engage where that next level the conversations start, where some of that marketing automation can help ask additional and thoughtful questions that are going to lead back to delight. 

So the three phases of the flywheel are: attract, engage, and delight and delight become magic because that treats every new customer, along with every existing customer, as someone who’s still in play, someone who you’re still interested in working with, and someone that you can still add value to.

Dave Meyer 12:29  

And so if I’m thinking about those people, if I’m asking them thoughtful questions, if I’m thinking, Okay, well, what is my best customer going to need next, after they’ve already started doing business with me, that dramatically opens up the amount of new business because it’s with existing customers. But it’s also so much easier. You don’t need to spend hundreds or 1000s or tens of 1000s of dollars on an ad campaign to reach somebody that already knows you because you have their email address. 

They already know you. The barrier to reentry is much lower than if you’re trying to work with someone that you’ve never worked with before. And in most B2B, there’s a high trust factor. And so, once I’ve built up that trust by forging an existing relationship, it makes it so much easier to resell or to add additional services and deepen relationships.

Sam Gupta 13:23  

Okay, so then, as you know, my goal in this conversation is going to be I’m actually trying to act as a CFO because that’s my target listener, right? So I’m actually trying to connect the dots for them because they are not going to have as much marketing background. For them, it might be slightly harder to follow things from the marketing perspective. 

Do you have any specific stories, so let’s say if I’m the manufacturer, right, and there is this kind of notion in the manufacturing community, and obviously, I speak to a lot of different marketers as well? And they seem to think that manufacturing companies are primarily tradeshow-driven. 

They don’t do as much either marketing automation or digital marketing, or SEO. They are not driving as much traffic from the SEO perspective. So let’s pick some stories. Because if I were a CFO and I have some sort of story or a situation, then I’ll be able to relate more. 

So let’s say if you were to answer this question in the form of a story, right? So tell me if I’m the new manufacturer, and I’ve, let’s say, never done any sort of marketing automation. I don’t have as much understanding of digital marketing, and you are trying to coach me, okay, yes. How to start on the marketing automation. What are the things that I need to know to start on the journey of marketing automation? So how would you do that?

Dave Meyer 14:46  

Perfect, yes, and absolutely. I have a fantastic example from an existing client of ours that we’ve worked with for the past three years, and that was dramatically disrupted by COVID. 

Right now, we’re talking in March 2021. We’ve been in this COVID thing for a year. And for manufacturers, in particular, this customer, they were doing everything right. You know, we had a marketing that we were doing, but they also did a ton of trade shows, and they were on the road quite a bit. 

As everyone that’s done a tradeshow knows, there’s a significant investment in travel in setting up the beautiful booths and setting up meetings. And just in handling all of the interactions that happen inside of a booth, what most manufacturers tend to think is that just being there is somehow magically going to get them the business. 

You don’t have a wonderful sales team that’s proactively going out and shaking hands and engaging, and you have great giveaways and things to engage and bring people in. The likelihood that you’re going to get real actionable leads is kind of low for a trade show. Now you’re just kind of sitting there with several dozen or several 100 other businesses that are all trying to do the same thing right alongside you.

Dave Meyer 16:02  

So how can you be more thoughtful with that, and with this particular customer, they had a Bible that they looked at, it was a manufacturing tolerance, that listed every little thing that you needed to know about the requirements for pressing, thin sheet aluminum versus thick sheet, or another example client, we have a printed circuit board maker. 

And so all of the different things that go into rapid prototyping, right, so the juxtaposition between traditional old school marketing of just going to a trade show, which trade shows or high target environments, or you know, rich target environments where there’s a lot of people that are theoretically there to buy, but there’s a lot of competition, and you need to be really thoughtful in your follow up. 

And so what we found with our customers is, especially after COVID, and they literally couldn’t meet at these trade shows anymore, because all the shows were canceled, we had to backfill that activity with something.

Dave Meyer 17:01  

And so what we did is we just came up with an email marketing campaign that took advantage of all of the existing customers and contacts that they already had in their CRM, their customer relationship management database. 

In this case, the customer was working on a tool called HubSpot, very easy to use, integrates with all kinds of other marketing and other things. We dovetailed what we knew about our customers, and we sent out a message to the people that we already knew and sent them the Bible that’s manufacturing tolerances book. 

But here’s where it gets interesting. That book was separated into several different sections on the kinds of things that you could do in precision manufacturing, were you sourcing material, were you trying to engineer new parts? Were you looking for rapid prototyping based on each of those options? We knew where that person looked at the documents. So in the tools that we have, if they downloaded that PDF, we knew how long they spent on each given page. So we know they went to the precision stamping page.

Dave Meyer 18:05  

And they stayed there for like 35 minutes that triggered an automatic deepening relationship, or we sent them another message, perhaps a blog post, or maybe even a demo video helping them break down and answer the questions that we knew they were probably asking. 

That’s much more scalable than even having a salesperson grabbing a business card and calling someone and having a conversation, right. So now, all of a sudden, our website, our marketing, our email tools, and our CRM are all working together to proactively and thoughtfully follow up with those targets. 

So that makes it much more scalable and repeatable. And on the backside as well. The Sales Team, all of a sudden, had exactly what they were looking for.

Dave Meyer 18:51  

They went from what we call marketing qualified leads, or just visits into the system to sales qualified leads, which means that our team was actively vetting each one of those contacts, are they likely to actually turn into a deal? 

And then the sales management was able to look at it and say, Okay, well, Bob on our team has been connecting with 18 people a week in this particular section in the precision manufacturing world. And so we know that Bob is doing his job, but it looks like Jim has had some trouble. 

Jim’s only made four calls in the past week, or he left four voicemails but didn’t actually get through to anyone. How can we help Jim get more information and give him more of what he needs? So we bolstered that part of that job to help Jim get what he needed. And so we gave them additional white papers or process sheets. We actually had the sales team coach him on what he needed to do.

Dave Meyer 19:50  

And so it gives you a lot more data and helps you be much more thoughtful inside of the entire sales process. So that’s kind of the new way of doing this and the way that you can use marketing materials and a CRM and an automated process to make sure that you’re not dropping any balls. 

Another example from a customer of mine is they were using post-it notes and Excel spreadsheets to keep track of all of their deals. Every month, they would have a trade show. They would get a big data dump from that trade show on everybody that attended. And they would send out the entire trade show worth of people, you know, the 2000 people that attended that show a blast email saying, Hey, we do our thing. And here’s what we do.

Dave Meyer 20:32  

And you should work with us. Yeah, not very engaging. And there’s a word for that I’m based in Minneapolis, Minneapolis, and Minnesota is actually the home state of spam, the actual food, right? 

So that spam whenever you’re sending people stuff that they haven’t asked for that they’re not interested in that spam convert, or juxtaposing that, too, I know that I’m interested in this particular thing, and someone is sending me information on that particular thing that I’ve expressed interest in, and then doing thoughtful follow up. 

It’s an entirely different conversation. And it’s very much the difference between the old school traditional car salesmen with the dancing gorilla on top of the building and trying to go in and saying, hey, you need the undercoating and all that and the juxtaposition of that with someone that takes the time to educate their customer on the benefits of doing something in the way that they can write. 

So it’s the difference between always talking about yourself as a business and meeting the needs of the customer and showing them how you can help them be successful in their world. 

Sam Gupta 21:42  

Okay, so I’m actually going to have two follow-up questions on the story, obviously, an amazing story. But let’s say if I think from the CFOs perspective, and you are comparing this situation with a trade show, in my opinion, I don’t think it’s a fair comparison. 

And I’ll tell you why. Because in this particular case, what you did is you basically targeted the existing customers in case of a trade show. If I’m going to a trade show, obviously, I’m probably going to meet some of the existing relationships. But my primary goal is to generate net new business, if I already have the relationships with somebody, then I can do dialing, and I can talk to them and do the follow-up. Right, that’s the easy part. 

But typically, net-new is going to be the slightly more difficult part. So do you have any story in which you did this with a net-new prospect as well, where let’s say you did not have their emails? And what was the process of getting them engaged on the content? And describe the whole process, from the beginning to the end. How can you generate net new business using these efforts?

Dave Meyer 22:41  

Absolutely. And you’re 100% Right. It’s easy to say: your trade shows are awful, and you can’t do them anyway. But conversely, on the flip side, doing thoughtful digital, hey, that’s the only thing you right now, but be it’s very easy to target based on who you know, you’re trying to reach. 

So in the tradeshow world, and again, if I’m a CFO, and I’m looking for what’s my biggest ROI, my biggest return on investment for spending this money to find new leads right now, it’s kind of a moot point. 

But even if it wasn’t the act of going out and trying to find people and just kind of hoping that they’re going to walk by versus a targeted LinkedIn campaign, where I’m going for exactly the right people is an entirely different conversation. And so what I’m doing a ton of with my customers right now is we’re going deep into the marketing personas, right, the idealized versions of who my best buyer is, and we’re looking at who they are. What roles do they fill in their organizations?

Dave Meyer 23:46  

What are their demographics, where are they physically located? What are their businesses? And what did those businesses do? And probably most importantly, what are the problems that we solve for those people?

So if I’m doing dedicated, thoughtful targeting using LinkedIn Sales Navigator, can be incredibly helpful on this because I know that my best customer is a purchasing officer at a Fortune 500 company that’s responsible for sourcing stamped plastics. 

So that gives me a bunch of keywords to work from, and then I can go out and specifically target that group with what I know they’re asking, you can look at keywords and keyword research and so in Google speak, you know, anything that people type into Google in order to find something about a business or a service is a keyword. 

And so if I know that people are searching for specific things, say it’s precision stamping, rapid prototyping, then I go in, and I can look for what those people are looking for. But then, most importantly, I can see what they’re doing after they interact with me.

Dave Meyer 24:52  

So if you have a tool again, my favorite is HubSpot. If someone clicks on a link that I’ve done or that I’ve created out of my link, In a lead generation campaign, you know, I’ve targeted a bunch of purchasing officers in a different level at a company, and almost like I’m targeting three or four different kinds of people at my target accounts, that’s called ABM, or account-based marketing. 

So I’m looking at specific accounts and saying, okay, for this business, I know that these three people are going to interact with my purchase, are going to be the decision-maker, the detractor, and probably the line-level person that’s going to be actually interacting with me, what are those three kinds of people looking for, I generate the content that they’re going to be searching for in my blog on my website, and I make a post on LinkedIn that backs up here are the three things that we can do. 

It’s very solution-oriented and gets them right to what we can do to solve. What I’m trying to get to for each of those accounts is they type the problem that they’re having into Google into LinkedIn, or just ask their friends and the other people that they know in the industry, and we show up as a business. And so it’s the level of detail that you can get and the measurability of all of these things that really seems to speak to CFOs in the business.

Dave Meyer 26:22  

So for finance officers that are really looking at what’s the ROI of every nickel that we spend, if I can say that 33% of this kind of marketing results in a lead that’s actionable for us and that our sales team can dig into, that’s a much easier new sell, or it’s easier to keep doing that particular activity if I know that that’s the kind of result that I’m getting.

And by the way, I can look at it and kind of broad-spectrum say, yes, this kind of interaction, the dedicated LinkedIn connections and emails followed up by our inbound marketing campaign, or the act of giving them more information and helping them do a choose your own adventure until it makes sense for us to call them proactively, that’s far more productive than just doing cold calling, or the last time we purchased a marketing list of people in our industry, we found that 23% of our links were just dead, that the people weren’t anymore at that position, or that the email bounced. It just went out and never got to anyone. Another 5% actually did click on it, but then the other 80% of folks never opened our email.

Dave Meyer 27:37  

Conversely, I can see that what I’ve been doing in other areas has either a higher or lower conversion rate. So it lets you make fact-based decisions based on the data that you’re collecting about what people are actually doing very hard to do in an in-person relationship. 

If you’re just walking around to a trade show, unless you have one of those barcode shooter scanners, and even then, you’re relying on people holding up their badges and letting you scan them. 

But when you’re interacting with them via automated email, online marketing, advertising, everything that you do is measurable and, therefore, decisional. You can actually make a decision based on the information that you’re getting. 

Sam Gupta 28:17  

Yeah, I completely agree with the measurability aspect of marketing automation. But I actually want to go back to the story. And I want to touch on one more point there. And that is going to be your comment related to the spam, right? 

So in my mind, when I look at these times when typically the way people perceive spam, if I don’t need something, and I think you mentioned this as well, right? That, you know, if I’m not looking for something right now, then that is probably going to be as bad even though it is not as spam, right. So identifying that purchase signal is always going to be difficult, irrespective of whether you are targeting the new customers or the existing customer. 

And finding the purchase signal was so easy, irrespective of whether you are cold calling or doing the marketing automation, the challenge is going to be similar. So how are you able to identify the purchase signal in the case of marketing automation when technically none of these signals can do that as confidently?

Dave Meyer 29:16  

So the part of the answer is by adjusting the number of touchpoints that you have, which gives you more data to play with. So if I send a message out, or if I’m doing an advertising campaign, and I expect that I’m going to reach 100 people, that doesn’t really give me a lot of data. 

But if I try to reach 25,000 people, that’s going to be a much more actionable set of data. One of the other things that we need to do is kind of just act in good faith and know that our people, our best prospects, are going to be searching for us at some time in the near future. 

So I teach courses for Google. I’m actually one of 12 people in the country to rise to speak on behalf of Google about search engine optimization. And here’s what the engineers at Google are actually telling me. And if we could optimize, or if I could wrap up search engine optimization, or SEO in one sentence, it’s as useful as possible to your audience whenever possible.

Dave Meyer 30:19  

So having a deep bench of helpful information is going to give you many more touchpoints, many more options, many more ways for that person to enter into your sales funnel or engage with you than it is if you just try to be super targeted every time. 

So our job as revenue drivers for our organization is simply to be as useful as possible to the people that need our services. Yeah, that’s much easier to do digitally than it ever has been before. Eventually, trade shows and things are going to come back, and we’re going to be able to do these. 

I think the way people are in or interact with trade shows is going to be different no matter what. We’re going to have a lot of different touchpoints. And everything’s going to be more measurable, more connectable, and we’re going to focus on having a fairly low bar for people to clear to start an automated conversation. 

And what I mean by a low bar to clear is you’re probably not even when we were at trade shows, we weren’t walking around and saying, Hey, can I get your credit card number? Because I want to double-check to make sure that you’re a qualified candidate or hey, can I have your social security number or whatever that is, right? What you’re asking people is if you’re interested in our services, grab this sticker, or this mug, or whatever.

Dave Meyer 31:36  

And in trade for that, I just want to be able to scan your badge so that I can send you some follow-up information later. That bar that you ask people to cross needs to be equal in value to the content that you’re giving them, right. 

So if I’m giving away a car, I can ask a lot more questions than if I’m just giving away a pencil. Or if I’m just letting them sign up for my email newsletter, right email newsletter, the best you’re going to get is their email address. If you’re giving away a car, you can probably ask a whole bunch of signals and see what they’re actually interested in. 

And you can be much more integrated and interactive right from square one. So it needs to match the value of what you’re asking for. But then you also straight just need to go right back to how can I make the process that they’re going through in their buyer’s journey, as they’re looking for and researching? 

Am I a good fit for them? How can I make it as easy as possible for them to find what they’re looking for, to understand that I’m the best solution for them, and to feel reassured that they can trust that I’m going to deliver on the promise that I’m making?

Sam Gupta 32:42  

So let’s go back to your comment about the volume. And this is probably going back to my earlier question related to where your spot is going to be fit, right. So you mentioned that the purchase signal is going to be slightly superior. If you have, let’s say a lot more data points. So let’s say if you’re sending the email to 25,000 people, right? You are probably going to be in a slightly stronger position to be able to tell which customers are going to buy. 

And if you have only 100 customers probably will not be as confident, right. So obviously, marketing automation is going to be a data game. The more data that you have, the better your campaign is probably going to perform, the more confident you are going to be in refining your campaign, aligning your campaign. So let’s go back to my question, right. 

And the question was, is HubSpot and marketing automation going to be fit in every single situation, or are there situations in cases where marketing automation may not be a fit? For example, let’s say if I’m selling to 10 customers, would marketing automation still make sense, or should I rather do the plain old cold calling because that personal touch matters a lot? We have come a long way in terms of understanding and appreciating technology. 

But we are still a long way to appreciate the bots or automated emails. So what would be your recommendation in terms of where the HubSpot is going to be a fit?

Dave Meyer 34:04  

Perfect, so for companies that have a captive market and that are basically locked in, all they need to do is say anybody needs some, and everybody that needs some is going to say yes, inbound marketing, automated marketing is probably overkill. 

If you’re going to get the business anyway, you probably don’t need to do that. However, I would probably argue that for many businesses, those doors are slowly closing. And people are being much more thoughtful, and the competition is heating up everywhere. 

I have conversations all the time when I’m doing my own prospecting for BizzyWeb, and I asked people how are you getting your leads, if you’re getting your leads through a dedicated system of people, just like everybody in the market knows me or I’m the only person that provides this particular product or service, you kind of have your market set for you, and it’s overkill.

Dave Meyer 34:59  

In that case, all you need to do is send out an email to everyone that’s on that list and give them the opportunity to keep buying, or probably at that point, you just have dedicated sales reps that call and fill orders. 

Conversely, when you do definitely need as much help as possible is when your particular product or service could be at least perceived as a commodity, or there are lots of other options in the market. 

So if there’s a lot of competition, and it’s a market where a lot of people can just enter it at any differentiation point, without there being a lot of differentiation. So if you’re an aluminum, if you’re a sheet aluminum provider, there’s a lot of places you can probably get sheet aluminum, and there’s probably not much difference between those.

Dave Meyer 35:41  

So what is the thing that’s going to get people excited about working with you? What’s probably going to be some ancillary service, some other things, that’s going to make the process of ordering that sheet aluminum much easier. Or it’s going to be a value add. And you don’t want to race to the bottom on the price whenever possible. You instead want to offer more value. 

And so for businesses that have a lot of options, or for businesses that the competition is strong, and or there’s not a lot of reason for that company to obviously be the choice, that’s when you need to have a more thoughtful and conversational outreach. We work with a customer that does Printed Circuit Boards, PCBs. And there’s a lot of people that help rapid prototype PCBs in all kinds of markets; they happen to be in Silicon Valley.

Dave Meyer 36:33  

And so it’s hot there, there’s a lot of people that are providing that service, what we had to focus on with that customer is that there’s a lot of added value that you can bring into the purchase process. And then it’s our job to identify and illustrate what that added value is because that’s probably what’s going to make that purchase decision for someone that’s the decision-maker, right? 

So if it’s the electrical engineer, that’s saying, Okay, well, we have this switch that’s on this tool, and we need a circuit board to let it work directly. How am I going to get that as quickly as possible? Well, there’s a way to do that. And so that’s what we focus on is what the added value is so short version of my long answer to your question, Sam is Yeah, if there’s no competition, you don’t need inbound marketing. 

But if there’s a lot of consideration that goes into marketing or a sales discussion, that’s when having a deep well of helpful information that will help lower the friction in the purchase process is going to really bear fruit.

Sam Gupta 37:36  

Okay, amazing. That’s great Dave, do you have any last-minute closing up by any chance,

Dave Meyer 37:40  

The only thing that I’ll leave everyone with is no one to raise your hands. A lot of times, we tend to think that we’ve got our market figured out, you know, we’ve been doing this for 50 years, and we’re doing everything that we need to. So, yeah, we just need to update our website, or you get calls from people saying, well, if you did Google ads, you would be at the top of Google search results. 

There’s a lot of noise in the market. And knowing and having a trusted advisor to help you actually convert leads can be incredibly powerful in the sales process for your business, there’s a lot of people out there, and I have an uphill battle every day whenever I contact someone because there’s a lot of people that aren’t that trustworthy in the marketing game, or they just work their system. 

And they guarantee it if you Google SEO, there are millions of results. But it’s the difference in knowing how to make this work for you. And not just having a brochure website that talks all about you and don’t focus on your customer at all. And having a thoughtful, conversational experience that’s going to let your customer warm themselves up and be ready for purchase by the time they call you. 

Sam Gupta 38:51  

Okay, amazing. And my personal takeaway from this conversation is going to be obviously in the sales and marketing world, there’s always going to be noise, but marketing, if done right, they can be incredibly powerful. So on that note, I want to thank you for your time, Dave. This has been a fascinating conversation. Thank you so much.

Dave Meyer 39:08  

Thank you, Sam.

Sam Gupta 39:09  

I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you’ve learned something new today. If you want to learn more about Dave or want to sign up for one of his upcoming seminars, head over to bizzyweb.com/events. Links and more information will also be available in the show notes. 

If anything in this podcast resonated with you and your business. You might want to check other related episodes, including the interview with Jeff White, who discusses why it is so important to identify the ideal customer profile for your offerings to streamline your growth. Also, the interview with Gil Walker, who discusses why CRM is important, and how that fits among other systems, such as ERP and e-commerce. 

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I hope to catch you on the next episode of the WBS podcast.

Outro 40:26  

Thank you for listening to another episode of The WBS podcast. Be sure to subscribe on your favorite podcasting platform so you never miss an episode. For more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guest Dave Hataj, who describes the role gears play in our society. He also describes the process of gear manufacturing and the nuances associated with it. Finally, he shares several stories related to gear manufacturing and procurement.

Chapter Markers

• [0:20] Intro
• [2:28] Personal journey and current focus
• [4:27] Perspective on growth
• [6:11] The overview of the gear manufacturing industry
• [7:59] The challenges of gear manufacturing
• [11:38] The nuances of manufacturing a quality gear
• [14:01] State of automation in the gear manufacturing industry
• [17:47] The importance of communication in workign with gear contract manufacturers
• [24:59] The lead times in gear manufacturing
• [26:45] The scheduling challenges in the gear manufacturing industry
• [37:06] Closing thoughts
• [39:35] Outro

Key Takeaways

• Modern civilization would not exist without gears because everything from our computers, to our tables, to our furniture, to our clothes, to how our food is packaged or delivered and transported. Everything is somehow made with gears.
• Gear can be anywhere from literally under an inch in diameter to many feet in diameter. Gears often need to be incredibly precise. You have an almost infinite variety of the number of teeth of the gear depending on what your goal is and then there are an infinite number of materials that gear can be made out of aluminum, steel, stainless steel, or plastic.
• There’s so much knowledge to learn that it literally takes a lifetime to gain at all, and then you try to pass that on to your employees, and it literally takes years to get really proficient in making the gear.
• We have such an opportunity in this country right now, even with COVID, that we’re asking the question, finally, what’s an essential worker? And I think we’ve realized that those of us in manufacturing, we’re asking those questions are plumbers, electricians, manufacturers, people designing and creating builds, were really essential in this economy.

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About Dave

Dave Hataj is the second-generation president and owner of Edgerton Gear, Inc., a Wisconsin-based custom gear manufacturer, where he has worked for over 30 years. He’s a journeyman machinist, a former pastor, with a Master’s degree in Family Business Systems and a Doctorate of Transformational Leadership. His innovative approach to small business has birthed two additional businesses, two charitable trusts, and a mentoring partnership with the local high school. He is the author of Good Work: How Blue Collar Business Can Change Lives, Communities, and the World. 

Resources

• Connect with Dave
  • LinkedIn
• Connect with Edgerton Gear
  • Website | LinkedIn

Full Transcript

Dave Hataj 0:00

We often don’t think about gears because they’re behind the scenes. But I often say that modern civilization would not exist without gears. It is because everything that is made everything from our computers, to our tables, to our furniture, to our clothes, to how our food is packaged, to deliver the chessboard, and everything is somehow made with it.

Intro 0:20

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned in to the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:56

Hey everyone, welcome back to another episode of the WBS podcast. I’m Sam Gupta, your host, and principal consultant at the digital transformation consulting firm, ElevatIQ.

Gears are among the most foundational parts of machines ranging from food delivery equipment to medical devices. While we all may recognize the prevalence of gears, how many of us know that gear manufacturing is almost like surgery? Yes, that’s the kind of precision and expertise required to manufacture gears. Manufacturing them could even be more difficult if you’re dealing with a customer who does not fully understand the engineering behind them.

In today’s episode, we have our guest, Dave Hataj, who describes the role geese play in our society. He also describes the process of gear manufacturing and the nuances associated with it. Finally, he shares several stories related to gear manufacturing and procurement. Let me introduce Dave to you.

Sam Gupta 1:47

Dave is the second-generation president and owner of Edgerton gear, incorporation of Wisconsin-based custom gear manufacturer, where he has worked for over 30 years. He’s a journeyman machinist, a former pastor with a master’s degree in family business systems, and a Doctorate of transformational leadership.

His innovative approach to small business has worked two additional businesses to a charitable trust and the mentoring partnership with the local high school. He’s the author of Good Work, how blue-collar business can change lives, communities, and the world.

With that, let’s get to the conversation.

Hey, welcome to the show, Dave.

Dave Hataj 2:26

Thanks, Sam. Great to be here.

Sam Gupta 2:28

Of course, my pleasure. Just to kick things off, do you want to start with your personal story and current focus?

Dave Hataj 2:35

Well, I’m a second-generation gear manufacturer, and a gear manufacturer actually makes gears for all sorts of equipment, from printing presses to food manufacturing equipment, to making boxes, to all sorts of things, but I never planned on coming back to the family business. I’ve been back here for 29 years. But I grew up in the shop because my parents started the business in 1962.

So as a child, I used to come down to the shop with my dad and put inset screws and wrapping parts and cleaning parts and cleaning machines. So by the time I was 15, I was already running a lot of the equipment, and I became a journeyman machinist. By the time I was 21. But by then, I said I’d had enough. I already have 17 years experience in running and working in the shop.

And I said I’m out of here. So as a 21-year-old, I just wanted to see what was out in the world. And so I kind of ran away from home, and I moved to California. I swore I’d never been back. I didn’t ever want to be in the gear manufacturing industry.

Dave Hataj 3:34

And then, eight years later, I was newly married, trying to figure out what to do with my life. And my dad was actually starting to have some health issues. And he invited me to come back and take a look at the business.

But you have to understand that the business we kind of think of manufacturing often is dirty, dark, and dangerous, and not a great environment. And that’s kind of the way the shop was back then people didn’t like each other. They weren’t getting along very well.

And so I actually came back and did my master’s degree on trying to figure out how to run the business, a family business, and see what would happen if we brought values back into the business and what effect that would have on the company and the shop itself.

So long story short, we plan to come back here just for two years, maybe five years we were thinking of selling the business, and then I’d figure out what I was really supposed to do with my life. That was 29 years ago, and I’m still here.

Sam Gupta 4:27

Okay, amazing. So we have an extended question. And obviously, we are going to be talking a lot more about gears. And obviously, they play a very important role in the whole manufacturing ecosystem. But before we do that, we have one standard question for every single guest that comes on the show. And that is going to be your perspective on growth. Dave, what does growth mean to you?

Dave Hataj 4:48

That’s almost a tricky question. Because I think in today’s world, everybody thinks you should grow as fast as you can. And once I had a customer, an associate, who said, if you don’t grow, you die.

And I said, but if you grow too fast, you die. Yeah. And we had another customer who just wanted to give us so much work this over and over and over. He was working seven days a week. His staff hated working there. He was burning people out. And he was actually upset at me because I said, we can’t take any more work right now. And his God, so to speak, was money.

Dave Hataj 5:20

And I’m like there’s a sense that there’s got to be a quality of life, it’s gotta be fun. You’ve got to make a quality environment for your staff. So they enjoy. So you get the most out of them, so they feel empowered. So my perspective on growth is you’ve got to be able to grow in a controlled way that you maintain your values, you maintain your metrics, you have to be efficient proficient, you have to be profitable in a way that it doesn’t get away from you.

Because I think we’ve all the stories of companies who’ve grown too fast, and they start sacrificing their reputation, their values, they start cutting corners. So for me, growth has to be organic. We don’t even have salespeople, and people say, oh, how can you not have salespeople because we grow by word of mouth, we grow with our customers.

So our perspective on growth is we are committed to our customer success. And so, how can we grow with them and not outgrow them, so to speak?

Sam Gupta 6:11

This is the best business, in my opinion. I mean, if you can grow with word of mouth, then obviously, you don’t have to have the overhead of sales and marketing. And obviously, you must be doing an amazing job there.

And that’s why you are able to grow with word of mouth. So now we are going to be talking about the gear manufacturing industry. Okay, so give me the rundown. Obviously, I am not as familiar with the gear industry. And obviously, my listeners are probably not going to be familiar with the gear industry as well. So let’s look at the geographic map. So how is the gear industry laid out? How many companies are involved in the gear industry? What are the current challenges of the industry?

Dave Hataj 6:50

Yeah, we often don’t think about gears because they’re behind the scenes. But I often say that modern civilization would not exist without gears because everything that is made everything from our computers, to our tables, to our furniture, to our clothes, to how our food is packaged or delivered and transported.

Everything is somehow made with gears. So even your biggest customers make cardboard boxes that Amazon makes a delivery to your door or pizza boxes when another of our customers makes aluminum cans and bottles and all the packaging when you go through a grocery store I love going through a grocery store because I can point out almost every single product was made with the assistance of our gears right no gears literally are everywhere, but people don’t know about it.

So from a geographic standpoint, we literally run the world. They are everywhere, yet our industry is struggling with not enough people. There are not enough gear manufacturers simply because we’ve sold students over the last generation that is going into manufacturer is dirty and dark and dangerous, and it’s there’s not a future but yet in our industry every gear manufacturer I talked to is overwhelmed does not have enough that can put out the products.

Sam Gupta 7:59

Okay, so that is very interesting. So, first of all, I don’t know if my listeners are going to be familiar with what gear is and how sophisticated these gears are. So are we talking about just a technical gear with a groove, and if that is the case, what is so difficult in manufacturing a gear?

Dave Hataj 8:18

So gear can be anywhere from literally under an inch in diameter to many feet diameter, so you may need a gear that helps make a cardboard box or runs a printing press. So gears often need to be incredibly precise. So gear has teeth, and another version of gear is called a pulley which also has teeth that run with a belt. And then there are our sprockets which run with a chain. So you have an almost an infinite variety of the number of teeth of the gear depending on what your goal is, how many power transmission your ratios, how fast you need to move the product then there are an infinite number of materials and gear that can be made out of aluminum or steel or stainless steel or plastic numerous products.

And then Yeah, I have all different configurations, like I said from under an inch to many feet diameter that maybe be used in mining equipment. Or we have a customer that actually braids the stents that go into medical that will go into your heart or your arteries for the medical profession. So you have this incredible variety of all the materials all the different configurations. There’s so much knowledge to learn that it literally takes a lifetime to gain at all, and then you try to pass that on to your employees, and it literally takes years and years to get really proficient in gear manufacturing.

Sam Gupta 9:37

So I am not sure if I understand this, to be honest, because see if you look at the current age, we are moving at rocket speed. People are talking about AI. People are talking about going to space. People are talking about building spaceships, and right you are telling me that gear manufacturing is very hard. So I’m still not convinced. Why is gear manufacturing so hard? What makes it so hard? Please tell me.

Dave Hataj 10:04

Well, it’s like with any technology these days. The equipment that runs that you use to make gears. And I’ll make any gear starts off with a raw piece of material. Maybe it’s a piece of steel. But you have to have a saw that needs to go in what’s called computer numerically controlled life of a CNC lathe, well working within oh my goodness, if three 5-10 thousandths of an inch. So if you take one of your hairs and you slice it, yes, six times, yeah, that is the tolerance that we need to work within to make these gears work properly.

So whether the bar and the gear or the teeth themselves, incredibly tight tolerances and so that laid that you learn how to turn the what we call the gear blank, that length could cost $200,000, that’s all computer numerically controlled, you have to understand your all your tooling that used to do that. And then from there, it goes to what’s called a gear Harbor, which actually cuts the teeth.

Dave Hataj 11:00

That machine can easily cost $500,000. But again, we’re working in such tight tolerances, and then the application might call for you to need the teeth to be actually harder than the steel is so that you have to harden the gear through different teeth treating processes. Maybe nitriding is flame-hearted. And then if the gear says goes into a helicopter, the precision even needs to be even tighter.

So now you have to grind the gear. So now you’re looking at a million-dollar piece of equipment to precision grind every tooth and every surface of that gear to the precision. It’s like working on very high-end medical equipment. And sometimes I look at our employees like they’re surgeons because the preciseness of what they do is so important.

Sam Gupta 11:38

Okay, so tell us some stories in terms of bad gear versus good gear. And obviously, if precision is going to be so important in this specific industry, then some manufacturers are not going to be as good.

So when we look at different micro industries or micro-manufacturing verticals, all the different gears that are being utilized in this micro-industry, and what are some of the implications that say if they don’t utilize good gear for the application?

Dave Hataj 12:11

Well, I go back even in the last 20 to 30 years. Yeah, and you’ve seen, we’ve all seen technology just explode in whatever industry we’re all in. It’s just changed so dramatically. We all remember, most of us are not very old. Remember when Google didn’t exist. And when laptops and we couldn’t have a zoom call, we couldn’t do a podcast.

We remember that wasn’t too long ago in our lifetime. So in gear manufacturing, all the equipment was all that we’d call manual. So it’s alternating cranks and handles, and it was very archaic and slow and couldn’t get the quality that we get today.

So if you didn’t keep up with technology in your industry, in my industry, you’re struggling to produce a product that is relevant and practical, and necessary. And even a printing press, let’s take that for an example. Printing presses today are running 510 times faster than what they ran even a generation ago, right?

Dave Hataj 13:06

Yeah. And so, let’s say you’re a manufacturer of bottles or aluminum cans that we all use. If you don’t keep up with the latest precision gears and understand that you have to run faster, you’re going to be out of business.

So I’ve seen customers that don’t keep up, they have very, very old equipment, and they’re going to be out of business. So again, technology has changed so much that for our customers, and for us, they have to be on the cutting edge of how to run equipment faster and faster.

Because the other big thing that we haven’t talked about I briefly touched on, if we don’t have enough people were coming in, that are skilled and making gears, but yet our world demands tremendous more output.

Like for our company, we’re ten times more output than we were just 20 years ago, we’re doing it with actually fewer people. So that tells me we have to figure out how to crank things out faster and faster. And you have to keep up, or else you’re gonna fall behind and be out of business.

Sam Gupta 14:01

Okay, so, what is the state of industrial automation in your industry? So I understand that you need to find people, but then we talk about industry 4.0, and we are talking about how smart these machines have become.

So are you not able to find any automated solution for your industry? Is it not complete for your application?

Dave Hataj 14:21

No, automation is tremendous in our industry, but our shop is not a production shop. Okay, so so we’re not producing 10,000 parts at a time of anyone or hundreds of 1000s like in the auto industry.

So we’re working with custom manufacturers that, let’s say you wanted to start a business and you wanted a pizza box if you want to start a big chain of pizza companies. And so you need 1000s of pizza boxes. So you have to go to a manufacturer says make me a pizza box.

Well, that is a custom size box. So that manufacturer has to come up with your specifications. So, therefore, what makes us successful is that we are the custom shop that can make the gears for the custom manufacturers that makes us the kind of equipment that you need.

So automation can only take you so far you can’t get a robot to just load machines when you’re only making maybe one gear or five gears at a time. So we can only go so far. So the tricky part for us and there’s, in our industry, what happened over the last 20 years, it’s much easier to buy automation than it is to train people.

So the industry has changed. And most manufacturers went the way of higher production. We are like the old-fashioned blacksmith who can make exactly what you need, maybe just one of them. So that’s the challenge. So we can use automation, but you still need that person that can stand there and figure out to be creative and be productive and profitable.

Sam Gupta 15:51

So let me see if I understand this. So obviously, you said that here manufacturing is extremely difficult. And obviously, we have a lot of automation at this point in time that is happening in your industry. And let’s say if somebody is still running the volume parts, then they can do this probably in a cost-effective manner.

But let’s say if they need just a one-off job, then you are going to be better suited for that. Because they cannot match the precision using the automated equipment they’re using, or is that really the cost argument from their perspective?

Dave Hataj 16:24

I think it’s both. One is you got to have very creative people that can think about, okay, we’re just going to make one. But on the cost side, you have to have all this equipment that is all dedicated. So in any job, the setup cost is when you’re working in ERP or whatever the initial setup time takes more time than anything, whatever industry so I think people say, okay, we want to devote all that time to that, but we don’t have time just to set up and make one.

And so I think people have decided it’s much more cost-effective. They think that it’s much more cost-effective to focus on high-volume parts. But our customers are such that say hold it. We recognize that you have all the setup time and making just one part, and we’re willing to pay for it because that one gear is running the entire factory if that one gear breaks, so we may make gear for say its printing press, let’s say it’s $500 just for that one gear.

But if you make 10,000 of them, maybe that cost goes down to $50. Yeah, so people like to focus on the higher metrics of let’s just do the production. But the profitability is tremendous because people understand that, that they need all that setup time, they need that custom part, and they’re willing to pay for it. It’s much more difficult like I said, because you have to have a staff that is very versatile, your manufacturing floor has to be incredibly versatile, you have to have all of the equipment, it’s almost on standby ready to take on that, just that one job.

Sam Gupta 17:47

So let’s talk about some stories. And obviously, you are coming across many different stories where you have to deal with your customers. And since this is a very precision-focused game, customers might say something. Then you might understand something else. And I think we were talking about one of the stories in the pre-show. So I don’t know if you’re going to be comfortable talking about that story. What happened due to miscommunication between your customer was telling you to produce, but something went wrong there.

So tell us some of the stories where you have had problems due to either miscommunication or not being able to understand the design that the customer was looking for. Can you tell some stories about that?

Dave Hataj 18:26

Yeah, and again, in our industry, and I think in all industries we get, we get engineers who come fresh out of college, but they have no work experience. And so, they assume that they know more than they do. And they will often draw things on prints, and we look at it and say you cannot get there from here, you cannot make it the way you have drawn it because they have never worked in a shop before.

So we are constantly working with customers and engineers say you want to make this part better. I understand you want to make your machine faster. But the way you designed it is an absolute nightmare. And that’s something that we deal with literally every week. So our role in serving our customers and working with our engineer saying okay, how can we make this part for you? It makes exactly what you need, but make it affordable, so you’re not wasting so much money.

Dave Hataj 19:16

And that happens so much that it’s actually quite humorous, that it’s gotten to the point that when we work with customers, we identified those customers where their engineers are humble and are teachable.

Yeah, versus working with those customers where their engineers are so arrogant, they think they know everything. And obviously, the best relationship works when we are both mutually respectful of each other. Yeah, we understand their needs. They respect our expertise, and we can help them get there when they’re not respectful, and they don’t listen.

We’ve had customers spend 10s of 1000s of dollars trying to prove that they were right. And it’s so difficult, trying to walk that fine line of pointing out to a customer that you’re really wrong, even though you think you’re right. And we often say the customer’s always right, except when they’re wrong.

Sam Gupta 20:06

Yeah. Nobody likes to see their customers losing money. So right, that we tell them that you know what I mean, this is not the right thing to do.

Dave Hataj 20:16

And sometimes they listen, and sometimes they don’t. And sometimes it’s like raising children. You have to let them learn the hard way and have natural consequences of their decisions of action,

Sam Gupta 20:26

I can relate. So let’s go one level deeper into the story. And you talked about the specific problem of the design. So what was the problem? Is it because the materials that they were using in the design that was not appropriate? Or just because they didn’t have experience designing a gear, that was the problem? What are the core problems in the design?

Dave Hataj 20:49

I think you hit on several of them. One of them, they’ve never made a gear, so they don’t understand the limitations of perhaps the material they chose. Because, okay, a gear can come in a variety of materials, as I said, you can have different hardnesses of steel, and that makes the gear last longer, and maybe it wears out too quickly.

And they don’t understand the stresses that they’re going to put on that gear and all the implications of it. So I think it’s pretty from our standpoint because we’ve been doing this for so long. It’s pretty straightforward. We’ve got one customer for instance recently, that they’re a manufacturer of machines, that prints on paper, whether it’s books, or magazines, or whatever it might be, well, their customer, they keep pushing their gear so hard, they don’t maintain them properly, they don’t lubricate them.

So then the gears wear out, they crash, something happens, and then the whole machine breaks down. Now you have an entire planet that is shut down.

Dave Hataj 21:41

And it could be 100 people that have to go home because the whole plant is broken because of one gear. So you would think that that customer would order another set of gears to have on standby, right? I mean, if this is such a critical component, you better have that on hand.

But they don’t get in this crisis situation where they say we are broken down. Can you make these gears in 24 hours? Well, normally, it takes two weeks to go through the whole process to make these gears. And so this one, I think, five or six times in the last two years, we’ve done the exact same breakdown service for this customer.

And because we have to do it so quickly, we literally have to charge double because we have to go and change all of our setups in different parts of our company to make these gears, and I look at that, and I go, but why would you pay double if you had just ordered some spares to have on hand.

And I think in today just in time delivery. Often companies don’t understand that. If you don’t have those parts on hand, it’s costing you so much more than if you had thought ahead a little bit.

Sam Gupta 22:44

Okay, so let’s talk about the design a bit more. So what is their driver? Why are they not able to get the design right? And you did mention that they don’t have the experience designing gear. I get it. But when you challenge them, but no, I mean, this is not the right way of doing it. In my opinion, they should be learning. So what is their driver? Is it just the ego? Or is it some other financial driver that they have?

The ego could be there. I see that all the time. But are there any other drivers? That could be, let’s say if they have preferred vendors where they have to use the specific material, or they may have that material in the stock, that could be the reason why they might be using that material. So what are some of the drivers that you see that they can come up with a design and they want to stick with it rather than listening to you?

Dave Hataj 23:33

Well, I think one is ego. You hit it right in the head. So often, you get people that I’ve been doing this my entire life. And I know better. And this is the way we’ve always done it. And it should work. And we have that sometimes in our own company where you’ve got the younger generation, the older generation, and the younger generation wants to be innovative and forward-thinking.

And I think we were all that way when we were younger. But then when we get older, we’re like, Okay, I’m tired, I don’t want to have to be innovative and creative. I just want to do things the way I’ve always done it. And so we run into that quite a bit. So that’s one part is that ego. But the other thing, I think everybody is under so much stress today, we’re so busy, we have so many demands, and it’s not just in our professional life, but it’s in our personal life.

Dave Hataj 24:14

And you often you can’t leave your personal life at home, you really can’t work. We look at our company and our employees. We are whole people. And if your personal life is stressed, we’re going to bring that to work. And then you have all this craziness that happens at work, so I think the time pressures, I think especially with bigger corporations, the pressure to get the product out the door as soon as possible, doesn’t allow enough time for research development and to really think through exactly the process to listen to people like us if they’re designed to gear to get our input in what they need.

Those customers that take the time to listen and to do that research and to test and to listen do so much better in the long run. But when we’re rushed, when we’re stressed, we just make bad decisions. And I think that’s what we deal with some of our customers.

Sam Gupta 24:59

So I would like to touch a little bit more on the just-in-time delivery aspect that you mentioned that you guys are taking roughly two weeks. So in my experience, when I talked to other manufacturers, obviously, they have very sophisticated capabilities these days in terms of their CAD or CAM capabilities, that majority of the work in terms of retooling of the machine is probably going to be done by the software.

So obviously, the specification has to be right. Nobody can really fix a bad specification. If the specification itself is not right, then that machine cannot help you. So obviously, you have to get that right. But you are actually going to get a lot of warnings from your some sort of ad system if that can test all the different parameters that you mentioned. So in your case, do you not have, let’s say, the CAD or CAM capabilities, that the reason why it is taking two weeks for you to be able to set up?

Dave Hataj 25:52

No, it doesn’t take us two weeks to set up? Because we have such a variety of equipment. But yeah, when you’re trying to manage hundreds of orders all at the same time, you work on this workflow, and you say, okay, where can we fit in? And how can we put this size of gear in with these gears, and it’s really managing the entire workflow of the entire shop.

So it’s not so much that we can’t do it. But when a customer called up and said, hey, I need this right now, it breaks that whole flow up. And since with just in time delivery, we have so many customers that they don’t want to stock anything, so we have to stock parts for them.

So it’s this game of how do we get all of our throughputs at the end and have it there for the customer without having all these interruptions? That’s why a lot of customers don’t work with companies. Gear manufacturers don’t want to deal with custom production because your schedules are constantly being interrupted.

Sam Gupta 26:45

So what are you guys doing at this point in time for scheduling? If I asked you that, are you guys doing manual scheduling? Do you have some sort of system that you utilize for the scheduling? What do you have for scheduling?

Dave Hataj 26:57

No, we have pretty sophisticated software that we have every work center for us. A gear may take five or six different machines. So those are called work centers. Yeah, so every operation has plugged into a setup time and actual runtime.

So if you’re making one gear, it might take an hour and a half to set it up in the actual run time is only 20 minutes. Well, if you do production, you still have that hour and a half set up, and then every part, it calculates, okay, 20 minutes times those ten parts. So the software’s very, very sophisticated. We never used to have obviously software to do this. So it was all manually scheduled. My dad would actually keep all the information in his head. So he’d go out to the shop and get some of the software himself. And he was the software, and when I came back and took over the company 29 years ago, I tried to be better than software.

Dave Hataj 27:30

But no, he wasn’t. It was actually pretty funny because I tried to do it his way for the first six months, and I said, Dad, this is insane. I can’t keep track of all this. And 90% of our phone calls back then were people saying, where’s my gear? Is it ready? When can I have it? My dad would have to go out to the shop and look for and say, oh yeah, it’s there, it’s there to that place.

Once we got software involved and we got advanced scheduling, I don’t think we have maybe one or two calls a week now asking where our gears are, and at the click of a few buttons, I can tell them exactly where it’s on the floor are just in time delivery is in like the 97 to 99 percentile we are very rarely late on any of our deliveries which that obviously builds tremendous customer loyalty and allows for even more relationship and growth with our customers.

Sam Gupta 28:38

Yep so I can relate to the problem of there is going to be a little bit of chaos there with respect to managing the workflow, and obviously, that is going to require time. So do you have any other interesting stories that you have seen where, let’s say, the customer did not listen to you, and there were some implications in their plan.

Dave Hataj 29:08

I want to be careful how I tell stories that don’t want to make some of our customers feel bad. But what we’ve run into one of the greatest challenges that we’ve had with our customers is when they have an inspection department within with staff who don’t know what they’re inspecting.

Yeah, so one of our top customers kept rejecting our gears and saying they’re not good. And like, what you are talking about. We have very specific advanced technology inspection processes and equipment, and then go on our equipment says these gears are spot on. That’s as precise as you’re going to get, and they would come back. Nope, they’re not good enough.

Finally, I went to visit them. And their inspection equipment was literally 60 to 70 years old. And our equipment is all state of the art within the last five years. And they’re trying to tell me that their inspection is better than ours. And I remember one time, I had to beg this customer, and I said, look, we’re gonna fight this over and over, have you put the gears actually in the machine to see if they fit?

Well, no, we know they’re wrong. I said, they’re not wrong. I’m trying to be as respectful as possible. And I’m getting angry. I’m getting so frustrated. And I said, look, I will pay you to put the gears into the machine to see if they work. And if they work, I don’t have to pay you. But if they do work, we just solve a very big problem. And very reluctantly, they put the gears in. And guess what? They work perfectly.

Sam Gupta 30:55

So you have to tell me a little bit more about the story. Okay, so why were they not putting the gear? Was there any financial motivation? Are they afraid of the machine failing or the machine breaking down because of the gear? What was their motivation?

Dave Hataj 31:11

Well, part of it, the gears off, and gears are very deep in a machine. So it could take them half a day, hours to put the gears. So it’s financial. Yeah, it was going to be a big stretch for them. And they didn’t want to waste half a day, and they’re under time pressure to get this machine delivered to their customer. So I get that, but we were wasting so much time.

And the other part of it, then we got back to ego, they did not want to admit that they were wrong. And they had people that had been there for many, many years. And they said, well, I’ve been doing this my entire life.

Dave Hataj 31:47

And I know if they’re right or wrong. And the worst part is finally once we prove to them that our gears were right. The worst part to me, as I said to them, finally one day said, Look, I’ve been to your company, I know our equipment is so much better than yours. And they used to make their own gears themselves. And then they stopped because, for a variety of reasons, they wanted to focus more on assembly and outsource all of their other gear-making other machine components.

So I went to visit them. And they were holding us this impossible standard that that was like these gears are good, but you don’t think they are. And finally, I said, I’m sure based on the equipment that you have in your shop, you never made your own gears to this, this quality level.

And finally, the purchasing agent said, Well, we never used to inspect our gears, and I went, you are kidding me. So you really are holding us to another level that you yourself couldn’t meet. And they just instituted this policy that any parts come in the door, they have to inspect, but they’re inspecting them wrong.

So it was just real. It almost got to the point I had to walk away from that customer. But then, eventually, we were able to salvage the relationship. And they got to a point where they trusted us and trusted our equipment and our processes that were producing better gears, and they’re giving us credit for.

Sam Gupta 33:01

interesting. Do you have any more stories?

Dave Hataj 33:03

Yeah, I do have another story. I have so many to choose from. It’s doing this for so long and getting beat up in this business. You learn the hard way, one of our top customers, and I won’t say what industry yet, but this whole idea of being so cost-effective and wanting to be as cheap as possible to get the product is as in, and I get that you want a quality product.

But too often, we look at just what the cost of the gear is without looking at the bigger picture. So one of our bigger customers there is one of our top five customers we probably did a half-million dollars a year of business with them. And they too often these companies and I think you’ve heard these kinds of stories, you get a financial person that comes in all they look at is the bottom line, they look at the cost of the gears, and they demand in the auto industry is famous for doing this, we demand a two to 3% reduction in the cost of your product your gears.

Well, if they demand that every year, you can’t keep up with the cost of wages, equipment, utilities, insurance, all those things. So your profit margins get less and less and less, and we have always tried to give our customers the best price possible with the quality and the service they need.

Dave Hataj 34:14

Well, a couple I’ve had this happen a couple of times where I’ve been called up to the customer, and I’ve said to sit down with what I call this hatchet man you know you’re gonna get beat up when you walk in you say where they’re just going to demand a price reduction, in particular, the one story that I had to fly out to Denver and sit down with this customer, and they hired a new financial guy who had never been in manufacturing, he’s only had been in electronics. So I’m sitting across the table trying to explain to him, this is all that goes into gear manufacturing, and he just looked at me like I wasn’t even there.

Dave Hataj 34:49

And his mantra was, 2%, 2% reduction or we’re gonna have to go somewhere else, and I finally said this is the best we can do, and I’m not gonna fight with you over pennies. This is who we are. So long story short, they pulled all the work, and they went away. And they sent all their business over to somebody in Ireland.

And so here our gears they’re made our steel. So they’re paying for all these shipping costs in Ireland. And I’m going, and then it takes all that time to get here. They can’t fly over. And I thought, well, that’s the way it is. We can’t work for free. We got to make a fair profit. About eight months later, I got a call from one of the purchasing agents who had been there for about 30 years.

And he said, Dave, how fast can you make this, the set of gears is like ten different parts. And I said, Well, we can get them out to you within a week. And he said, do it. And he said, and after that, and he’s paying next day air charges to Denver, over the next three or four months, he spent 10s of 1000s of dollars on next day air charges.

Dave Hataj 35:52

And I said what was going on. He finally admitted that the company that was making the parts in Ireland, the quality was just horrible. So they get the parts all the way across from two weeks to get them here, they put them in the machines when or they’d have to rework them, it was costing them double of what we would charge to make the gears and what ended up happening is, and this happens in large corporations too often you bring someone in, they think they can cut costs, but they don’t look at the relationship.

They don’t look like us, the vendor who understands what they need, not only the quality, not only the right delivery, and it ends up costing them more in the long run. And so what happened with this particular company? The senior executives, the owners, came in and fired the entire management team and put in place the old guy for 30 years.

And the old guy says You know what? This is like the third time I’ve been through this. Yeah, because they have these hot shots coming in, they think they can save costs. So for us, our customers and people to understand that if you want a quality product, you got to have that relationship that has a vendor or supplier who understands your needs, and who’s being honest and fair, and has the integrity to supply what you need when you need it at a fair price.

Sam Gupta 37:06

That’s it for today. Dave, do you have any last-minute closing thoughts, by any chance?

Dave Hataj 37:09

Well, for me, one of the things that I often talk about in manufacturing is this perspective that it is dirty, dark, and dangerous and that it’s not a great career path, every manufacturer that I talked to, in fact, I’m speaking at our national conference in a couple of weeks for, but there’s actually a thing called American gear Manufacturers Association.

But everybody that we know said the biggest challenge that we face is finding quality young people that come into our trades. Because of an aging demographic, the average age in most shops right now is between 55 and 58. So in the next five to 10 years, we’re going to be in an even bigger crisis than we are now.

And I would just say for any company or anybody looking to go into business. Boy, manufacturing has an incredibly bright future. And if we can tap into our young people to do that, and I actually believe that blue-collar work in manufacturing, I actually wrote a book about this called Good work, how blue-collar business can change lives, communities, and even the world.

Dave Hataj 38:00

We have such an opportunity in this country right now, even with COVID, that we’re asking the question, finally, what’s an essential worker? And I think we’ve realized that those of us in manufacturing, we’re asking those questions are plumbers, electricians, manufacturers, people, designing creating builds, were really essential in this in this economy.

And too often regret word we’re getting education for, for students for jobs that don’t exist. When the manufacturing world, there are so many opportunities for people to get into, whether it’s gear manufacturing or any kind of manufacturer or any of the skilled trades. So I just think we have an incredibly bright future, but we need to get our people to wake up to say, well, I want to get into that because it’s a real need.

Sam Gupta 38:48

Okay, amazing, and my personal takeaway from this conversation, Dave, it’s going to be, especially since this show is about CFOs. And the finance, folks, I mean, you guys are going to be great at business, you guys are going to be great at running the numbers. But listen to the expert, the person who has spent his life in gear manufacturing or whatever that could be any product.

Listen to the experts who understand what it takes to build that before you get into the cost argument. The first argument is to wait but listen to the expert. That’s going to be my advice. So on that note, Dave, I want to thank you for your time. I really enjoyed the insight. I really appreciated your powerful stories about gears.

Dave Hataj 39:30

Sam, thank you so much. It’s been a real pleasure. It’s been fun talking to you as well. Thank you so much.

Sam Gupta 39:35

I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learn something new today. If you want to learn more about Dave, head over to EdgertonGrear.com. Links and more information will also be available in the show notes.

If anything in this podcast resonated with you and your business, you might want to check other episodes, including the interview with Matt Guse from M.R.S. Machining, who discusses the challenges associated with manufacturing complex parts and short runs. Also, the interview with Mark Oser from Enteras Consulting Group, who discusses how to launch new products by simply changing the packaging.

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform. Or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I hope to get you on the next episode.

Outro 40:32

Thank you for listening to another episode of the WBS podcast. Be sure to subscribe on your favorite podcasting platform so you never miss an episode. For more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guest Kirk Thompson from Chief Outsiders. He discusses how team alignment may be necessary to align with your customer experience strategy. He also touches on removing the choppiness in the sales and operational cycle by systemizing the processes. Finally, he shares several stories where businesses had hit the wall in their growth journey. And required a refined product and pricing model to grow.

Chapter Markers

• [0:20] Intro
• [2:48] Personal journey and current focus
• [4:08] Perspective on growth
• [7:15] Customer experience strategy needs across industries
• [11:41] Business model innovation through customer experience strategy
• [14:05] Product model innovation for highly engineered solutions
• [26:10] Changing the product offerings from service to congfigurble products
• [30:06] Factors that affect customer experience strategy
• [34:15] Closing thoughts
• [37:42] Outro

Key Takeaways

• Once they shifted that mindset, they invested in technology to support the customer’s needs. And the customer’s ability to stay in touch with the business. And then obviously, their ability to service the business when needed on almost on demand.
• The more you can put in control in the hands of that user, the better off.
• Holding the price meant better margin, it meant better consistency and the pricing strategies. It gave them just a better way to say, no we really are the ones who you can count on. You can count on for what you bid and propose and see through that process. But all the inevitable variables that will come up even once we start once a job starts. Once the production starts, Once the installation starts.
• If you’re really solving problems like assurance, quality, safety, the moment you elevate that problem statement. Just for a split second. Typically it illuminates the way people process technology systems. This speeds up what you can and to allow the value add conversation to really add growth. And add more attention to your relationship with the customers. And help them grow their businesses.

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About Kirk

Kirk Thompson is a 30-year marketer, having led marketing teams and growth strategies for retail & hospitality giants. He has won branding and innovation awards across four corporate roles, and speaking at industry conferences and marketing organizations. Today, he is focused on building revenue performance, go-to-market, and content strategies for professional services firms and distribution companies as part of Chief Outsiders, a national management consulting firm. Passionate about the customer experience strategy, Kirk works with small & medium-sized businesses ready to accelerate growth to the next inflection point.

Resources

• Connect with Kirk
  • LinkedIn
• Connect with Chief Outsiders
  • Website | LinkedIn

Full Transcript

Kirk Thomson 0:00

Holding the price meant better margin, it meant better consistency and the pricing strategies, it gave them just a better way to say no, no, we really are the ones who can count on for not only what you did, and we propose and we see through that process, but all the inevitable variables that come up even consequences.

Intro 0:20

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:56

Hello everyone, welcome back to another episode of the WBS podcast. I’m Sam Gupta, your host, and principal consultant at digital transformation consulting firm, ElevatIQ.

Most people think of customer experience strategy as providing the best customer service. But in reality, it’s much bigger than that. It’s about removing the friction and choppiness from each, and it’s making the experience personalized while not compromising on scalability. The customer experience strategy requires a rounded approach starting from your team alignment, offerings, processes, and the product bundle.

In today’s episode, we have our guests Kirk Thompson from Chief Outsiders, who discusses how team alignment may be necessary to align with your customer experience strategy. He also touches on removing the choppiness in the sales and operational cycle by systemizing the processes. Finally, he shares several stories where businesses had hit the wall in their growth journey and required a refined product and pricing model to grow.

Let me introduce Kirk to you.

Kirk Thompson is a 30-year marketer, having led marketing teams and growth strategies for retail and hospitality giants, winning branding and innovation Awards across corporate roles. And speaking at industry conferences and marketing organizations. Today, he’s focused on building revenue performance, go to market and content strategies for professional services firms and distribution companies as part of Chief Outsiders, a national management consulting firm. Passionate about the customer experience strategy, Kirk works with small and medium-sized businesses ready to accelerate growth to the next inflection point. With that, let’s get to the conversation. Hey, Kurt, welcome to the show.

Kirk Thomson 2:41

Hi, Sam, it’s great to be here.

Sam Gupta 2:43

Of course, my pleasure. Just to kick things off, do you want to start with your personal story and current focus? I would love to.

Kirk Thomson 2:48

I’d like to think of most of my career as having dealt with the major verbs of life eating, drinking, design, shop, build travel. I feel like sort of a couple of of those verbs. I dealt with most of the major things that I think people enjoy and are challenged by and just treat as part of their lifestyle, different types of companies, a lot of corporate background, but I evolved several years ago into a consultant because I loved that whole problem-solving aspect that was part of taking a business and really driving it into a growth space.

And that has led really to where my current focus is helping businesses that have maybe hit a sticking wall, if that makes sense, Sam, yeah, kind of just get to that point where the growth doesn’t seem to come quite as naturally. It’s not as organic to the business. They just get a pass-through.

They got to figure out more problems to solve more new territories to go into. And that, just to me, is ripe territory for really helping businesses grow. And from my lens through the perspective of really dissecting what’s a new customer area? What’s a new customer group? What’s the way to really take that customer experience strategy to a whole different level and open up new revenue growth?

Sam Gupta 4:08

So you might be stealing my questions here because that was going to be the next question I was going to have for you.

Kirk Thomson 4:15

I’m happy to anticipate your next conversation. I really am. It’s funny, I think it’s just a natural evolution, and I like the nature of telling my story, but kind of tilting it over towards where I think the most interesting business problems and business opportunities are, and that has been really through that lens of the customer.

It’s just one of those things I’ve honed through all my career, and I find that as I am a consultant and I work with a wide array of businesses, so everything from construction and chemicals to retail to manufacturers to real estate to services. I find that as long as we come down to the, I’m in a conversation about, hey, are you really getting as much out of your customers as you can?

Are you focused on what your customers are going to need next? And where are the next sets of customers that fuel the next round of growth, then typically that bridges into whatever that companies category is and helps them navigate through that inflection point they’re in where they’re trying to figure out how to double their growth or double their territory?

Sam Gupta 5:30

So basically, my next question was going to be, what is your perspective on growth? And you probably answered by right, do you have anything else to add? In that, we are looking to see what growth means to you?

Kirk Thomson 5:41

Sure, growth to me. I think once upon a time, I thought growth was purely around sales and revenue and great efficiencies, and where’s my bottom line? And those are certainly important metrics to me. But I like to think of growth much more through the lens of where’s more customers, where’s the next customer, where’s the next customer opportunity.

And sure, that starts from a marketing perspective. I’m a marketing guy by training and background, but to me, customers represent all the growth that if I were an operator, if I were a developer, if I were a manufacturer, if I were an entrepreneur, I would be searching for where are those customer groups that I can find, attract, attach, and ultimately really build a long term relationship with and to me, the growth factor in particular that I’ve seen clients and businesses that I’ve worked with bring to the table is that hard point that I think so many businesses have faced about a typical traditional customer relationship of an attracting a new customer and selling them through and then post-sales service or follow-ups to it.

Then it goes to making that work in an online environment and on-premise environment, in my hand environment in terms of tablets, and other sorts of tools, and of course, product specifications, product development, I feel like, in the end, the work that I’ve done throughout all of this leads me back always to really being in touch with the customer to drive growth and then leading the customer because sometimes they don’t know what they need next.

Sam Gupta 7:15

So let’s talk about these different customer groups that you are talking about. And obviously, we are going to be talking a lot more how the customer experience strategy because that’s your focus. From the customer experience perspective, let’s say if you look at different industries that you mentioned, do customer experience needs differ among those industries?

For example, let’s take an example of manufacturing versus distribution versus retail inside manufacturing. It could be, let’s say, aerospace manufacturing, the aerospace manufacturer could have very different customer experience strategy needs, then let’s say, F&B manufacturer.

So what are some of the plans that you have seen from the customer experience strategy perspective? And how do they vary across these sub-industries?

Kirk Thomson 8:01

Certainly, I think the unifying theme to me has been across any of my industries. And I’ll touch on some of those that you mentioned with an example or two. I think just to illustrate that recurring theme really has been that the sales process has changed from the way it once was. And the standard sort of here’s my future benefits specifications. What do you want me to make? I’ll make that for you kind of perspective is now not actually sufficient.

In a world in which everything is tailored, customized, personalized, there’s some sort of value add quotient being added to it. And I speak about that across literally any category. In the case of retail businesses that I’ve worked with Sam, each one of them has struggled with being commoditized. And that commoditization gets obviously in the big way of growth because there’s always a competitor who will be nipping at your heels, there’s always a competitor who will low bijoux, or overwhelm you as a customer with other aspects.

Kirk Thomson 9:02

And to me, if you get down once and for all to what you do uniquely, then in a position that across all the different ways your customers will actually buy from the retailer or from the retail business, you’re going to dissect it differently than you would in the old days in which it might have been a one to one sales operation that then matched up with what manufacturing was making.

And then obviously, everything around service and support would take care of itself. Today, so much B2B sales. So much of every category is driven on an online basis, not a one-to-one sales relationship. Those high-touch moments when sales are really needed. Those are the ones where you’re really developing a custom solution. And that’s a build off of your basic sort of purchasing patterns that happen in retail, ensure it’s about outlets available distribution points are made available, how close can I get to the customer, but At the end of the day that the customers or the clients that I’ve worked within different retail, food, and beverage, or true shopping, retail, or real estate services, all of those really have recognized that to be in front of the customer.

Kirk Thomson 10:15

And to put all the services and the touchpoint in their hands, let the customer control, let the customer dictate more, let the customer take advantage of all that you can bring in a solution, not just a variety of equipment or products.

As another example, I’ve worked once with a commercial kitchen manufacturer, designing a manufacturer, and that business was led for years on the backs of an equipment solution that needed a variety, a range of services and solutions and support. And the CEO, in that case, had the vision of wanting to flip that model.

And to really recognize that while he was a manufacturer, he was a distributor, he was in that kind of the logistics business. The fact is he offered solutions; he added brain power to how to design to fit the needs of the customer. And that dramatically changed the way the use of digital tools, content information, examples really add value to the services or to the equipment solutions that were put on the table.

It made a dramatic difference in helping drive growth by flipping the model to a solution orientation that was empowered by equipment solutions, or manufacturing offerings are technology. And that was a growth path. It changed the way the sales cycle the sales ladder, went for that business, and reproached ultimately to go to market strategy as well.

Sam Gupta 11:41

So interesting, I’m definitely interested in knowing more about this particular story, how they flipped the model, what changes they made, because if you look at our landscape from the industrial manufacturing and distribution perspective, the majority of our audience is probably selling very commoditized product. And that’s how they feel they typically are very sales driven, they don’t really have a lot of marketing background, and then they don’t even have the ecommerce capabilities.

Kirk Thomson 12:06

That’s a very relatable problem. Frankly, it is that process of saying, I’m going to flip the model, right, I’m going to actually offer an idea and a solution that Oh, by the way, comes along with equipment or a manufactured product or a distribution model that supports your business.

And in the case of the example, I’m citing the CEO who rethought how to align account managers and product managers and aligning that in a way that started from basically your solution should fit your business operation. And supply is not just hey, I’ve got a limited supply of equipment that fits your specs, and I’ve got service windows to deliver that or logistics to distribute it to you and meet you, wherever you are. This sort of our greens fees, what made the difference was sitting down with a customer to understand what that business’s growth plan looked like and to fit a solution that was scalable.

Kirk Thomson 13:06

So it is not just manufacturing for one location or for one site in the case of a retail business. But to actually think about what is the next ten going to look like? Are they clustered? Are they all in the same configurations from a design standpoint or from a requirements standpoint, and instead of designing it from listening to what do they want that business to be able to grow into what’s their next customer base look like and then pausing and feeding all that information back to what a product solution set should look like versus just sort of working from what products do I have available and how that matches with it flipping that model made all the difference?

And it didn’t matter what categories we were talking about. It didn’t even matter what types of restaurant or commercial kitchens or commercial foodservice enterprises he was serving. It was the hard pause of saying what your growth plan is. And I’m going to fit that with a more tailored, a little higher-touch selling process, but a more tailored solution of equipment service design custom needs.

Sam Gupta 14:05

So in this particular case, and obviously, I’m very interested in this particular topic because this is right-aligned with our target audience. And there are going to be a lot of manufacturers that are going to have, let’s say, similar offerings or they are going to have very customized offerings.

And they are customized to the extent that they cannot be configurable, right? Because each job that they are doing, probably job is going to be different. So they need to have tons and tons of salespeople, and that process is probably not scalable. So I don’t know if you had to do this in this particular example that you’re citing.

But let’s say if you were the manufacturer, who is doing, let’s say, very highly engineered components and each project or the job that you are doing at this point of time, and you have to make the process scalable. As soon as you introduce any time manual intervention, obviously, the process is not going to be as scalable.

So you have to bring some system components fair in terms of making the process scalable, and Even if you have the organizational process where you are bringing people, the process from the people perspective needs to be scalable as well.

So let’s say if you are in the highly engineered component process where when you look from one job to the next, you are not probably similar. But you have to, number one, make a personalized label. You have to make it customizable. But you have to also make it scalable.

Kirk Thomson 15:25

So the interesting thing for me is I’m going to flip to a different example. So in the case of a chemicals manufacturer and distributor, that line of business is very specific to standards and compliance and regulation—quality Control.

Yeah, there isn’t a lot of variabilities, obviously, in those offerings, right? They are very fixed. And that’s comparable to what you’re describing is the situation that that might help that many might face about Look, I’ve got a pretty locked-in product design or product manufacturing process.

And, and putting that into a nice match for them what the solutions are, for scalability purposes, means I’ve got to actually figure out a way to package together what the right things are that come together.

So in the case of the chemicals manufacturer, for instance, most of their end-user conversations, which is where most of this always begins, Sam is with an end-user conversation, describe to me what the end-user is going to face or find helpful about this or it’s going to speed up the overall production capabilities describe what the end-user case is going to be like.

Kirk Thomson 16:39

That means I can actually take a little bit of work and create that set of packaged solutions that come together in a product solution. After that, some digital or electronic support to it. System support to it’s something that makes the process work smoother for that end user. So end-user case that they’re going to pace for the chemical plant I’m describing, for instance, there was a hard pause on categories of end-users and understanding where those categories existed.

And then taking a little bit of work manpower hours to create what likely were the 80-20 kinds of rules of what solutions would they likely add in beyond the obvious purchase of this line of product? You know what other equipment that they need to support and what other equipment would they need to finish it, and then obviously transport onwards to the ultimate customer, the ultimate manufacturer in this equation, and then stopping one more step and going through content and information that supports that.

Kirk Thomson 17:30

The only way to that we talked about for them to grow the business beyond just sheer numbers, that top of the funnel prospects for that for their chemical lines, was to design the solutions in such a way as to say we’re going to help you with your end-users. And here are half a dozen of the key ways that we can do that beyond just the one product that might have brought you here, to begin with.

There’s always a sort of love for a lead product. And then there are the next ancillary products that go beyond that, that really rounded out for the end-user. And the chemicals. Industry, for instance, starts with one key product, of course, but it is always supported and extended into other end-user categories or other packaging forms or delivery forms. And that requires a more thoughtful approach upfront that can be scaled because that same set of questions is going to be asked across multiple customers.

Sam Gupta 18:31

Okay, so this would be an example of where you did more of the, let’s say, product line extension, right? I mean, the product base innovation where you had revenue coming from, let’s say one product, and now we have some supported products that are actually supplying more revenue, which is amazing, right.

But the example that I had offered, that’s slightly different. So in this particular case, this is going to be slightly more commoditized. Here, one product is not really different from the next. In my example, it was more of the highly engineered components.

So, for example, this is going to be an example of, let’s say, a manufacturer of the parts. And they might be supplying to a machine manufacturer or something like that each part is going to be different. In this particular case, obviously, it is very personalized.

The customer experience strategy is very personalized because each point is different. So anytime the way the sales process is going to look is let’s say if the customer is coming, they are going to talk to the salesperson, they are going to do the entire analysis of whatever they are looking for, then there is going to be a design process, then that design goes to the customer, and then they approve. And then finally it goes to the production, right. So that’s how the highly engineered components work. But now this proof is not scalable,

Kirk Thomson 19:39

But to me, that whole process of ultimately doing the highly engineered and highly customized, highly specific sorts of solution sets needs the toolsets underneath of it so that you know to a certain degree. There’s a whole lot of specification that’s going to come very naturally out of a customer.

I don’t truly need to have the one-to-one conversation to go through the basics to really define that end user. And ultimately, to define all the different very specific requirements that tailor it for that solution that I’m looking for, that one customer for that one use, or for that one product that I’m going to ultimately make.

Kirk Thomson 20:14

So going through almost the rigor of customer profiling is something that obviously system tools really support. And that’s what we’ve applied across a couple of the businesses and clients that I’ve worked within these areas is how much will the customer knowingly and happily give you as profile information upfront to get all of that sort of sorted out from a system standpoint, from a platform interaction standpoint, before we start to actually add the brain and the conversation to it.

There’s an awful lot when you’re thinking about how to manufacture design and ultimately create the specifications that fit that one, use that one specific customer. And a lot of that, frankly, is getting it out all on the table, categorizing it the way we can through proper systems, information systems, entry information from that customer. And then move into a value add dialogue, where the sales team is coming into place, or the product design teams coming into place, then to take the raw material and actually move it. I’m speaking almost in a manufacturing term, but that is exactly what’s needed is more raw information out of the customer to get to the point of tailoring it for the ultimate specifications.

Kirk Thomson 21:27

Otherwise, scalability is difficult. I have to laugh at what you’re describing. Of course, everything becomes a snowflake, right? Yeah. And you got it. You got to design one by one by one. And that’s not scalable.

So that you’ve got to create scale easily in the areas in which most of it is information gathering, specification, establishing and use-based, any of the other technical requirements are going to accompany and getting all of that out upfront, but in a processed automated fashion before you start to add the value add live conversation, live interaction, where now I’m really going to tailor and specify what you need.

Sam Gupta 22:05

Okay, do you have any other stories where you have done either the personalization work or maybe the scalability or the growth was a problem? And then you solved using either finding out some sort of scalable model for the product? Do you have any other stories?

Kirk Thomson 22:19

Well, so one of the retail businesses that I worked with has to do ultimately with supplying services to commercial properties. And everything that involves construction design, additional equipment, support, additional system support, everything that is absolutely pertinent to the operation of a commercial property.

And their efforts were very much with the obstacles. You’re describing Sam, meaning everything became a one-off conversation. It was very time-intensive upfront. Then the solution set would come together. And then obviously, the timeline to actually produce install, ensure that everything is at full operational levels and capacities and off you go, and that the mission there with that particular client was to condense the upfront time in order to allow the actual installation almost post-sale pieces of it, where operational success was the focus to allow that to be where the humans the human beings in the value of the human beings expertise and experience really could come in and help from a team to team perspective.

The process of going through all the litany of requirements of design, manufacturing, installation needs, everything from power requirements to what kinds of protection and security needs would be accompanying it any kind of a solution set for this particular commercial properties, commercial property customers, it meant that doing that had to be as quick almost as it could, in order to really zero in on how to bring it install it and service and support to make sure operational excellence was there.

Kirk Thomson 23:58

That meant standardizing. That meant a more automated approach to capturing all that information. Not in an impersonal way. Of course, yeah. But in a way that allowed for I might call it easy data dump, right? Easy collection of information from, in this case, the property management, the property design, and property construction teams so that it wasn’t so time-intensive.

Most of these solutions are variations on each other. Very few things were true snowflakes to pick that up for a second, they were variations on a couple of key packages or a dozen different key packages of design configurations and installation models and specification models, and it changed dramatically for that business.

It changed the course of their sales growth by 20 or 25%. In the course of about a year year and a half’s investment in working through how to capture that information in a systematized way that meant from the customer’s perspective, it was faster to place a bid, a proposal, a specification list faster to get to actual commitments to how the manufacturing process would work or the installation process would work.

Kirk Thomson 25:10

And then faster to actually getting the team on-site to finish that work and to ensure that everything was up to standard and thereafter let it go and create the business production lines that it needed to it was invaluable.

But it was a laborious exercise, I’ve got to say sand, quite honestly, one that the client knew would take an investment of time and a lot of thought where to get to what are those core sets of upfront inputs that were required.

And once they were done, it meant so much speedier process of working with new customers, onboarding new projects, getting quicker to the ability to manufacture, install and support. For them, it was well worth it to take a short trip to figure out how to automatize and systematize information-gathering specifications, lockdown variations, and customizations. That’s where they needed to be able to jump faster to the actual manufacturing installation and operational success.

Sam Gupta 26:10

This is going to be related to a similar discussion that we are having right now. And I get a lot of customers, especially in the construction space, or the hybrid of construction and manufacturing. And these seem to believe that they don’t necessarily have a product even though they have a product. So from their perspective, because see, every business can have a product, even the service business, you can define a model, you can productize it, right?

They don’t seem to believe that they have a product. And the reason for that is because they don’t, or they are not able to find a common model to be able to create a product, and then they can tailor the experience around that product for that specific customer. Yes, the jobs are going to be different across the customers.

But that does not mean that the underlying attributes or underlying specifications cannot be a product. So what would be your thoughts on that? We believe that most businesses can have a product. And if they can, what would be some of these strategies to define a product model for service-centered businesses.

Kirk Thomson 27:15

I’m gonna think about it, or I’m gonna talk to that through the lens of a client in the construction industry. Okay, and they believe that all they had initially was great relationships and great and great, basic products that could be viewed as commodities, and in sitting down and planning what their growth plan could look like and should look like we pause and said, you’re selling more than equipment, you are selling the benefit of assurance of that construction, going off as planned, going off as safe and secure and efficient as possible.

Because at the end of the day, construction industry businesses live and die on, can they get the job done as spec as originally spec or bid? And can they get it done on time, if not even faster? So that there is where margin lies. So are you selling just a bunch of equipment and in construction equipment?

Kirk Thomson 28:21

No, you’re actually selling the means by which that project gets done efficiently on time, on budget. Those are important metrics when bidding and succeeding in that industry where the margins can make such a difference with a day’s delay, a second day’s delay, a delivery that isn’t there.

And making all of that run like a railway train was important. So it meant a lot of systematizing of logistics flow and managing and managing it like it’s like it was a logistics business, not just managing it like it was obviously manufacturing or an equipment sales business.

Once they shifted that mindset, they invested in technology to support the customer’s needs and the customer’s ability to stay in touch with the business. And then obviously, their ability to service the business when needed on almost on demand, which would be hard. Normally in that kind of business without the infrastructure of good processes and good technology systems. It allowed them to product to truly productize something that ordinarily probably would have been thought of as just the way you conduct the transactions and provide information to the customer.

And instead, it became the value add proposition. It became the assurances of being able for that construction site for that construction manager for the business that are the business and organization that became the means to count on it and therefore locked down expectations around budget and cost and delivery and labor, and those, of course, are the magic formulas right for managing growth and managing successful growth on a sustainable, scalable way.

Sam Gupta 30:06

Yeah, and I’m actually going to talk now about this problem from the pricing perspective; let’s go back to the same example of either construction or construction focused manufacturing, or slightly more engineered manufacturing. They’re a very simple business model, in my mind, so let’s say if they have the highly engineered products, and they might believe that they are slightly more service-centric, and they might not feel that they have a product.

And if you don’t have that, then your pricing is going to be obviously slightly more difficult, right. And you think about the customer experience in case of customer experience. Pricing actually plays a very important role. Because, let’s say if your customer is coming to you, and they are asking for a quote, so let’s say if you are slightly more service-centric business, where you have to go every time, and you have to, let’s say, reconfigure your quote, and you have to price it out, and then you go back to your customer, let’s say that process is going to take two days before you can get approval from your manager before your feasibility team looks at it, right.

So this whole churn is what I call could actually affect the customer experience, because number one, it actually delays your sales cycle. And number two, it’s actually going to not provide the kind of confidence that customers nowadays look for when they transact with a business, right. So if you bought them, right, if your product is like this, then there’s going to be a lot more confidence because you have probably slightly more standard pricing. And it’s actually not going to delay your sales process.

Kirk Thomson 31:31

So one of the side benefits of what I just described that construction business was getting rid of the choppiness in all that delivery process hitting the site at the right time, logistics and distribution part of the business, it got rid of some of the choppiness in that, and it got rid of the choppiness in the pricing conversation, it was a really direct line, just like you’re describing.

So it was a really direct line to supporting a pretty standard. We’re not playing discount games. We do not sort of match competitors, all those things that we all face in business, right? Well, when you can provide assurance when you can truly say what you mean and mean what you say and deliver when you say those things have value and selling assurance and control to a business that often is not in full control and circumstances change, the speed slows down, and delivery slows down, or labor gets sideways somehow or another.

The more you can put in control in the hands of that user, the better off.

Kirk Thomson 32:48

And it meant that what was already a pricing strategy that was not built around, well, we’ll beat our competitor, which many businesses are built on that pricing model. Yeah, they were not built on that pricing model. But it meant when they got through that good work of setting up better processes upfront like that with their customers and clients.

It meant that there was even greater support for the way the pricing strategy would hold. And there was less choppiness realize that prices held the better margins held better, but it also held better because as a business, they were managing the business tighter, they were managing it tighter for the benefit of the customer. They were hell-bent on managing the business tighter for their own business.

And so holding the price meant better margin, it meant better consistency and the pricing strategies, it gave them just a better way to say no, no, we really are the ones who can count on for not only what you bid, and we propose and we see through that process, but all the inevitable variables that will come up even once we start once a job starts once the production starts Once the installation start. There are always those last-minute variables that come into play.

And again, we build the business model from one of assuring customers that all that’s going to go away, and we have the means to pull from our kit or part or kit apart in terms of solution equipment solutions, or added services or quicker service or whatever else picks up the problem for them all the better support for the pricing strategy.

Sam Gupta 34:15

Okay, amazing, that’s it for today. Do you have any last-minute closing thoughts?

Kirk Thomson 34:18

The only thing I always want to come back to is if we just always start from not only what problems are we really solve for the customer, and I don’t mean just the product solution or the delivery solution.

But if you’re really solving for problems like assurance, quality, safety controllable, the moment you elevate that problem statement just for a split second. Typically it illuminates the way people process technology systems to speed up what you can and to allow the value add conversation to really add growth and add more attention to your relationship with the customers and help them grow their businesses.

It’s certainly the way I’ve approached any business, from one that is manufacturing and distribution oriented to one that is more tech and SAAS oriented to one that is retail and consumer-facing. They all benefit from that hard work of just pausing and thinking through the customer experience and where we really add benefit and value to it, as well as then ultimately get rid of all the noise and the choppiness and the mistakes and the problems.

Sam Gupta 35:25

Yeah, and my personal takeaway from this conversation is going to be your customer experience is much bigger than just thinking of it as customer service.

Kirk Thomson 35:35

Sam, thank you. But it absolutely is that customer experience starts from the moment they even think about a need or they think about a project, or they think about what they need to supply. And it goes all the way through ultimately to post-purchase, post-installation, post-production line, and post-manufacturing.

It goes all the way down to the end. I find that growth comes when you think your way, all the way through to that endpoint, because it helps you loop back to another purchase helps you loop back to another project as opposed to the kind of just stopping with I got the sale done. And we’re, and we’re on to the next.

Sam Gupta 36:13

Yeah, exactly. I couldn’t agree more. Thank you so much for this powerful conversation. I totally enjoyed it.

Kirk Thomson 36:19

Sam, it’s been a ball. I love talking about growth. It’s good.

Sam Gupta 36:23

Absolutely. It’s always fun. Thank you so much.

Kirk Thomson 36:26

Again, thank you again. I appreciate it. Sam,

Sam Gupta 36:28

I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today.

If you want to learn more about Kirk and his detailed bio, an introductory video is available at Chief outsiders.com/contact-Kirk-Thompson. Links and more information will also be available in the show notes.

If anything in this podcast resonated with you and your business. You might want to check other related episodes, including the interview with Mark Jaffe from strategic growth consulting, who discusses how macroeconomic trends impact consumer behaviors. Also, the interview with Enrico Parodi who discusses the sales organization’s key components.

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I hope to get you on the next episode of the WBS podcast.

Outro 37:42

Thank you for listening to another episode of The WBS podcast. Be sure to subscribe on your favorite podcasting platform, so you never miss an episode. For more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guest Mike Ryan, who discusses how to do S&OP planning appropriately for a growing business. He also discusses his lessons learned from various KPIs pertaining to sales and operations planning and how to streamline them to maintain appropriate levels of inventory and cash. Finally, he shares his insights into several inflection points of growth for businesses and their needs for proper S&OP systems.

Chapter Markers

• [0:15] Intro
• [2:42] Personal journey and current focus
• [8:38] Perspective on growth
• [10:18] What is S&OP planning?
• [16:04] The implications of poor S&OP planning
• [19:22] On-time delivery and absorption
• [22:48] The accuracy of S&OP metrics
• [26:21] Tracking scheduling on the spreadsheet
• [30:34] Planning issues due to the complex product mix of SMB businesses
• [33:33] Closing thoughts
• [35:12] Outro

Key Takeaways

• S&OP planning takes the needs of sales, balances the demand against the supply that manufacturing provides, and then works with finance to make sure it meet the needs of the business.
• The two metrics that drive the S&OP process are: 1) on-time delivery 2) absorption. And sometimes, these metrics can align, but most often, they don’t. So one way to have really high on-time delivery is to have a ton of inventory. Now while on-time delivery can be exceptional. If you use that bloated inventory method, your cash flow and your working capital are going to be horrendous.
• If you’re using past dues to measure your business, you’re measuring the wrong thing. It needs to be your on-time delivery? Here’s the date. I said I was going to ship it. Here’s the date I actually shipped it. Did I hit it? Did I miss it? It’s very simple. It’s a very simple metric.

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About Mike

Mike Ryan has freed up more than $275 million dollars from inventory across his career, unlocking piles of cash for his clients that are often hiding in plain sight. Besides being an “inventory iceberg crusher” Mike is seen as an “EBITDA Engineer.” As a GE trained & certified Six Sigma Black Belt with more than 25 years of experience, he has solved inventory issues for both middle market and Fortune 500 businesses, translating into optimized inventory, customer satisfaction, improved cash flow, and EBITDA.

Resources

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• Connect with The M. Ryan Group
  • Website | LinkedIn

Full Transcript

Mike Ryan 0:00

It was a forecast of trying to predict for the grocery store how many of each I needed to order on a daily, weekly, monthly basis. I would lose my mind if I tried to do a spreadsheet. It would not be practical and without the cost of managing it.

Intro 0:15

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:51

Hello, everyone, welcome back to another episode of The WBS podcast. I’m Sam Gupta, your host, and principal consultant at a digital transformation consulting firm, ElevatIQ.

As your business grows, it’s hard to find that Goldilocks zone of inventory so that you neither lose on opportunities nor lock your cash down. S&OP planning is easier said than done. The problem becomes even more complex when you might have a high mix of your products, especially if you might be planning your KPIs manually or on a spreadsheet.

In today’s episode, we have our guest Mike Ryan, who discusses how to do S&OP planning appropriately for a growing business. He also discusses his lessons learned from various KPIs pertaining to sales and operations planning and how to streamline them to maintain appropriate levels of inventory and cash. Finally, he shares his insight into several inflection points of growth for businesses and their needs for proper S&OP systems.

Let me introduce Mike to you.

Mike Ryan has freed up more than $275 million from inventory across his career, unlocking piles of cash for his clients that are often hiding in plain sight. Besides being an inventory iceberg Crusher, Mike is seen as an EBITDA engineer, as a GE trained and certified Six Sigma Black Belt with more than 25 years of experience. He has solved inventory issues for both middle market and fortune 500 businesses, translating into optimized inventory, customer satisfaction, improved cash flow, and EBITDA.

With that, let’s get to the conversation.

Sam Gupta 2:36

Hey, Welcome to the show, Mike.

Mike Ryan 2:39

Thank you, Sam. It is so good to be here with you.

Sam Gupta 2:42

I’m so excited to discuss the inventory because that is always a problem during my engagement that I do with ERP. So I am super passionate to learn about that. But before we get there, do you want to start with your personal story and current focus, Mike?

Mike Ryan 2:57

I would love to. Thank you, Sam. So I am a ceramic engineer by trade. And right out of college, I went into the most traditional of ceramic industries in that I made sinks and toilets. And it was during that period of my career that I really started to understand the process. Yeah, from there, I had an opportunity to join GE superabrasives, in which we made industrial diamonds. The way I like to describe it is I went from making a product that everybody needs and toilets to a product that everybody wants with diamonds.

With GE, that’s really where I got that six-segment training. The idea of having a process that’s definable, predictable, and repeatable really got hammered into me. And what I learned is that processes are transportable. So when that GE division was sold, I had a decision to make, so I try and stick around with the business? Or do I make my own way. And from there, I leveraged the process experience to get into Good Year, Good Year Tire and Rubber. Actually, in corporate finance, the finance process needed process.

Mike Ryan 4:08

So it needed really an overhaul to dig into what was working well, what they need to do more of, and what they needed to do less of. Yep. And after a couple of years of that, I said, Okay, this is great. I’ve learned a ton about the business and one and a ton about finance.

But I want to get back to my roots in manufacturing and supply chain, and operations. And it was at that point that I was introduced to S&OP planning. And the process spoke to me because it had all the functions represented. It had sales, manufacturing, supply chain, procurement, marketing, finance, all sitting around the table, you know, talking at a level to really understand here’s where we want the business to go, set the strategy and then begin to work in here are the things we need to do on a regular cadence to keep the business moving, and for me, That was really where I started to get the understanding of how critical inventory was and how inventory tied to cash flow.

Mike Ryan 5:09

So once we got the process to where it was steady-state externally class, a certified S&OP planning. The other thing I learned about myself, Sam, is I am not a good maintainer for me. I’m the guy you call when your car’s in the ditch. I will get you out of the ditch. I will get you up on the road, put you on the right path, get you off and running.

Yep, keeping the car between the guide rails or simply managing the business. To me, that’s better handled by somebody else. So I went looking for my next opportunity. And it came with a S&OP planning business called Carlisle break, and friction was looking to implement the global process. And I said, This literally has my name written all over. I worked on an interview with the president of the business. He said you’re the right guy for this.

Mike Ryan 5:55

And with S&OP, it really comes in under that umbrella. It gave me an opportunity very early to understand the business from stem to stern spent a couple of years with Carlisle and then went to a small family office-owned business.

And it was really then that I realized these corporate big company best practices could absolutely be leveraged in smaller businesses. And it didn’t need 100 people deep worth of resources. It really just needed key representation from each of the functions and having meaningful conversations that were metrics-driven to get everybody working together.

And from there, that business served the oil and gas industry very, very heavily. And when the oil and gas bubble popped that business to some extent, pop, so I found myself saying, okay, I can put my hand, and I can put my fate in the hands of others, or I can figure out and make my own way because I realized I had something to give, especially for those middle-market businesses, those businesses that we’re a publicly-traded word on the stock exchange, but made up of regular good people that may not have that exposure to these best practices.

Mike Ryan 7:17

And Sam, how I got to inventory was, yeah, I literally printed out 20 years’ worth of resumes, and I looked for the common themes, and common threads, one of them was six sigma and lean, continuous improvement.

I’m like, okay, but that really doesn’t. I didn’t feel like that had a hook, where I started digging deeper. I see American Standard inventory, Goodyear $200 million worth of inventory, Carlisle, $65 million, and on and on.

And I’m like inventory is the common thread because to me, inventory is an output. And you can shape that output by understanding the balance between supply and demand. So that, for me, was how I got into inventory because I realized that there are so many businesses out there that struggle. Either they’ve got too much inventory, and it kills their cash flow, or they don’t have enough of the right inventory at the right time.

And then they end up with very, very unhappy, angry, frustrated customers. So to me, it was that natural fit that natural progression between S&OP planning as the umbrella and inventory as the link to cash that I said, This is my mission, I want to go out and help as many businesses I can not only deliver on their customer needs but deliver on the needs of the business itself.

Sam Gupta 8:38

Okay, amazing. And I cannot agree more inventory is definitely the heart of the business. And sometimes, people say that this conversation is slightly biased. But I have seen this in the ERP implementations as well, that if you don’t get inventory right, then obviously your organizational view or the MRP view is most likely is not going to be right.

So on that note, I am going to start with the next question. And the next question is very standard. And that is going to be a perspective on growth. So Mike, what does growth mean to you when you think of this keyword?

Mike Ryan 9:11

So how inventory relates to growth for me, Sam, is that if you don’t have the right product at the right time, no matter how fantastic your product is, you’re not going to have the revenue to grow the business, you’re not going to have the profits to grow the business, whether you’re a manufacturer or distributor understanding that having the product the customer wants when they want it.

Ultimately, that’s job one because if you don’t have something in stock, customers are simply going to go someplace else. I mean, it really is that simple. So if I’m on Amazon and I’m looking at a spatula or a sieve or houseware, and I go to buy it from Company A, and they don’t have it, I’m just going to go to Company B even if Company A has my preferred color.

If it’s not stock, right, I’m going to pick the purple one that I know I can get tomorrow. So really, just as quickly as I can tell the story, that’s as quick as decisions are made. And if you don’t have the right product at the right time, you’re not going to have the revenue. And quite frankly, you’re not going to have a business.

Sam Gupta 10:18

Yep, I agree. Okay, amazing. So now the next question I’m going to have Mike is going to be around the S&OP planning. So I know that let’s say, in the inventory world, and a lot of manufacturers might be familiar with that, right? They might sort of know that what S&OP planning is, but I don’t know how many people know to do it well, so touch on what S&OP planning is, that is number one, you can answer this question in the form of any stories that you have seen where the company sort of knew that they were doing the S&OP planning.

But the planning wasn’t as you would like to do as an S&OP consultant. So tell us what S&OP planning is? And what are some good ways of doing it? And what are some not so good ways of doing it that you have seen in your experience?

Mike Ryan 11:13

So starting with what a good S&OP planning process is, it begins with the customer. It begins with demand and sales saying, Hey, I know my customer, I know how many I can sell, I know how many I need and then turning around to manufacturing and saying, hey, I need this many of product A, this many product B, this many products to see manufacturing that saying I can do that I can build a supply plan to meet the needs of sales.

And then ultimately, it’s looking to see financial sales, the top-line revenue manufacturing ultimately creates the bottom line cost, does that produce the profit that the business needs? So in 30 seconds or less, S&OP planning takes the needs of sales, the demand brings it up against the supply that manufacturing provides, and then works with finance to make sure does it meet the needs of the business?

Now, let’s start with the S&OP done poorly. I’ve got plenty of stories there. That’s probably the easier one to tell you. I was working with a business where every year they went to a big industry show and touted, hey, we’ve got this new innovative product.

Mike Ryan 12:29

This is what’s new, this is the product of the year, and the dealers and the wholesalers and the distributors would put their orders in the right at the show and then wait with bated breath for the manufacturer to deliver.

And guess what? The manufacturer did it. It would take 30-60-90 days before their first orders would even begin to ship. So what would happen is, year, after year has the big annual industry show dealers will put orders in knowing that the business was not going to let them down.

And over time, what happened was this business was losing business to their competition. Even though the competition’s products weren’t as innovative, weren’t as on-brand for what the market needed. They were the business. It was losing revenue simply because they couldn’t deliver.

So, in this case, this happens to be tires, something near and dear to my heart. And coupled with the annual giant auto show is hey, here’s the newest tire technology, the latest, the greatest, and people were excited.

They’re like, Hey, this is what’s new, this is going to deliver better form fit function. I know I can sell these. The car owners are gonna love these. I want these tires and the way the business was planning, or I would actually be more accurate to say the lack of planning.

Yeah, they wouldn’t start building these tires until the orders started coming in, which meant they were already late. Sam, they were late at the moment they took that first order. And then what would happen was they would end up with six months worth of the old tire and zero months of the new tire.

Mike Ryan 14:07

Okay, and wondering why profits were down. So what we did was we said hey, sales and marketing. We know today when the car show is next year, we know what the destination is. Let’s work backward and say six months prior to the launch of this new tire. We need to start burning down, consuming our old inventory, and start ramping up and filling the pipeline with the new inventory.

So we developed it as a phase-in phase-out process. So we were consuming inventory that in the past would not have sold, and we were building up inventory to fill the pipeline’s so the moment that annual auto shows the date showed up on the calendar, the business was able to say we have two weeks of inventory for you in stock with your name on it.

May I please have your order? And by having the new product in inventory to back up the sale, Sam, it went through the roof. That was one of the best years this business ever had simply because they had communications linking sales, marketing operations.

Mike Ryan 15:19

And they began with the end in mind, we know when the show was next year, let’s use that and plan backward and not be surprised on the day of the show when we hit quarters for our new products. So that was a case where taking what we knew and knowing that there literally was a day circled on the calendar helped us plan, and it got the communication going in a very structured way to understand, hey, this is the outcome we’re trying to achieve.

This is the potential both in terms of cash from the inventory that’s going to get consumed, as well as the new revenues, the growth that’s going to be generated. And this all happened under that umbrella of S&OP planning.

Sam Gupta 16:04

Okay, so I would like to go one level deeper into the story and some more colors. Okay. So when let’s say you were doing this S&OP planning before making the changes before going to the annual auto show, what were the kinds of metrics that they were tracking? What were the flaws in the method that they were utilizing for the S&OP planning? What was the disconnect?

Was the disconnect primarily from the communication perspective? Was the disconnect primarily from the inventory planning perspective? And was there just misalignment in the organization? So go one or two levels deeper into the story and provide as much color as you can to the story. Can you do that?

Mike Ryan 16:44

I can. So initially, this was when the S&OP process was relatively new and not very mature. The two metrics that were driving the process, one is on-time delivery. And then the other one was a manufacturing metric of absorption. And sometimes, these metrics can align, but most often, they don’t. So one way to have really high on-time delivery is to have a ton of inventory is to just literally stuff the pantry with as many pieces, parts, and products as you can. Now while on-time delivery can be exceptional. If you use that bloated inventory method, your cash flow and your working capital are going to be horrendous.

Mike Ryan 17:28

The other driver, in this case, you know, manufacturing, was looking at absorption. They were looking at utilization. And in that case, you know, manufacturing tries to make as many as possible as quickly as possible to lower the per-unit cost.

So if it costs me $10 an hour in fixed overhead, if I make ten parts, that means I have $1 per part overhead. If I can make 100 parts. Now I’ve got a 10 cent per part overhead. So the absorption looks fantastic.

So if you’re measuring absorption, your absorption is through the roof. But the second-order impact or the unintended consequence is your cash flow just goes down tubes.

So it was stepping back and saying, Hey, we can get to really great on-time delivery rates by making sure we have enough inventory, not too much inventory, just enough of the right inventory, and then stepping back from using absorption in manufacturing as the primary driver to a different metric that we call schedule adherence.

Mike Ryan 18:40

So if I give you a schedule, and that schedule has five different items and the quantities for those five items, how well did you manufacturing do in hitting that schedule, right. And the goal with the schedule is to make what the schedule says not too few, not too many.

We want you to make what the schedule says. So by shifting the metric for manufacturing absorption to schedule adherence, it really drove the plant to make what sales said they needed, what the customer demand created. So by shifting the metrics a little bit, digging into that second level metric really helped the process get in line and make the right stuff at the right time.

Sam Gupta 19:22

Okay, amazing. So now we are going to be talking about the two terms that you have been speaking a lot, and that is going to be on-time delivery and absorption. And I’m not even sure if all of my audience is going to be familiar with these terms. So can you describe them a bit more? And can you describe how this is going to be applicable in different industries?

Mike Ryan 19:44

Okay, so as for on-time delivery, you have the product that the customer wants when they are ready to order it, so if today is Monday and I promise you delivery on Wednesday if you receive that delivery then, you had 100% on-time delivery. If you did not receive that delivery on Wednesday, then you had 0% on-time delivery and an individual order level. It’s very binary.

So let’s say on one day, I had 100 orders that were due to ship. If I ship 95 of those 100 orders out on time, then I have 95% on-time delivery. So it really becomes on-time delivery is a metric. It’s a way to measure how well you did what you said you’re going to do. So if I make a promise to ship these 100 out on Monday, and I ship 95 out on Monday, that means I met 95% of my promise.

Mike Ryan 20:48

So that’s on-time delivery with absorption. I really, Sam, you, especially in the context of S&OP absorption to me, is an indicator that somebody is measuring the wrong things because absorption is about volume absorption is about throughput.

It’s not about doing what’s right. It’s just about making. What I prefer is schedule adherence is how well did you do from a manufacturing perspective, how well you did based on what the plan is. Similar to the on-time delivery schedule, adherence is a promise if we think about it as a fast-food menu and I’m at the counter, and I say I need five hamburgers for cheeseburgers, three french fries, and two cokes.

So it’s five hamburgers for cheeseburgers, three french fries, and two cokes. That’s my schedule. Now think of this kitchen as the manufacturer. If they make seven hamburgers, two cheeseburgers, six french fries, and four cokes, they don’t make what was requested. So their schedule adherence would be very, very poor.

Mike Ryan 21:52

If it’s five hamburgers requested and four hamburgers made right, four out of five is 80%, they would have 80% schedule adherence on that item. Just like on-time delivery is a promise made versus a promise kept, schedule attainment is that version of a promise made a promise kept.

How well a manufacturer or the manufacturing operation delivers based on what they said they would deliver that schedule it here, it’s so the better your schedule adherence, it means you’re doing a better job making the right parts at the right time. You know, whether we’re talking about tires or machine couplings for the aerospace industry, did you make what you said you were going to make that schedule adherence?

And then on-time delivery is done. You shipped when you said you were going to ship. So that’s how those two metrics really dovetail in together.

Sam Gupta 22:48

Okay, so let’s talk about the SMB landscape. And obviously, these metrics sound so exciting. I mean, if all of the manufacturers had access to these metrics, it would be amazing because you would know so much about your customers, so much about your products.

But when I look at the SMB landscape, the majority of the time, even if they claim that they are using the ERP system, in my experience, let’s say for the scheduling, they are probably doing a lot of their S&OP function on probably spreadsheet or doing the manual data collection.

So even though these metrics could be powerful, in your experience, are manufacturers and distributors able to capture these metrics? And if they are able to track? How accurate are these metrics in your experience when you go across different manufacturers or distributors?

Mike Ryan 23:38

So, Sam, it’s really interesting because in some cases, the metrics of business measures are, well, quite simply the wrong metric. So your business may say, hey, what is our past? What are our back orders? Right? How late? That’s a horrible metric.

If you’re using past dues to measure your business, you’re measuring the wrong thing. Yeah, it needs to be okay. What’s our on-time delivery? And on-time delivery? Sam, you can use your ERP to measure. Yes, you can absolutely. As you’re starting out, use a spreadsheet. Yeah, here’s the date. I said I was going to ship it. Here’s the date I actually shipped it. Did I hit it? Did I miss it? Right? It’s very simple. It’s a very simple metric.

Mike Ryan 24:22

And it’s one of those metrics that you literally could start an Excel spreadsheet, right yet. It’s maybe not sustainable in a spreadsheet, but it’s a great way to get started. And having metrics that matter. And having everybody understand what they are, even if it’s just two or three critical metrics, right? That’s a start. That’s the foundation.

So if I got into a business and they weren’t measuring anything, the two places I would start is, what is your on-time delivery? That’s the delivery perspective. And then for manufacturing, what I would measure is what’s the throughput you have. How many pieces did you put on the shelf? How many pieces did you put into inventory versus how many pieces do you need to put its inventory for?

### Mike Ryan 25:00

So I had worked with a manufacturer that makes sunless tanning, it’s a cosmetics manufacturer. And during their peak season, they needed to put 50,000 units a day on the shelf to support all their customers all their salons and boutiques. So they knew they needed 50,000 a day.

That was the denominator for the manufacturers and their throughput, their transfers to finish goods, what they put on the shelf, that was the numerator. So anytime they were less than 50,000 units a day, they knew they were going to fall behind. Yeah, anytime they were above 50,000 units per day, they knew that number one. They were beating the needs of the business.

And number two, they were getting a little bit ahead. So by looking at from a manufacturing perspective, how many pieces do I need to make a day, whether we’re talking about machined couplings, or tires or cutting tools, or bridge blocks? How many do I need to make a day? And how many am I actually making? So those two metrics, right? It’s the supply and the delivery of the demand that those two metrics are where I would absolutely recommend a business starts.

Sam Gupta 26:21

Okay, so I’m going to touch a little bit on the scheduling part. So the majority of the time that I personally have seen, especially in these small to medium-sized businesses space, the scheduling is not really as sophisticated as I would like to see from the automation perspective.

And they typically have a lot of manual intervention in the process. And when we talk about any planning or decision making, in my experience, the reliability of data or metrics are going to be significantly important.

So when I look at these metrics and let’s say if a business is tracking these metrics, using a spreadsheet, obviously, in case of scheduling, there is going to be a lot of nuances there, in terms of the process collaboration in terms of the parties involved, you are going to have your production involved, you are going to have your procurement involved, you are probably going to have your finance involved as well.

So in your experience, how scalable is the process going to be if they tracked the entire scheduling on the spreadsheet? Also, the entire sales planning on this spreadsheet, I mean, is it realistic? or are these metrics going to be reliable? Is planning going to be reliable?

Mike Ryan 27:26

So Sam, the more complex a business becomes, the less reliable and sustainable a spreadsheet will be. So if you are a business that has two products, literally, you only make two products, and it’s extremely high volume. Yes, you could probably track it on spreadsheets.

But once you get into a business, and this is really, this is when it’s critical to look at what is the business looks like? Is it a make-to-stock business where people order, and it’s an inventory? Or is it a make-to-order business where something is not manufactured until an order is received?

So that’s the first split is make-to-stock vs. make-to-order. And then, even below that, one or two levels down is what’s the relationship between volume and mix. So you may have a business that has four or five, six different products, and they all sell at a relatively high volume, right?

Mike Ryan 28:23

So that’s a high volume example, pretty straightforward to plan and track the metrics and have conversations with the sales team and predict financially.

Okay, if I make this money, it’s going to cost me this much. It’s going to generate this much revenue. And here’s my profit pretty clean, pretty predictable. Now, as the number of SKUs as the number of products grows, and the relative volume of each one of those shrinks.

So low volume, high mix. If you imagine a grocery store, everybody shops, everybody eats. So if you were in the grocery store, and you’re in the cereal aisle, and there were two cereals to pick from in the entire aisle, that’s it two brands of cereal, it would be pretty easy to predict how many of cereal A and how many of cereal B. Now we go into a supermarket today and literally an entire aisle is full of cereal, you’ve got healthy cereal, kids cereal, fiber cereal, traditional cereal, there’s literally if I had to guesstimate there’s probably 90 different types of cereal, and they each shell in different volumes.

Mike Ryan 29:32

If I was a forecaster trying to predict for the grocery store how many of each I needed to order on a daily, weekly, monthly basis, I would lose my mind if I tried to do it on a spreadsheet, it would not be practical, it would not be possible. Right?

So that’s where the strength of the ERP comes in to say, hey, the more complex the business, the more SKUs you use there are developing metrics that matter and tracking them on a consistent basis. It’d be done through an ERP, right?

So if you’re a small business with five SKUs and relatively low volume, yeah, a spreadsheet would suffice. It may not be sustainable in the long term, but it could suffice. Yep. But if you’re a business that does any volume, I would if I had to draw an imaginary line in the sand, I would say any business that has more than $2 million of revenue and sells more than ten different parts or products, you need an ERP in some way, shape or form because the planning quickly gets exponentially much harder if you try to do it on a spreadsheet.

Sam Gupta 30:34

Yeah, in fact, let me see, I was going to have the same comment. When we look at these small to medium-sized businesses, as you mentioned, the example of two products is very rare. In fact, these small to medium-sized businesses tend to be slightly more complex.

If you even look at these products, they are trying to sell whatever they could in their power. And that actually makes the whole planning and the product planning very complex. I honestly don’t know a business that simply sells one or two products. And typically, the complexity of SKUs is probably going to be slightly more in the case of small-to-medium-sized businesses than in enterprises because they tend to plan their product slightly better.

And I have seen in the enterprise base where they might have, let’s say, just some excuses because they have the brand authority, they have the sales authority in the market, and we don’t have to sell 5000 products, they are only selling, let’s say a couple of products, right? Because the product is already proven, the market is already proven. So what is your experience with that?

Mike Ryan 31:30

It’s really interesting, Sam, in that, in some ways, every business is unique. Every business has its unique characteristics and its own really specialized needs.

And in other ways, ultimately, whether you’re a manufacturer or a distributor, right, you buy something, you transform it, you add value, and then you sell it, right. So we’re at 100. If we’re flying in an airplane, 42,000 feet, businesses all look the same. And it’s really understanding, what are the basic needs of the business? How can we meet those needs? And how can we scale the solution as the business grows?

I don’t want to have a solution for a million-dollar business and then put a solution in when that business hits 3 million and put a new solution. And when it hits 10 million, right? I want to have a solution that scales. And when we look at the S&OP planning process, I’ve done it in $20 million businesses, and I’ve done it in $2 billion business. Yeah, yeah, the process scales. And as the process scales, yes, is more resources and more technology that’s required. But ultimately, at its core, the process is still the same.

Sam Gupta 32:46

Yep. All right, Michael, that’s it for today. Do you have any last-minute closing thoughts, by any chance?

Mike Ryan 32:51

For me, I look at inventory like the story of Goldilocks and the three Bears in Goldilocks went in, and this part was too hot. And this part was too cold. Okay, from an inventory perspective, it’s that do I have too much inventory? And it’s going to kill my cash flow? Or do I have too little inventory where my customers are going to hate me, and they’re going to take their business somewhere else?

So finding that Goldilocks zone of just right, that’s something that sales and operations planning process really, for me is that’s the goal, I want to have just the right amount, it means my customers are happy to cash is flowing, the business is profitable, and I can grow my business.

Sam Gupta 33:33

Yeah. And my personal takeaway from this conversation is going to be that Goldilocks is not just from the inventory perspective. That is going to be the Goldilocks for your growth, also for your business. On that note, Mike, I want to thank you for your time. This has been a powerful and very insightful conversation.

Mike Ryan 33:52

Thank you, Sam. I appreciate the opportunity. And I very much look forward to our next conversation.

Sam Gupta 33:57

I cannot thank our guests enough for coming on the show for sharing that knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today. If you want to learn more about Mike head over to MRyanGroup.com. Links and more information will also be available in the show notes.

If anything in this podcast resonated with you and your business, you might want to check out the related episodes, including the interview with Ian Pratt, who discusses how to distinguish between the need for additional resources and operational bottlenecks that need to be optimized before investing further. Also, the interview with Kevin Lawton from the New warehouse podcast who discusses why standardization plays a key role in inventory planning.

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I hope to catch you on the next episode of the WBS podcast.

Outro 35:12

Thank you for listening to another episode of The WBS podcast. Be sure to subscribe on your favorite podcasting platform, so you never miss an episode. And for more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guests Sarah Scudder from Real Sourcing Network and Madison Mobley from Fairmarkit. They discuss different categories of spend that companies typically consider as tail spend. They also discuss how companies can capitalize on growth opportunities by better managing their tail spend. Finally, they share several stories where they’ve saved millions of dollars through better insight about tail spend.

Chapter Markers

• [0:17] Intro
• [2:08] Personal journey and current focus
• [4:02] Perspective on growth
• [33:24] Closing thoughts
• [37:03] Outro

Key Takeaways

• Tail spend is non-strategic things that manufacturers buy, like pens, white-out paper clips, lightbulbs, cleaning supplies, toilet paper, and printed items.
• Tail spend is not actively managed by the procurement team or the finance team, or the operations team. And it’s typically decentralized across several departments in a company tail spend consists of high volume but low transactions. The transactions are typically under a spend threshold.
• Before the pandemic, around 72% of business partners are indicating an increased need to get suppliers in place quickly, but at the same time, only 41% are consistently willing to make trade-offs for faster buy.
• Companies have to spend a lot of money and time, and resources on designing and buying packaging and labels. So those are two of the biggest growth areas in the print space. And in particular, in the manufacturing space. The third growth area in print is coming in the form of direct mail.

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About Madison and Sarah

Madison L. Mobley is an Enterprise Sales Director at Fairmarkit, the intelligent sourcing platform that revolutionizes the way organizations buy the stuff they need. Mobley’s career journey includes time at EMC Corporation, Dell EMC, & Procter & Gamble where she’s held global leadership positions in sales, category management, customer advocacy, and HR strategy. Present-day, her time is spent automating tail spend management and driving diversity, equity, inclusion, and belonging in Procurement Tech.

Sarah Scudder is President of RSN. Sarah is honored to win awards, but she is not defined by them. She loves helping procurement professionals transform the way they buy print and marketing services. She speaks at industry events, serves on panels, hosts webinars, and writes articles for Sourcing Industry Group (SIG) and Procurement Foundry. Sarah created ProcuRising, a magazine that uncovers the unique stories of doers in our sourcing community. Sarah created ProcuremenTalks, a monthly series that features procurement leaders.

Resources

• Connect with Sarah
  • LinkedIn | Website
• Connect with Madison
  • Website | LinkedIn

Full Transcript

Madison Mobley 0:00  

One of the things that Gartner commented on towards the end of 2019. And just before the pandemic is that I think around 72% of business partners are indicating an increased need to get suppliers in place quickly, but at the same time, only 41% are consistently willing to make a trade-off faster.

Intro 0:22  

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:58  

Hey everyone, welcome back to another episode of The WBS podcast. I’m Sam Gupta, your host and principal consultant at digital transformation consulting firm ElevatIQ.

They say that numbers add up. It couldn’t be more true about tail spend, which is the non-strategic spend that most companies don’t care for. The problem becomes more serious if they may not have true visibility into tail spend or if they miss classifying details when this issue typically leads to companies losing millions of dollars in potential cost savings and growth opportunities. 

In today’s episode, we have our guests Sarah Scudder from the Real Sourcing Network and Madison Mobley from FairMarkit. They discuss different categories of spend that companies typically consider tail spend. They also discuss how companies can capitalize on growth opportunities by better managing their tail spend. Finally, they share several stories where they have saved millions of dollars through better insight about tail spend. Let me introduce Madison and Sarah to you.

Sam Gupta 1:59  

Madison Mobley is an Enterprise Sales Director at FairMarkit, the intelligent sourcing platform that revolutionizes the way organizations buy the stuff they need. models career journey includes time at EMC Corp, Dell, EMC, and Procter and Gamble, where she has held global leadership positions and sales category management, customer advocacy, and HR strategy. Present-day, her time is spent automating tail spend management and driving diversity, equity, inclusion, and belonging in procurement tech.

Sarah is currently the President of RSN. Sarah is honored to win awards, but she is not defined by them. She loves helping procurement professionals transform the way they buy print and marketing services. She speaks at industry events, serves on panels, hosts webinars, and writes articles for sourcing industry growth and procurement foundry Sarah created ProcureRising magazine that uncovers the unique stories of doers in our sourcing community. She created ProcurementTalks, a monthly series that features procurement leaders. 

With that, let’s get to the conversation. 

Hello, Sarah. Hello, Madison. Welcome to the show.

Sarah Scudder 3:10  

Hello from the San Francisco Bay Area. It is sunny and nice here, almost tanning weather.

Madison Mobley 3:20  

It’s a pretty nice day over here, too, for a change.

Sam Gupta 3:23  

Sarah, I don’t like to talk about the temperature because I am in Toronto, and you know how the temperature is here. And every time when we get into the conversation. You’re always talking about how nice the weather is there.

Sarah Scudder 3:39  

Notice how I didn’t actually tell you what the temperature was. I just come to that it’s sunny and nice. So on Sunday and Monday, my boyfriend and I were in Monterey and Carmel, and it was incredible weather. We’re talking tank tops, and flip flops at the beat him this tough-talking about weather Sarah.

Sam Gupta 3:59  

 It’s freezing cold here.

Sam Gupta 4:08  

Anyways, just to kick things off. Do you guys want to start with your personal story and current focus? So I’m going to start with you, Madison, if you don’t mind? Can you start with your personal story? 

Madison Mobley 4:19  

Yeah, absolutely, Madison Mobley here, Enterprise Sales Director at a company called FairMarkit, but before I get to what FairMarkit is and what FairMarkit does. I once upon a time thought I was going to be this world-renowned journalist. I’m a sociology major who graduated from Columbia University never foresaw a career in tech sales or procurement or any of the above. 

But my New York City Bills said No, ma’am. Thanks again. And the next thing I know, Fast Forward 10 years I’ve spent my entire career in sales from EMC Corporation to Dell EMC work through kind of that merger and acquisition to Procter and Gamble, and now it’s a fair market, and we are the intelligent sourcing platform that is revolutionizing the way all organizations buy the things they need and so very much expert in the area of tailspin which is why I’m incredibly excited to be here and take part in today’s conversation. So thank you for having me.

Sam Gupta 5:24  

So you’re still pretty much a journalist, in my opinion, medicine because when I see you everywhere on social media, you are always educating on stuff promoting stuff, so in my eyes, you’re still a journalist.

Madison Mobley 5:37  

Well, that makes me feel good because it is still in me screaming to get out it is, but I’m doing the adult thing and working a more standard daily job at this age, my life story.

Sam Gupta 5:49  

Based on the activities that you are doing on social media, I’m not too sure how much you are able to focus on your job right now. 

Sarah Scudder 6:01  

I want to give kudos to Madison. She was just named one of the top 10 influencers in supply chain and procurement. So really, really exciting accomplishment. Una selected ten women that are thought leaders in this space. So I’m super proud of you, Madison. You should be really happy with all the work that you’ve done.

Sam Gupta 6:24  

And then I hope you guys get added to these lists. I never get any recognition. 

Sarah Scudder 6:31  

Well, in this case, it was celebrating women because March is the month of celebrating women. So it’s actually coming out technically on March 1, but they did an announcement this week.

Sam Gupta 6:44  

So I have to ask this. Okay. Are there any lists for men as well?

Sarah Scudder 6:48  

Well, there are. Bam, there are general lists, but I don’t think there’s a top 10 Mail influencer list. So you got to represent and work at Sam.

Sam Gupta 6:59  

Yeah, I need to do that. Because it especially in the procurement community, I mean, it’s overcrowded by women. I mean, that’s what I see on LinkedIn. 

Madison Mobley 7:11  

And Sam, don’t let us get past the fact that Sara Scudder was also on that list of women shaping procurement. So I wanted to make sure I gave space for that and speak to the inspiration that she’s been for us growing in this space.

Sarah Scudder 7:26  

Thank you, Madison,

Sam Gupta 7:27  

You guys are amazing. So Sarah, do you want to start with your personal story and current focus?

Sarah Scudder 7:31  

Yeah, so like Madison, I had no plans to go into supply chain or procurement. That’s a really hard word to spell. And so I was planning to go into fashion. In high school, I did runway modeling. I’m a tall chick. I’m six feet without heels. And I always had thought that I wanted to be an entrepreneur and have my own company, so am planning to do go work for an agency that produces fashion shows and then eventually opened my own firm and do something in the fashion runway business space. 

And that is not what happened at all. I wound up going into marketing. And through an acquisition, I transitioned into doing marketing procurement, always with a focus on helping organizations better buy print and marketing services. And then, about two and a half years ago, I decided to become an entrepreneur and joined a startup called Real Sourcing Network. 

We’re a tech firm that helps companies better by print and marketing services. And it’s been a really incredible journey, lots of highs and lows and having a startup, and we do a lot in the tail spend space because print is typically classified as part of the tail. So really, really passionate about the topic and excited to dive into how tail spend in particular should be on the radar for manufacturers and what they can do to get the tail spend under control.

Sam Gupta 9:06  

Wow. So six feet in height. I don’t think I have ever seen a lady with six feet eight. So that’s really cool for me, and I didn’t even know that. 

Sarah Scudder 9:18  

I wear three or four-inch stilettos. I’m often one of the tallest people. 

Madison Mobley 9:27  

Oh, wow, and let me just say I’m jealous because I’m all a five three, like on a good day. Oh, just not at all impressive on the height front compared to six feet. But I do my best I do it. I can.

Sam Gupta 9:40  

Yeah, people joke about my height all the time. They feel that I’m probably four. So let’s move to the next question. I think you know. We are probably going to cover this whole episode just with jokes, I guess. 

Okay, so we are going to be serious from now on. So Okay, the next question is perspective on growth. So, Sarah, I’m gonna start with you. What is your perspective on growth? What does growth mean to you?

Sarah Scudder 10:02  

Yeah, so I’m going to answer that two ways. First is I think procurement and supply chain as an industry has made tremendous strides in the last 12 months as seen as a function that’s really adding value, being very strategic, and helping organizations, whether that’s a manufacturer, or any type of company, really advanced through supplier management, revenue generation, and getting processes and systems in place. 

So I’m really proud of and excited for the growth that I’ve seen in the procurement space. And I think we’re going to continue to see that as a priority and focus throughout this year and many years to come. From the perspective of my industry, which is the print industry, we’ve seen tremendous growth in three areas. And I’m bringing these up because I think all three are very relevant to the manufacturing space.

Sarah Scudder 11:03  

And because consumers have shifted their buying habits, and they’re not going into brick and mortar establishments, I can’t tell you the last time that I’ve actually gone into a, for instance, a clothing store or retailer and actually purchase something, I’m buying things online. 

And that’s kind of the trend that we’re seeing. And so because of that, companies have to spend a lot of money and time, and resources on designing and buying packaging and labels. So those are two of the biggest growth areas in the print space. And in particular, in the manufacturing space. The third growth area in print is coming in the form of direct mail. 

So if manufacturers are, have a higher-ticket item, or something that they’re trying to market to an end consumer, they’re leveraging direct mail, in order to do that, to be able to send things to people’s homes, because we’re not in the office anymore to help get new customers or win back repeat business.

Sam Gupta 12:06  

Get me things, and I’ll be going to come back to your medicine. And from your perspective. Do you agree with these growth factors that Sarah is seeing in her industry? Are you seeing anything similar in your industry? What is your perspective on growth? And what does growth mean to you?

Madison Mobley 12:21  

Yeah, absolutely. Growth to me looks like right about now, if I think about and I absolutely agree with what Sarah has shared thus far, when I think about the advances that have been made in the procurement and or supply chain tech space in the last year, five years, right? 

They’ve been massive. And what’s been affirmed is that organization-wide spend visibility is now absolutely in reach. When you think about the investments that have been made in the analytics and automation space, where we’re now in a world, it’s possible to anticipate the needs of the business. What I love to see now and what I think about when we have growth conversations, or even the innovations in the SAAS space, is one of the things that Gartner commented on towards the end of 2019.

Madison Mobley 13:13  

And just before the pandemic is that I think around 72% of business partners are indicating an increased need to get suppliers in place quickly, but at the same time, only 41% are consistently willing to make trade-offs for faster buy. 

And what this conversation leads to is how do we create space as procurement professionals where organizations are able to balance speed with other strategic priorities. And so when I think about the conversation that we’re having around tail spend and the benefits of managing it and how to grow out of a sound tail spend management strategy, it could be anything from cost savings to increase spend under management to the reduction of risks, increased productivity, per FTP. 

Those are some of the things I think about when we talk about the climate in this space, the spotlight procurement, and supply chain professionals are now in, and the benefits that come with better spend visibility and better tail spend management specifically.

Sam Gupta 14:13  

Okay, Sarah, so I’m actually coming to you now. And obviously, tail spend is a sort of it could be a new term because our audiences are CEOs and CFOs and not really the procurement people, right, so they might not know what tail spend is. So do you want to describe what tail spend is and maybe share any stories where you have seen the savings because of the term spend?

Sarah Scudder 14:36  

Yeah, so Sam, I was definitely in that bucket. I had absolutely no idea what tail spend was when I got into marketing procurement. It took me a while to get down all the lingo, and my dad is a writer, and so he’s always taught me to keep things really clear and simple. 

So I like to break it down to make it really easy for people to understand. And so for me, I define tail spend as non-strategic things that manufacturers buy, like pens, white-out paper clips, lightbulbs, cleaning supplies, toilet paper, and printed items. 

Tail spend is not actively managed by the procurement team or the finance team, or the operations team. And it’s typically decentralized across several departments in a company tail spend consists of high volume but low transactions. The transactions are typically under a spend threshold.

Sarah Scudder 15:39  

And so a lot of organizations that we work with, and I know manufacturers have this as well, there will typically be some sort of minimum if an order is over $50,000, or $100,000, there’s a process or procedure that you need to go through might include RF, ping it getting pricing from some different suppliers, or they’re just some processes that you need to follow before you can go and cut that purchase order. 

But if something that you need to procure is less than that, oftentimes you can just go out and buy it. So tail spend typically falls below that threshold. And in the world of procurement and manufacturers, tail spend is typically considered indirect. 

So for a manufacturer, that means it’s not something that’s actually going in the end product that they’re selling. And there’s something called the peredo principle. And in the 19th century, there was an economist named Vilfredo Peredo. And he observed that 80% of the wealth in Italy belonged to 20% of the population. And this has morphed into the Pareto principle, which is also known as the 80-20 rule. And what this means is operations, finance procurement teams can’t do everything. So they have to focus on the most strategic purchases and their most strategic suppliers.

Sarah Scudder 17:09  

And then the same thing holds true for smaller companies that maybe only have a couple of people on a procurement or finance team. They’re limited because they only have minimal resources. And they need to focus on the biggest ticket items. But there’s a flaw in that principle. And I’ll let Madison hop in here as well and talk about some of these things. 

But the flaw is that the principal only focuses on spending. So what is that actual amount, but it fails to take into account some other things that I think are really important for manufacturers to think about. And the first is a risk. What is the risk to the manufacturer? The second is quality concerns. The third is environmental impacts, which we have come to know as sustainability, the fourth is social factors. And the fifth is supplier diversity. So I’ll give you two manufacturing examples.

Sarah Scudder 18:10  

The first is in aerospace. So if a jet manufacturer would be regarded as a high-risk, high-cost supplier, they would likely sit in that top 1%. Right. So that’s not going to be considered tail spend because that’s a high spend item. 

But if an airline food manufacturer has a lower spend amount, but there’s a food safety breach that happens that because of that spend an amount that’s considered tail spend, but it also needs to be really looked at and focused on because there’s a huge risk factor. 

If the airline manufacturer sells the products to American Airlines, Southwest, and there’s a food poisoning issue, and passengers get sick or die. That’s a massive brand breach, and there’s going to be major repercussions company-wide. So it’s really important that manufacturers know about their tail spend and also look at assessing these other five factors that I just mentioned. 

Sam Gupta 19:24  

Okay, so before we go to medicine, I have to ask you this, Sarah, so obviously, in medicine, you can chime in as well. I’m pretty sure you would agree that there is probably one of the most articulate people. So since you mentioned, Sarah, that your father is a writer, is the articulation coming from there, or where is it coming from? You have to tell me that.

Sarah Scudder 19:43  

I’m a little slow, like it takes me a while to understand things and process, and so because that’s just how I’ve always been when I need to retain information. I appreciate it when other people write things and speak.

And then make them very simple and easy for me to understand. So I like getting my information that way. So I try to return the favor and make things really clear and simple for other people medicine do agree with me or not.

Sam Gupta 20:11  

She’s super articulate, right. 

###Madison Mobley 20:15  

I agree every day of the week and twice on Sunday. I agree. Yes, I agree.

Sam Gupta 20:22  

And I love it. Alright, so now I need to come to you. Do you agree with Sarah with respect to the tail spend? Do you have anything else to add there?

Madison Mobley 20:30  

Yeah, I agree. And one of the things Sarah alluded to, which was looking very critically at your spend as an organization to define what is and isn’t classified as tail spend or tactical versus strategic, because then the thing I would double click on an ad is that tail spend depending on the organization can have a ton of definitions, none of them right or wrong, it can include everything from you know, misclassified purchases to even Maverick spend. 

And for those that have heard that term or not, it’s typically spent that’s not under contract, not necessarily managed by procurement, and oftentimes non-compliant, so you get some of that too. But even within the tail, you’ll hear terms like the meat of the tail. And of course, as I recently mentioned, Maverick, but all of that is defined by organization stakeholders, and Sarah’s point is well about the risk to the organization versus quality concerns, environmental impacts, social factors, supplier diversity, things that are looking at tailspin in a very strict fashion doesn’t capture. 

This is why the conversation around what does a sound tail spend management strategy looks like. And it can range from very, very simplistic and approach to significantly more advanced, and the more advanced you get in your thinking and approach to tail spend management, the more likely you are to account for those other things that making decisions solely based on price is not going to capture.

Sarah Scudder 22:14  

Yeah, and Madison, one of the things that I think is so important for companies, when they’re deciding that they’re really going to look at all of their spend and look at some of this non-strategic spend in these smaller purchases, it all starts with data. 

So I recommend that any manufacturer that is really going to try to get their spend more under control. And in a managed program. Step one is to get your data in order. So our friend, Susan Walsh, who is also one of the top 10 influencers in procurement and supply chain, she’s the classification guru, and she has a business around helping companies clean up their data. 

And I think it’s so important. So without having good data, you can’t make decisions. And it’s hard to classify and prioritize where to spend your time and resources. So data number one, two, and three get your data in order, then once you have your data, then you can look at it and make very smart strategic decisions about what you’re going to then do and how you’re going to act on it. 

Sam Gupta 23:28  

Amazing, so guys, now we have to talk about the stories and medicine. I know that you have very exciting stories, right. So we are going to have a little competition. First, we are going to start with Madison. And then we are going to follow up with Sarah because Sarah always has very good stories. So Madison, do you want to start with your story first?

Madison Mobley 23:48  

Yeah, I’m happy to start, although I’m quite certain Sarah is going to bring the heat and will probably be significantly more exciting to me. However, let’s get into it. So going to leave these customers, or I should say partners, nameless, but I want to walk you all through a few stories. 

The first certainly in the manufacturing space on the west coast is the electric car manufacturing space, specifically. And the use case was pretty straightforward, extremely manual processes. They had identified some, let’s call it low hanging fruit we mentioned earlier that tail spend is often very, very much indicative of kind of a company’s indirect bending profile and so had identified an opportunity within their it category, and through leveraging fair market to run major RFI through the platform to realize savings but also to benchmark against other customers what was important for their core negotiations fast forward after partnering formally with the fair market, they were able to do a few things.

Madison Mobley 24:57  

So the first is 10x ROI and identified savings 9x ROI and awarded savings. And these results were achieved in a matter of six to eight months, right, which is significant when you’re thinking about a world where we’re managing a down economy, we’re managing a pandemic, etc. 

And all of this was done and supplemental to an existing in-place ERP and P2P system. And they’ve since expanded to other categories, which speaks to one approach one could take when getting their tail in order. 

So one of the things that certainly helped was the assist of technological innovation, right. So one of the things that FairMarkit uniquely provides is the ability to execute touchless sourcing events that don’t replace the value of procurement people’s and natural intelligence around the work that they do.

Madison Mobley 25:55  

But augmenting their source to pay activities, allowing them to extend their reach, and gain visibility into spend they weren’t previously able to manage. So the technology piece certainly helped in not only automating prior sourcing activity but also granting this particular partner visibility into not only their strategic spend, which they were doing and managing pretty well but also their tail and their quote-unquote non-strategic and tactical spin. 

And to Sarah’s earlier point, when you have data, and you have visibility to data, and all stakeholders can access that data, you’re able to make meaningful and powerful decisions that drive high cost and efficiency savings.

Sam Gupta 26:45  

Okay, now, do you want to go to your second one?

Madison Mobley 26:48  

Yeah, the second one I’ll go through pretty quickly, but also in the manufacturing space. Also, on the west coast, the current state at the time that we explored partnering with them few things, one, their indirect spend was being manually sourced. 

And oftentimes, business decisions defer to incumbent suppliers, and oftentimes not ever receiving competitive pricing for the things that they were looking to buy lead times were incredibly high limited visibility into their indirect supplier ecosystem. 

Fast forward partnering with the FairMarkit, again, in this case, and unlocking the power of automation, and touchless sourcing, in many respects, few things happened $3 million to date source through the FairMarkit right now around 30%, and identified savings, which is creeping up and around a million dollars of savings since joining them as partners, and it’s not even been a year, right. So you begin to see what’s possible when you pair natural intelligence, the work that humans are doing day in and day out with technology, and the innovations that are happening in this space. 

Sam Gupta 28:06  

Okay, Sarah, do you want to start with your stories now?

Sarah Scudder 28:08  

Yeah, so we have a manufacturing client that we’ve been working with for a couple of years. So the example I’m going to give is, is related to print and marketing spend. So I think it’s important to mention that manufacturers spend a lot of money on printed material, they may not know it, and it may not be classified as a print, but they do spend a lot on that category. 

That would be things like packaging, labels, forms, tags, and all the marketing print. And then you’ve got safety print for fulfillment centers and for warehouses. So we started talking to this manufacturer, and they told us that they spent less than half a million dollars a year on print and that it wasn’t a high enough priority for them. 

They had more strategic spend categories that they needed to focus on. It just wasn’t enough money for them to pay attention to. So we made one simple ask of this team that we were talking to. We said would you be willing to spend an hour working with your accounting team to tail spend data for your last 12 months and just find out how much you spent on print? All we asked.

Sarah Scudder 29:34  

So they agreed and fast forward. A month later, we had a follow-up meeting, and they came to learn that they were spending $5 million dollars a year on print, not less than half a million. And they were shocked, and this happens a lot with manufacturers. They don’t realize how much money they’re spending on printed material. 

It’s kind of like the whole thing out of sight, out of mind. Or we do what we’ve always done, right. So we are different stakeholders, and teams have been buying from different suppliers for years. So we just keep doing it. So one of the reasons why they were so out. It was such a shocking discrepancy that their data was not really coded well. 

So their finance team was putting any marketing-related spend, and a lot of their print fell within the marketing spend in their marketing bucket. And that marketing bucket wasn’t broken out by subcategories. So this is a manufacturer that spends a lot on marketing.

Sarah Scudder 30:46  

They’ve got a big media to spend, they’ve got an agency spend. They’re doing sales and events. So that’s a big spend, they’ve got freight and logistics, they’ve got marketing technology. So all of that was kind of bundled together. 

In this massive bucket of marketing, well, within that massive bucket was print. And that was where that $5 million was pulled out. Once the organization decided to work with us and put more strategic technology-driven solutions in place to automate competitive bidding for all the print that they procured, we’ve been able to save them about 21% a year. So a 21% savings off of $5 million spend year over year savings is pretty significant.

Sarah Scudder 31:37  

And I have to say that their CFO is pretty darn happy with their results because that has a direct impact on the finance and the operations team because it’s giving the company more money to focus on other strategic initiatives. It’s the example I like to use when I meet with somebody, and I’ll show them the same item. I’ll have it in my right hand and my left hand, and I’ll say, Do you see any difference between these two items? 

And the manufacturer will say no, we don’t see any difference? And I’ll say, okay, well, these are exactly the same. One of them is 20% less, which one would you like? Well, they want the one that’s 20% less, right. So that’s an example of how manufacturers can really focus on tail spend by getting their print bend under control.

Sam Gupta 32:34  

Yeah, and CFOs definitely like to save money. So they would definitely appreciate the story. So thank you so much for sharing that setup. So we need to balance things out medicine share two stories. So now I need one more from you have been more.

Sarah Scudder 32:46  

My other example is very similar because what I just mentioned is what we see happening all the time with our clients in the manufacturing space. Same situation, different numbers manufacturer wasn’t really realizing how much money they were spending on print. 

And they thought it was a certain amount. After doing some digging, they realized it was much greater, thus putting in a more strategic solution with us to better manage tail spend. So it happens time and time again with manufacturers.

Sam Gupta 33:25  

Amazing. That’s it for today. Do you guys have any last-minute closing thoughts? 

Sarah Scudder 33:31  

So I’m gonna start with you, Sarah. Yeah. So for manufacturers, I think it’s really important for them to look at leveraging technology and ways to automate a lot of the manual work that’s being done with tail spend, so they can free up time and resources for their teams to focus on innovation, and help to propel their companies forward. 

Sam Gupta 33:53  

Okay, Madison, do you have any last-minute closing thoughts when you can? 

Madison Mobley 33:56  

Yeah, the one thing I’ll say is that leaving 20%, right, even if we’re being conservative of your budget, unmanaged tail sped is a massive strain on capital and human resources. And so I invite everyone listening to this conversation to just do it, get your tail in order. 

And I’d be remiss if I didn’t say that fair market is uniquely positioned to help and guide in this area, but also open to being challenged if there’s someone out there who can also contribute right to the conversation because it’s that important and so happy to be having this conversation today.

Sam Gupta 34:35  

Okay, and my personal takeaway from the conversation is going to be irrespective of how ugly the tail may be, the tail could be bigger than what you think, so pay attention to your tail. So on that note, guys, I want to thank you for your time. I really enjoyed this discussion.

Sam Gupta 34:54  

Thank you, Sam. I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today. 

If you want to learn more about Madison, head over to MadisonMobley.com. If you want to learn more about Sarah, head over to rsnetwork.com. Links and more information will also be available in the show notes. 

If anything in this podcast resonated with you and your business, you might want to check out the related episodes, including the interview with Francois Jeffrey from Noviland, who discusses what manufacturers need to know about working with international suppliers. Also, the interview with Susan Walsh, who discusses how to normalize your product, customer, and vendor data to avoid planning and forecasting issues with your inventory. 

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review or rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I hope to see you on the next episode of the WBS podcast.

Outro 36:08  

Thank you for listening to another episode of The WBS podcast. Be sure to subscribe on your favorite podcasting platform, so you never miss an episode. For more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guest Aaron Spool from Eventus Advisory Group, who describes what it means to have a cash flow mindset in the organization. He also touches on business drivers and why tax and accounting should not drive business decisions. Finally, he discusses many scenarios of cash and revenue misalignment and the resulting implications because of this issue.

Chapter Markers

• [0:24] Intro
• [2:09] Personal journey and current focus
• [5:24] Perspective on growth
• [6:35] Cash-flow focused CFO
• [8:19] Revenue vs cash
• [13:57] Mixing personal finances vs business finance
• [17:21] Misalignment of revenue and cash
• [24:34] Product costing issues
• [29:57] Closing thoughts
• [31:06] Outro

Key Takeaways

• Why are you buying such a giant amount of inventory in bulk with the hope that you can sell it, and that’s where the cashflow thing came in is, is that you’re sitting on a whole bunch of inventory. So you’re using cash, a vital piece of fuel, and you’re sitting on a whole bunch of inventory, which you’re hoping you can sell. That is a recipe for disaster.
• You end up showing next to no profit. Therefore, you bought a building or whatever you buy these physical assets, that’s fine in the short term because you don’t pay taxes if that’s your goal.
• You have this new piece of equipment that hopefully you can use to make more money off of, but the cost is that you’re not bankable anymore because I looked at your income statement and your balance sheet, and as a credit issuer, as a credit committee and a bank looking to see if I’m willing to loan you money.
• All those little fun things you did to prevent yourself from paying taxes suddenly come to bite you in the proverbial back because you’re not bankable.
• When it comes to businesses, don’t let the accounting that also means the taxpaying lead the business decision. This decision needs to be led about things like profitability, cash, market share, and pleasing the customer.

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About Aaron

Aaron is a 20+ year finance exec who has helped entrepreneurs and executives grow, adapt, and fix their companies through operational improvements and data-driven decisions. He’s helped raise tens of millions of dollars for companies and guided eight-figure exits. He’s a Partner at Eventus, an on-demand CFO, Finance, and Accounting firm, as well as a CPA and CFA holder. He is a frequent writer for Forbes, CrossFit enthusiast, and Scoutmaster for his children’s Scout troop.

Resources

• Connect with Aaron
  • LinkedIn
• Connect with Eventus Advisory Group
  • Website | LinkedIn | YouTube | Twitter

Full Transcript

Aaron Spool 0:00

You’re sitting on a whole bunch of inventory, which you’re hoping you can sell. That is a recipe for disaster. Now, there’s probably a whole bunch of people who could tell me, Oh, you know, Aaron. This is like we’ve had cases, and this worked out perfectly. That’s nice. I don’t deal in those cases ideal, proper practicality. So the number one lesson learned here, you don’t have the buyers.

Intro 0:24

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 1:00

Hey everyone, welcome back to another episode of the WBS podcast. I’m Sam Gupta, your host, and principal consultant at a digital transformation consulting firm, ElevatIQ.

Most of my positions focus on growing revenue. Sure, getting revenue is always the hardest part. But did you move at the increased time between earning revenue and collecting cash that could result in giant write-offs impacting your growth? Also, how would you define the right customers to focus on? Would it be based on revenue or their ability to pay? Having a cash flow mindset is critical for growth, especially for capital-intensive organizations such as manufacturing.

In today’s episode, we have our guest Aaron spool from Eventus Advisory Group, who describes what it means to have a cashflow mindset in the organization. He also touches on business drivers and why tax and accounting should not drive business decisions. Finally, he discusses many scenarios of cash and revenue misalignment and the resulting implications because of this issue.

Let me introduce Aaron to you.

Sam Gupta 2:09

Aaron is a 20 plus year finance exec who has helped entrepreneurs and executives grow, adopt and fix their companies through operational improvements and data-driven decisions. He has helped raise 10s of millions of dollars for companies and guided eight figures exits. He is a partner at Eventus, an on-demand CFO, finance, and accounting firm, as well as a CPA and CFA holder. And he is a frequent writer for Forbes, CrossFit enthusiast, and a Scoutmaster for his children’s Scout troop.

With that, let’s get to the conversation.

Hey, welcome to the show. Aaron.

Of course, my pleasure. Just to kick things off. Do you want to start with your personal story and a current focus?

Aaron Spool 2:56

Sure, absolutely. So I’ve always been, I guess, a combination of an entrepreneur and a finance person at heart and kind of melding the two together. As you think about the typical kind of business that you ran from a lemonade stand to selling kids candy, things like that all the way through the childhood you get all the way through, getting into college focused on your finances, econ came out and had a whole bunch of different roles and different sized companies, accounting, financial analysis, eventually business intelligence, where I dealt with big data and making data-driven decisions.

And then all the way that culminated and being CFO of small and midsize firms and I guess the story that I like to say is I’m a very cashflow focused CFO, and there’s a huge reason for that. What do you learn from pain? And one of the CFO gigs I was that actually was my first major one. I was super excited to be it. And it was an industry that I really cared about. It’s a combination of manufacturing and tech, really, really cool.

And we ended up right after I joined I took over all the financial modeling, I started studying everything they went on a hiring spree because they raised a whole bunch of money and soon afterward, did some analysis of mine I remember the day I looked at our revenue, I looked at all of our cash collections I said oh my god, we’ve got four months left before we run out of money.

Sam Gupta 4:14

That’s not a pretty situation to be, I guess.

Aaron Spool 4:17

Oh no. And trust me, the board was like what because entation until here I remember that the CEO even said it’s like you know this the first like when I first put them all before he saw the results is the first like an actually hardcore data-driven model we’ve ever had and really excited to see the results for it just with stories like stories.

Stories might vote yes, yes. Yeah, exactly. It’s like stories might make a great podcast what we’re doing here, but stories don’t make money. So what’s really interesting about cash, and this is kind of an I tried to get everyone says there is no good reporting on a day to day basis about cash. There’s not, and if you think about it from an accounting perspective, everyone’s thinking about the income statement balance sheet. They’re thinking about profitability.

All-important stuff but things like there’s your sales group care about cash, maybe if there comps on it, do you even know your cash and no one’s gonna end there’s no easy way because you can look at a bank statement. But that’s a point in time the cash is especially for manufacturing firms. And that’s where cash becomes incredibly important. So I’m happy to go. I know we’re going to talk about that a lot. But that’s my story and why I’m super focused on cash as a CFO.

Sam Gupta 5:24

Okay, amazing. So I’m super excited to talk about cash as well, because cash is king, whether you are a small organization or bigger organization, and as you correctly pointed out for manufacturing companies that are so capital intensive, so for them, cash is definitely king. But before we get into cash, one question that we have for everyone who comes on the show is going to be the perspective on growth?

Aaron Spool 5:50

That’s a great question. So I think real true growth is not incremental. You can eke out a 5% additional. You could call it growth, additional gains from anything. Yeah, but true growth is transformational is something that doubles the size of your sales.

Yeah, adding multiple different, you know, new offerings. So I would say when you get to 50% or more increase that in my mind is growth and that increase better growth gonna be two ways growth could be my expenses have grown. We’ll keep it there. Because that’s the essence of your question is something transformational. And when you say at least minimally, you’re half as big as you were before that, my mind is growth.

Sam Gupta 6:35

Okay, amazing. So let’s go back to your comment about the cash flow-focused CFO. So obviously, there are a lot of different CFOs. And they all have their own leadership styles. They all have their own ways of managing things. So how does a cash flow-focused CFO differ from the other CFO mindset that you may have seen in the industry?

Aaron Spool 6:59

Sure. So, I would say that like so while I’m cashflow focused, especially for manufacturing, a really versatile CFO wears multiple hats, there’s thinking about your profitability, that side of the house, thinking about the capital side, and where you’re going to get your money, whether it is to maintain operations, or to fund growth, or to get a really good exit, or new investors.

But those are all different mindsets, and they’re really good mindsets, and they have a point in time. The difference between all those mindsets and the cashflow mindset is cash flow is eternal. And when you take your eye off cash in which and really if you think about cash is the essence of what you’re doing.

Yeah, what you’re doing in your business, eventually it’s to get paid. And if you don’t just have enough. Cash is the fuel of business. Not only do you have enough cash to fuel it, eventually, but you also have to have enough cash to pay yourself. And I don’t want to sound like you’re not in business to be a charity. But in the end, like, what’s the point of all this stuff, the point is eventually to get paid. You pay yourself in cash. And you might pay yourself in something else.

But I’ll tell you this. Your energy bills are not paid anything but cash or mortgage is not paid with anything but cash. Your kids’ college tuition is not paid with anything but cash. So I go back to cash as the fundamental unit, the fundamental substance, whatever fancy word or in a small word you want to use of what’s going on? It is the fuel for your business life.

Sam Gupta 8:19

Okay, so let’s go back to your comment about or maybe just compare the revenue versus cash, right? So the majority of the time, organizations are going to be very revenue-focused. Yes, they are cash-focused as well, but not as much, right? Their assumption always is if they are doing well in terms of revenue, then maybe their cash problems are not going to be as big. So in your experience, have you seen any stories where everything was going well, from the revenue perspective, but they ran into real business troubles because of cash management?

Aaron Spool 8:54

Sure. There are two stories with this. And one is a general story. And the other one is significantly manufacturing-focused. Okay. So the classic case, and I’ve seen this, and this is going to be so many companies I work with, they have great sales, which shows ever-growing revenue, and really doesn’t matter the business and they don’t realize that they haven’t collected then they start investing more into this business, you start these and investing more could just be resources put it could be inventory put, which we’ll get into a little bit later, but they haven’t collected.

And if there’s enough time that passes between sales and collections. Yeah, you start to eventually have the come to your deity talk about it. It’s a giant write-off. So right off means Okay, we’re not going to collect this. Yeah. What I’ve seen especially repeatedly I’ll say this, the company I told you about in my first story about cash, we assumed that we were going to have a lot of sales, we started getting a lot of sales, but collections weren’t necessarily there.

It’s what you find is that who’s tied to the sale, almost always not the person that’s tied to the collection. And not everyone wants you to harass the person that owes you money. Because they want to continue the business, but I always like to say the following. It’s that sale isn’t real. And that relationship isn’t real unless they’re actually paying you.

Aaron Spool 10:09

I agree that that’s a high level. Now let’s get into specifics, right. So what makes manufacturing different than your traditional services business or your point of sale business is that it has two interesting things that align with capital and make it so much more capital A, capital B, capital E, cash cash-intensive.

The first is, odds are you’re going to have machinery, which costs a heck of a lot of purchase, to lease to finance, whatever word you want to use lots of lots of money, how you get that money, an entirely different conversation.

The second thing, and this is the operational piece, is that odds are you have to buy something, put money down, and this is your inventory, right? You might even have to do something to that inventory. And that’s the work in progress. You have to change it. But this all costs even more money before you can actually sell it.

So it’s not like a sale that you already have the services, or you have the technology because technology companies go with it. There’s no like inventory of the amount of program that you’re selling.

Aaron Spool 11:08

Because it’s digital, there’s an unlimited supply. This is something very specific. You’re selling a good example clothing manufacturer, so where and you said exactly a specific question and the story of like where cash flow kind of gotten away of sales. So I knew a company that actually brought us on. They were expecting a huge amount. They were predicting a huge amount of sales. So they made a deal overseas to buy a whole bunch of clothing products, then it came time to pay the bill for the clothing product.

And they didn’t have all the money upfront. And so they wanted to be able to find it some either through extra investment dollars or for financing, and I and it wasn’t a case where they had pre-sales. So they were just assuming they were going to be able to sell this entire product. And they were panicking because now they had this big invoice due, they weren’t going to get them they weren’t going to get the product shipped. So they could actually sell it until they could pay for it.

Aaron Spool 11:57

And they didn’t necessarily have the buyers in order to purchase it. So it became a really difficult financing decision. Yeah. And we were able to get the financing because they had a really good rap. And the finance was based on this is acid-based finance was based off the inventory.

So there’s something there, they were able to finance it, they finance it. And the interesting thing was, they didn’t learn their lesson, because they tried to do the exact same thing six months later than the people that we gave them for financing. And they were like, No, you have to be smarter than this. You can’t, you can’t just assume, and this is where the cash will think of you don’t have any money in the bank to be able to afford this purchase. And you don’t have the other side is you don’t have pre-sales lined up.

Aaron Spool 12:36

So why are you buying such a giant amount of inventory in bulk with the hope that you can sell it, and that’s where the cashflow thing came in is, is that you’re sitting on a whole bunch of inventory? So it’s you’re using cash, a vital piece of fuel, and you’re sitting on a whole bunch of inventory, which you’re hoping you can sell. That is a recipe for disaster.

Now there’s probably a whole bunch of people who could tell me, Oh, you know, Aaron. This is like we’ve had cases, and this worked out perfectly. That’s nice. I don’t deal in those cases. So that’s the number one lesson learned here is if you don’t have the buyers lined up, yeah, be careful how much inventory you’re holding.

Aaron Spool 13:14

And if there’s a button, there is a medley way beyond this podcast, way beyond this discussion. There’s a medley of ways in which you can finance inventory. So you can get just-in-time inventory. Yes, you’ll lose a little bit of margin, but the security of knowing that you’re not going to be sitting on stale inventory, or you’re not going to be, you know, so out and owing people money is worth it every day of the week.

Sam Gupta 13:37

Yep. And you had the second story as well, or did you already cover that story?

Aaron Spool 13:40

No, that was the first one. So I’ll talk about a second story. And this is, and this is kind of it’s, and you see this more with personal owners. So what I mean by that is, it doesn’t have to be people in the call you the founder, owner, or whoever says this is one person that owns the company.

Sam Gupta 13:57

So we have had a lot of guests. They actually call lifestyle business the term Yes.

Exactly. He said, and I’ve even Yes, it’s a lifestyle business, somebody. So what I find with a decent amount of lifestyle businesses is that they are going to mix their personal finances and their business finances.

Aaron Spool 14:02

And this is a recipe for disaster. So just for emphasis, Sam, I’m going to say it again, mixing your personal and business finances is a recipe for disaster. This is transcribed bolded and underlined a recipe for disaster. And let me walk through why in this. This is very, very pertinent. Personal finances. The number one thing you’re thinking of most likely is I don’t want to pay a lot in taxes.

Yeah, there’s a whole bunch of things you can do legally or illegally, right and illegally. Yeah, to pay taxes. And usually, that’s spending money. Yes, I’ve seen manufacturing especially say, oh, I’ve got this lump of cash. I don’t want to pay taxes on I’m going to buy more equipment, and then I’m going to be able to depreciate that accelerate, depreciate that, okay?

Aaron Spool 15:00

Well, you end up showing up next to no profit and no profit. Therefore, yeah, you don’t have to pay taxes and or you bought a building or whatever you buy these physical assets, that’s fine in the short term because you don’t pay taxes if that’s your goal.

And now you have this new piece of equipment that hopefully you can use to make more money off of, but the cost is that you’re not bankable anymore because that I looked at your income statement and your balance sheet, and as a credit issuer, as a credit committee and a bank looking to see if I’m willing to loan you money.

So you haven’t made a profit in three years. And I might say, Oh, you have all this excess. And it’s probably not in inventory you’re sitting on because that’s gonna handed you sitting on all this equipment.

Aaron Spool 15:39

And then you look at the various different ratios, your return on net assets is super low, you have this revenue, but you have all these additional manufacturing assets, you’re not even running efficiently.

And so let’s just this might, so I don’t want this timestamp, this podcast, he’s kind of want this thing to be eternal. But today, there’s, let’s just say, hinted there was a global pandemic. Yeah. And you’re a manufacturer, and you’re desperately looking for sources of capital?

Well, all those little fun things you did to prevent yourself from paying taxes suddenly come to bite you in the proverbial back because you’re not bankable. Yeah. And so that’s where I would say, from a cash flow perspective, if you’re a person, don’t combine your personal and your business finances. There are ways to minimize a tax bill. But I go back to the fundamental principle of accounting and finance.

Aaron Spool 16:31

When it comes to businesses, don’t let the accounting that also means the taxpaying lead the business decision. Yep. Is this decision needs to be led about things like profitability, cash, market share, pleasing the customer?

All those things are business decisions. But what is the accounting going to make this look like from my revenue reporting? What is the accounting going to make this look like from my tax reporting can be a consideration? And it shouldn’t be.

But it should never be the top consideration because you’ll get into situations like this, that you’re making sub-optimal long-term or even short-term business decisions, just to have good accounting. And the secret is like, okay, you made these accounting adjustments? Well, if someone’s a sophisticated investor, they know what you did, they can figure it out. They’re just gonna adjust everything you did. And so they’re gonna see what you’re really looking like as it is,

Sam Gupta 17:21

Yeah, interesting. And now we are going to dig a little deeper into the misalignment of revenue and cash. So obviously, if it is actually misaligned, that’s a real problem. But we have seen cases where it could look pretty just because of the way it is recorded and reported.

So we were talking about the scenario yesterday related to tail spend. And I don’t know if you are familiar with a term called tail spend, when it’s typically the 80-20 rule in the procurement community, and it is called the expenses that don’t really matter, and people don’t care for it. Right.

So that’s going to be your supplies, the marketing expenses, Petty expenses that we are talking about from the procurement perspective, and there was a story, in one case, they had the expectation or the assumption that they had the tail spend of $200k. But then they started tracking that in the accounting, okay, but that’s because their systems were not really integrated. They were relying on accounting to provide the information.

Sam Gupta 18:19

And there was a big disconnect overall in the operations and finance. And because of that, finally, when they started digging, they found out that the actual tail spend for them was $5 million. Okay, so this situation could very well happen.

In the case of a manufacturing scenario where you have your revenue and cash look perfectly aligned, but maybe they are not aligned. So that is the number one problem. And number two, one scenario I see a lot more commonly, especially in the lifestyle manufacturing businesses, they don’t even track product cost. And product costs could be so important.

You really need to track how much machine you are consuming towards the product. And that product costing could be very, very important because it provides great insight in terms of your profitability, which products are profitable, which products are not so from the cash perspective. Aaron, when you look at this situation when let’s say the product is not getting costed appropriately, if not getting reported appropriately, let’s say from the production floor. How would you see this from the cash perspective?

Aaron Spool 19:20

There’s gonna be a couple of things you talked about, actually two different things what I would call unrecorded liabilities. That’s the technical accounting term. Yeah. And the second is product profitability. You could also call it customer profitability. You could call it job costing an essential duty of the people running your plant besides actually running the plant and making it, so the number two the number one duty is to make a good product as safely as possible as efficiently as possible.

The second is to actually record everything that went into it. So if you’re not able to tie the inventory to the product to the sale and you’re not able to tie in the shipping cost to the product to the sale, and you’re not able to tie the labor to the product to the sale, you will inevitably make a poor decision you could have, and you’re not going to see that from an overarching perspective.

Aaron Spool 20:07

So you say, so what I could do is to samples. Alright, so I’m going to see my P&L, and it shows that I’m profitable. But if you had two products, the classic case, two or three products, and one was the majority of the profitability, and the other two were actually unprofitable. You got to ask yourself, why do you care about those other two products?

Now there could be a whole bunch of strategic reasons. Let’s just assume that they’re not. Let’s just assume that you didn’t know that they’re unprofitable. And if you could change those resources over, that’d be great. Or you could do something in from staffing or manufacturing, whatever. So make them profitable.

So if you can’t break your profitability into both customers, job, and product, depending upon the type of products that you sell and how your business is run, you’re missing out. And odds are you’re making a lot of poor decisions. And where that comes to cash is a couple of things.

Aaron Spool 20:56

One, your pricing. So you could be selling something at a price and even collecting it, and the cash is totally fine. But guess what? That cash coming in is less than the cash going out? Yeah, that’s the classic case of everything you talked about with Job Costing. That’s really where it is.

But let’s talk about the other thing because this is a lot of practicality that happens and calls it an unrecorded liability. Liability is money that you owe something that you’re there for you’re liable for. It is don’t bang me up on the accounting terminology here. Yeah. So a lot of times what will happen will be is that you’ve got the classic cases way before things ever got digitized, who’s sitting on invoices, who’s sitting on requests, who’s sitting on bills, and they just put in their desk drawer, and they forget about it, you’ve incurred all these expenses, your oldest, but no one ever recorded it. So you don’t even know that it’s due. And then one day the power goes out? Or one day the service stops?

Aaron Spool 21:46

And like, why did the service stop? Why are you repossessing my machine? Oh, well, you didn’t pay your bill. What bill? What are you talking about? Now, it’s easy. If it’s like the power bill, right, it’s coming monthly, you’re kind of used to that there are ways to figure that out.

But if you enter into a long-term contract or something that requires installments, and those installments aren’t monthly, you could easily forget about it if it’s not properly recorded. And that and just and that’s part one. So to be aware of that what you’re really supposed to be seeing is like money out the door should be recorded on your liability side things that you owe should be there, what you’re not going to get.

Essentially, what you’re not going to get from your financial statements is when is it due? And that goes all into cashflow management, and there’s no standard accounting report. And there’s probably no standard, and people say that they have this stuff, but I haven’t really seen it.

Aaron Spool 22:37

Well, a standard reporting package is easily going to show you what all your cash flow in your cash flow out is coming that usually has to be done customized. And as should be the most important thing that you focus on.

From a tactical perspective, is your cash flow in and your cash flow out? So how do you catch this stuff is one who’s allowed to give to some contracts, you should be very few people in your company, very few who shall have the authority to do that. And then once you sign a contract and So that’s written down. It’s recorded somewhere in the reporting tools that you use, and the finance team, whoever it is, should have that record, and it should be front and center. And it should be all part of your cash flow forecast. If it’s not, make it happen.

Aaron Spool 23:24

That is key because you’re going to know your classic Oh, I have a payroll that’s due twice a month, I’ve got my rent and my power all this stuff. You know that, but you’re talking about the talents. And really, what you’re talking about here are unrecorded liabilities. These are expenses that either are not reoccurring or not normal is, as I say, not reoccurring.

And they should also never surprise you because you’ve agreed to them. Where it gets a little bit more complicated is if you have a service agreement. And based on a level of usage, it’s suddenly spiked. Well, that gets into more sophisticated. Who’s managing the level of usage? Yeah, and that could be anything but let’s make it super, super simple. Over time, are you managing overtime properly?

And there’s a whole bunch of philosophies why and the like, but overtime is the classic case of an unexpected cost. You have a factory floor, that or you don’t have the right staff, or you have surge sales and the like it, you can easily get into a place where you’re spending a ton of dollars in overtime. And if you don’t have a pricing mechanism, in order to pass that on to your customer, you are going to incur a lot of cashflow pay.

Sam Gupta 24:34

Yes. So obviously, the point that you made that makes sense that’s slightly more black and white. But the scenario that I was talking about is not necessarily because of the unrecorded liability. It’s slightly different, okay.

So it’s because of the operational and financial disconnect. Just because the finance is not going to have as much understanding of the operation and operation is not going to have as much understanding of the finance. So here in the center. What is happening is these expenses are being recorded, but they are being recorded differently.

Okay, they are not being recorded in the right category on the P&L the way they should have been recorded. Right. That’s where the disconnect is. So that actually affects the product cost, in my opinion, that should affect the cash as well. Do you agree that this is different? Or do you still think that this is going to be an unrecorded liability?

Aaron Spool 25:25

Oh, it depends, right? So it depends upon what, so if they’re recorded as an expense, they’ve got to get paid. Right. So from a cash flow perspective, your high level, if it’s a technology expense, and I suddenly recorded it as rent expense, all right, yeah, that’s, that’s bad from understanding perspective.

Sam Gupta 25:44

But it’s not as black and white, right?

Aaron Spool 25:48

So I think what you’re really talking about, and I could be wrong here, is gross margin, right, versus net margin, because you said something very interesting. You said it should have been part of the job. And it wasn’t recorded. It was recorded elsewhere.

Sam Gupta 25:59

So there are many different scenarios, right. So I have seen where they what they would do, as opposed to doing the real product costing. What companies do is they are recording the material for each of the jobs. And they are recording that the labor and equipment usage for each of the jobs. Rather than doing that, what they would do is, let’s say if you have the equipment, and let’s say if you’re running 5000 jobs, they will simply divide by five 5000. And they will record against those rights. So that’s not actually the true cost. Sometimes it could be negligible, but sometimes it could be significant.

Aaron Spool 26:28

So you’re talking about allocating out a cost. You’re doing cost allocations there. So there’s a couple of different things here. Right? Yeah. One is cost allocation. So what can too, I would say, so it’s what you’re really trying to do. Right?

The essence of what you’re trying to do is how much does a job cost? Exactly? That’s what you’re asking yourself now. Yeah, odds are, you don’t have a way to get people to record their exact time to the exact job, because and so if that’s the case, okay, then then you have to come up with an estimating structure.

So I like to say the following cost allocations, the purpose of a cost allocation is influenced behavior, where the classic case where it makes in my mind, next to no sense is if you take a department and you say, oh, I’ve got a piece of real estate.

Aaron Spool 27:17

Alright, so I got to allocate rent. So I’m going to allocate rent out of maybe headcount. So based on the number of heads that you have, that’s how much your department is going to pay for the rent is going to, in my mind, that makes no sense.

Part one is that none of these people have any say in what rent is. They’re not negotiating leases, right? They’re going to be then incentivized to be very careful with their headcount. Well, they met the cake, the Hey, great, y’all have, we’re gonna make sure that they don’t have a headcount wonderful, no high headcount.

That’s wonderful until that’s a position that’s desperately needed. And so, taking that aside, says you got to be careful with the allocations. You only need to be concerned with the allocation of specific costs that are directly related that these people have.

Aaron Spool 28:02

So you do have power over the machine usage. And you definitely don’t want to call peanut butter things. That’s the worst thing to do. And peanut butter is you’re just exactly just headcount. We just go spread it over by peanut butter is a great condiment. Peanut butter makes a great sandwich. Peanut butter is bad for finance. That’s another tag I get, is it?

No, that peanut butter effect is very, very bad, what you want to be able to do, and there’s a whole bunch of ways to do this is like, where you can apply to talk about allocation of costs, or where you can, you can apply, if it’s people as people on the floor, the closer you can get to the action of what the people did, and then be able to allocate the cost, the better you are, you might not be able to do it on a per hour basis.

Or maybe they’re doing five jobs at once. And you know, they’re, and it’s by seconds. So that allocation doesn’t make as much sense. Yeah, I go back to practicality, know what’s happening on your factory floor, look at the processes that are going right, make a rational than a judgment of what these people are doing, and then out and then allocate out accordingly.

Aaron Spool 29:05

And you also then have to ask yourself, when you’re done with all this stuff, does it actually make sense? Do the numbers make sense? Because that’s what a lot of people don’t think of it, they make some really bad decisions because the allocation model says x, but if your intuition is different, yeah, the model still has to make sense.

If I make a financial model, and it says we should do x decision, and that decision is the dumbest thing in the world. Because no one’s ever gonna buy it, then there’s something wrong with a model. So does this stuff makes sense? And the practical cases, so if you’re running something on the factory floor, see how many runs you’re doing, see how many people are there.

And see if there’s is parallel processing is two machines are being used at the same time, and it’s the same person watching both machines. Well, okay, but you have to know that before you make an allocation decision.

Sam Gupta 29:57

Yeah, amazing. So that’s it for today, Aaron. Do you have any last-minute closing thoughts, by any chance?

Aaron Spool 30:03

Sure I, I’ll give you this, if you can’t figure out what you’re paying for something in total, and you can’t figure out how much money at the end of the day you made off of something, you got a problem.

So always look at your business transactions, and especially every sale that you make as to how much money I’m making off of this. And if you actually really look at every expense that how much money am I making off that expense? And if the answer is not much, you don’t have to stop the expense, but it just gives you a different perspective of why you’re incurring that expense.

Sam Gupta 30:37

And that’s it. Okay, love it. So my personal takeaway from this conversation is going to be in my mind, everybody in the organization should be cash-focused, as opposed to just the CFO.

And if you can have that mindset of being cash-driven, because revenues not only the earned it has to be collected, the collection is equally important. So on that note, Aaron, I want to thank you for your time. This has been a very insightful and fun conversation.

Sam Gupta 31:06

I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today.

If you want to learn more about Aaron or Eventus Advisory Group, head over to eventusag.com. Links and more information will also be available in the show notes.

If anything in this podcast resonated with you and your business. You might want to check other related episodes, including the interview with Brian Goffenburg, from VitalHub, who discusses the difference between accounting for a public and private company. Also, the interview with Jim Gitney from Group 50, who shares his thoughts on each inflection point for companies and what we need to know to identify them and move to the next by making necessary changes.

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get out. Thank you, and I hope to catch you on the next episode of the atheist podcast.

Outro 32:13

Thank you for listening to another episode of the WBS podcast. Be sure to subscribe on your favorite podcasting platform so you never miss an episode and for more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.