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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

• Connect with Mike
  • LinkedIn
• 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.

In this episode, we have our guest Martin Cloake, who discusses different barriers associated with Artificial Intelligence and Industry 4.0 adoption. While technology has come a long way, he shares his insight into how behavioral challenges impact manufacturers to operate with a continuous improvement mindset. Finally, he discusses why siloed systems result in companies operating on two sets of KPIs and ledgers and the impact on the growth of this siloed mindset.

Chapter Markers

• [0:17] Intro
• [2:08] Personal journey and current focus
• [4:02] Perspective on growth
• [5:14] Why is data necessary for industry 4.0 adoption?
• [9:10] Key barriers for the industry 4.0 adoption
• [12:08] Industry 4.0 adoption challenges for manufacturers
• [20:03] The role of financial data with industry 4.0 adoption
• [21:46] The implications of siloed financial and operational data
• [24:39] The role of different data sources with industry 4.0 adoption
• [27:47] The challenges of integrating operational and financial data
• [33:24] Closing thoughts
• [37:03] Outro

Key Takeaways

• One of the things when you begin to capture the simple stuff, that’s really the first effective step on your digital journey, know what is happening, know what has happened. And then the next phase, once you’re confident that you have those, you can begin to understand why did it happen, which is kind of the next level of analytics, and then the next, the final step is to predict what’s going to happen and avoid bad things.
• A continuous improvement comes from a realistic and true view of where you currently are, which is a struggle and challenge for many organizations. I think our true view of where we are we typically rely on our feelings and instincts, which absolutely have value, but for the most successful organizations, they combine their instincts about where they are with data to support those instincts.
• The age of being able to rely on instinct alone is going away quickly in manufacturing. In some ways, I would say we’re often behind the times a little bit, but things are changing.
• It’s key for leaders to recognize that there’s a shift that’s accelerating right now and to take those same skills that made them successful in driving their businesses to this point and use that to find the right technology partner and service partners to help them jump to the next level.

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About Martin

Martin is an experienced executive and award-winning technology entrepreneur with a background in manufacturing, hardware development, and operations management. Martin holds multiple patents and is Mechanical Engineering and business graduate from McGill University in Montreal, Quebec.

Resources

• Connect with Martin
  • LinkedIn
• Connect with Raven AI
  • Website | LinkedIn

Full Transcript

Martin Cloake 0:00

Integrating new pieces of technology also requires that we change our behavior, and we don’t change as quickly as technology. You can buy a new piece of software, but to have that actually influence how you run your business is slower moving. So for leaders today, it’s important that they recognize that this change is coming.

Intro 0:17

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 0:53

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.

Data is the new oil, but collecting data could also mean distracting you operators from focusing on jobs. Moreover, just because you collected millions of data points, drawing insights or meaning could be challenging. This is especially true if your systems are siloed and don’t communicate with each other. Finally, the data quality issues may result in poor sales and operations planning, impacting your bottom line and growth.

In today’s episode, we have our guest Martin Cloake. He discusses different barriers associated with artificial intelligence and industry 4.0 adoption. He shares his insights into how behavioral challenges impact manufacturers to operate with a continuous improvement mindset. Finally, he discusses why siloed systems result in companies operating in two sets of KPIs and ledgers. Let me introduce Martin to you.

Sam Gupta 2:08

Martin is an experienced executive and award-winning technology entrepreneur with a background in manufacturing, hardware development, and operations management. Martin holds multiple patents and his mechanical engineering and business graduate from McGill University in Montreal, Quebec. With that, let’s get to the conversation.

Hey Martin, welcome to the show. Hey, Sam.

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

Martin Cloake 2:39

Absolutely. So I work at Raven AI. We serve manufacturers helping them to improve performance with data. But maybe I’ll just describe sort of what got me into this. So my background is in high tech. I worked in telecom in sort of the boom of the 2000s. But when I graduated, I got recruited by a company called BlindsToGo in Montreal, which is a custom blind manufacturers.

So I was high tech, I jumped into manufacturing, which is where I got my start in this field. And one of the things that were most interesting was that my impression of manufacturing. And my actually seeing what it was in reality, once I got there, was completely different.

Martin Cloake 3:16

And one of the biggest challenges that I found was that the impression is from an engineering perspective and a technological perspective. It’s a series of processes and machines that have to be optimized with math, where we’re effectively manufacturing today is still very much a people-centric organization.

So that’s how I got into manufacturing. Then from that is really what triggered my observation that manufacturers struggle to use data in an effective way. And I found that Raven or co-founded Raven, partly based on my experience in manufacturing. The desire to make it so that manufacturers could spend the time they need with their operators to drive those kinds of behavioral changes to improve while getting access to all the real-time insights needed to guide their actions in the most effective way.

Sam Gupta 4:02

Okay, amazing. So obviously, there’s going to be a very exciting discussion here since you are doing some cutting-edge stuff. But there are going to be some foundational elements that you need to take advantage of this cutting-edge technology.

But before we do that, we have one standard question here. And that is going to be your perspective on the business growth, Martin. What does growth mean to you?

Martin Cloake 4:24

I would say that it means evolution and positive evolution in some ways in business and personally. In order to be successful, you need to have a growth mindset. And you can constantly be looking for opportunities to improve, so I associate growth with continuous improvement in a business setting.

And I would say in a business context. A continuous improvement comes from a realistic and true view of where you currently are. It is a struggle and challenge for many organizations. We typically rely on our feelings and instincts, which absolutely have value. But for the most successful organizations, they combine their instincts about where they are with data to support those instincts. And I think the first step is to know where you are and where you’ve been. And for those who are most successful, they’re able to take that information and change their behavior to continuously improve.

Sam Gupta 5:14

Okay, amazing. So this is a very interesting point. And that’s probably sort of truth if you ask any organization, they are going to say that I understand my business very well.

But in reality, they don’t have a thorough understanding because they don’t have either enough data or enough quality data. So in your opinion, Martin, what are some of the key growth barriers? And the challenges that you are seeing in the market at this point in time?

Martin Cloake 5:48

Well, and I don’t want to discount the power of instinct. So many say medium-sized organizations have become very successful based on the instinct of people in leadership positions. And I think there’s there’s a lot of power there. But growth and continuous development are slow as they are dependent on the instincts of leadership.

One benefit of a clear view is: you can share the burden with others because others don’t need to rely on instinct. Also, one main benefit of new technologies that are making it easier to see what things are happening is. It’s about making it easier to perform at that transformational level that typically only the top can do.

Just imagine, like a chess master, it took us a long time to be able to beat that chess master with software. If you compare today, if you take an average chess player and give them average chess software, they’re going to beat that chess master. It shows that a combination of good skills and good software can outperform skill alone. And that’s really the potential here where you can perform at a chess master level by combining your instincts that with software,

Sam Gupta 6:58

Yeah, and I completely agree with respect to your comment about these instincts. But you must have the quality instinct. If you look at some of the successful leaders, the reason why they have successful instincts is that they have lived through the quality information.

The way our human bodies and brains work is, the people who are really good at judgment, they are able to filter out the information, really quality information from noise. And that’s why they are so good at instinct, and they can make quality decisions.

So even our human bodies and brains do require quality data, a quality environment. A positive environment for us to be able to make decisions. What would be your thoughts on that? I mean, see, instinct is definitely foundationally reliant on the quality of data. And obviously, when you talk about the infrastructure that has to have the quality data as well,

Martin Cloake 7:45

And I would say that the age of being able to rely on instinct alone is going away quickly in manufacturing. In some ways, I would say we’re often behind the times a little bit, but things are changing.

And COVID has only accelerated that was for people to rely exclusively on instincts today to guide their business is a risky proposition. And those are the kinds of businesses that are not growing and are not evolving and will struggle to maintain competitiveness, as others are, as everybody’s diving into the bringing in technologies to support them here.

So I think it’s key for leaders to recognize that there’s a shift that’s accelerating right now and to take those same skills that made them successful in driving their businesses to this point and use that to find the right technology partner and service partners to help them jump to the next level. Because if they wait too long, at some point, they’re their competitors will be ahead.

Martin Cloake 8:36

And being ahead isn’t simply the fact that you do have software or you don’t have software. One of the biggest things that we often discount in this phase of growth is that adopting or changing our organizations. integrating new pieces of technology also requires that we change our behavior.

And we don’t change as quickly as technology. You can buy a new piece of software, but to have that actually influence how you run your business is slower moving. So for leaders today, it’s important that they recognize that this change is coming and don’t discount the fact that change management within their organization is likely going to be more difficult than simply purchasing or partnering up with a technology partner.

Sam Gupta 9:10

Yeah, I agree. And I’m actually going to go back to your comment about manufacturing being a people-centric organization. So when we think more from the data perspective, the more manual intervention that we have in the process, it’s likely that we are not going to have the data that either the machine or the software is going to require to be able to process so obviously, humans are very good at instinct.

And that’s what they should be looking at. They should be acting on the data. They should be making decisions on the data. So when you look at the current landscape of manufacturing, what are some of the key barriers that you see on the shop floor with respect to the system in having a lot of manual intervention in the process, and because of that, the barrier to the key insight that businesses can really utilize for their competitive advantage.

Martin Cloake 9:57

So I think there’s. I don’t know if you’ve heard the term data is new oil probably yes. So this is a very dangerous statement with regards to its impact on people on the shop floor. So by making the statement data as the new oil, what has happened is that many organizations are treating their operators on the shop floor as a source of data.

And to your point here, there’s a lot of data that we can get from them. But the reality is that by asking your operators to provide and feed these data systems, it is, by definition, a source of waste. So these systems are often set up in a way that discounts the fact that what our operators need is to be left alone to run their process. And they need a lever to apply pressure on the organization to get support, what they don’t need us to be constantly distracted by data.

Martin Cloake 10:38

So I think one of the fundamental mistakes is that organizations are having redefined what success is. And collecting data is not a success. Success is the better product, your customers better profits, better jobs for people on the shop floor. So I would say that one of the biggest challenges on the shop floor is just the whole frame of these transformations, where it’s centered around data and not centered around continuous improvement, which goes back to your comment about growth.

So the way to view this change our view here is I’m not sure if you’re familiar with just the concept of servant leadership. Yeah, sure, you are so. So effectively at a, if you are in a manufacturing organization, and you’re not standing in front of a machine, it is your duty to do whatever you can to help them be more effective in their job. And that could be to help them figure out how to not spend too much time doing setup and spent help them run their machines more effectively.

Martin Cloake 11:26

So what we don’t need to do is to slow them down with data collection. So I think one of the things that I question that people should ask is when and whenever we’re being asked operators to input data into the system, we should question how many questions we’re asking of them.

And we should question whether or not we’re asking dumb questions. if you’re asking a dumb question frequently, you probably don’t have the right system. So on occasion, you can ask questions to provide context if the purpose is to apply pressure to the organization to fix important problems.

I think that if you ask that question is that, are we asking too many dumb questions, it sort of frames kind of the technology solutions you have on the shop floor in a bit of a different way. And that’s the biggest challenge. So when people say data is the new oil, they are pointing themselves in the wrong direction.

Sam Gupta 12:08

Yeah. And those dumb questions are not fun, even for humans. I mean, they don’t appreciate procedural stuff. That’s data collection for the sake of it when they don’t know what you are going to be doing with this data.

So it’s an interesting dynamic there. So now what we are going to do, Martin, we are going to take the human side of the picture from the equation because obviously, people’s issues are slightly harder to solve in my experience. Okay, so let’s talk purely from the software and machine interaction perspective.

So again, going back to the landscape of manufacturing, typically small to the medium-sized manufacturer. So let’s say keeping the human element aside, what are some of the challenges that you are noticing in the market at this point of time, when you look at the kind of software these manufacturers may be using at this point of time, that kind of machinery they may be using at this point of time, and the challenges that they face? Number one with respect to data collection, and the key insight that can be that they can really utilize for their competitive advantage?

Martin Cloake 12:59

Yeah, I think in many cases, the story of digital transformation in industry 4.0 adoption, that’s being told by service providers and technology providers is not the story that’s most important to most manufacturers. And what happens is that manufacturers get overwhelmed with the idea that they need to digitally transform and with industry 4.0 adoption and perform predictive analytics and all this where effectively the kinds of things that they would benefit from now are much, much simpler.

There are many manufacturers today that have combinations of equipment that are legacy equipment from 30 years ago, equipment that they just got recently, and many manufacturers don’t have a clear view of what has happened recently. So and when I say what has happened recently, if we asked a manufacturer to reconstruct the timeline of what happened on a given station yesterday, they will struggle to do so. They will struggle to identify that they can capture how much it’s run.

Martin Cloake 13:51

But it’s difficult to understand why it wasn’t running or why it was slowing down. And this is kind of going back to the previous comment about capturing data from people like the context that people can provide to those systems is critical to understanding how they’re spending their time.

So the narrative should start off with the first thing is, Do you know what’s happening right now? Really? Do you know what’s happened recently? many manufacturers aren’t at that level because they don’t have that reliable true data set, even capture those most simple things. And one of the things when you begin to capture the simple stuff, that’s really the first effective step on your digital journey, know what is happening, know what has happened. And then the next phase, once you’re confident that you have those, you can begin to understand why did it happen, which is kind of the next level of analytics, and then the next, the final step is to predict what’s going to happen and avoid bad things.

Martin Cloake 14:36

But I think people don’t recognize that you need to go through those steps in that sequence. And one of the benefits of starting in that sequence is that it’s really easy to get operators to understand the first level; we just want to know what happened yesterday and then operate and understand. Okay, what happens is that vendors are pitching analytics tools and predictive tools which are jumping to the end, which are typically based on trying to squeeze value out of bad data and Be nobody understands in the shop floor because we’ve introduced this tool that’s not needed at the wrong time.

So you create disengagement in a system that doesn’t work here. So I would say that it’s shocking that too many manufacturers that they can start so simply and get so much value. And this is what we’ve done for Danaher and various other organizations. And Sanofi, the first steps on this journey don’t have to be that hard. In some ways, leaders should be discounting all the jargon-filled posts with a perfect hashtag on Twitter and LinkedIn and have a conversation about continuous improvement and see what technology is available to help them accelerate that.

Sam Gupta 15:34

Okay, amazing. So let’s start with some stories. And obviously, I mean, you are going to have tons and tons of fascinating stories, were using data, probably you have some sort of insight, and that actually rocked the world of, let’s say, manufacturers.

So do you have any specific stories that you would like to share? And typically, what I like to cover in the story is the previous situation. Whatever they were doing, it could be some sort of challenge that triggered what actually happened. And because of pledge, probably you were brought into the equation, your team analyzed the system, and then finally, some sort of outcome. Right. So do you have any stories that you would like to share?

Martin Cloake 16:07

Absolutely. So I have a great story about a Danaher plant in California we were working with for a while. Yeah, so Danaher is a multinational manufacturer with multiple different sectors. What they’re known for, they’re known for being experts in, in operational excellence, right? Their culture, continuous improvement culture, their team is extremely, extremely talented.

And it’s always amazing to go visit any of their plants here. So we started serving a plant in California, making small metal components, and beginning to sort of try and figure out how to allow for them to keep up with demand, and they’re there in the dental industry. So how can we help them keep up with demand and what their hypothesis was in, as we began to work with them was that they had issues with machine reliability, which is often what triggers a conversation with a technology provider, where we think our machines aren’t reliable, we’re spending a lot of time fixing them, let’s get some more details and data from the machine?

Martin Cloake 17:10

So we set up our technology with them collaboratively and simply did that first phase that I just described earlier, what is actually happening at the machines, and there were issues with machine reliability. But that wasn’t the main cause for lost productivity. when a machine breaks down, there are actually multiple segments of time that capture the different kinds of losses.

You can imagine that you and I are working at a machine and the machine breaks down. So the first time segment is the machine’s broken down. How long does it take for us to actually call for maintenance? So there’s a little segment there, which is we’re trying to figure out, and then the next segment wants maintenance has been called, How long does it take for them to arrive? And then once they got there, how long does it take to fix?

Martin Cloake 17:52

And then once they’re done, how long does it take for us to start up again. So when the time was split up into those segments, what we found out was that they were losing 600 machine hours per month waiting for maintenance to arrive.

So a machine our stay is worth $1,000 a product that is a tremendous amount of lost time. And now, if you were to chat with their maintenance team and a supervisory team, there wasn’t a lack of goodwill towards solving this. It was just there was a little tweak in their process that was making it, so maintenance wasn’t arriving on time. So with these insights, the next step was to how do alert maintenance when this has happened?

And how do we show them how well they are doing at solving this particular problem. So, in this case, your problem was how do we increase improve maintenance response time to service requests, and it sounds so simple.

Martin Cloake 18:40

So they reduced that loss from over 600 per month to under 100 a month in six months, resulting in millions of dollars of additional production and reduced costs. And it’s. It was shocking how simple it is.

So like when people begin the conversation about we want to predict when the vibration of this motor is going to get to the point where we’re going to it’s going to break, that is such a small of an opportunity, where if the goal is simply to continuously improve, provide products to your customers faster and reduce costs, and actually create a good job here because nobody wants to be waiting.

The first things that you’ll see are shockingly mundane. And I think time and time again, when we begin to work with world-class companies, we see the same thing where leaders are almost surprised to see how simple the first thing is.

Martin Cloake 19:24

And then, from a practical standpoint, I find that many organizations try to do too much at the same time. So if you’re running your operations, and if you were to focus on one or two things at a time, it’s way easier to drive gains and actually get your team on board with the initiative because it’s easy to wrap their heads around.

So now the machine is at that station. They don’t want to be waiting if you think of the system. The goal here is to get where maintenance comes sooner to fix their machines. There’s no operator that’s gonna fight that because it’s solving a specific problem. So that just, I would say a great example of how the narrative of the kinds of things that manufacturers need and the way To drive these massive gains is not as complex as people believe.

Sam Gupta 20:03

Yeah, it’s kind of interesting because of the kind of space that I operate in the SMB space. Sometimes they are not even tracking these machine hours or the product costs, they just don’t have a sense of how much time they might be wasting in between runs, and almost a product may be costing.

And sometimes that cost is not really counted towards the product. So they don’t really have a true sense of their product costs. So in this particular case, did they have a true sense of how much the time was wasted?

Can you talk a little bit from the financial data collection perspective, then what were their processes? And how did they recognize that they were wasting this time? Was it because just from the conversation that they felt that they were wasting 600 machine hours? Or were they did they have actual tracking of financial hours as well?

Martin Cloake 20:46

Well, so maybe I’ll also talk about it from an SME context. Danaher is an organization that has a very good sense of the connection between their operational data sets and their financial data sets. So like that’s something that, but I would say for many smaller manufacturers and some larger manufacturers, it’s always surprising how it seems like plant management has two sets of books.

They have the set of books that is looking at operational metrics, and then they have the financial metrics. And the connection between those two is often tenuous. And it’s almost like you see a plant manager with two ledgers on their desks. It’s always a bit of a joke here where, when you’re trying to prove the value of a system, they have to somehow map between the two, and they always get frustrated.

Sam Gupta 21:30

Yeah. So typically, I’m the finance guy on the floor. And I remember a lot of times I got kicked out from the shop floor because the team felt that I didn’t belong there.

Martin Cloake

21:40
What were you wearing, a white shirt and shiny shoes?

Sam Gupta 21:43

I have to. I’m an ERP consultant, brother.

Martin Cloake 21:46

There you go. See that as a problem? If you go on the shop floor in a white shirt and shiny shoes, then people will look at you find it easier. You have to dress for the right spot.

Sam Gupta 21:55

I was a rookie back then. And then I figured out I had learned my lesson. That’s good. Okay, Martin. So yeah, so you were talking about the financial and operational data? So do you want to touch a little bit on that from the SME perspective?

Martin Cloake 22:06

Yeah, so I think the, and maybe this is leading into a conversation just about how organizations tend to have data silos. One of the most obvious Data Silo is that between the planning and financial data and the operational data, and this is very much a function of how our systems are set up.

I know your space is kind of the ERP space. ERPs were not designed to facilitate connections between data in different sections. They were designed to have been a one-place store for all this different data. One of the challenges with the supply chain operates on a daily basis, or on a whereas an operation side. It’s in real-time. So you have these two different systems that are often we’re trying to optimize them in isolation, where they are absolutely connected. And I think the plant manager recognizes that but often that the technology solutions that we’re providing to manufacturers don’t play well together.

Martin Cloake 22:59

And if you have these two systems connected together that are being optimized separately, you are not setting yourself up for success to be efficient; you’re almost baking in thrash into your system that is going to make it inefficient. And I think that’s one of the reasons why many manufacturers are struggling to see the benefits of tweaking one aspect of their system, because optimizing supply chains are great, but if your operations can’t keep up, there’s not going to work.

And I have an example here, which is right now more and more people are consumers have a desire for quick delivery of customized goods and manufacturing has is way more efficient when you have slow delivery of the same kinds of things. The consequence of this shift to quick delivery of customized goods is there’s a lot more pressure on manufacturers to basically make up for mistakes in the plan.

It’s almost like the approach to come up with a plan for production and then execute that plan is failed from the start. What I see happening on the operation side is you have a production plant with a certain sequence that may be optimized.

Martin Cloake 24:01

But then, every day, there’s a backlog of orders that didn’t get completed the previous day. Then, because you all have a duty to your customers, you jam those orders back in your production lines, and you basically blow up whatever plan they add. Manufacturers have to switch from one job to the next to the next in an extremely inefficient sequence that results in very low performance and that this is not the fault of operations.

It’s not the fault of the planning is the fault of the fact that the two systems are not connected. The model of trying to plan a week out when that’s not how consumers want to consume is resulting in a lot of thrash. And I think the real opportunity here is to connect those two systems in a more practical way.

Sam Gupta 24:39

Okay, so let’s talk about the system landscape a bit more. You mentioned the operational and financial systems not being connected in most organizations. My assumption here is going to be, and you can correct me if I’m off here. So my understanding of the operating system that you are referring to is going to be some sort of MES system that actually talks to the machines, but there aren’t going to be many different data sources that are going to be there on the shop floor.

I don’t know how many data sources you typically utilize in the kind of data gathering that you guys do and data analysis that you guys do to be able to make the decisions for your engagement. Typically, what kind of data sets are going to be relevant? Is it going to be just the ERP data? Is it also going to be MES data? Do you acquire data sources from there? Do you look into the engineering data from the CAD system perspective? So what are the data sources that are really relevant from the operational and financial planning perspective?

Martin Cloake 25:34

Yeah, and I’ll talk about that from a practical perspective right now. And then also maybe touch on kind of how I see things changing here. But from a practical perspective, the most basic information is how much of a certain product is trying to be, are you trying to build, and when and that’s typically sitting on the side?

The second one is, what is the build standard? What is the standard cost for this product in the ERP? So, what do you need to build for the customer? That’s generally pretty clean data. And that’s easy to map. One of the biggest challenges is that the standards that sit in the ERP to describe how long it should take to produce products are typically a disaster. And because they’re done so infrequently and changed infrequently.

Martin Cloake 26:10

They’re frequently changing because it is disruptive on the financial side to be changing standards, but the fact that we have a disconnect between the capability that we believe we have and that we’re using for our plants and our actual capability is almost making the planning pointless.

We see cases, and one of the first things we do with our clients is a little bit of validation of their performances per SKU compared to what they think it is. And that first glimpse of that is just shocking. Just even the way that these standards are come up with, if you send a call up to the shop floor to perform a time study, really a time study shouldn’t be a one-time thing, you should have a 24 seven-time study that’s making sure that you have a clear and true view of what your actual capabilities are. So the two most simple things that we connect to is the MES. What are you trying to build? When is it due?

Martin Cloake 26:57

And we have examples of clients in the pharma space where delivering on time can mean the difference between getting a $40 million contract and not getting it. So it’s critical for us to understand what is their goal because we want to make our clients achieve those specific objectives.

Now, we’ve always set up our model, like we are a company, we work on a month to month basis here. So at some point, if we’re not earning our keep, we don’t get to stay around here. So yeah, like, what is your goal? What do you need to present products for when? And then what is your actual capability? And then with those two, I would say that those that are like no, as I mentioned before, with the example in the plants, and simply getting maintenance to be more responsive to these mistakes, I would say that if you just connect the plan to your build targets, to the shop floor and have a true view of your actual performance, that is a very big step for most manufacturers, and they and that that will take them a long way.

Sam Gupta 27:47

Okay, so do you have any stories around the challenges associated with integrating the financial and operational data? The people who don’t have, let’s say, software background, sometimes it’s just harder for them to understand why is integration so difficult when we are talking about two systems, and sometimes these two product could be from the same vendor? So why is integration so challenging? When we talk about two systems, let’s say operational and financial?

Martin Cloake 28:13

Well, I think there’s this bit of a mindset change where it’s hard for people to recognize the value of connecting these two systems. So there’s First off, it’s a mindset, I think, on the technical side, and I know consultancies that are aware of both datasets are aware of the planning data set, and the operational data set can connect these datasets in an effective way.

So I would say it’s the main challenge is for organizations to recognize the power of connecting planning to their true operational data set, and then find the right kind of service partner to connect those two, because at this point here are I would say the biggest challenges in our industry are no longer technological is behavioral that we’re not quick to jump on to new things.

And in some ways, we’re looking for that model here. So I would say it is just awareness, because technology is available both in service their service providers available that can create that strong connection so that you do not have to have two sets of books, you can understand what your operational performance means on the financial side.

Sam Gupta 29:09

Okay, so do you have any stories that you might be able to share around the integration challenges that you have seen in your space?

Martin Cloake 29:14

Often, when we begin to chat with clients, the first thing that they request is, let’s connect the data set to SAP, right? And what we can cover is part of that, and consultants can come in as well. I think organizations don’t often have an awareness of what’s required on their side to actually create those connections.

So often, what happens is that there’s a motivation to make the connections. Many organizations don’t have the internal, so one of the things that I’m sure you’re aware of here is you can’t create a live connection to SAP it wasn’t designed to do that. It’s designed to have intermittent connections from a data perspective.

Martin Cloake 29:49

So this is something that we come across again and again, and in some ways, the need to push to connect these two data sets and maybe just and I’m not even sure if the past That we will end up is one that goes through the ERP players that are currently in place. Because of the way that the ERP systems have been designed, the way that MES has been designed and these operational systems have been designed is with minimal interconnectivity.

And maybe this is getting into a bit where I see things going. But you know, there’s a challenge here where we have a bunch of legacy software systems, and even more importantly, legacy behavior that is struggling us to switch from the old way of doing things to the new way of doing things, which is to optimize for one thing, and that’s what I said on the top here, which is optimized for our ability to deliver value to the customers to maximize profits, and to make jobs better on the shop floor. To do that, you need to optimize one equation and not optimize these data silos. Yeah, so one of the things.

Sam Gupta 30:45

This is not really related to one specific vendor, in my mind, and again, when we talk about SAP, SAP has many different products, and they all have different versions. And that is good with any vendor out there, right.

So some ERP systems may be able to provide live connectivity, some ERPs may not be able to provide, some may be able to connect with the system. But again, the capabilities that some of these companies may require could be different. So there are a lot of different variables when we talk about the software landscape as well. And that is something I think everybody needs to keep in mind. So do you have any other stories that you could not cover as part of this episode? Well, okay, so maybe this goes back to sort of my experience in manufacturing as well.

Martin Cloake 31:00

But one of the consequences of not having a strong connection between the operational data set and the financial data set is you have many engineers, and I was one of these engineers when I was working in manufacturing, struggle to make a compelling business case to financially motivated leadership to get them to invest in improvement projects.

And what happens is that so this is something where many engineers struggle early on in their careers. And I think your background is one that as background in finance, which I think would benefit many engineers early on to understand how to follow the dollars all the way from the money coming into those projects here.

So I think a lot of projects start with best intentions, but the fact that engineers don’t have the skill sets to understand how to create that translation is making it difficult for them to be internal advocates to drive these improvement initiatives. So I think at some point, it’s, in order to unblock, we need to be able to change the way that leaders view operational performance and have a much stronger tie to financial data.

Sam Gupta 32:00

And one of the ways to do this is to technology. Absolutely. But I think this is something where there’s a bit of a shortcoming, on how engineers are trained, and even in organizations, how the engineering side of organizations are run, kind of as they’re project-based versus continuous improvement focused.

And I think that mentality, which has been in manufacturing for a long time, is kind of created this idea that engineering provides value by executing projects versus providing value by accelerating continuous improvement. So it’s not a specific story here.

But I think there are a bit of mindset changes that that’s needed in manufacturing, where if you are an engineering, you are almost, by definition, linked to continuous improvement and continuous improvement culture. Yeah, but that mindset of being project-based disconnects them from that because a successful engineer is somebody who executes projects on time and on budget versus who provides more impact to the business in a way that’s measurable financially.

Sam Gupta 33:24

Yep, completely agree. So that’s it for today. Martin, do you have any last-minute closing thoughts?

Martin Cloake 33:28

Yeah, no, I think just as far as how things are going, I mentioned that earlier, in some ways, the ERP is not in the middle of these challenges that we’ve been discussing, a lot of the data that we are of massive value sits there, the operational data that sits next to it would naturally flow into it. I think what’s going to transform the industry is by finding ways to leverage that data in a holistic way. What I mean by that is that to track, we do a lot of work in manufacturing to track how value is provided from the person at the machine to the customer, but to actually map that financially. And then optimize. That is really where I believe our industry is going.

Martin Cloake 34:07

One of the neatest things is that when and maybe this is only here in Canada, but when you Google manufacturing, the first company that pops up is Shopify, which is kind of shocking that Shopify has so, and I’m in Ottawa, Shopify town, and that sort of I think that is sort of pointing in the direction of where things are going here, where we’re going to have these systems.

And maybe at some point, your ERPs and operational data systems will simply be apps off the Shopify store, and why I see this happening is that the way to create really this to optimize manufacturing and achieve all the promises that industry 4.0 adoption requires is to connect that so if you are an app on a Shopify store, by definition, you have access to data on the sales and marketing side, but you also have access to influence on the sales and marketing side.

If you have access to the ERP data and costing and planning and operational data, you basically are creating that full data connection from the person to the customer.

Martin Cloake 35:02

And if we think about technologies that have been massively disruptive over the last ten years that the companies that come to mind are Uber and Airbnb. And if you think about Uber, it’s the first that you wouldn’t say it’s necessarily similar to manufacturing, but you have a person, and you have equipment providing value to a consumer. Now, in that case, the reason why it works, it works so well is because there is a direct connection between operational data sales and marketing. It’s all in one.

And they’ve cut out all the inefficiencies. And I’m not speaking about whether or not they’re, they’re profitable or not here, and there’s competition in that space. But to date, if you think about what Amazon and Shopify do, they don’t complete that loop from the sales portion of things all the way down to the person providing the value here. And the way to complete that loop is to connect those systems to the operational data systems.

Martin Cloake 35:50

And I think that is when we’re all looking for that Uber moment for the industry for auto, and the Uber moment will happen when that is connected, when it is so clear and simple for SMB leaders to see how they might be using this system can provide more value to their customers, more profits and better jobs for their teams.

And I think that’s completing that loop is what’s going to give our space that Uber moment where everybody will flip over. But until we do that, as long as we continue to optimize these different systems in isolation, there’s always gonna be thrash, and there’s going to be, and we’ll continue going through pilot purgatory, and where we install something, we think it should work.

Martin Cloake 36:27

But at the end of the day, we don’t see those financial benefits. And I think that’s kind of the big challenge for us that we need to now think horizontally and not vertically with regards to data. That’s an amazing and very interesting perspective. And my personal takeaway from this conversation is going to be everybody knows that data is the new oil.

But in the new world, I think connectivity is probably going to be the new norm. So the more connected we are, the better and more competitive we are going to be as a society and also as an organization. So on that note, Martin, I want to thank you for your time. This has been a fun conversation and very insightful. Awesome. Thanks for your time. Thanks for the invite, Sam.

Sam Gupta 37:03

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 Martin, head over to raven.ai. 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 related episodes, including the interview with Dave Griffith, who discusses why manufacturers must look for low-hanging fruits when exploring the path of industry 4.0 adoption. 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 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 get you on the next episode of the WBS podcast.

Outro 38:09

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 Chris Harris, who discusses the importance of shop floor data collection for manufacturers. He also provides insights into how every machine has a story and how much you can learn from these stories by collecting and analyzing data. Finally, we discussed the nuances of digital twin and how that could help manufacturing maintenance departments become proactive and efficient.

Chapter Markers

• [0:25] Intro
• [2:58] Personal journey and current focus
• [3:43] Perspective on growth
• [4:09] Pulp and paper industries’ shop floor layout
• [5:21] Shop floor data collection
• [7:50] Your competitive advantage with shop floor data collection
• [8:57] Shop floor scrap handling
• [13:57] Recommended approach to shop floor data collection
• [19:59] The core challenges of a maintenance department
• [27:50] The implementation challenges of a digital twin
• [31:16] Closing thoughts
• [32:14] Outro

Key Takeaways

• It was that 80-20 rule. We’ve got so many other problems that cost so much more money and our business that scrap is not considered one of the high ends. And now, to have a green economy to have less of a carbon footprint, scrap is stuff that is considered. But some industries, more than others, are more reluctant to identify that, but everybody’s starting to do that.
• None of their problems are easily tended to because they don’t know what the problem is, they know there is a problem. They even may know that what the problem is, but to be able to take charge of what is required to fix it take more of an in-depth shop floor data collection.
• Everyone wants a widget that fixes everything. But no one wants to hear that everything needs to be looked at and analyzed individually.
• Shop floor data collection thus far has been strictly relatable to the machinery aspect. What is the status of the machine, and is that shop floor data collection is done by physically tying it into the machine? Or it’s when a supervisor sits down at the end of the shift and thinks about what happened?

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About Chris

Chris Harris is a mentor, coach, entrepreneur, process industry veteran, and patent holder. Following a twenty-year engineering and installation career at a custom conveyor manufacturer, he founded and continuously enhanced ​WPR Services​. The company’s primary product is a suite of hardware and software, including vision and voice-enabled devices and connected devices that assist customers in addressing, solving, and planning for various challenges in today’s manufacturing environment.

Resources

• Connect with Chris
  • LinkedIn
• Connect with WPR Services
  • Website

Full Transcript

Chris Harris 0:00

Yeah, what are you going to do with the digital twin now that you have a digital twin? What are you doing with it? And how is it adapting? How is it used? So that’s more than half of the battle having all of these data gathered, and every manufacturer that makes Electronics has a wireless way of connecting to so many different things. So now, I have this thing that I’m calling a digital twin. What am I gonna do with it?

Intro 0:25

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 1:01

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.

Digital twin has been around for a long time. But is it just marketing hype? Is it just a fancy term for shop floor data collection? What are the core challenges digital twin solves? Is it supposed to help overworked maintenance departments and extract stories from each machine? Could it help in reducing waste and improving product quality? These are the questions you will have if you are in the process of exploring a digital twin for your organization.

In today’s episode, we have our guest, Chris, who discusses the importance of shop floor data collection for manufacturers. He also provides insight into how every machine has a story and how much you can learn from these stories by collecting and analyzing data. Finally, we discuss the nuances of a digital twin and how that could help manufacturing maintenance departments become proactive and efficient. Let me introduce this to you.

Sam Gupta 2:11

Chris Harris is a mentor coach, entrepreneur, process industry veteran, and patent holder following the 20 years engineering and installation career at a custom conveyor manufacturer he founded and continuously at WPR Services, the company’s primary product is a suite of hardware and software, including vision and voice-enabled devices and connected devices that assist customers in addressing, solving and planning for various challenges in today’s manufacturing environment. With that, let’s get to the conversation. Hey, Chris, welcome to the show.

Chris Harris 2:54

Thanks, Sam. Thank you very much. Appreciate your time and ability to talk here.

Sam Gupta 2:58

Of course, and we’re super excited to have you. Just to kick things off, do you want to start with your personal story and your current focus?

Chris Harris 3:06

Yeah, I’ve got 25 plus years of experience in manufacturing. We were a conveyor manufacturer. And I got to install equipment in a variety of demographics, as well as industries, and learn from that and created a product line today that is in retrospect of what I learned as a road warrior. And somebody they’re in a factory without how to handle the shop floor data collection that’s needed for manufacturers.

Sam Gupta 3:33

Okay, amazing, so obviously, we are going to be digging a lot into the shop floor data collection aspect and how we can make the shop floor more intelligent than we commonly see in the manufacturing world.

Chris Harris 3:43

But before we do that, we have a standard question for every single guest that comes on to the show. And that is going to be your perspective on growth. Chris, what does growth mean to you? Growth means me the ability to expand not only what I’m trying to do with my products but also the shop floor data collection techniques that I’ve started with and put forward to how shop floor data collection is done. And that would be a good growth platform.

Sam Gupta 4:09

Okay, so let’s talk about some of the industries where we were discussing in the pre-show. Chris, you have done a lot of work, let’s say in the pulp and paper and the corrugated box. So tell us a little bit about how these shop floors are for these industries, what you have seen in the other industries.

Chris Harris 4:31

Yeah, and the shop floor data collection thus far has been strictly relatable to the machinery aspect. What is the status of the machine, and is that shop floor data collection is done by physically tying into the machine, or it’s when a supervisor sits down at the end of the shift and thinks about what happened?

And so what I’m trying to do in my industry is make the shop floor data collection be inclusive of everything about a machine center. And so when we’re learning about the success of a production line, we want to understand what created that success and the aspects of everybody who touches the production, whether it be a maintenance, person quality control, who’s looking, trying to get all of that information out of one platform into the decision-makers to analyze that.

Sam Gupta 5:21

okay, so when we look at shop floor data collection, obviously, shop floor data collection could mean a lot of things to different audiences. So here, I believe that you are talking about slightly more operational data and the shop floor data as the product is moving through the production line, and you are talking about shop floor data collection directly from the machine as opposed to inputting this data.

Let’s say in some sort of ERP system, or whatever system they might have on the shop floor to be able to gather this data. So tell us a little bit more about what shop floor data collection means to you. And why is it different from what manufacturers may be doing at this point in time on their shop floors?

Chris Harris 5:59

Yeah, so the shop floor data collection for me has always been to be a wedge and to bridge into an ERP. So many software’s out there for a production facility are done from the outside into the machine, and I’m taking the whole idea from the inside of the machine and working back into the front side, a lot of that sales on the front end, and databases that are empty, ideas that we in a perfect world want to get all this data.

And I’m coming at it going here this data is possible to get this does not or here’s how the data needs to be shaped through then your platform your ERP system can take and do this magic that it says to do so looking again from the inside out and in creating the unicorn of the pull versus push and how do you run manufacturing and pulling versus pushing and so creating that environment and ERPs now go to the sales where the 20 years ago that wasn’t it, they were just production It was a loose connection to a sales platform, and I’m trying to feed all of that.

Sam Gupta 7:07

Okay, amazing. So So tell us some stories where you have done some work tell us the prior state of the shop floor, what kind of work you have done, what were the benefits of the work that you have done, and how that translated, let’s say, into either the revenue or business growth.

Chris Harris 7:25

Business growth that I’ve got is has been understanding how to build my product and listening to what is needed, so I’ve gotten a lot of sales inquiries for not necessarily a product, here’s a device, and you use it, and you do it I’m coming in with an idea, and that idea is shaped from what are the needs the customer has at that moment.

Sam Gupta 7:50

Okay, so tell us how you have helped some of the customers so customers or you might have some sort of stories where you saw a situation where they could have used shop floor data collection as they’re either a competitive advantage or maybe to reduce the costs or to improve their products.

Chris Harris 8:05

So tell us some of these stories from that perspective shop floor data collection with the material it seems to be raw material usage and scrap those from manufacturing those are the data is the primary data is that every manufacturing process is wanting to do reduce scrap make the most out of the raw materials and then ship something and so data has been limited to just that type of thing.

I’m trying to grab data for other departments, not just production or other plus saving revenue avenues in just raw material and scrap and then ship product and so how can I have a platform that is able to implement it and be able to touch all of the different departments to justify our allies in a variety of ways.

Sam Gupta 8:57

So okay, so many talks about this scrap, right? Is this a scrap problem going to be on every manufacturing shop floor, or is it limited to some shop floors?

Chris Harris 9:09

I mean, you got somebody in a CNC mill shop is putting scrap metal pieces all around for based on how they’re doing a pass of their CNC work. So there’s a lot of facilities that have scrap pizza dough. I worked in a facility that was just sweeping pizza dough off the floor. And so I’ve seen a with working with conveyor and conveying material from one side of the plant the entry of raw material and the exit of finished goods.

I’ve seen that there are a lot of parallels with wanting to do scrap and because a lot of industries do that. Other industries say let’s make our business model on reducing waste and whatever that is and making the most out of the materials that we have coming in.

Sam Gupta 9:56

So in your experience, let’s say if you talk about scrap. In my experience, a lot of manufacturers don’t even track that sometimes they are simply going to have scrap as the production output. They don’t even do the production casting. So how are they going to know how much space they are producing?

Chris Harris 10:13

So in your experience, do manufacturers practice scrap? Always? If not, what can they do to reduce the scrap? It’s not been a concern because it wasn’t known to be a concern until you started really doing finite analysis of your manufacturing process 20-30 years ago that it was discussed.

But it was that 80-20 rule. We’ve got so many other problems that cost so much more money and our business that scrap is not considered one of the high ends. And now, to have a green economy to have less of a carbon footprint, scrap is stuff that is considered. But some industries, more than others, are more reluctant to identify that, but everybody’s starting to do that.

Chris Harris 10:57

Because the shop floor data collection is easier to get, there are too many tools. There are so many tools that you can gather data that allow you to then validate that 20% of the stuff I didn’t think is needed. I can go grab that now. And again, the benefits of reducing waste, just waste handling waste, don’t waste away.

And knowing that you have so much in some industries may say you know what, we’re running 40% waste, we’re not getting any better than this. So then be creative on how to use that waste to do something else. And so there’s the analysis that’s being done, slowly but surely, that you see in the news? Oh, you’re finding more. You see more and more on the news.

Sam Gupta 11:35

Okay, amazing. So when you talk about this green economy concept, there are some regulatory agencies as well that are monitoring. So I don’t know if there is going to be any penalty or reporting required by the manufacturers if they are reducing the waste or not. Have you seen any of that by any chance, from the government agencies for manufacturers to be able to report the waste and what they are doing to reduce the waste in their facility?

Chris Harris 12:01

No, I haven’t. I don’t have any data on that. WPR is my product that has the ability to gather data, whether that be a metric, and the number of this, or the size of that. And so, the tools that I’m gathering are able to take and quantify that metric that’s needed.

Sam Gupta 12:21

Okay, amazing. So you spoke about finite analysis, and some of my audience may not be familiar with what finite analysis is. So tell us a little bit more about finite analysis and how that is relevant for manufacturers. And if you have any stories where they were not using finite analysis before, and maybe they started using afterward, what was the impact of using finite analysis.

Chris Harris 12:42

The Finite analysis is really just meaning that people can look into things a little bit more depth. So my reference to finite analysis was the path I was trying to deliver the message. So again, analyzing things one or two steps further and analyzing things with the answers that your original analysis creates, and so finite, then it has to do with the tools to be able to analyze that the computation of power to analyze that there that allow you to use words like the finite analysis.

Sam Gupta 13:18

Okay, so, give me some examples. So let’s say if I was not using finite analysis before, and maybe I did not have enough depth, but now I may be using finite analysis, and maybe I’m going to have depth. So let’s say if I’m the pulp manufacturer here, Chris, okay. And I am trying to take advantage of finite analysis on my shop floor. So what kind of insight. Am I going to get on the shop floor that I did not have before more data?

Chris Harris 13:40

Again, the finite and now the in-depth analysis is thinking about more ways of shop floor data collection? Again, is there additional data? We don’t know.

Sam Gupta 13:57

Okay, so tell us some of the challenges that you have seen in these industries when you are doing, let’s say, shop floor data collection. Okay, what are some of the challenges of do you find that the machines that you are interfacing with? Are they modern enough to be able to get the data from those machines? What kind of preparation is required? Do we need to upgrade the machines? Do we need to put any sort of sensors before we can get the data from the machines?

So let’s say if I take you to a manufacturing shop floor, what would be your approach recommendation, the steps that you are going to take in order to get the appropriate data that you need to be able to provide the insight to be able to grow the business?

Chris Harris 14:34

Yeah, every machine has a story to tell every factory floor has a story to tell all around the machine from raw materials in effort out, and cameras and audio data gathering from those two can extrapolate that data. A lot of people are taking an old machine that is mechanically inclined to run production but doesn’t think that you can update its technology of telling a story to get to a device because of primitive ways of running a machine.

But every machine has a baseline story and can tell you something you didn’t know yesterday. And with having the ability to gather more than one bit of information from a machine, now the machine tells you the story that you need and then tells you whether or not you really need to get a new machine and tells you if you really need to upgrade controls. But it starts with knowing what the root cause is? And what is it that we’re trying to fit?

Sam Gupta 15:39

Okay, so you mentioned that every machine has a story to tell. So tell us one story. And probably the last machine that you interfaced with that rocked your world completely, that was really fascinating for you to be able to find that you probably were not expecting when you started your process.

Chris Harris 15:58

The viscosity of the liquid. The temperature of the viscosity of a liquid. And how temperature and pressure affected glue, and how it was the thing that never was considered to then revolutionize the ability to glue in the boxing industry that was really unique. The other unique thing found is a bug zapper that was affecting laser LIDAR or laser pathway sensors that a handful of different companies make some of the electronics manufacturers, but obscure scenarios that you don’t know unless you’re analyzing a lot of things from the outside looking in.

Sam Gupta 16:45

Okay, so this is very interesting. And I’m super fascinated about this particular story where you are talking about the viscosity and temperature, and that is affecting the group process. So what was the original expectation of the shop floor when they did not have this insight, and then you started gathering the insight?

And then they came to know that there is something going on here that I did not know, and I got to know this only because of this shop floor data collection. So tell us a little bit about the situation before in terms of what was the insight that existed or the myths that exist around the shop floor and how that changed once you find this insight from your shop floor data collection process.

Chris Harris 17:24

Good luck not to see data that is changing. When you’re charting data, the inconsistent things are visibly there, more so than the consistent thing. Those ROIs allow you to see similarities and not similarities.

And so that tying into a variety of sensors that are existing, or tying into a maintenance technician who said I do this 17 times, and I always go to find this data out and then I go home because I know what that data is to tap into that and then to build trends and tendencies from that. And the data have shown that you can analyze quickly then allow you to allow me to come up with that let just because it was a variable that changed a lot that I didn’t know that you don’t know.

Sam Gupta 18:18

Yeah, so every story has some sort of trigger, right? I mean, the story starts from somewhere. So in this particular case, what was the original trigger? What were the core problems that the shop floor was having? And then probably you were brought in, or your team was brought in, or somebody was brought in that you knew. So what was the trigger?

Chris Harris 18:36

The problem was that they didn’t know that they were looking, they wanted to know, a factory goes through a new maintenance manager who tries something new, a new production manager does something different, a quality person who just attended some seminar that said, this is the buzzword that we’re supposed to use for our game, our thought process in our department of this year.

And so none of it was working because they’re all still changing. And so that trigger was how we’re going to get the data we don’t know to help us, we don’t know, and how to how do we get that data. That’s where my wedge data gatherers come into play. When you said none of it was working, so I want to dig a little deeper on that. So what was not working? The product quality wasn’t good enough. The efficiency wasn’t there.

Chris Harris 19:22

What were the problems? Now working is a harsh term. It could be more optimized. It could be better. There was always the challenge to get that extra 20% in the 80-20. No. And so, it wasn’t always a perfect thing.

So I learned from seeing lots of maintenance departments and seeing how maintenance works to see how production interacts with the production employees, production managers, and employees and seeing the need for all these things that are different. But the fact is that you need to gather the data, somehow raw machine metrics, and people met.

Sam Gupta 19:59

Great. So let’s talk about the maintenance department. So what are the core challenges that you typically see in a maintenance department that you have worked with? What are the core challenges?

Chris Harris 20:11

I have seen every maintenance department were overworked and underpaid, and we just had an employee quit? And the efficiency of our department just went to 75%, because we’ve lost one out of four. That’s a very real number. And now that three other maintenance, people have to take that other 25% without a pay increase, and now you have a moral issue.

And so those are the things that I’ve seen in maintenance departments. So why are the older work? What are the core reasons? Why are the award-winning is the there’s not money put in for budgets, there’s not there’s a maintenance that said, hey, we need to this money. After that, may I talk earlier about a different maintenance manager who has ideas and educated ideas from a college or from life experiences that they’ve gathered in, but everything costs money, and money’s not spent the maintenance, because 80% of maintenance is reactive?

And so companies know, maintenance can be a very expensive challenge. But 80% of it is reactive, and the latest people are just trying to get on the flip side of that to not have to become too reactive. So that’s the thing that I’ve seen with maintenance departments.

Sam Gupta 21:31

So obviously, when you talk from the CFO perspective and let’s say if I take the side of my manufacturing CFO, they have a lot of competing priorities, right? So from the CFOs perspective, or CEO’s perspective, maintenance, people are saying that I have tons of problems with my service, people are saying they have tons of problem production, people are saying they have tons of problems.

And marketing, people are saying they have tons of problems. So it’s not easy for a CFO to think about that. So in your experience, let’s say if you were to make some recommendations to a CFO, and again, the goal of this exercise is going to be to create some sort of ROI, so that whatever I’m spending today, either I can spend less. That’s what CFOs care for.

Chris Harris 22:11

You just said it. The CFO hears from the quality department. I have problems in every department. So I’m coming in from a product to understand that every one of those people has problems, but none of their problems are easily tended to because they don’t know what the problem is, they know there is a problem.

They even may know that what the problem is, but to be able to take charge of what is required to fix it take more of an in-depth shop floor data collection. And that’s where I’m coming in is tying into each of these departments and being able to get the data to take the pains away from that person. And it starts with talking to that person and cleaning and inquiring off of them the data that’s needed to make his life better than ultimately CFOs life.

Chris Harris 23:00

Okay, so when we talk about the maintenance, and I’m actually going to give you an example, right, so let’s say if I’m driving a car, and if I look at the maintenance, from the cars perspective, typically you are going to require a lot more maintenance and an old car, right. And this is what I see on the shop floors as well.

Whether you talk about ERP systems, you talk about the machine. Each of them is some sort of machine, right. So the reason why you would require a lot more maintenance in these machines is that they are probably too outdated. Right, and they are not getting things. They have fewer things, all machines have fewer things, they have fewer electronics, and new machines have lots of new electronics that then require new maintenance technicians to be able to attend to them.

Chris Harris 23:48

So yeah, there’s, they’re newer things. And they’re easier to obtain. And they’re easier to build. But they also add complexity to the whole process because they are new things. New things don’t always work out. And there’s another new thing that replaces the new thing. So when they put machines together, they really had to think what’s the simplistic way to do this.

So I see Emerson, both as a former machine builder and the company, we were making robotics and conveyor and other machinery. I’ve seen the migration with new stuff, old stuff, and I’m 50-50 based on the situation every situation is different. And knowing the analysis that needs to be done tells you whether or not you’re on this side of the 50 or that side of the 50. And those are things that my product can do ahead of time to justify how a machine performs. What’s the problem?

Chris Harris 24:40

What’s the root cause? Is it that I spit that the machine is broken down and the four operators hurt their foot because they kick it because they’re mad that the machine is broken down and always because it’s a mechanical nightmare because maintenance spends too much money on it, and we have technicians from the OEM that doesn’t exist anymore.

So you’ve got to analyze and look at it. And everyone wants a widget that fixes everything. But no one wants to hear that everything needs to be looked at and analyzed individually. But it does. And that’s where my tools come in, that allows you to do that to take on that individualized entity, that that machine interaction with a person operating, it has to be able to say whether or not a norm.

Sam Gupta 25:29

So tell us some of the examples or the stories of that 50-50, in which situations the new machine is going to be the right fit, and in which situations, the old machine may be okay. Do you have any stories or examples, or criteria that you would recommend?

Chris Harris 25:46

Not a story, conversations, and it comes down to where everybody knows what data that they want to gather to get that answer. But they have to speculate on a lot of the answers because it’s too hard to gather the data, or that employee doesn’t have time to gather the data.

And so, therefore, if decisions are made, wrong decisions are made because the assumption is maybe that this is a bottleneck for maintenance because they remember last week maintenance guy said the machine broke down.

So they immediately think, wow, my machines always broke down. But that may have been the only time it was broken down in 10 years, but that person remembers that and then makes an ill decision based on that. And that’s why qualifying the data is an important part of it.

Sam Gupta 26:35

Okay, amazing, and so so from the maintenance perspective, what other stories or recommendations that you might have, or maybe you have some other stories from the maintenance perspective that you would like to cover?

Chris Harris 26:45

Yeah, that’s not a product that I sell. Unless selling smiles is a product is the most important thing. The most important thing with the maintenance department is morale. And as a vendor, if I’m involved with it, I’m going to try to get a chuckle and try to take and try to create that because I’ve seen the success of good maintenance type. And how can you take him and leave the main shop and give the main his department the tools that they need and the data that they need to then make an informed action or decision based on that?

So that’s what I’m trying to do. But then it also goes in production and the folks producing. So, for instance, I did a report. And when we put the reporting together, we had no negatives; we had no downtime, not minutes off. Not that everything was uptime, and green and nice fiber colors, and not red and x’s and things like that. So shape your data in a kind way is one of the delivery messages that we want with our data gathered.

Sam Gupta 27:50

Okay, so obviously, you talk a lot about digital twins as well. So let’s talk about the complexity of the digital twin in implementing that. So let’s say find the manufacturer or the manufacturing CFO. Yes, I’ve heard that the digital twin is cool. But I’m looking to see if I can make the life of my maintenance people easier by implementing, let’s say, a digital twin of a machine or a process.

Chris Harris 28:13

In my opinion, a digital twin is a marketing word that, again, was talked about earlier. Offline, people don’t know what a digital twin but they know their competition bought two of them last week. They want to buy one now. They want to buy three now. So digital twin is just knowing the data and having the data pop up in front of you and telling you here it is.

And the digital twin is all of those bits of data that are pertinent. Someone can say I’ve got a digital twin, and I have all data pertinent, but I can’t read any of it. I don’t understand it. I don’t know how to extrapolate it quickly. And so my interpretation of a digital twin is the data that’s needed all readily available there in one page on one period.

Sam Gupta 28:55

Okay, so in your case, you are saying that digital twin is just a marketing term, clearly, the shop floor data collection, if you think about it, so basically from the resultant protected as long as the data is there, on one page, it describes, let’s say whatever trends you’re facing with respect to the machine, and it actually solves the problem.

That’s what you should be looking for. Right? So in your experience, tell us some of the, let’s say, well recommended digital twins. And if I were to implement a digital twin in my manufacturing plant, what are the attributes other than data being on one page, and the data is relevant to my process? What else should I be looking at? In the digital twin?

Chris Harris 29:33

What are you going to do with the digital twin now that you have a digital twin? What are you doing with it? And how is it adapting? How is it used? So that’s more than half of the battle having all of these data gathered, and every manufacturer that makes Electronics has a wireless way of connecting to so many different things. So now I have this thing that I’m calling a digital twin. What are what am I gonna do with that data? So that’s the whole digital twin 2.0.

Sam Gupta 30:02

Okay, amazing. So, that’s it for today. Chris, do you have any last-minute closing thoughts?

Chris Harris 30:06

Some of my challenges with using vision and video and audio, there are people who feel an invasion of privacy with cameras, and the challenge of how to address that has been a subject that I’ve been working with to try to offer up these solutions that help manufacturing environments and bring a lot of smiles to employees faces that then create a really good cohesive work environment.

So the challenges with that if you have any further shows that maybe touch base on that or you got topic or industry experts that know about that, I’d love to be able to participate in something like that.

Sam Gupta 30:44

Okay, amazing. We’ll definitely keep you in mind. And my personal takeaway from this conversation is going to be every machine has a story, and it’s up to you how you want to craft that story using the data. So on that note, I thank you for your time in class. This has been an insightful conversation.

Chris Harris 31:04

Yes, thank you. And it was really very impromptu. I had no idea that I was going to do this, and I would have worn more than a T-shirt for a verbal or audio-only call.

Sam Gupta 31:16

Alright, thank you so much. Thanks. I cannot thank our guests enough for coming to 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 Chris, head over to WPRServices.net. Links and more information will also be available in the show notes.

If anything in this podcast resonates with you and your business. You might want to check out the related episodes, including the interview with Dave Griffith, who discusses why manufacturers must look for low-hanging fruits when exploring the path of industry 4.0. Also, the interview with Jason Chester, who shares his thoughts on how evolving consumer trends are forcing manufacturers to rethink their approach to managing manufacturing processes.

Sam Gupta 32:14

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 32:35

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 Chad Moutray, who discusses the current economic conditions and manufacturing industry forecast. He also translates economic insight for small-to-medium-sized manufacturers who may not understand how these issues might affect them. Finally, we discussed several other topics, including supply chain, consumer behavior in the new normal, pandemic-driven business trends, changes due to new administration, and much more.

Chapter Markers

• [0:22] Intro
• [4:01] Personal journey and current focus
• [5:12] Perspective on growth
• [6:24] Impact of macroeconomic trends for manufacturers
• [11:53] Business growth during pandemic
• [13:07] Why is service industry not growing in proportion to manufacturing?
• [16:22] Manufacturing workforce challenges vs unemployment rate
• [19:06] Supply chain disruptions for manufacturers
• [23:42] Business model changes due to the pandemic
• [25:41] Using external market data for internal business decisions
• [33:05] Closing thoughts
• [33:50] Outro

Key Takeaways

• The skills gap is a structural problem. We’ve known this problem is going to be happening for the last decade. There’s the worry out there about where’s that next generation of workers going to come from. And so part of that is, I think, a perceptional challenge.
• Sometimes, part of the skill gap challenge is that not only do you have a skills mismatch, but you also have a location mismatch, and that is the challenge that we have quite a bit.
• Pre-COVID, packaged foods, were kind of starting to lose favor, especially amongst millennials. And yet, during this just crisis, as everyone has stayed home, packaged foods have gained favor, right? So if I was selling in the packaged food business, you’d have to ask yourself, is that a trend that’s going to stay?
• There’s an enormous amount of interest, not just in the economy, but in what’s happening in terms of the policy. I think to be a good forecaster. You almost have to kind of have a good handle about it.

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About Chad

Chad Moutray is chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews and has appeared on various news outlets, including CNBC. In addition, he is the director of the Center for Manufacturing Research at the Manufacturing Institute, the social impact arm of the NAM, where he leads efforts to produce thought leadership, data, and analysis of relevance to business leaders in the sector.

Prior to joining the NAM, Dr. Moutray was the chief economist and director of economic research for the Office of Advocacy at the U.S. Small Business Administration (SBA) from 2002 to 2010. In that role, he was responsible for researching the importance of entrepreneurship to the U.S. economy and highlighting various issues of importance to small business owners, policymakers, and academics. In addition to discussing economic and policy trends, his personal research focused on the importance of educational attainment to both self-employment and economic growth.

Prior to working at the SBA, Mr. Moutray was the dean of the School of Business Administration at Robert Morris College in Chicago, Ill. (now the Robert Morris University of Illinois). Under his leadership, the business school had rapid growth, both adding new programs and new campuses. He began the development of an M.B.A. program that began accepting students after his departure and created a business institute for students to work with local businesses on classroom projects and internships.

Resources

• Connect with Chad
  • LinkedIn
• Connect with NAM
  • Website

Full Transcript

Chad Moutray 0:00

Manufacturing actually has been a bit of a bright spot in the larger economy. That doesn’t mean that we’re out of the woods. We’re clearly not back to pre-pandemic levels of employment or output at this point, but when you compare it to the service sector, we certainly have fared a little bit better. Overall, the manufacturing sector is just down 1% below where it was less prevalent, which is pretty impressive.

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 a digital transformation consulting firm, ElevatIQ.

Are we already out of the woods from COVID? Should you be bullish on the economy? How should we plan your investments for this year? Can you comfortably plan for long-term investments? How would the new normal look? What disruptions can you expect in your supply chain? What new consumer trends can you expect? And what workforce changes can you expect? If you are a manufacturer, these are the questions you might have as you plan for 2021.

In today’s episode, we have our guest Chad Moutray who discusses the current economic conditions and manufacturing industry forecast. He also translates economic insight for small to medium-sized manufacturers who may not understand how these issues might affect them. Finally, we discussed several other topics, including supply chain consumer behavior in the new normal pandemic driven with the strength changes due to new administration and much more. Let me introduce Chad to you.

Sam Gupta 2:05

Chad Moutray is chief economist for the National Association of Manufacturers, also known as NAM, where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews and has appeared on various news outlets, including CNBC.

In addition, he’s the director of the Center for manufacturing research at the manufacturing Institute, the social impact arm of the NAM, where he leads efforts to produce thought leadership data analysis of relevance to business leaders in the sector. Prior to joining the NAM, Dr. Moutray was the chief economist and director of economic research for the Office of Advocacy at the US Small Business Administration from 2002 to 2010.

Sam Gupta 3:01

In that role, he was responsible for researching the importance of entrepreneurship to the US economy and highlighting various issues of importance to small business owners, policymakers, and academics. In addition to discussing economic and policy trends, his personal research focused on the importance of educational achievement to both self-employment and economic growth.

Prior to working at the GSB. Mr. Moutray was the Dean of the School of Business Administration at Robert Morris College in Chicago, Illinois. Now, Robert Morris, University of Illinois. Under his leadership, the business school had rapid growth, both adding new programs and new campuses. He began the development of an MBA program that began accepting students after his departure and created a Business Institute for students to work with local businesses on classroom projects and internships. With that, let’s get to the conversation.

Chad Moutray 3:56

Hey, Chad, welcome to the show. It’s always great to be on your show, Sam. So nice to be on it.

Sam Gupta 4:01

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

Chad Moutray 4:06

Sure, so my name is Chad Moutray. I’m the chief economist at the National Association of Manufacturers. I’ve been at the NAM for ten years now. For those of you who are not familiar with the National Association of Manufacturers, we are 125-years-old, the largest trade association dedicated to manufacturing in the US. And certainly, I think when you think of all of the members that we have a small, medium, and large, pretty much every sector across the country.

It doesn’t have to be necessarily a US company. We have a lot of global companies as well as long as there’s a US presence. The other comment to make is that I’ve had an interesting career. I started my career in academia; I was the Dean of the School of Business at Robert Morris College in Chicago, which is actually now part of Roosevelt University. And my passion there was was not only economics, but I also helped grow the MBA program or start an MBA program while I was there, and then After leaving Robert Morris, I moved over to the US Small Business Administration, where I was the chief economist for eight years. So kind of an interesting career from academia to government to now trade association.

Sam Gupta 5:12

Yeah. And it’s always fun to talk about any of the economic topics because that’s my favorite subject. And it has always been, so I’m super excited to talk about that. But before we do that, we have one of the standard questions that we ask every single guest that we get on our show, and that is going to be Chad, your perspective on growth.

Chad Moutray 5:31

Well, obviously, I mean, I think one of the things that you want to try to do as an overall economy, it’s just to continue to, to grow. I think if we think about Americans and our standard of living, you know, you always hope that your kids have a better standard of living than you do, right.

And so I think the key to all of that really is a growing economy. What can we do to make sure that we continue to grow our overall size of the pie right? Yeah, making investments in research and development and technology, making sure we’re smarter, right? I think continuous growth is important for us as a society, but I’ll certainly as an individual, as well. And all of those things have the tendency to make us richer, but also help us to keep our competitiveness. And so when I think of growth, I think, what can we do as a society to continue to make the pie bigger and to make ourselves better off as a result?

Sam Gupta 6:24

Okay, amazing. That’s a very interesting insight. I want to make sure that my audience understands this. And when we look at these small to medium-sized manufacturers, they are probably not going to have as much knowledge, or I would say, translation of how the global economic factor translates to their own personal interest. So I’m going to ask you a question. Okay. So obviously, the pie has to be bigger. But how does that benefit? Let’s say if I am a manufacturing CFO? How is it going to benefit me?

Chad Moutray 6:53

Well, I think every keep in mind that 90% of the members of the National Association of Manufacturers are also small and medium-sized manufacturers. And so I mean, all of them really are thinking about how can I continue to stay competitive? How can I continue to keep up with China? And in many cases, they are suppliers to the OEM. So those larger companies, right, and so when I speak to many of them, they are very interested in making investments, the right and smart investments in technology that are going to help keep them efficient and productive and competitive.

And so I don’t think the topic of growth is one that is foreign to the small and medium-sized manufacturer, I think that they are very keen on it. I think the challenge that smaller medium-sized manufacturers have is limited resources and limited bandwidth, right. And so they might not have a person who was dedicated to looking at some of these topics, the way that a large company might. And so I think that that is the way I typically think of it is that they are very in tune with what’s actually happening in the overall economy. It’s just a matter of the number of different priorities that are kind of at stake there.

Sam Gupta 7:57

Yeah. And I’m actually gonna give you a story of one of my recent conversations with one of my bank of America counterparts, and he was looking at one of the reports, and what I typically find with the macroeconomic data, and the research base data is there is always a little bit of disconnect, okay, versus what we are hearing in the community versus what the reports are telling us.

So when we looked at the report, it was telling that the manufacturing has grown during the pandemic, and which was eye-opening for me because I actually talked to a lot of sales and manufacturing executives, and I don’t really get the same impression. So what is your perspective with respect to the overall current economic conditions? And do you think that the data that we typically get, let’s say, from the research really translates into what the current SMB is feeling?

Chad Moutray 8:48

So that’s a great question. And just to kind of back up a little bit, yeah, obviously, last February to April, that was really peak to trough in terms of the steep decline that we saw on overall manufacturing activity at the beginning part of the pandemic manufacturing activity overall fell 20.1% over the that two month period, that’s looking just at manufacturing production, we lost more than 1.3 million workers in the sector, those numbers somewhat pale in comparison to when you look at the actual sector by sector breakouts.

The worst sector by far in that two month period was a motor vehicle and parts, which was down at 83.5% in that two month period. So flash forward since, since April, manufacturing actually has been a bit of a bright spot in the larger economy. It doesn’t mean that we’re out of the woods, we’re clearly not back to pre-pandemic levels of employment or output at this point, but when you compare it to the service sector, we certainly have fared a little bit better.

Chad Moutray 9:44

Overall, the manufacturing sector is just down 1% below where it was last February, which is pretty impressive. But we are down about 575,000 workers from where we were this time last year. So again, a number of things, a number of challenges out there, even as we are a quote-unquote, bright spot, what I continue to hear from our manufacturing members.

And this is something that I’m sure that you’re hearing in the companies that you’re speaking with as well, is a large number of supply chain disruptions in the overall sector, they just need, especially in an environment where manufacturing activity has been growing pretty rapidly.

It’s hard sometimes to keep up, especially in the COVID world as a result of the supply chain disruptions. And I guess I would add to that, there’s also a lot of challenges with workforce and getting enough workers, you’ve seen raw material costs skyrocket, especially for steel, and in the construction sector for lumber and a number of other commodities, you’re seeing very rapid increases in producer prices.

Chad Moutray 10:43

And I think those are really starting to have a little bit of a drag on the overall sector. Again, the service sector is faring worse, especially in Europe and other places, but you’re still seeing some lingering challenges that are out there. When it comes to the number one issue that I hear about in terms of our main manufacturers’ outlook survey, it’s once again not having enough talent that that is still the biggest challenge that’s out there.

And I’ve given a long-winded answer, but I don’t think I’ve actually answered your actual question, which is, even though the overall sector is down, just 1% below where it was at the beginning part of the pandemic, there still are a number of sectors which are down by double digits relative to where they were before.

Chad Moutray 11:25

So on a year-over-year basis, manufacturing production, for instance, for metals, is still down, roughly 6%. Right. For a lot of other sectors, even machines you get, you get the idea. This, it’s not as broad-based as you might expect. And so, we still are continuing to hear challenges. On the optimistic side, I do expect that by the time we get to the second half of this year, we will be back to pre-pandemic levels. But not that’s not true forever. One, I do think there’s still gonna be some lingering challenges out there.

Sam Gupta 11:53

Okay, so this is very interesting. And I want to dig a little bit deeper into this. So obviously, you know, some of the sectors are still down. But the overall pie is probably similar to what we had at the pandemic level, right. So there must be some sectors that must be booming at this point in time. So do you have a sense of those sectors that are booming?

Chad Moutray 12:10

So I mentioned motor vehicle imports earlier. They actually have fared pretty well, especially considering that they were down at 3.5%. Last year, at one point last year, overall motor vehicle and parts were up 1.7% in terms of production over the last 12 months.

So that’s a pretty impressive rebound considering what happened early on. The other sectors, obviously food is it’s benefited. Obviously, there’s a change in terms of where people are buying the food, but the overall food and beverage has just fared well, aerospace has bounced back chemicals is another sector. Keep in mind that chemicals include pharmaceuticals.

And so you know, obviously that’s part of the solution. But I think probably the biggest success story, and you know, you and I are talking remotely, I’m not actually looking at you in the eye here is computers, right? The technology and computers, everyone is looking more and more at how technology is changing the landscape. And so I would probably call that the biggest bright spot that’s out there right now. Okay, interesting.

Sam Gupta 13:07

And I’m actually gonna touch on a similar topic, based on your previous comment. And that is going to be you mentioned that manufacturers are always interested in the technology investment, right, from our perspective, and you talk about small to medium-sized business. I mean, we are a small to medium-sized business. We do business in the ERP space.

And obviously, our manufacturers are small to medium-sized businesses as well. So for us, as an executive for us, the economy is going to be what is my lead flow? Okay, so if I look at my lead flow, pre-pandemic level, obviously, it is not the same. So I don’t know if the sentiment is still the same, even though the market is up.

So I don’t really see that the interest in the investment in technology at this point in time among the manufacturing community. I don’t know if it is still the same. Or maybe it is because of the financial systems that they might not be as excited or but I mean, I keep hearing the same story, even in the industry 4.0 space, we don’t have the same lead flow at this point in time.

So, where is the disconnect? You are telling me that the manufacturers are definitely interested in growth, they are interested in the investment in technology, but we are not really seeing the same momentum. So what could be the disconnect here?

Chad Moutray 14:16

I would say is that manufacturers are always looking at and trying to look ahead and say what my facility is going to look like three, four, or five years from now. And as a result of that, do To be fair, I think the investments and technology were taking place well beyond well before the pandemic. So they already were starting to think, okay, what’s going to what is my facility going to look like down the line?

I think what the pandemic changed is now technology is sometimes the solution, right? When it comes to maybe re-engineering your production process with social engineering in mind. It certainly has changed potentially, maybe where there are possibilities for remote work, etc.

But I think the overall trend line is still there in terms of how I can use augmented reality to help train my workforce to be able to do new things. How can I actually incorporate some new form of robotics into the production process that will help keep me competitive, maybe also help me with that social distancing element, but also help to kind of streamline the overall production process?

Chad Moutray 15:18

And so I don’t think the conversation has necessarily changed, in many ways, relative to what it was before the pandemic, I think what you’ve seen happen, there was a survey that PwC did, I think, last May, that said, where companies were pinching pennies and other categories, they still were making investments in technology, largely because they saw that as a growth opportunity down the line, right. We also are currently doing we’re updating our skills gap study that we do with Deloitte every so often.

And I’ve asked a lot of these manufacturing member companies that we’re talking to what is the future of work looks like for your company? How does technology play into that space? And certainly, I think having that continuous learning, having that digitization and data background, I think is a helpful skill to have.

And I think certainly recognizing the future potential of where the sector is going. So I think maybe that’s where the disconnect is. I think, certainly right now, everyone is focused on the here and now, but I think most companies that I talked to are certainly focused on where are they moving down the line? 1-2-3-4-5 years from now.

Sam Gupta 16:22

Okay, so let’s talk a little bit about the workforce as well. Right. So you mentioned that the manufacturers have serious workforce challenges, but at the same time, the unemployment rate is still at a very high rate at this point in time, right? A lot of people don’t have jobs. So why is there a disconnect between these two data points?

Chad Moutray 16:40

So I call this the paradox because you’re right. The unemployment rate is 6.3%. Keep in mind this time last year was 3.5, which was a 50 year low. We have, you know, almost 10 million Americans who are out of work, in terms of the unemployment insurance rates were down 575,000 workers in terms of manufacturing employment, and yet time and time again, when I go out, and I survey our members about what are the top challenges, the number one issue is the inability to attract and retain workers.

To me, the skills gap is a structural problem. We’ve known this problem is going to be happening for the last decade, as long as I’ve been at the NAM. We’ve talked about the skill gap, largely because baby boomers are retiring, right? And there’s the worry out there about where’s that next generation of workers going to come from when they do retire? And so part of that is, I think, a perceptional challenge. I mentioned it a second ago. We’re doing a lot of interviews with companies as part of this Deloitte study. I said to many of them, you know, we have a lot of service sector workers who are out how to work right now, how are you going to get those people who were selling as a cashier or whatever, behind?

Chad Moutray 17:43

Or maybe a burger flipper? How are you going to get them into your shop floor? And the first thing they say is, well, we got to get them interested, right? They’re not thinking of us, right. And so I think that there are these perceptions out there that manufacturing is dark, dirty, and dangerous, which are not true. It’s certainly an enemy in a modern sense.

And yet, people have that stereotype out there. So we’ve got to get them interested in manufacturing in ways that they weren’t before. The second one is that because manufacturing is so technologically advanced, now, you need a different type of worker than we might have before, right? It’s not just a matter of doing the same routine over and over and over again, right? It’s now you need someone who can look at a computer look at you know, be able to understand what the computer spits printing out and spitting out to them, and maybe having some other type of trade or skill that requires some additional work.

Chad Moutray 18:31

So if you’re looking for a different type of worker, and that means that sometimes there’s a skills mismatch there. I guess the last thing I would say is that we as a society think we like to think of ourselves as being very mobile, but the reality is, we are not right.

I like to pick on my family here; I’m from rural Illinois, I have a lot of my family members who would never leave Illinois, despite the fact that there are probably greater opportunities if they were to move and go elsewhere. Right. So sometimes, part of that challenge is that not only do you have a skills mismatch, but you also have a location mismatch, and that is the challenge that we like that we have quite a bit.

Sam Gupta 19:06

Yeah, interesting. So let’s talk about supply chain disruption a bit. So what does it mean to, let’s say, if we talk about manufacturing, CFO, or CIO, so how are these supply chain disruptions translating to their challenges at this point in time, and what can they do to prepare for these disruptions?

Chad Moutray 19:24

Well, I guess the biggest supply chain disruption that you hear about just to kind of pick on some current events is obviously the lack of chips in the motor vehicle sector. Right, and just the huge ramifications that that is having on you know, you’re actually having OEMs major car companies saying that they have to shut down production for a while because they are waiting to catch up in terms of chips, but you see that even on a smaller scale with some other companies as well, some of that in adjusting time production process. If you’re waiting for one supplier to give you something and it’s not there, that really is going to hamstring the entire process.

Chad Moutray 19:58

You might have to shut down for a little while. The other thing that I continue to hear about is, again, kind of in that COVID world, you might just have one or two people who can do a certain task, and maybe one of them was exposed to COVID or potentially exposed to COVID.

Now you’ve got to be flexible with your workforce to be able to handle that load. And so there is this kind of unique challenge out there with number one, the fact that manufacturing is a bright spot right now. But also the fact that you have COVID, kind of underlying that and an adjustment time process. Suppose one of those dominoes doesn’t fall at the right time. That creates some backups along the process.

Sam Gupta 20:35

Okay, amazing. So let’s talk about some of the changes that we are going to see with respect to COVID. So I don’t know if there are going to be any changes in the way we do business. If manufacturers should be changing their business models or the way they interact with their customers, or the way they sell their stuff. Are you seeing any of that insight in your surveys or during your conversations with manufacturers?

Chad Moutray 20:58

Companies are trying to figure out what the new normal looks like? Right. Certainly, we spoke earlier about remote work, I think, yeah, to a large extent. But on the white-collar side of manufacturing, I think many of those people who are working remotely probably will stay remote.

So that certainly is a shift. I think beyond that. I think companies are clearly looking at all what can they do to re-engineer the production process so that there is social distancing so that if this were to ever happen, again, they don’t have to shut down the line, right to be able to make sure that those protections are there, that’s not always possible.

Chad Moutray 21:33

Oftentimes, production requires people to be in close proximity to one another. So that’s certainly something that will likely shift technology could be the solution there to a certain extent, because robotics might be something that could be placed into a kind of help that production process.

And so I do think companies are looking at number one, how can technology be incorporated to help not only with COVID but with any other future thing that might come up? I think everyone that I talked to says that they’re re-evaluating their supply chain. I’m not sure that every company knows what that means. Right? Does that mean that the US is going to benefit from that? Does that mean they’re going to be doing more onshoring? Maybe it might, but I think companies are looking at, again, is a duplication in the production process or in terms of suppliers? Where else can I get parts? If this one is down, or maybe I can move stuff closer to home so I can monitor a little bit better? Right.

Chad Moutray 22:23

So I do think companies are reevaluating their supply chain. To be fair, I think they were already doing that before COVID, largely because of the trade war. So there’s that element. So that’s all on the production side. I think the bigger challenge the manufacturers have is, how has the consumer changed?

Because I think consumers also have shifted their thinking, this has been a huge game-changer, right? I’ll pick on packaged foods here, you know, pre-COVID of it, packaged foods, were kind of starting to lose favor, right, especially amongst millennials. And yet, during this just crisis, as everyone has stayed home, packaged foods have gained favor, right? So if I was selling in the packaged food business without picking on any company, you’d have to ask yourself, is that a trend that’s going to stay?

Chad Moutray 23:06

Are you going to revert back to the way things were pre COVID? And so I do think some trends have changed so dramatically that some of them are gonna stick others might not as many millennials, we’re not buying cars pre COVID.

Now, suddenly, they are because they realized that that that was a way that you could have appropriate social distancing, right. And so I think that there are some definite consumer trends that have shifted, and I think as a manufacturer, you’ve got to figure out which one of those are going to stick post-COVID and which ones aren’t, because you’ve got to be able to be appropriately aligned with. However, those consumer shifts have happened, have moved.

Sam Gupta 23:42

Okay, so let’s talk about a little bit with COVID. I was speaking to one of the persons from the wine industry, and the wine industry has changed completely because now they don’t really have that in-person interaction.

Pre-COVID, what they used to do is they used to go to different restaurants, they used to have this wine tasting event, even at the retail outlets, but they don’t have that anymore. So what they have started doing is they are doing a lot of zoom calls, and you will be surprised. I mean, they are actually shipping the wine packages before the zoom call starts.

So this is a very interesting way of doing business. Have you seen any similar trends? Or have you come across any similar stories because of COVID if any manufacturers have changed the way they were doing business, and that is completely a surprise when your hardback?

Chad Moutray 24:31

Well, I mean, honestly, what you’re describing there is the sales techniques of a lot of manufacturers, right? They were making a lot of in-person sales calls right now. They’re doing all that from home. And so, I think that’s one of the new normals that we hear out there.

If people are moving much more virtual, yeah, I used to be on the road myself, right. If I was giving a presentation, I would be out. You know, pretty much at least once a month, get a meeting with member companies kind of fit getting a sense of what was happening in terms of the overall economy as it relates to what they were seeing.

Now we’re doing all of these briefings virtually right. And so moving into that new normal fact, at some point, we’ll be getting out there and still doing business trips, just because I think there’s value in getting out there and seeing people face to face and seeing what’s really happening on the ground.

But I think that there’s also going to be a trend there that says, hey, we’ve learned that this works, the virtual, and this works, right. And I think you’re gonna see perhaps a lot fewer business trips than what you saw pre-COVID, just because there’s no reason for me to get on the plane and fly 1000 miles or something for a 30-minute presentation when I can do it virtually. So I think that is also what you see in terms of sales calls, etc.

Sam Gupta 25:41

Okay, and what are your perspective on the macroeconomic data? Right, so let’s talk about some of these small to medium-sized businesses, right? I don’t know if any of those really use the macroeconomic data to actually make the decisions. I don’t know if they buy this data from a source.

They might go to, let’s say, a lot of different events, and they might be making decisions based on whatever they are hearing. But number one, should they be using this data for any of the decisions that they are making? Let’s say if they are launching new products? Are they using this data right now? If not, why should they be using this data?

Chad Moutray 26:15

See, most of the manufacturing companies that I speak to, even the small ones, follow what’s happening in the news and in the economy pretty closely. So they know, they’re looking at GDP, they’re looking at the Purchasing index, they’re looking at the employment numbers. And I think that for the most part, those companies are looking at it just from a general gauge of okay, what’s happening in the larger economy.

How does that affect me? Right? Yeah, you’re right. Most of them don’t have an economist. In fact, in many ways, I am kind of their quasi economist as the chief economist at the NAM. And they and they certainly read my Monday’s report.

But I think the value that companies get in looking at macroeconomic data is to look at some just general trends as it relates to sentiment, right? You certainly look at consumer confidence, or what the PMI numbers show what’s happening in terms of what future sales might be. You know, they’re looking at it from that lens.

But I think the other element to that and one to not be forgotten is that they also follow political news pretty closely as well, right? Because I think nowadays, to be a good economist, or to be a good business leader, you’ve got to understand what’s Washington is doing or what the state capitol is doing in your state, because that really affects not just the economy, but certainly, it could affect what’s going to happen down the line for you, right.

So everyone’s looking now at what will the Biden administration do in terms of taxes or regulation, or some type of infrastructure investment or whatever else that might be right. And so, as I’m traveling around, there’s an enormous amount of interest, not just in the economy, but in what’s happening in terms of the policy. And I think to be a good forecaster. You almost have to kind of have a good handle about it.

Sam Gupta 27:57

Yeah, so let’s talk about I mean, that was going to be my next question, man. So it’s segwayed nicely for you.

Sam Gupta 28:05

I know the radio is helping me out. So okay, so let’s talk about the policies and forecasting. So if we look at different sectors, right, and if I’m the manufacturing, CFO of, let’s say, either the metal organization or the motor parts of the position of the machinery organization, so how are these policies going to affect me as the CFO or the CEO?

Chad Moutray 28:25

Well, I think the first thing to say is that this is going to be a really strong rebound year and the economy, right. And I think people know that. I mean, I expect to see 5% GDP growth, right? Okay. I already mentioned to you that I expect manufacturing production to actually break back to pre-pandemic levels, probably before the middle of the year.

So I think that’s nice encouraging signup. So what does that mean? Right, I think when you’re looking at overall policies as well, we already got a stimulus from the end of the Trump administration last year. We’re likely going to get another $1.9 trillion package passed in the coming weeks as part of the Biden administration.

And they’re looking at making some additional investments later this year, likely in terms of infrastructure. And the way that I think of that, I think of that not just as your traditional roads, bridges, that kind of stuff, but also broadband, also probably some green, some green energy, or green grid kind of stuff.

Chad Moutray 29:20

And so if you’re looking at all of these things coming down the pipe, that certainly means an enormous amount of stimulus for the economy, right, which means, if I’m a business leader, that means that my demand is going to be pretty, pretty strong. If I’m selling, for instance, machinery, if there’s going to be a major infrastructure package, you know, that construction companies are going to love that, right?

Steel, all these companies are going to love the fact that you’re going to be making some pretty major investments in the economy into the infrastructure. And so I think that knowing those, I think certainly helps you be able to plan not just for this year, but for next year, knowing that those are possible things on the agenda. So those are positives on the negative side.

There are also conversations about what will happen with tax policy, right? Yeah, in the Trump administration, we had pretty significant tax reform. Most of our companies loved the fact that taxes were lower and much more competitive globally. And the administration has said, at least in their campaign, that they want to raise corporate rates up to 28%. Right.

Chad Moutray 30:17

So what does that mean for you as a company if that were going to happen, and certainly the NAM will be, you know, pushing back against that, but it’s certainly something that’s part of the conversation. And we would also expect a much more aggressive regulatory stance from the part of Washington, again, probably much more akin to what we saw in the Obama years.

So as you’re looking out, not just at the favorable, but you’re also looking out at saying, Okay, what new regulations might be coming down the pipe that could affect my business, not just this year, but next year?

Sam Gupta 30:45

Okay, amazing. So let’s talk about some of the manufacturers and the resources. So obviously, you mentioned that 90% of the manufacturers are probably involved with NAM, right. But I don’t know how involved they are. So and because of that, I don’t know if they are going to be aware of all the resources that they can utilize. So do you want to talk about some of the resources that they can take advantage of, or should they take advantage of?

Chad Moutray 31:08

So I mean, certainly, hopefully, you’re a member of a trade association, right. So obviously, I would be pushing the National Association of Manufacturers. We’re a great nation. But there are also a lot of state associations that, particularly, give us a lot of policies that come from your state government.

Yeah, hopefully, a member of one of those as well. And we actually are affiliated with, you know, a manufacturing Association in every state. So you can go on our website and see who we’re affiliated with. But there also are a lot of vertical associations. So one for steel, another for aluminum, or another one for electronic components, etc.

Chad Moutray 31:43

So we have about 250 vertical associations that we also partner with, right. So that helps expand the overall breadth of our reach. But you know, each of those associations gets much more tailored into either state policy or to regulations or policies that might be more specific to that specific sector, as it relates to the NHS while we’re out there doing people join the NHS, largely because we’re out lobbying on their behalf for tax policy or regulation, regulatory policy, looking at infrastructure investments.

You had a lot of people last year who were looking to the NAM, particularly at the beginning part of the pandemic, for looking for some guidance on how do I continue to make my business deemed essential, right? I bet state governments were closing a lot of facilities or in terms of vaccines, or in terms of other things that are coming out.

Chad Moutray 32:29

So I do think that there’s an enormous amount of intellectual knowledge that our policy leaders have in terms of some of these topics. And the advantage I think that members have of the NAM is that you have pretty instant access to that knowledge, right? People who want to know about the economy will call me, and I’ll pick up the phone, right?

If you’re looking at tax policy, or trade policy, or whatever else, a similar type of knowledge is there on some of those topics as well. So I would encourage folks to go to the NAM website, nam.org. And we can certainly email me as well, and I can hook you up to our membership folks.

Sam Gupta 33:05

Okay, amazing, so that’s it for today. Chad, do what do you have any last-minute closing thoughts for manufacturers?

Chad Moutray 33:10

No, I think what I would say is that I’m bullish about manufacturing as a sector. I think that we’re coming through this pandemic. Obviously, we were hit pretty hard by it.

But I do think that not only are we the bright spot now, but I think that there’s a lot of optimism for the sector moving forward. And if anyone wants to get my regular thoughts on the economy, I would encourage you to either follow me on LinkedIn or on Twitter. I’m at Chad Moutray.

Sam Gupta 33:37

Okay, so my personal takeaway from this conversation is going to be there are there is going to be exciting times, probably the worst is over. So on that note, thank you so much for your time and insight. It was a fun conversation.

Chad Moutray 33:48

Thank you. Hope to do this again soon.

Sam Gupta 33:50

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 Chad, head over to nam.org. 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 Harry Moser from reshoring initiatives, who discusses how to compute the total cost of ownership of reshoring initiatives. Also, the interview with Amanda Schelede, who discusses how manufacturers and retailers can better manage disruptions associated with COVID spread.

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 34:47

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 SMB 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 Gill Walker, who discusses the overlap of CRM vs ERP and how they fit among other systems such as E-commerce. He also shares several best practices for executives embarking on a CRM implementation journey. Finally, she shares several stories about the poor implementation she has seen and the lesson learned from them.

Chapter Markers

• [0:18] Intro
• [2:53] Personal journey and current focus
• [5:09] Perspective on growth
• [7:29] The difference in CRM vs ERP needs for a product vs. service industries
• [5:09] The role of CRM vs ERP, and E-commerce systems
• [15:42] The customer hierarchy in CRM vs ERP, and E-commerce systems
• [19:01] CRM functionality list
• [22:42] How to take advantage of a marketing automation system?
• [25:40] CRM implementation stories
• [33:54] Closing thoughts
• [35:02] Outro

Key Takeaways

• If you select technologies that are known to work well together, it is going to be a lot easier than if you just get a good CRM and a good ERP that are not working well together.
• One area of education that I think is very, very important is that everybody inside the organization who is going to be involved in key decisions should understand the functionality of the technology that they’ve invested in.
• Even though you as a CFO, CIO, COO, may not be as involved with your CRM implementation, be entering leads, entering customers, creating email templates, adding products, and a million other things, it is worth investing the time to have that education, when you do that stuff, purely to cement it so that then you can have those conversations about the implementation.

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About Gill

Gill Walker is “Your CRM Success Catalyst. She has been helping clients achieve success – better return on effort and better return on investment – with CRM for almost three decades, and for the past seventeen years she has focussed on Microsoft Dynamics 365. She is a Microsoft Certified Solution Architect and Microsoft Certified Trainer. Listen to Gill as she explains her philosophy of avoiding project calamity with education.

Resources

• Connect with Gill
  • LinkedIn
• Connect with Opsis Pty Limited
  • Website

Full Transcript

Gill Walker 0:00

And that might have happened because somebody who we thought we could trust said it wasn’t necessary. And even that deserves a why is an implementation partner telling you that this broader education is not necessary.

Intro 0:18

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

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.

As your company grows, you might feel the need for software as you encounter each problem. The software landscape is hard to navigate. And if you don’t understand the role each system such as CRM vs ERP systems play, you could create an extremely patchy architecture which typically results in significant admin overhead and conflicts among teams causing your growth to slow down.

In today’s episode, we have our guest, Gill Walker, who discusses why CRM vs ERP distinction is important, and how that fits among other systems, such as e-commerce. She also shares several best practices for executives embarking on a CRM implementation journey. Finally, she shares several stories about the board implementation she has seen and the lessons learned from them. Let me introduce Gill to you.

Sam Gupta 1:53

Gill Walker is your CRM success catalyst. She has been helping clients achieve success, better return on effort, and better return on investment with CRM for almost three decades. And for the past 17 years. She has focused on Microsoft Dynamics 365. She’s a Microsoft Certified solution architect and Microsoft certified trainer. Listen to Gill as she explains her philosophy of avoiding project calamity. With that, let’s get to the conversation. Hey, Gill, welcome to the show.

Gill Walker 2:26

Thank you, Sam. It is awesome to be here from sunny Queensland all the way to freezing Toronto.

Sam Gupta 2:32

Okay, amazing. So this is not the first time we have had somebody from Australia, even though we are in North America. So I’m super excited to have this conversation.

Gill Walker 2:41

Of course, it’s not the first time you’ve had people from Australia. There are so many good people over here. But that’s because we’ve got so many good people.

Sam Gupta 2:53

Yeah, whenever I’m bored, I’m actually bringing a lot more people from Australia. Okay, so here’s what we are going to do today. So just to kick things off, do you want to cover your personal story and your current focus?

Gill Walker 3:03

Sure, I am your CRM success catalyst. And what that means is I work with you to get a better return on effort and better return on investment for your CRM project. And I do that by unpacking the mystery of CRM success. I’ve been in the CRM space now for about 30 years. And like many of the people I meet in this area is happened by accident. I morphed from teaching to consulting to IT training and back then to consulting, specifically in the CRM space.

And for the last nearly two decades, I’ve been working almost exclusively with Microsoft CRM, Microsoft Dynamics 365. And now, of course, power platform, my main point of difference is I help you understand your technology from bottom to top, whether you’re an end-user, an executive, wanting to get the best of the implementation, or anything in between, the more you understand of the technology and the processes that need to be involved, the more successful your project will be.

So that is my mantra. Educate, educate, educate.

I now live in Australia, in Sydney, moved here 20 years ago when I was headhunted for a role helping a CRM company that now no longer exists because of the mergers and acquisitions that occurred in this space in the first decade of this century. And I now live in a suburb in Northern Sydney. I live with my husband, no pets, no children at home, we generally have a pretty good life, and as you know, Sam, I am also a Toastmaster. I joined Toastmasters seven years ago, eight years ago, and achieved my distinguished Toastmaster earlier this year.

Sam Gupta 5:09

Okay, that’s amazing. I always enjoy talking to Toastmasters because we get a lot more stories. So today, we are going to be covering a lot more stories from your work perspective. But before we do that, we have one standard question here, which is going to be your perspective on growth do What does growth mean to you?

Gill Walker 5:30

It means making more profit so that the company is more successful. But of course, there are five things that you need to do to make more profit. You can get more leads into the business of those leads. You can convert more of those leads into initial opportunities and ultimately into customers. Once you’ve got those customers, you can increase the frequency that they buy from you, and you can increase the size of every purchase they make from you. And finally, of course, you can increase the profit of each of those sales. And a CRM can help you do all five of those.

What is particularly interesting is that while a 10% increase sounds eminently achievable, and for most people, it is, if you focus on achieving 10% more leads, and 10% more conversions, and 10%, more sales, 10%, bigger sales, and 10%, bigger profit, you don’t achieve 10% overall, you don’t achieve 50% overall, you actually achieve 61% more profit.

And that is one of the reasons why you should get your CRM to be fully rounded, why you should not only do marketing with it, not only do sales, make sure that those existing customers are kept happy. So they come back and back and back and back and eventually become raving advocates of your organization. And maybe even to the point that they’re almost as good as your salespeople, and you don’t have to pay for them.

Sam Gupta 7:29

Okay, so the organizations that we work with, typically and or my vision that is listening to this podcast, are going to be slightly more manufacturing, distribution, and retail-centric organizations. So these companies are not scrum-heavy. Their processes typically start with, let’s say, the order because let’s talk about the distribution or the retail organization. Right? So they are going to be starting from the order and not from the lead. So have you seen the application of CRM in the manufacturing, distribution, and retail verticals?

Gill Walker 8:07

I have, and one of our long-term clients did exactly as you’re suggesting Sam, so their CRM did start specifically from the order. And they were working then from the order through to the invoice, and we were able to do some fairly clever stuff. So they had one invoice document containing multiple of the actual invoices that were raised in CRM.

But even in that instance, there are opportunities for you to look earlier in the sales cycle and use that to a degree to keep topping up your customers. Because as we know, there are very, very few organizations in this world that have no competitors. If you have competitors, you are going to lose some of those customers. And you, therefore, do need to keep replacing them. And that requires some sales effort.

Sam Gupta 9:07

Okay, so how would you define, let’s say, you know, typically, manufacturing and distribution organizations have some sort of ERP because they need to do product costing, their accounting is going to be slightly more involved, their operations are going to be involved from the planning perspective as well.

So for them, obviously, the ERP is going to be slightly more important. So how would you draw the boundary between these two systems? They’re probably going to have a third system, which is going to be e-commerce, and e-commerce has its own way of tracking, let’s say, the customers.

Sam Gupta 9:39

So let’s say if you are in a manufacturing, distribution, or retail organization, where you have to have these three systems because they have their own roles and responsibilities, and they have their own way of doing things. Now, if you try to get customers and three different systems, you can imagine how bad the problem is going to be.

If so, how would you design the architecture for a company that has to have some sort of ERP because you cannot put this functionality, the functionality that belongs to CRM vs ERP, and the functionality that belongs to, let’s say, ecommerce in CRM either? So what will be the ideal architecture recommendation from your side if you were to recommend manufacturing, distribution, or retail company,

Gill Walker 10:23

it will vary depending on the business and how they operate. But given that we don’t have this level of detail in our hypothetical company, yeah, in general, the approach that I try to take is something that I call WORM, and what WORM is when we’re looking at WORM. That is, Write Once Read Many, so what we are trying to do within the system as a whole, and I agree totally with you, Sam. This is a system that comprises e-commerce, ERP, and of course, CRM.

But across that three systems, we’re trying to apply the right ones read many principles. So we need to make sure that certainly all of the data, specifically the customer data, but not only the customer data, as relevant is synchronized. So as you said a moment ago, we only want to enter those customers and that those customer details once in general, the customer details will get entered into the CRM system, because that is the first contact with our hypothetical organization will be before back about to be a customer is a customer because that organization is probably weighing up your organization with a couple of others, which is the best organization for them partner with obviously, we hope it’s you, but they may decide otherwise.

Gill Walker 12:03

So at that first level of interaction, we should be capturing as much of that general the company name, their address, that general background information should get captured in CRM, and then should flow from CRM through probably to ERP. And finally, on to e-commerce. But the will, of course, variations of that another point of contact between those systems is the orders.

So once this organization becomes a customer, they will be placing orders, and they will be placing lots of orders, maybe multiple per day, certainly several per month. Usually, we then need to look and think at what point does the information need to flow into an ERP, and again, keeping things very, very general, we can have that information flowing up the quote level at the order level. And at the invoice level, I would guess that for most organizations using ERP, the data is going to flow across at either the quote or maybe the order option. But occasionally invoice is the better option.

Gill Walker 13:18

And then, we need to think about what data needs to flow back to the CRM. Is it beneficial for the sales team to have visibility of invoices raised, the payment history of the customer, the products that they those customers buy, the frequency that they buy, and all of those other questions? And if it is relevant, does it make sense both from a usability and a cost perspective for that information to be made available to them inside the CRM system, rather than asking them to go to the ERP system.

So if those salespeople are comfortable using their CRM system, taking that data back from the ERP or the e-commerce system into CRM, quite possibly read-only, also makes a lot of sense. So salespeople, from a usability perspective, are only using CRM. They do not have to flick between CRM vs ERP, and e-commerce. So their life is made easier. And from a financial perspective, there may also be a benefit because you may well save on licenses for the ERP and the e-commerce solutions. Keep those so that at a user level. They are the only people who do need to interact with that data and update it, and so on. People who would use CRM feel they have the data but give it to them via the tool that they use all day and every day.

Sam Gupta 14:56

Yeah, that’s a very interesting perspective. And in fact, I would like to dig a little deeper into the customer definition. Because from the finance perspective, if you think about it, the customer is going to be slightly different. And what CRM cares for is going to be slightly different information.

For example, in the case of CRM, you guys are going to care for more of the psychographic information. And I think you already mentioned that they address the buying habits and interactions, so anything and everything that actually helps you in finding out, okay, how can I find other customers that are going to be similar to this customer? That’s what CRM is in my mind.

Sam Gupta 15:42

And with the ERP perspective, the customer hierarchy is going to be very different. His ERP does not care for as much of the psychographic data. What it cares for is it care for the bank account. It keeps all the financial details. It also cares for the hierarchy in terms of where the product is going to be shipped, who is going to be billed. So the customer hierarchy that you are going to see in the case of your ERP system may be completely different from your CRM system.

And by the way, if we expose all of this data, let’s say a field, people want to look at the invoice, or they want to process the order in the CRM, then they would probably need the pricing data, they would need the product data. Right? Then we are trying to replicate pretty much everything that exists in any ERP, which becomes a very difficult job because of keeping this data in two different systems. So as you mentioned, your philosophy is right. Read multiple times. But it’s easier said than done. So how would you approach the customer hierarchy?

Gill Walker 16:45

I made it sound very simple when I went through WORM. I agree with you. Yeah, but the other thing, and it does, of course, the answer, the detailed answer that we came to with any particular client or any particular implementation, will, of course, vary on the particular technologies that they have selected.

And if you select technologies that are known to work well together, and that would certainly be my recommendation, it is going to be a lot easier than if you just get a good CRM and a good ERP that are not working well together. However, we don’t necessarily need to take everything back. So with products, for example, we probably if there is an ERP, in place of the net in the way that you discussed a moment ago, Sam, yep, we probably could take the product, but we don’t need all of the product catalogs.

So it’s just enough to make the order make sense. If that level of detail is necessary, we may choose just to take the value of the order. So we might take the order information but not worry about the line item information that would give our CRM users the frequency and the value of the order, but not worry about the details. So that might be a solution. That works great.

Sam Gupta 18:17

But I mean, if they are getting the orders in the CRM system, they will need to know the line item details as well. In fact, then CRM is going to be the driver to create the orders.

Gill Walker 18:31

Maybe we don’t go that far. Maybe we stopped before they created the order. I think it is one of those that we could do in so many different ways. It would be wrong to say you must do it this way until we’ve got a lot more information about the particular implementation. At this level, let’s keep it up. We could move the data through at any one of the sales stages.

Sam Gupta 19:01

Yep. So when we come across these implementations, typically, we come across two different scenarios. Obviously, CRM plays a very important role. There is no question that the functionality that CRM is going to have is most likely not going to be available in ERP and your ecommerce system because CRM is designed for a purpose. It is designed to do a lot more things from the customer’s perspective.

If ERP systems try to do that, then they are simply overlapping CRM systems. That’s not the intent of all of these systems. They all have their own places. So some of the specific functionality from the CRM system that you have seen is commonly not available in other systems that are designed to make the CRM process slightly simpler. They are not for complex CRM organizations.

So tell us some functionality that you have seen in your CRM implementation, which is not going to be available in the case of an ERP, and these companies would probably require a sophisticated CRM system.

Gill Walker 20:05

Where we go-to for that is looking at the beginning of the sales process. So we’re possibly into marketing automation, which is, of course, another whole system the sales organization may well need. How do we get people from the world out there? How do they, first of all, establish that they have a problem that we as an organization can solve? Secondly, how do they then know that we exist and could solve that problem? All of that is covered off by marketing, and marketing, if we don’t have marketing automation in place can become very, very, very expensive.

So having an overall system where the prospects are doing some of the work for themselves, they’re finding your website, from the website, they’re getting a very good understanding of the services you offer, the problems that you solve, they are then entering some data. And whether that’s because they’re making a simple inquiry, they’re downloading something, or even placing an order. They are doing the work. And then marketing automation takes that into the CRM solution.

Gill Walker 21:27

And then, if there is an order in there, passing that through to ERP, even though it might go straight through CRM, that is probably a simpler overall solution than trying to integrate the website directly to ERP. But there are always options. And then, with marketing automation, we can also see how effective our marketing is. So, how effective are both the website and individual pages on the website? How effective are particular campaigns, and knowing the effectiveness of anything like this does, of course, then mean that you can do more of the good stuff and not waste time, money, and effort on doing the stuff that you that doesn’t work?

Anyway, I’m sure many of the listeners will be familiar with the phrase, I know that 50% of my marketing budget is working, but I don’t know which 50% of that is. I am so getting that whole flow from the very, very early interaction of a prospect. And then all the way through is so important.

Sam Gupta 22:42

Typically, in our listener base and the audiences well, the majority of the organizations are going to be slightly more sales driven. So the way they acquire leads and the way they acquire their customers is going to be from the tradeshow. So let’s say if they are not utilizing the marketing automation at this point in time, what would be your recommendation in starting on this journey, number one, and how we can take advantage of marketing automation initiatives to increase the effectiveness of their marketing, as well as sales.

Gill Walker 23:17

So if we look at the whole trade show scenario, you’ve invested the money and the time of people for somewhere between a day and a week to go to this trade show. And we want to get the maximum possible return from that. So we want to get back data of everybody that expresses an interest in the system.

And we’ll probably do that by a range of different methods, we may well have some form of business card collecting vessel on the stand, and any cards that are then dropped into AP business card, whether they that business card container, whether they do it because they really want to talk to a sales rep, or whether they are just interested in the free bottle of whiskey or whatever.

Let’s not worry about that for the moment. What we then want is a business card scanner that can get the relevant data from those cards into the relevant fields in CRM. And then once they’re created, we want an automated email probably going out that thanks them for dropping by the stand and how can we help further depending on the particular scenario in place.

Gill Walker 24:38

Another alternative is to have a tablet of some description. So prospects themselves enter their own name and address and company and inquiry reason into that tablet under course that tablet then takes the information directly into CRM and has the appropriate order. Follow on from it.

And the third possible option is that your staff members on the stand enter the data, possibly using the same tablet application, possibly using a different direct CRM application. But all of those want to then be following up it as soon as possible with automated communications, getting to the point where, where relevant, and we need to have something in that whole process that estimates the relevance where we can get an appointment between a salesperson and a prospect.

Sam Gupta 25:40

Okay, so obviously, you see a lot of different CRM projects, and you talk about CRM project management as well. So from your experience, can you share some of the stories where the CRM implementation did not go as well as you would like?

So, for example, in my mind, the CRM project of any project, for that matter, is an art. Okay? And it’s really up to the artist how they want to draw it. So sometimes it goes. Well, sometimes it does not. So what I’m really interested in knowing is when it did not go well, and what are the mistakes that you have seen. And if you have any lessons learned from these stories.

Gill Walker 26:23

I could talk on that point for days. Let’s think of a couple of useful ideas and lessons that we can then broaden out. I think, for the purposes of this conversation, I’m going to focus on CRM as a discrete and worry a little bit less about the ERP and e-commerce that may or may not be in place.

But if we generalize, where do I see problems? One of the biggest problems that I see is when people make design decisions. And the design of the CRM itself doesn’t understand the technology that they have invested in. So I remember one instance, probably ten years ago now, where I came to know a client who absolutely insisted that we created a custom entity, a custom table in the system for suppliers, and in the CRM that was selected that is not appropriate.

Gill Walker 27:35

And it’s not a good idea. Because suppliers are just one group of organizations with whom you have a business relationship. And that data of organizations with whom you have a business relationship should all be held in accounts, but they’ve got this warped idea that an account had to be an existing customer.

And that is not true. It is a much bigger group than that, although we hope that many of them will become customers. So this client asked me, first of all, to create the custom entity. And then, of course, the custom entity didn’t have all the functionality that the account entity had in the system.

So they wanted us to add this and this and this so that we could email from it and do this and do that and do the other. And it just didn’t work. And if the client had just been prepared to take their suppliers, put them into the account, differentiate them with a flag, which then allows you to see only suppliers, or accounts that aren’t suppliers, and so on. Everything would have been better.

So that’s certainly one area I have also seen people have. In fact, I’m helping a client now, where the entire sales process has been put into the lead entity. So this is using Microsoft Dynamics, and we have got 400 custom fields.

Gill Walker 29:11

It is so bad. I am engaged for is to unwind that and split that lead across the lead opportunity, quote, product, product line, contact, and account. And we’ve got a few other problems, but that’s the major one. And I am going back to my earlier example of failing to understand the technology.

I worked with a CIO last year, and I honestly believe that he thought any problem in CRM could be solved by adding another field or another couple of forms. It’s a completely different organization different project follows On nicely from our friends with their 400 custom fields on the lead.

So rolling those three stories into one, my advice to anybody, even a CIO or CFO, CIO, who is leading championing a CRM project into their organization, is to be prepared to invest both financially and timewise in education. And this brings me to another point that, for me is really important that education is way more than end-user training.

End-user training is, without a shadow of a doubt, hugely important and must be part of your project if your project is to be successful. That, again, is a topic I could talk about till Christmas. The only education that we should have in the project. And one area of education that I think is very, very important is that everybody inside the organization who is going to be involved in key decisions should understand the functionality of the technology that they’ve invested in.

Gill Walker 31:14

And that education is not going to be weeks and weeks and weeks of training, although it should be fairly hands-on because as anyone who’s been in the education space will tell you anything that you learn, you learn far more effectively when you practice it at a practical level.

So even though you as a CFO, CIO, COO, may probably will not in your CRM implementation, be entering leads, entering customers, creating email templates, adding products, and a million other things, it is worth investing the time to have that education, when you do that stuff, purely to cement it so that then you can have those conversations about the implementation.

You can make the right decisions for the design and not get yourself into the sort of pickles that I’ve highlighted in the last few minutes. And while I’ve only focused on three of those projects, I’ve worked on more than three projects in the last 20-25 years that I’ve been in this space. And I could, as I said, talk for a lot longer and a lot more samples.

Gill Walker 32:36

But one of the things that I feel when I look at projects that have gone wrong, and the failure rate is horribly high, is upwards of 60%. And some things that you read have it even as high as 85%. When we drill into the reason behind those failures, I think nine times out of 10, the root cause may be not the visible cause, but the root cause of failure is a lack of understanding, which in turn has come from a lack of education. I think of it as all roads lead to Rome.

So all of those reasons for project failure. When do you ask why did that happen? Why did that happen? Why did that happen? The answer to the final question will be we didn’t invest, or we didn’t prioritize the understanding of the technology that we were taking on. And that might have happened because somebody who we thought we could trust said it wasn’t necessary. And even that deserves a why is an implementation partner telling you that this broader education and understanding isn’t necessary?

Sam Gupta 33:54

Okay, Gill, this was a very insightful conversation. Do you have any last-minute closing thoughts, by any chance?

Gill Walker 33:59

I think my closing comment has to be the education piece through that education, and really do it. There’s a lot more to doing education than just signing up for a course signing up. So part of it, but obviously, you need to go along to the course, or it may well be virtual in the current world.

And of course, when you’re in the course, you do need to do it, not spend the day or however long it is on your phone nipping out doing emails, whatever else you may be doing, engage with that course take on board the education and then apply it to your project in conversations about the design, about the implementation.

Sam Gupta 34:43

Great, amazing thoughts there. My personal takeaway from this conversation is going to be there are two critical aspects of any project success. And that is going to be the number one education of your core team. And the second is going to be end-user training. On that note, Gill, I wanted to thank you for your time and your insight.

Sam Gupta 35:02

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 Gill, head over to obsess.com.au. 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 Chris Grainger, who discusses why his company EECO, a large electrical distributor, needed to change the way they sold to their customers.

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 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 Mark Jaffe from Strategic Growth Consulting, who discusses how macroeconomic trends impact consumer behaviors. He also shares his insights on what business owners might do to combat uncertainty associated with macroeconomic factors by understanding customer behavior better and shifting the mindset from cost-saving to opportunistic organization. He also shares several stories of companies that faced macroeconomic uncertainty but ended up growing instead.

Chapter Markers

• [0:23] Intro
• [2:47] Personal journey and current focus
• [5:04] Perspective on growth
• [18:50] The role of marketing
• [8:25] Macroeconomic factors driven consumer behaviors
• [13:06] How to take advantage of macroeconomic conditions?
• [22:31] How to instill marketing mindset?
• [26:05] The motivation of decision-makers
• [27:43] Closing thoughts
• [28:31] Outro

Key Takeaways

• An inflection point is usually between decision or no-decision. And oftentimes, the mistake that people make when running companies is they elect to make no decision because they don’t realize they’re at an inflection point.
• When you are siloed in an organization as a CFO or as a marketing professional. You oftentimes focus on “what is” you don’t focus on “what should be”.
• Companies often silo their core value proposition to those audiences that they’re most familiar with or that it was originally intended, when oftentimes, even more, valuable targeting can occur with two completely different target audiences.

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About Mark

With over 40 years of experience, Mark Jaffe grew Walt Disney Records from a $30M company to a $120M company while he was President. He has also grown topline revenues for over 100 clients in the last fourteen years with a cosmetic company achieving a revenue jump from $2M to over $60M in five years and many client companies doubling in size in less than two year’s time.

Resources

• Connect with Mark
  • LinkedIn

Full Transcript

Mark Jaffe 0:00

And again having an entertainment experience that not only could be experienced by children alone but shared with their parents, once again, not fighting the lack of traffic in the in these resort destinations, but expanding the definition and the execution of the core value proposition to where the customer is going now.

Intro 0:23

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 are finance leaders 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 digital transformation consulting firm ElevatIQ.

No one appreciates uncertainty. It is even more frustrating when the uncertainty may not be in your control. And if you’re an executive of a company, navigating through difficult times has a toll on everything. The uncertainty could be related to macroeconomic trends such as recession, trade tensions, or merely changing consumer behaviors. These macroeconomic factors directly impact not only the top line but also the bottom line. What would you do if your job was to help a company navigate through difficult times?

In today’s episode, we have our guest Mark Jaffe from strategic growth consulting, who discusses how macroeconomic trends impact consumer behaviors. He also shares his insights on what these owners might do to combat uncertainty associated with macroeconomic factors by understanding consumer behaviors better and shifting the mindset from cost saving to an opportunistic organization. He also shares several stories of companies that faced macroeconomic uncertainty but ended up doing well instead.

Let me introduce Mark to you.

With over 40 years of experience, Mark Jaffe grew Walt Disney records from a $30 million company to a $120 million dollar company while he was president. He has also grown top-line revenues for over 100 clients in the last 14 years, with a cosmetic company achieving a revenue jump from $2 million to over $60 million in five years and many client companies doubling in size in less than two years time. With that, let’s get to the conversation.

Sam Gupta 2:42

Hey, Mark, welcome to the show.

Mark Jaffe 2:44

Oh, thank you so much. I’m really glad to be here.

Sam Gupta 2:47

Okay. It’s my pleasure, Mark. And I’m super excited to dig into your experience. But before we do that, just to kick things off, do you want to start with your personal story and your current focus?

Mark Jaffe 2:55

Yeah, I would love to do that. Sam, thank you. So it’s interesting when we all think about our careers, you know, they’re the people that have it all planned out at 25. I’ll do this at 35. I’ll make triple my age at 45. That was never, ever my approach. I was always the guy who just wanted to do things I was passionate about. I mean, it sounds like a crazy career path. But it really does work. And the one thing I’ve always been passionate about is really figuring out what the other person needs, and how, as a company, I can give it to them, not for free, but give it to them, how can I satisfy their needs.

And I remember my first job. My first job was with A&M Records, which, as you might remember, was this massive pop label with all sorts of hits from the police to Janet Jackson. And, you know, all I mean, there, Peter Frampton, I mean, all these great hits of the 70s, 80s, and 90s. And they said, how about if you start a children’s label, and I said, I’m willing to do that, as long as we do it differently than it’s ever been done before, because back then The Walt Disney Company at all this music out for $1.99 for cassettes, and I said, That’s not what parents want. The macroeconomic trend for parenting in the 80s. And 90s was not to lock your kid in the room with the music and say, come out when you’re done because I can’t stand it.

Mark Jaffe 4:16

It was participatory involvement with kids. So I said, we can’t do it the way it’s always been done. Let’s do it differently. And I discovered this guy in Canada named Rafi and grew the A&M children’s entertainment group from zero to $15 million dollars in five years as a result of understanding this coordinate for parents to bond and be with their children and giving them the products that enabled them to do that.

Similarly, right after that, when the Disney Company recruited me to run Walt Disney records, I grew that division from $30 to $120 million dollars over a five year period, not only by releasing soundtracks like the Little Mermaid, Beating the Beast in the Lion King but developing products that allowed parents to equally enjoy the music and enjoy their work. At the same time, children were enjoying the music.

So in essence, what we were able to do was to truly understand what those consumers of media needed at the moment, and how we can give them products that satisfy their current needs, as opposed to what many companies still do, which is say, here’s what we got. Here’s why you’ll like it. And that never really works. And they don’t even have the statistics to back it up.

Sam Gupta 5:04

So those are some compelling stories that we want to dig deeper into. But there is one standard question that we ask all of our guests, and that is going to be your perspective on growth. What does growth mean to you, Mark? For me, growth is when revenue is increasing at an increasing rate, oftentimes was in a sustainable and replicable way. It’s important to add that because we’re not going to increase revenue in a way that’s not sustainable, replicable, or profitable.

But what I often find is that many CFOs, CEOs miss the moment of inflection. A lot of people think an inflection point is when you go right or left, you’re at a fork in the road. But most of the time, that is not the case.

Mark Jaffe 6:17

If you’re on the road, and you don’t realize it’s time to make a decision. So it’s not between decision A or decision B. An inflection point is usually between decision or no-decision. And oftentimes, the mistake that people make when running companies is they elect to make no decision because they don’t realize they’re at an inflection point.

How do you know that this is the moment for you to consider your an inflection point to do an examination of your business to understand the next horizon of growth you need to be on it could be either because your revenues are increasing at a decreasing rate because your marketing spend becoming increasingly inefficient. And as we know, in digital marketing now, there are so many measurements that could help you figure that out or that your operating income is dropping for reasons that you don’t understand.

Mark Jaffe 7:11

Now, these horizons of growth are really interesting because when you consider the average growth curve, as you add curves up at an increasing rate and then slowly starts to flatten, one might think the time to consider the inflection point is at the moment you start to see it start to flatten, I would suggest it’s before that because what you’re doing is creating a new growth curve that sits on top of the old-growth curve.

I remember I had a company that developed makeup application devices. We completely altered their core value proposition to reflect the fact that women had different needs than they had originally thought. And as a result, they were on an exponential growth curve. I came to them and said, You’re at an inflection point. They looked at me like I was crazy. They were increasing at an increasing rate.

Nevertheless, we embarked on a very exhaustive strategic analysis and realized that there was another growth curve that was possible by venturing into an adjacent space. I mean, this is a company that’s grown from $2 million to over $60 million in five years as a result of aggressively challenging its current business model at the right time and acting appropriately.

Sam Gupta 8:25

Okay, amazing. So when we talk about understanding the customer needs, truly, if I actually did the study with a lot of companies, I mean, they probably all are going to claim that they really understand their customers, right? But growing something from, let’s say, $30 to $120 million dollars is a big deal.

And you like to emphasize a lot on the macroeconomic factors to be able to understand these consumer behaviors, and that I find fascinating. So do you have any stories that you would like to share regarding these macroeconomic trends? How were you able to capitalize on them, and how were you able to grow these companies?

Mark Jaffe 9:03

Well, yes, I do. As a matter of fact, one of my favorite stories involves a B2B supplier of production materials to entertainment studios and television production companies. As you might remember, a number of years ago, there were threats. Ultimately, those threats were realized that China was going to raise tariffs on aluminum and steel materials, which was a large majority of the raw materials that went into the production of these products.

The companies heard from customers, and they have petrified themselves that they were about to engage in a huge drop in sales as a result of the price increases that would be imposed upon them and their customer’s inability to pay, and we went into a meeting to try to talk about how we could say reduce production time how we could save expenses, and in that meeting, I realized that was not the answer. In essence, we were fighting the macroeconomic trend, and for any of you who are horseback riders, what it’s like to fight the horse when it’s ready to go back to the barn.

Mark Jaffe 10:05

That is not a strategy. So I said, how do we ride the horse in the direction it’s going? How do we use this macroeconomic trend to our advantage so that we can increase our top-line revenues at a reasonable cost? And we realized that as afraid as we were for these tariffs to impact our sales, because of the dramatically increased costs, so afraid, where our customers and what we did is we have relatively simple ideas, some greatest ideas tend to be that way, we instituted a pre-tariff sale at full price for our customers to not only order in advance but scheduled delivery in advance of all of these products, without any tariff increase.

And we were able to do that because we ordered all the raw materials in advance at the pre-tariff prices. As a result, their sales on that pre-tariff sale, which wasn’t really a sale, because it was a full price, was 200% higher than any other sale or promotion they had ever put together. And it’s all because we took advantage rather than fight the macroeconomic trend of macroeconomic conditions that we were facing at that moment.

Mark Jaffe 11:23

Another one that comes up, and I just think it’s so fascinating, involves the response to the pandemic. There’s been so much written on how everything is changing as a result of the pandemic. I think what it does is it creates a construct where we’re doing things we might have considered even sooner necessity becoming the mother of invention.

This particular company is a B2C company that sells products at retail in resort destination areas. These products are customizable toys. What they noticed was that their customers’ overall toy sales have decreased dramatically as a result of the lack of visitors during the pandemic. And they’re like, what can we do. So we decided to engage again, in a reexamination of what their customer needs, and why their customer is going, and patronizing their store. And we quickly realized that it was not to buy a customizable toy. They were customers that were going to an entertainment destination in search of entertainment.

Mark Jaffe 12:25

So, we were actually more of a location-based entertainment environment that made money not by charging admission fees but by selling customizable toys. And so what we’re doing currently This is a current client is we are transferring that entertainment experience to an online environment where people are very accustomed to having entertainment.

Again, having an entertainment experience that not only can be experienced by children alone but shared with their parents, again, once again, not fighting the lack of traffic the in these resort destinations. But they are expanding the definition and the execution of the core value proposition to where the customer is actually going now, which is online.

Sam Gupta 13:06

Okay, so obviously, these stories are extremely exciting. And as a manufacturing executive, if I think about it, obviously, who doesn’t want growth, but getting from point A to point B is always sort of difficult. So what I would like you to touch is an order of operations here. Let’s say if I would like to explore some of these macroeconomic either conditions or levers in my organization, and I want to take advantage of them.

So what will be the process of number one studying and number two, taking advantage of them. Now, you can talk about this from the perspective of the existing examples that you have already provided. So it could be breaking down these stories one level down, or it could be you could take a hypothetical example in creating this process in understanding how we can go from point A to point B.

Mark Jaffe 14:09

Just for fun, I’ll bring up a new story if you don’t mind. So the more, the merrier. I love telling stories. Who doesn’t? So it’s a client that is a furniture manufacturer that came to me right after the recession and said,

Now what I mean, in essence, sales are dropping dramatically. How can we increase our sales in a period of recession? And what we did is we did an exhaustive examination of the conditions at retail to understand what the buyer wanted. It’s so interesting. You would think, oh, furniture, a B2C customer, let’s understand what the consumer wanted.

But in this case, and this is where it’s applicable to B2B sales. In this case, the issue was not what the consumer wanted. The issue was what the buyer wanted. And what the buyer wanted was a way to have dramatically increased sales with dramatically decreased access to inventory because they’re buying less inventory and assistance of unfair salespeople because they’re firing on poor salespeople.

Mark Jaffe 15:09

So we realized that what this customer was was a brand-centric furniture manufacturer. And for any of you look around the furniture in your home, you don’t really know who makes it. So how could you be brand-centric? How could you be fashion-forward brand-centric because there is a real way that they put together furniture that resonated with these target consumers?

So how did we satisfy the buyers’ concerns? We basically realized that in that environment, when there’s no backup on-site or off-site inventory that is easily accessible, and the long lead times to selling in furniture, that when a furniture group of three, or five or six pieces were taken away by someone buying two or three off the floor, you now had three orphans that were taking up more space and not producing sales.

Mark Jaffe 15:58

And we realized that the first way to solve that was to create a larger group of inventory across a number of different styles that people can mix and match together. So we took our top five best-selling models, adjusted the colors, adjusted some of the finishing touches on how they were designed so that they all work together, and then encouraged each of the retailers to not buy a grouping of five but by three groupings of five.

Now you’d naturally say, well, that’s not going to work, because they don’t want to buy the first five, why would then buy three groups of five? Well, a number of months earlier, I was strolling through the warehouse, which by the way, I think every executive, no matter how you’re consulting, a company should stroll through the warehouse and the manufacturing facility.

Mark Jaffe 16:46

Because if you don’t understand where the battle is fought, you will never win the war. And off in the corner, I remember seeing this massive mound of I don’t know was dusted the what it was? And I said to the CEO, I said, What is that massive two-story mound of stuff. He said, For the last 40 years, we’ve been throwing away all of our scraps of material, and we really need to get rid of it. It’s a fire hazard. I know we’re gonna get cited.

And I said, Now, don’t get rid of that. Those are assets. Those are millions of dollars and written-off assets. And we can make pillows, and not only will we make pillows, but we will solve our problem of getting the buyers to buy our extra inventory by giving them away because that fabric which is a beautiful, fashion-forward fabric that you’ve been using on your furniture can make beautiful pillows and pillows, as you know have very high-profit margins.

Mark Jaffe 17:42

So we took a lot of leftover lumber, created beautiful furniture, what pillow walls, stocked them with furniture, and said to the buyers, they’re free, they’re absolutely free. And the buyer would say, well, these are 1000s of dollars worth of inventory you’re giving us for free. What do we have to do?

And we said buy three groups of five pieces of furniture and allow us to have our self-directed sign telling people how to play and use the furniture since we know you don’t have any salespeople. The result? I found out three years later. It was even greater than I had thought they invited me out to dinner to tell me that their $55 million company three years later had gone over $100 million.

And I said to them, what else have you been doing besides those strategies? They said nothing else. That’s all we need to do. We wrote up this recession and nearly doubled our company’s revenue as a result of the strategies that you talked about virtually no cost of goods sold on the pillows, and minor design and manufacturing tooling costs on the changing the furniture.

Sam Gupta 18:50

Okay, so. It’s a very fascinating and interesting story. In fact, I mean, I remember my conversation today, and I appeared on a podcast as well. And we were talking about why everybody either should have the marketing mindset in the company or marketers should be involved beyond sales as well. Marketers should not be just limited to three tails. And that’s how the majority of the organizations operate, that they are limiting their monitors only before the peace process.

Sam Gupta 19:19

So this is what we did. We were discussing that when CFOs or CEOs look at anything, their perspective is very different because their perspective is going to be slightly more efficiency-driven, the cost-driven what when marketers look at the same problem be looked at from a very different perspective, they look at it from the opportunity perspective, and you could have a lot more innovation just by changing the messaging or just by changing the packaging, and you could create an additional product line, you can create additional revenue. So this story sounds similar. What would be your thoughts on that? Mark?

Mark Jaffe 19:52

Absolutely. And I would add one other thing when you were siloed in an organization as a CFO or as a market being professional. You oftentimes focus on what is you don’t focus on what should be. You focus on what is, and you’re doing incremental steps to change what is. I want to give you a great example of a company that was decided that they were not going to do that.

It was a company that I worked with extensively a number of years ago, back when there were tremendous financial irregularities in financial reporting. This company’s value proposition was to assess accuracy in corporate financial reporting and to report that to individual investors so they can make better investment decisions.

The head of the company was troubled by the fact that they were getting high turnover high churn with this B2B or B2C service. And I said it’s the wrong way to go. They are not the big consumers of that information to make important and valuable decisions.

Mark Jaffe 20:59

There are B2B companies that need to know whether or not the financial reporting to the SEC is correct. And those are your bigger customers; they have those needs; what would be great examples of that DNO insurance companies are getting sued right and left as a result of the fact that the actual reporting was incorrect that investors relied upon it.

And they went to the Board of Directors as a result of allowing that incorrect reporting to occur. They were our biggest companies. I spent so much time in Bermuda talking to these insurance companies and signing them up. As a result, you’re not going to believe this one. But the SEC was a big customer. Why? Because as the head of corporate enforcement told me, you do the first 80% of our work, not only do you identify every single one of the metrics that could conceivably be out aligned, but you tell us exactly where we do the next 20% in identifying the specifics and the kind of corporate enforcement work that we do to identify companies that may be incorrectly reporting.

So what I find particularly interesting is that companies often silo their core value proposition to those audiences that they’re most familiar with or that it was originally intended, when oftentimes, even more, valuable targeting can occur two completely different target audiences. And this is a great example of really bridging that divide, abandoning the B2C approach, knowing that more fertile pastures are in B2B sales.

Sam Gupta 22:31

Amazing. So very interesting story again, and now I’m actually going to ask you for some advice, right. And that advice is going to be for the executives. So, Mark, you have been president, yourself of a company, and then you will have a significant marketing background.

But if we look at the state of manufacturing, especially in the SMB business, most of the SMB businesses start just because they are good at something, they have creators, they are not as sharp marketers. So let’s say if you have a President, I mean, who might not have a sharp marketing background, they would have got a bunch of customers, they would have succeeded, they would have survived.

But now, they want to instill this marketing mindset in every single employee that they have. So what would be the process for that? Is it going to be to hire a marketer and involve them in every single process, and some of those processes could be, for example, ERP implementation?

This is what we were talking about this morning that marketers are very rarely involved in the digital transformation initiatives or the ERP implementation. So as a president, let’s say if you don’t have any marketing background, what do you do to make sure that you are able to capitalize on these opportunities inside your organization?

Mark Jaffe 23:44

I really think that it is involved in utilizing each of the different departments to get their expertise in pursuit of a common goal. And perhaps the easiest common goal to go after is to try to understand what the catalyst is for a purchase decision. I remember I had a B2B company that sold UV lighting systems as a customer to create reduced air pollution and reduced bacterial involvement in air conditioning dogs because these UV lights using UVC light actually kill bacteria.

And they’re which was a wonderful value proposition who wouldn’t want cleaner air, but they didn’t understand. The CEO didn’t understand why marketing and sales couldn’t deliver more customers. And when we did the analysis with marketing and with sales and did a deep-dive interview with each and every one of them, we understood that the catalyst for driving a purchase decision was not air purification as valuable as that is or health benefits as valuable. It was really economical.

Mark Jaffe 24:55

These owners of office buildings, these owners of factories, these owners of hospitals, when you think hospitals would care more about health? Nope, they cared about economic. Why? Because they would have fewer maintenance costs, there’s less bacterial buildup on the airfoils in the ceiling. They would have a greater reduction in energy bills because with reduced bacterial goes up. There’s less airflow, less energy required to generate that airflow.

This all came as a result of having these types of in-depth conversations, having people not continue to work in the business but work on the business. And as a result of that, the insights that are actionable are incredible. And it’s a result of these types of conversations. We developed vertical marketing plans that isolated each of the economic benefits in the different vertical markets. And that became the focus for the increased sales that this company realized and ultimately was able to sell out.

Sam Gupta 25:55

Okay, amazing. So this is an amazing story. And you said that you know, you have so many stories. Mark, I want to give you one last chance. Do you have any other stories that you wanted to share but could not?

Mark Jaffe 26:05

Wow, I don’t know where to where to take that anymore when I think about the stories. But the most important message that I want to leave is understanding the motivation. Alright, fine. I’ll do one more story related to the motivation of the decision-maker; I remember there was one software company that I was working with that developed a solution that made the lives of workers easier, that made them more efficient, that made them better at what they do. And that gives that gave them higher enjoyment of their task and their responsibilities.

And naturally, you would think that these workers would be the ones who would bubble up to their bosses. The bosses would obviously recognize this and make a decision to purchase this enterprise software. But it didn’t. They didn’t. And what we realized is that the purchase motivation of the head of the company was not to make the head of this classification of companies, was not to make their workers’ lives easier.

Although that seems like it would be a very admirable motivation, it was actually to make them more informed by the data that was being assembled in a more effective way for them to make better decisions. And so we wound up adding a data analytics tier to this already very highly functioning software engine so that the decision-maker was able to realize a benefit that they personally wanted to realize, in addition to the benefits for those who reported to them.

Sam Gupta 27:43

Okay, amazing. So that’s a good remark we have any last-minute closing thoughts, by any chance?

Mark Jaffe 27:47

Well, I think I go back to what we said originally, which is, it’s a simple equation. But if you were to keep your eye on this ball, you’ll hit it out of the park every time you find out what your customer needs, and give it to them in a way that they know that you are the best and potentially only provider of that solution in that way that 100% satisfies their needs.

Sam Gupta 28:12

Okay, amazing. My personal takeaway from this conversation is going to be understanding your customer needs is a much deeper exercise than you would think. So make sure that you really understand your customer needs. So on that note, thank you so much for your time and insight, Mark.

Mark Jaffe 28:28

Well, thank you so much, Sam. I really enjoyed the conversation.

Sam Gupta 28:31

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 Mark, head over to MarkJaffe.com. He can help you create new revenue for your company. 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 Jim Gitney from Group50, who shares his thoughts on each inflection point for companies and what they need to know to identify them and move to the next by making necessary changes. Also, the interview with Jeff White, who discusses why it’s so important to identify the ideal customer profile for your offerings to streamline your growth.

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 29:37

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 Enrico Parodi, who describes the sales organization’s key components. He also discusses different sales organization structures and how their roles vary, including direct, hybrid, and channel-driven. Finally, he had a chance to touch on sales and marketing alignment and why that is important for an organization’s sustained growth.

Chapter Markers

• [0:24] Intro
• [2:49] Personal journey and current focus
• [3:49] Perspective on growth
• [4:46] Sales organization through an inflection point
• [9:30] Sales organization for B2B companies
• [12:06] Selling through partners vs. direct
• [19:54] Generating net-new sales for brands
• [23:55] The role of marketing in a sales organization
• [27:24] Demand generation challenges in a hybrid salesorganization
• [29:13] Closing thoughts
• [30:36] Outro

Key Takeaways

• Around the $5 million point, there is no destination, the compensation plan, most of the time doesn’t exist, there is not even a sales organization, because most of the time the business is driven by the family, or it is driven by the owner, and there is no size later.
• At $25 million, sales strategy starts to appear. But still, there is a problem because there is no formal structure. There is no CRM, or if the CRM has been bought by the company is not used, it is just there to support the operation in a passive way.
• There is a very tight correlation between not growing the company and not having a sales strategy. So when you talk about strategy, you need to start from your customers and your potential customers and define an approach to the market. Once you have identified and that approach, you then decide how do you sell? How do you reach out to those customers?
• You want harmonization between the channels, and again, the starting point is your sales strategy, which channel do you want to use to reach what type of customers and to sell what type of product or service and you need to have a kind of a mapping process here. So, through that process, then you define precisely which is the role of each one of the channels.

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About Enrico

Enrico Parodi has 30+ years of global experience, including leading direct and indirect go-to-market channels, with specialization in small and mid-sized companies. He earned multiple Presidents club awards over his career, with the most recent being at Sales Xceleration. He is also credited to have the first rank among 150 advisors in 2020. He currently consults with small-to-medium-sized businesses in the capacity of fractional VP of sales.

Resources

• Connect with Enrico
  • LinkedIn | Twitter
• Connect with Sales Xceleration
  • Website | LinkedIn

Full Transcript

Enrico Parodi 0:00

You need the high octane gasoline for the car. That is the compensation plan that fuels the behavior of your reps. As well as the leads, you need a sports team to support you. So that means that you need to hire. The right says you need the dashboard and the windshield in order to drive.

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 digital transformation consulting firm ElevatIQ.

Building a high-performing sales organization requires more than just winners and the winning product. It requires the right compensation structure, refined customer groups, and a deep understanding of their needs. But is that enough for sustained growth? What do small to medium-sized businesses miss that struggle to grow? Whose responsibility is it to generate leads? Is the sales organization accountable for everything? Or should marketing share some accountability of missing growth targets?

In today’s episode, we have our guest, Enrico Parodi, who describes the sales fields organizations’ key components. He also discusses different sales organization structures and how their rules vary, including direct, hybrid, and channel-driven. Finally, he had a chance to touch on sales and marketing alignment and why that is important for an organization’s sustained growth. Let me introduce Enrico to you.

Enrico Parodi has 30 plus years of global experience, including leading direct and indirect go-to-market channels, with a specialization in small and medium-sized companies. He earned multiple president club awards over his career, with the most recent being at sales acceleration. He is also credited with having the first rank among one PP advisors in 2020. He currently consults with small to medium-sized businesses in the capacity of a fresh new VP of sales. With that, let’s get to the conversation. Hey, Enrico, welcome to the show. Hey, good

Enrico Parodi 2:46

Good afternoon, Sam. Thank you for having me here.

Sam Gupta 2:49

Of course, it’s our pleasure. Just to kick things off, I do want to start with your personal story and your current focus.

Enrico Parodi 2:55

Yes, thank you so much. So you can understand my accent is a little bit that I am not American. I’m Italian. I came to the United States twenty years ago. I came here. I was working for corporate at the time I was in the information technology was with IBM great experience. I was in that business for almost 30 years.

And then, a couple of years ago, I decided that to get out of it. I wanted really to go into something in which I could help companies and CEOs. And so I decided to become a fractional VP of Sales Empire now have a network of people across the country. It is called sales acceleration. And we really to help CEOs of companies to have a high-performing selling organization. That’s what we do.

Sam Gupta 3:49

Okay, amazing. So before we get into some of your backgrounds, and obviously we want to hear some of those exciting stories that you might have, from your fractional sales experience, one of the standard questions that we have for all of our guests, and that is going to be your perspective on business growth. What does business growth mean to you, Enrico?

Enrico Parodi 4:10

I mean, business growth is the life of a company. You cannot stay in business without growing. So my contribution to all the discussion of the growth is around how you can connect the growth to your sales organization. You cannot grow if you don’t have a sales organization. And I would even say the more. Specifically, you cannot grow and sustain growth if you don’t. They’re in high performing selling organization. So that’s so crucial for the success of the company. That’s where I spend my time with my customers.

Sam Gupta 4:46

Okay, so do you believe that the sustained growth that you are talking about from the sales perspective does change at each stage of the organization, so as organizations grow through their inflection points, are sales organizations going to change and be changed for structure in the fields of migration? Is that going to change as well?

Enrico Parodi 5:08

Absolutely. If you allow me, I usually use a comparison between high performing selling organization and a sports car. So this car performs if all the pieces are there. But that’s not enough. They need to work all together, you need the driver, and you need the destination. And the trick is really to make all these things work together.

So for example, if we look at the key components, and we do a review this comparison between a scorecard in a sales organization, you need the destination, those are the sales targets, you cannot operate in a sales organization without having sales goals, you need the high octane gasoline for the car. That is the compensation plan that fuels the behavior of your reps, as well as the leads.

You need a sports team to support you. So that means that you need to hire the right team. You need a dashboard and a windshield in order to drive the car. And this is going to be your CRM, a customer relationship management that and your forecasting system. And then you need the driver. And this is your sales leader. So I just focused on a few of these five components.

Enrico Parodi 6:00

Now, when a company goes through an inflection point, some of these components and in their early stages do not exist. And then, the more they grow, the more they have to add those components. Otherwise, they cannot grow at a certain point is not only the key is not only adding the components.

It is how they work together, how they can scale, what is the skill of the people that you are using in the different stages. So if we go through the different stages of a company, let’s assume that we started normally. The inflection point is around the beginning of $10 million.

But I have to say from a system point. There is one even below that identifies around the $5 million. At that point, there is no destination, the compensation plan, most of the time doesn’t exist, there is not even a sales team, because most of the time the business is driven by the family, or it is driven by the owner, and there is no size later.

That’s what I find that the $5 million, then if we go to the next level, if you go to the $10 million, then obviously the company realizes that they need some people, it’s unwraps some sellers be as call them as you want.

Enrico Parodi 8:00

So they start to hire people, and they put some kind of compensation plan, but all the rest is not there yet there is no sales target. There is no customer relationship management system. There is not a sales leader. So those compensation plan is there. But there is very often a situation of frustration, wherein in the end, the CEO is not satisfied with the sales team because they don’t do what he or she wants.

And the reason is that the compensation plan is not really aligned with the said strategy, but there is no said strategy. So that’s the problem. Okay, then as you grow to the next level of $25 million, sales strategy starts to appear. But still, there is a problem because there is no formal structure. There is no CRM, or if the CRM has been bought by the company is not used, it is just there to support the operation in a passive way, you move to the 50 million, and you start to see the need of establishing a sales leader.

But very often, I still see situations where there is no CRM in place. And finally, when you go to the 100 million, the business is at the point where there is no way to grow if you don’t have very structured processes. Now at that point, really, as I said before, the secret of the successes are all those components that I just mentioned working together, are they designed to be complimentary, and do you have the right people in place so that the machine can scale.

Sam Gupta 9:30

Okay, amazing. So when we talk about sales strategy, obviously, my assumption here is going to be this is going to be primarily B2B play, so if we look at the state of the B2B organizations, especially the in our target audience, which is going to be the manufacturers, distributors, retailers, and some of the e-commerce B2B players, right.

So when if I look at their field structure at this point in time, their primary channels, or distributors. So these are two primary channels that they acquire their customers from. They are going to have some web presence, which is very rare, okay, so even if you have a web presence, they might not get any traffic from the web at all, just because they’re not spending as much money, they probably don’t trust on this channel.

And when I speak to my marketing audience here on this show, they have a comment that these organizations are extremely sales-focused. They are a sales-driven organization. So now, looking at the structure the way I described here, and we go, do you feel this is the fields-driven organization? If yes, why do you feel? If not, why do you feel?

Enrico Parodi 10:41

To answer your question, the same strategy is so crucial to the point that there is a very tight correlation between not growing the company and not having a sales strategy. So when you talk about strategy, you need to start from your customers and your potential customers and define an approach to the market. Once you have identified and that approach, you then decide how do you sell? How do you reach out to those customers?

And that drives then the type of people and the type of channel that you want to use? Are these salespeople, though, that work directly with customers? Or are you working with this with channel and distributors, and that is so crucial, because the skill of people that you need from a sales standpoint, that is really dependent upon what type of customers you are, if you manage the relationship with a network of partners, you require a totally different skill than selling directly to customers.

So today, I agree with you. You need that type of the right channel that either manager, customers, or managers partners to be successful in this arena.

Sam Gupta 12:06

Okay, so let’s talk a little bit more about this specific scenario, right? So there could be three scenarios. In one case, the manufacturer might be selling directly to the customers, which is rare because pretty small manufacturers, they will not really sell direct, they were selling through distributors, and distributors were selling through the retailers, right?

That’s the retail value chain. So now, with changes in the marketplace, now there is a lot of overlap. Distributors are trying to manufacture their own goods. And then manufacturers are trying to go to the consumer, end customers directly, right. So we typically see three different business models from the manufacturer’s perspective, one is going to be very distributed or the partner-driven, the way you mentioned, one is going to be completely focused on the customers, and the third is going to be mixed. I’m interested in knowing this mixed mode. There are going to be a lot of channel conflict issues. So how would you approach a model where you are trying to sell through partners as well as direct?

Enrico Parodi 13:09

Yeah, this is a great question, Sam and I have seen many, many companies failing it because they were not clear and crisp on this point, right. So channel conflict, there is one answer you want to avoid, you want harmonization between the channels, and again, the starting point is your sales strategy, which channel do you want to use to reach what type of customers and to sell what type of product or service and you need to have a kind of a mapping process here. So, through that process, then you define precisely which is the role of each one of the channels.

Now, that is the starting point. Then in execution, inevitably, you will find situations where there is some overlapping. So at that point, you need to be very crisp on how do you manage the conflict, and all comes first, no comes second. In my experience, I have to tell you that if you do not put your partners ahead of you or your internal salespeople, you will not be very successful in implementing in hybrid channel go to market that’s crucial to show that you are supporting your partners your there is a value-added component in their selling activity. They can trust you. They will stay with you. If you are not walking the talk there. You’re building an app a says strategy on it on the sand.

Sam Gupta 14:55

Okay, so tell me some of the nuances associated with selling through partners versus selling the right how the sales strategy is going to differ. What are some of the things that executives need to be aware of? Let’s see if they have never sold through partners, or they have never sold, right? What are some of those nuances?

Enrico Parodi 15:14

I think that in a nutshell, selling direct to customers is today. I mean, you can be successful. If number one, you will listen to your customers. And second, you help them to solve their problems. This is a skill that can be built in an individual and requires a severe predisposition to listen and to be curious and be able to go in solution mode. I call it a selling scale.

When you go in there with a network of distributors or resellers, sometimes, I mean, it could be even integrators or influencers, then, and I’m talking about not the influences in the digital world or the people that influence customers. And then it’s all about business development. You need to have a salesperson that understands that his or her role is to develop the capability of your partner.

So the partner can be effective in the market, the person needs to understand that the business has to make sense for the partner first and second for your company. So it’s a totally different DNA, a totally different type of go-to-market approach totally different people. When I hire people to do these different roles, I look for completely different job descriptions and completely different types of profiles profile of the candidates.

Sam Gupta 16:51

Okay, do you have any stories that you might be able to share around the hybrid structure, or maybe direct to sales? So just tell us some stories in terms of the structure? What may be your customers had before? What problems do you see with the kind of changes you made? Just from the structural perspective, there? Yeah, that’s exactly what he decided he wasn’t aligned.

Enrico Parodi 17:12

So this is a technology company that is really integrating. So they are acting as a distributor for a technology product. And at the same time, they also have a network of partners. Okay, so it’s a kind of a hybrid model. So their value proposition is really they are various experts in their industry. And before I joined the company, the company was able to really assess the organization with no specialty.

So the salespeople had both coverages for resellers and end-users, there were not enough salespeople, and one of the salespeople was the CEO of the company. And so COVID caps, and the business, obviously is getting impacted. They have huge challenges in reaching out to customers. So what they did in this context, I looked at the organization, every shaft of the organization, we made sure to have the right people in the right seat.

One of the things that define a sales organization is the people, and you need to add high-performing people doesn’t matter what they did in the past. What matters is are they able to be high performers in this new environment, and maybe they were successful before, but they are not successful anymore.

Enrico Parodi 18:50

So we said, I selected the right people in the job, I’d find different roles, we segmented the customers in different sizes, and we separated approach between supporting resellers and selling directly to customers.

For example, one of the things that we are doing today is we want to sell value, okay, and to sell value, you need to be able to solve problems. So we are introducing an assessment methodology that we do directly with customers. And the purpose is to identify their issues and to come up with some solutions. This is the approach for the direct customers. The approach for the partners is going to be different. We want to enable the partners to do the same with their own customers.

So it’s more about sales enablement than says execution with a purpose. I don’t know if this gives you an idea, but it’s really interesting because we double the organization even in a difficult situation like this, but now there is clarity. People know exactly what are the customers that they have to target. They know exactly what to do, what their goals are, and what their expectations are of them.

Sam Gupta 19:54

So I guess when things go well and then sales or big vision, I have not seen much of The problems, right? Because if you have tons and tons of leads, then things are easy. But if you don’t have much of the business flowing at the top of the funnel, that’s when the problem is going to be there. So what do you believe? I mean, do you believe that it is going to be the responsibility of the salespeople to be able to deliver the results isn’t going to be the responsibility of the partners to be able to deliver the results?

Who is responsible, number one, for generating the demand? And number two, do you have any stories where the demand was really low? And you did something because of which you created tons and tons of demand that everybody got busy and busy? Meaning closing deals? Right, that’s what everybody wants?

Enrico Parodi 20:41

Yeah, I mean, this is a question I get a lot, Sam. There is, in my view, a clear distinction between the sales role and the marketing role. And those are two different professions that you need people with a different profile. Obviously, the two organizations have to work together and support each other, but they should be accountable for their part of the job. So in terms of ensuring the sales goals are achieved, this is a responsibility of the sales organization, there is no doubt.

And so, you need to have an accountability system that holds the salespeople accountable for the different parts of the business they are responsible for. Okay. Now, as you noticed, I didn’t say that the salespeople are accountable, in my view, to generate leads or to do demand generation. That is the responsibility of the marketing team. And that is to be very clear so that everybody works on their own piece of the puzzle.

And many times, I find situations where there is not even a marketing part of the organization. And salespeople are accountable for generating demand, cold calling, and things like that. Unfortunately, it doesn’t work. You want to spend the money of your salespeople to make the biggest impact that is really to talk to customers that are interested. Okay, so how do you get to customers that are interested?

Enrico Parodi 22:00

This is why your marketing. So the story I can tell you his story of a customer where the customer was launching a new product is it was targeting new customers different from their traditional customers are and what we decided to do for the first time in a survey company to use an external company to do qualification of customers. So we could know an in the company ABC, there is a person that is interested about what we are trying to sell to them.

And then to do appointment setting. They were never used to doing that. Their model was or relationship-based. Their apps were going to customers and finding opportunities. The problem was that this new product they were bringing to market was different. They didn’t have the traditional people they were using to talk to as their counterparts.

So the process proved to be very successful, we were able to get a lot of interest from nontraditional customers, and we are now selling this new product. And really, their reps are involved. Just when the customer says, hey, I’m interested, I want to see it. Come here. And obviously, there is much more productivity and success rate. Right?

Sam Gupta 23:55

So let’s look at this from the manufacturing executive perspective. So let’s say if I’m the CFO or the CEO of the organization, and I want to create some sort of sustained growth in my organization. Now, if I go to my marketing, you know, marketing is going to say that you know what, I should not be accountable. Because I don’t know, I can write my content.

But I don’t know whether that is going to generate the leads or not. If I go to my sales leader, the sales leader is going to say that unless you have leads, I will not be able to close anything. So as an executive, obviously, I’m looking for tons and tons of investment. Number one, I’m looking for tons of investment in the marketing department where I don’t have much of the hope, whether those initiatives are going to be converted or not.

And then I’m talking to my sales team, and sales teams are saying unless you give me the leads, I will not be able to deliver on my targets. So obviously, there is a huge risk here with respect to sustained growth. So how in your recommendation, how do you think executives should approach number one, how should they approach what’s the structure of the organization? And how can they ensure that their investment is not going to be wasted?

Enrico Parodi 25:07

Again, this is a very common case, Sam. It happens, not only is more business, but it’s also in big corporations in my experience, and usually, it becomes a finger-pointing contest, then at the end of the story, right, it is never my fault. And in order to keep it simple, First, you need that to set up clear roles and clear responsibilities. Marketing, in my view, has a responsibility to generate a pipeline of leads that I will call marketing, qualified leads, and sales as the responsibilities than to take those leads and move them through the funnel.

So they have to work together, then you need to put in place a Sam system that makes them work together and rewards them for doing that. Once that system is in place, then the next step is to be extremely crisp on what is the definition of a sales qualified lead and the marketing qualified lead marketing is going to be accountable to generate a certain number of marketing qualified leads and says, we’ll take those leads, and then using whatever is the conversion rate be accountable for the revenue for the company, it is philosophically not complicated, it is difficult to execute in my experience because there is lack of clarity.

Enrico Parodi 26:50

But if you have clarity and teamwork, it is doable. My part of what I do I’m really focused on says, I work very closely with the CMOS and fractional CMOS, and they are part of my team, we work together, we define this together with how to enable the salespeople we define together, what is the value proposition for the company because you need to have a value proposition in order to be selling to your customer.

So it’s totally relying on the numbers. There are other components of integration between the two organizations, and in the end, you can be successful, but it doesn’t come out if you don’t have the number one predisposition to work with another organization. And second, you have a clear approach.

Sam Gupta 27:24

Okay, so this is going to be an even bigger problem when you are working with a partner, right? So let’s say if you’re working with a distributor, now, what distributor is going to say if everything I’m going to do from the sales and marketing perspective, if you’re not going to be providing me any leads, and in most cases, I think that’s where the definite finger pointing is going to be my distributors gonna say, you know, what, if you aren’t providing me any leads, then what I’m really going to do is I’m simply going to carry your competitor’s product, and you know, whatever my customers are going to buy, I’m going to sell them, because now I’m a distributor, right?

So this problem can be for fear when you are working with the partners. So what will be your recommendation in structuring the KPIs in the case of the distributor-driven organization?

Enrico Parodi 28:06

When you work with partners, it’s, yes, it is more complicated. But you also need to be very crisp about setting up the expectation with balance. All right, it might not be providing the latest part of the value proposition and a managed partner organization across the world and for different products.

And the topic about generating leads was really to me is a signal from the partner telling me I do not know how to go after the market opportunity. I do not know how to differentiate myself. Can you help me to be more effective in the marketplace? And that’s why it’s called partnership because there is not an answer that is a short answer to that question. It has to be developed in the man’s in the near side because the market changes. So if you’re there for the long run and you work on partner enablement, that becomes really the real route to success.

Sam Gupta 29:13

Right, and we go, that’s great. Do you have any last-minute closing thoughts, by any chance?

Enrico Parodi 29:18

I can say that there is really a couple of things that are crucial if you want to be successful. First, you need to have a destination. You need to be very crisp about what your goal is, which are the customers you want to target are the market segments we want to target. Who are you using to do that? Second, you need the system to go after the meaning you need it clearly defined sales process. You need the technology to support it like CRM, customer relationship management system. I mean, and then you need an accountability system.

The reason why reorganizations fail is that these pieces are missing. They have to be managed as a car altogether. You cannot have a car with three wheels. It doesn’t go very well. You cannot have a car where the windshield is obscured, and you don’t see that the road ahead, you’re going to go against the wall, right? So that’s really the most difficult thing. Keep the added pieces, but make them work together.

Sam Gupta 30:36

Okay, amazing. So my personal takeaway from this conversation is going to be it’s all about structure and alignment. So on that note, thank you so much, and we go for your time. I really enjoyed your insight and had fun with it.

Enrico Parodi 30:48

Thank you so much, Sam, and good luck to you.

Sam Gupta 30:51

I can’t 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 Enrico, head over to salesacceleration.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 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 out. Thank you, and I hope to get you on the next episode.

Outro 32:10

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 Matt Guse from M.R.S. Machining, who discusses the challenges associated with manufacturing complex parts in short runs for a CNC machine shop. He also shares his insights into the process changes he made to his company that resulted in significant quality improvement and growth opportunities. Finally, he shares several stories of where he was able to save significant costs and grow his customers by simply replacing a material or improving the design of a part slightly.

Chapter Markers

• [0:18] Intro
• [3:33] Personal journey and current focus
• [4:14] Perspective on growth
• [5:28] People, process, and product
• [8:58] Incentive structure to improve quality
• [15:25] How to reduce setup times between runs?
• [23:01] Product costing implications of siloed systems
• [32:28] Closing thoughts
• [35:00] Outro

Key Takeaways

• Everybody has a gift, and you have to empower them to become part of that gift. So by doing that, they had invested interest in it because if they made a mistake, they scrapped the part. So essentially, that was money out of their pocket.
• When we put the incentive plan in, a lot of guys weren’t really filling out their process sheets.They weren’t taking pictures of the parts as much as they should have. But now, when they took ownership of the process, sheets were filled out to almost every detail where anybody could read it.
• We all fail. It’s a given. Fix it and then forget. If you’re gonna sit there and dwell on the mistake you made, it just kind of put your head down. That’s just cancer, and you got to get over it and just move on.I always use three Fs: fail fast, fix fast, and forget fast.

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About Matt

Matt Guse is President of M.R.S. Machining. Matt and his wife Vicki own M.R.S. Machining that was started by his father in 1986 in his garage. Matt has been in the manufacturing industry for over 30 years. In 2007 M.R.S. Machining was named one of American Machinist Magazines Top Ten CNC Machine shops in the nation and most recently was named a 2017 TOP SHOP by Modern Machine Shop Magazine.

Matt has also been very active in his community by serving on his local school board, Chippewa Valley Technical College Machine Tool Advisory board, and his local church board. Matt also was part of the startup of Cardinal Manufacturing at the Eleva-Strum school by donating equipment. He continues to contribute his time and expertise to this excellent educational opportunity regularly. He is keenly interested in developing new talent and ideas for the manufacturing industry and holds two patents for cutting tools that he developed. Matt was also one of the faces in the IMTS 2016 and 2018 ad campaigns.

In his spare time, he enjoys being a Basketball and Football official. He has a passion for cycling and has successfully cycled up Pikes Peaks to an elevation of 14,115 feet. And this past year, he put over 9,000 miles on his bike and is always up for a ride.

Resources

• Connect with Matt
  • LinkedIn | Twitter
• Connect with M.R.S. Machining
  • Website | LinkedIn

Full Transcript

Matt Guse 0:00

Well, I was blown away by when I told my employees that we would give 40% of the profits to our employees. My quality went from 3% down to one and a half percent. My revenue grew 20 to 25% in the first year, and it’s maintained that since then, and as a business owner, that’s kind of a no-brainer.

Intro 0:18

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 0:54

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.

Running manufacturing operations is not easy. But if you’re running a CNC machine shop that produces complex parts in short runs, the switchover time between jobs or additional time spent in bringing material to CNC machines could add significant profitability and growth challenges. Also, the field data collection and entry are primarily manual. You might run into significant operations bottlenecks and might not be able to compete.
What process changes could you make to your operations to improve your quality and reduce costs.

In today’s episode, we have our guest Matt Guse from M.R.S. Machining, who discusses the challenges associated with manufacturing complex parts in short runs. He also shares his insights into the process changes he made to his company that resulted in significant quality improvement and growth opportunities. Finally, he shared several stories of where he was able to save high costs and grow his customers by simply replacing a material or improving the design of a part slightly. Let me introduce Matt to you.

Sam Gupta 2:05

Matt Guse is president of M.R.S. Machining. Matt and his wife Vicki own M.R.S. Machining that was started by his father in 1986 in his garage. Matt has been in the manufacturing industry for over 30 years. In 2017, M.R.S. Machining was named one of American machinist magazines’ top 10 CNC machine shops in the nation, and most recently was named 2017 Top Shop by modern machine shop magazine. Matt has also been very active in his community by serving on his local school board, Chippewa Valley Technical College machine tool advisory board, and his local church board. Matt also was part of the startup of Cardinal manufacturing at the labor from the school by donating equipment. He continues to contribute his time and expertise to this excellent educational opportunity regularly.

He is keenly interested in developing new talent and ideas for the manufacturing industry and holds two patents for cutting tools that he developed. Matt was also one of the faces in the IMTS 2016 and 2018 ad campaigns. In his spare time, he enjoys being a basketball and football official. He has a passion for cycling and has successfully cycled up pikes peaks to an elevation of over 40,000 feet and his past to you. He put over 9000 miles on his bike and was always up for a ride. With that, let’s get to the conversation. Hey Matt, welcome to the show.

Matt Guse 3:30

Thank you, Sam. I’m delighted to be here today.

Sam Gupta 3:33

Okay, amazing. Just to kick things off, do you want to start with your personal story and your current focus?

Matt Guse 3:38

Yes, I started machining back in high school, I had a tech ed class, and I got exposed to it. And my dad also was a machinist. So I actually grew up on a farm. And I had that work mentality. So we sold our farm when I was in eighth grade. And when I got exposed to it in high school, I decided, hey, manufacturing is a way for me to still use my hands and my mind. And I basically started working out of my dad’s shop, but my dad’s work at a CNC machine shop, and I just fell in love with machining. It just, you know, I took art classes, and I played sports in high school, and I knew I had that kind of talent. So that’s why I got into it.

Sam Gupta 4:14

Okay, so obviously, we are going to be talking a lot about CNC machines. What’s going to be a good CNC machine versus a bad CNC machine. And obviously, our customers and listeners can take advantage of your machining expertise. But before I do that, we are going to have one standard question that we ask everybody because the focus of this podcast is growth. So what is your perspective on growth? Matt, what does growth mean to you?

Matt Guse 4:38

Yeah, growth is a big word. Over the years, I’ve learned a lot of things. And you really got to define what growth is. Some people think growth is growing your sales, but in order to have grown sales, you got to have the right equipment, but you got to have the right people. I always do the three Ps. You gotta have people process and a product in place for you to have sales growth without one of those three, you really can’t grow.

So when you think of growth, how much do you want to grow? Do you want to grow at 5% a year, 10% a year, 15% a year, or more? And I found over the years, if you’re growing more than 15%, then your year may be getting out of control, and it’s hard to zone in on it, and you start having a lot of waste. So I try to keep my growth under 15% as a goal of growth. And your goal without a plan is called failure. So you need to write down your goals and then execute that plan.

Sam Gupta 5:28

Okay, amazing. So you mentioned the right equipment, right. And one of the things that you mentioned is people’s process and product. So typically, in the ERP world, we talk about people processes and technology, but you are talking about a product, and I completely agree with you that getting the product right is definitely important. And to get the product right, obviously, you need to have the right equipment. So tell me from your experience from any of these stories that you might have, tell me what the right equipment is and what is not the right equipment, and how that might impact the product that manufacturers might be producing.

Matt Guse 6:02

You got to look at what kind of product you’re making. And if you’re looking at a simple, easy job, a high volume, yeah, no, you’re gonna, you’re gonna lean towards a Swiss CNC machine or screw CNC machine, you’re gonna look at complex short run. And all that we do here is we are high mix short run, we have over 500 active jobs in our system, and we ship over 35 jobs a day out of here. So our equipment got to be real versatile and easy to set up and program.

And when I started out, I wanted that’s kind of what our focus was. And M.R.S. is to be a quick short-run turnaround. So we actually partnered up with a company called Mazek. They’re out of Florence, Kentucky, and their control, their control is really user-friendly, and which makes our guys on my shop floor. I have 32 machinists, and over 80% of my guys are able to set up a program.

Matt Guse 6:47

That’s because the use of the control is so simple and easy, where most people have one programmer or two programmers in a shop, and they write all the programs, and the people on the floor are allowed to make changes or edit programs.

And for us to grow. At that time, I had to give my people that the control the ownership, put that into their hands, because when you’re on the run in two or three parts, and you see something need to change or tolerance or dimension, they got to have that otherwise, they have to go back to the art camp system update program, download it and just waste I mean, it would take them up to a half-hour to 45 minutes, where if they could just adjust it on the fly within, you know, really, really seconds.

Our volumes are once I implemented that our sales almost grew 20 to 30%, which gave our employees the ownership of doing that. That’s where people come into place in. You got to envision got to build a culture of people. And that’s where growth comes in.

Matt Guse 7:39

Because when I did three years ago, I was just floating along year by year, our sales were just kind of maintaining, and our quality was we didn’t have a quality problem, we had less than 3% that wastes you’re doing that 35 jobs a day, that’s quite a bit, you know, I thought a lot, that’s not bad, because a lot of setups, short runs, you can make mistakes, but I just know there’s something better.

So what I ended up doing is I ended up putting a profit kind of but not a profit-sharing but incentive plan in place. So I’d give 40% of the profit back to the employees, I didn’t know what to expect. First, I just knew I had to do something better what I was blown away by when I told that my employees that we will give 40% back. My quality went from 3% down to one and a half percent. My revenue grew 20 to 25% in the first year. And it’s maintained that since then, and as a business owner, that’s kind of a no brainer, grow, your company profits and quality went up, quality went up, and profits went up and really did nothing, then my return on my investment of that 40% was well over 20%.

So that’s why I talked about building the culture and let envisioning people, and letting them do their thing. Because really, they’re in the trenches every day doing everything. They’re the best people out there. They see it every day. We’re business owners. You don’t get to see it every day. So you’re probably not the expert in that area. So let them do their thing.

Sam Gupta 8:58

Yeah, I completely agree with your assessment there. If you enable your employees, and you have the incentive plan, and obviously that is going to help, but what I’m really interested in knowing is what were the core reasons why they were not able to maintain the quality before and how the quality improved. And it seems like you improved by almost 100% or 50%. So what were the core reasons why you were not able to accomplish the same quality before? But you were able to do that later on once you have the incentive plan in place.

Matt Guse 9:32

Everybody has a gift, and you have to empower them to become part of that gift. So by doing that, they had invested interest in it because if they made a mistake, they scrapped the part. So essentially, that was money out of their pocket. And that’s really what I think inspired like the quality. They didn’t want to make bad parts. And so they took that extra second that extra time just to focus on what they’re doing where before they would just punch a number in Oh, it’s a bad part.

But so that, to me, really sparked a lot of interest. They don’t work that just gave them ownership take total ownership. And what I do here at M.R.S. is that I just stay out of the way. I let them run the show because they’re the best at it. And when they have a problem, they come to me, and I try to help as much as I can put this given them. I think the ownership part of it, and it makes it a part that they felt was really good and is what really set it apart.

Sam Gupta 10:28

Great. So I get that you’re taking the ownership. You are probably going to be slightly more driven, slightly more passionate about the part that you’re producing. But I’m still looking for the underlying technical problem, what was the core reason for the quality issues before, and how they resolved that by taking the ownership isn’t just the attention is the drive is that the passion. And because of that, you had quality issues,

Matt Guse 10:51

I just felt like I guess it came back to a story where my dad passed away in 2013, he passed away, and you go through the emotional stress of your dad, my dad was actually half of myself, and I was struggling for six months. Those people stepped up to the plate and took care of business here to rest without really me being here. My philosophy was I always wanted to give back to them.

Previously, we looked at an employee-owned business. And every time I went down that road, I just kept hitting dead ends. And I knew that wasn’t the relative route to go at the time, not that he stopped or a bad thing. But it just felt like it just wasn’t great for us. So that’s why I came up with an incentive program. I wanted to give back to my boys. And I wanted quality to get better, which wasn’t bad. But just I guess that was a wildcard. The quality thing went down one and a half percent.

Sam Gupta 11:47

So basically, what I’m trying to understand here is from the process perspective, so if the quality is improved, there is going to be an underlying reason, right? Either the engineering improved, or you improved from the machining perspective, or you improved from the operations perspective. So what was the underlying reason for the improvement? Yes, the motivation is there. Yes, the incentive plan is great. But there has to be an underlying reason for the improvement in product quality.

Matt Guse 12:13

Yeah, the quality was better. As far as dollar-wise, we chart our quality every month, and every course every six months here, we post it so people can see it. Some companies I go into it, you can see all these charts and charts and charts. And they have all this if I don’t do that, because what happens is people stand there looking at it, and they get confused by it.

So I always try to keep things as simple as possible. But, overall, when you’re looking at one and a half percent and quality, you know, we’re about 140 to 150,000 a year in scrap waste, and that’s a lot of money. But when you have a multi-million dollar company, it’s that’s 3% probably what we’re after this we’re down you know, 70%-80% of scrap tell that’s a lot of money. We figure in a scrap percentage because nobody’s perfect. And when you’re setting up a pretty complex job with over 150 dimensions on features under a print, it gets pretty complex, whereas if you’re just making a simple washer with three dimensions on it, that’s a whole different story.

Matt Guse 13:11

But the driving factor is, you know, I’ve just wanted to I wanted that scrap number to come down. And I wanted to give that number back to my employees as much as I could. And what we did without that money is we actually turned around and invested in our Q.C. department with better tools such as a vision system, which also drove the quality down probably another half a percent, because when we had better tools for our checking our parts. So what we do is we document all our processes, we have computers and all ourselves, we’re trying to be as paperless as much as we can.

Matt Guse 13:53

So when people we put the incentive plan in, a lot of guys weren’t really filling out their process sheets weren’t taking pictures of the parts as much as they should have. But now, when they took ownership of the process, sheets were filled out to almost every detail where anybody could read it. So we could get actually when you go to set that when a picture’s worth 1000 words, I don’t care what anybody says, because your memory isn’t as good as other people.

But when you see a picture like, oh, yeah, I remember that. So those are getting filled out. The pictures are getting downloaded to your computer. So we have repeat runs. All that information is right there. And we know what tools we have, what the tools are, we know what the picture the part looks like. Because sometimes you get a 2D drawing, it’s hard to envision the part where we got a picture of the finished part.

Matt Guse 14:38

Okay, that makes a lot more sense. Of course, you get nowadays you get models, and you can take the model, but still, a picture is really worth 1000 words. And then along with that, when are you know we have our inspection sheets for our parts, you know, we blew in our prints but all the dimensions that were also saved, so we weren’t reinventing the wheel there. It was all there documented.

So when people got to quit quality, then we would fill our sheets. You mentioned we had a little bit of problem people knew, they would check the parts, but they weren’t documented. Well. Now, when they would miss something or are not documented, well, then you have a chance of making a bad part. So by them doing that, then we would highlight the really critical tape dimensions, and we put a yellow in our inspection sheet, the one that that’s a tight tolerance. And that all that’s what all came out of this people just took it to the next level. And of course, as a business owner, that makes you happy.

Sam Gupta 15:25

Yep, definitely. And you mentioned one comment about reducing the setup time, and a lot of manufacturing companies are going to have issues with the setup time, as well. So let’s say if they asked you your advice, in terms of how we can reduce the setup time between runs, what would be your recommendation?

Matt Guse 15:41

First of all, you need to ask yourself the kind of part you’re making? We fell in love with is our 5-axis Mazek integral axis. And the reason we fall in love with them is they have big tool magazines in a standard turret lathe is like 12 tools, or standard V.T.C. is probably you know, 20 tools, if everybody’s going to start a shop, don’t I know, it’s a lot of money to invest in another set of tool magazines, but get the most tools you can in the magazine.

Because without these tools in there, we have a matrix of tools where we know that CNC machine, we have like a family of parts where we use a quarter 20 tap the half-inch half. We leave those we did those tools in there. We don’t touch them. It’s like our personal tool crib right in our CNC machine. And that’s where the integrants do come in nice. And they’re 5-axes.

Matt Guse 16:23

So you can get at all angles on features, you can have sub-spindle, the part you can pull the part off complete, that’s just, that’s what we excel at, we’re not if you’re going to be running 10s of 1000s of parts. No, that’s not the CNC machine that you really want. You want to get into a fourth axis where you have two-thirds of twin spindle parts coming in. But that’s not who we are. We just never had very good luck doing high-volume parts.

So we just kind of stayed away with not that we can’t do it someday. But so the readers’ setups you just the tools got to be there, you just don’t cut short on tools and don’t cut shorter magazines, we have all our jobs numbered. When you like the lay, if we have pilots, we have it all there, right, and our work, so people don’t have to go searching.

And one of the biggest things we’ve done in our computers where we have in our cells, we have this little thing called A.B. notes. Like for $200. It’s the software you can get, and you can internally email everybody in their cell. So if you’re running apart, and you’re not making the time where you have a quality question, you don’t have to leave yourself and go walk around, find that person to go back to the customer go back there are so many here, we can sit there and keep running production or keep running on another CNC machine.

Matt Guse 17:27

Until we get that answer, that alone, I’m a kind of a numbers guy. Yeah. And that we reduced our setup down by 25 minutes per job just because of that, because a lot of times the communication wasn’t there. Now the communication is there. And that all gets documented and downloaded into our process files. So if that question comes up again, it’s right there.

You just pull up the job process for the job number, boom, everything’s there. So it’s all that tribal knowledge, save it and keep it in your computers. And everybody has access to that there was another thing that we brought up parts anywhere from eight-inch diameter up to 2000 pounds.

And I was tracking that one day, and I did a little survey, and we found out it was taking us anywhere from a half-hour to 45 minutes to get the material to the CNC machine. Well, that ain’t good enough. So what I did is I hired a valedictorian out of a local high school here was super smart was going to go into computer software, and I gave him an internship, and I told them what to do, here’s what I want you to do.

Matt Guse 18:20

So he developed the software, well, we can barcode our job travelers, and where it goes back to our shipping people. And also we put computers on our fork trucks. So when they scan that traveler, if someone’s across just we have two buildings here, if someone’s across the street and sees it comes up on your computer, they can grab it, bring it over.

So we went from an average of 30 to 45 minutes to fit in our material to our CNC machines or work cells down to less than five to 10 minutes per job. And you can do the math on that one. That’s a substantial saving. Personally, I haven’t even put a number or percentage or cost savings on that, but for hiring a high school valedictorian for summer, he was a pretty sharp individual. We actually tried to hire him full-time.

But he went on to go work for some big aerospace company. He’s doing really well. I always take no for an answer. And when I was in high school, I was always told that you don’t go to a four-year college, you’re not going to succeed in you know, you’re going to end up, and I know that was never good enough for me.

Matt Guse 19:13

So I always try to find a way around it. You got to be creative in this today because everything’s changing so fast. So just don’t ever take no for an answer. That’s where the barcoding system came into effect. We had material when we bought a lot of material. We can’t even you know we buy millions of pounds of material a year and we you buy 12 feet, you can’t buy a revenant because the four feet you’ll be paid for anyway, so why not keep it so we just started our shelf and then we tried to do an inventory, and they would take us four days to do inventory, and nobody wanted to do it, and it wasn’t accurate.

So there again, we have to find a better way. So we developed there, but I couldn’t find out. I tried to buy something I couldn’t find it. And so the first problem was if you buy material, you get stickers on the material in our people, you buy it from distributors, they put stickers and tape and ends up falling off, and now you got to pay color-coded whatever distributor has a different color code on their bar ends in the material. So one’s red can be 1045.

Matt Guse 20:06

And other companies could be red could be 4140. So we ended up storing the wave because you didn’t know what it was. So we found a sticker. And it took us a long time to find the right sticker that actually stuck on the material.

I actually even took it and tried to sandblast it off, and I couldn’t even get it off. So I knew we were set. So then we created our own software or Excel where we can barcode it, or we can tell it the peel number we ordered on under it tells us what type of material it is.

And then it also tells you the damaged material. So now when we put an inventory, we can just scan it, and we have our handheld computer, and we say we got three feet in this storage bin, everything’s numbered alphabetically in A.B.C., and then 123. So we know what the material is.

Matt Guse 21:00

And we know how much we have it in. And we took that data, and we downloaded it into our ERP system, which is called JobBoss. And that thing is live. And now when you want to go to inventory, you just get your get our gun, we can scan it, and then we basically put a tape measure on it, it’ll take us four days to do inventory.

Now we can do it in four hours and used to try to buy the whole team here try to get people to do what they want to do it now everybody volunteers for it because it’s so simple. to them. It’s like taking half a day off with pay. And you know, we used to be off 10s of 1000s of dollars. Now when we do inventory orders, you’ll shoot in less than $200. And that’s usually just because that’s because you’re down to inches. We measure everything in feet. We don’t measure in inches.

Matt Guse 21:26

Yep. So what does that do? Well, where we on average, that will save us probably three to $4,000 a month, just material we weren’t scrapping out that we paid for. And I have to say says we implemented it probably five years ago, six years ago, I bet you we save over hundreds of 1000s of dollars, Sam, it’s just it’s amazing.

And I have customers that come in it always aerospace. We’re starting to get a lot of aerospace work. And when they come in, they see that like where did you get that system? Oh, it’s homemade. Or can I buy it? Well, I don’t sell software. I’m not into it works for us. I can tell you how we did it and tell you what we use, and you guys can try doing it.

I have several customers at big companies buy that, but I helped them set up their own system, which I feel more comfortable about just some of the things that we’ve done. Never take no for an answer. You can always get better, and you can always figure it out. So one of the things that we tried to do here also I never asked, as I call it QVS, which stands for quality, value, and service.

Matt Guse 22:19

And that’s what we’re about. We’re about the quality. We’re about value. We are about service. It was a service that comes in when you call M.R.S. You don’t get voicemail is when someone calls you. They’re not looking for a talk to a CNC machine or looking for an answer. And I’ll be honest with you. Sometimes you call it may not be the answer you want. But it’s an answer. That’s the key eight. Wait for an email 48 hours later. You’re not waiting for someone to call you back a week later.

And that’s what our customers came back to us as they tell us every day Hey, we like when you call M.R.S. we get an answer may not be the answer we want at least we get an answer. And that’s what we love about it. And that’s where the value comes in. There’s not a lot of people that respond that fast these days. It’s just, especially with COVID. It’s hard, but we still hold those Morales.

Sam Gupta 23:01

Okay, and how are you doing product costing? Because your ERP seems to be separate? You have that in a JobBoss, and then you have to collect this data, you have to dump it in your ERP? Are you able to track the cost of each of the parts? The way you are building it? Or do you not have a sense of your parts?

Matt Guse 23:19

Yeah, we track. Yeah, we tracked across the best we could. The one thing that’s hard for us sometimes is that when we get busy, we can’t always run that specific part on a CNC machine. And so we have to pull it important and undersell just to get the customer out the door. So there is a very answer or be recorded on integrex where you got all the tools there, you know, your setups probably can be less than 30 minutes, where you have to pull it and put it on a four-axis lathe where they had no tools in there, whether you got like tooling less or horsepower, it your setup can go from like get up to two hours.

So it varies a little bit. A lot of all our guys log into their jobs in like everybody else you do make a mistake once in a while where you’re logged into there, you forget to log on, if you get to go home, we have little green slips, we have to manually put the job number down and deduct the hours. But that’s how we cost our parts. We also have an in each operation, we have a part to part-time, or people write down their part to part-time just to make sure that it matches because sometimes if you log on, you can do the math. If it takes three minutes and you make it in 10 parts, that’s 30 minutes. So if you log in 10 hours, well, there’s obviously something wrong.

Matt Guse 24:21

What are the key factors that came out of there, Sam? We’ve done all our work orders are color-coded. Yeah. And why do you color-code your work orders? Well, a green job, for example, green jobs are brand new jobs we have no programs, we have no processes, we have nothing.

So that tells everybody if a high alert, we have to really document this. We have a white traveler. What is the job we ran before, so everybody knows they see a white traveler? It’s a job; we have everything documented, everything should be there. And then we can get on to Orange traveler is a rep change.

So there are actually some customers who change the dimension or change something on that part. Now, these are all quality things that people don’t think look at as quality, but it is you can keep printing the same print, and you don’t have a visual. How do you know there’s a rep change in that print? You really don’t.

Matt Guse 25:05

So you can make a part to the wrong row. And usually what happens is our customer will get parts, and you say, hey, you made us the wrong dimension, what happens is that they don’t want to change it in their system.

So we’ve already changed it in our system. And if they do send a P over, we can catch that. Well, they’ll send a P over for a rep B.S.A. and our system saying a rep. See, because we’ve had that orange traveler, and we know our ERP system or flag and say hey, there’s a rep change. So we can call him and say, Hey, you know, you just sent over a P, or it should be rev C.

And another thing we did that helped it was we scanned all our documents. And so we have all our material certs, we have all our inspection sheets, we have all our travelers, we have the print, we scan and under each job, and that also goes in our job file. So our customer can call up and say, hey, this, we have a little problem with this part, or something’s not right, but I get the dimensions within a click of a button, we can email, and we don’t have to go searching for hours or sometimes days looking for all that is all electronic. It’s all simple, quick, easy. That’s where the value comes in. And the quality comes in.

Sam Gupta 26:06

Okay, so when your customers are sending their specs. Are they sending in terms of, let’s say that file a design a spec, and then you are manually entering this data in your system? Or how is that process?

Matt Guse 26:16

Yeah, well, we have to enter it manually because that’s how JobBoss works because everybody’s got a different peel number. And you have to actually change the peel number and then all the models and the prints, we actually can come in, or we can convert them into the job process file. So when they come on the new job, we’ll put the job number in there. And then we’ll put the latest and greatest print that they sent with us.

And then the models also going there, the models are kind of the thing we get now, and it’s funny about models is you really have to be careful, we have some customers that have great models, and we can use them right to the team. And then we have some models where you can’t trust them because the dimensions change.

And they say we’ll make the print off the model. But it’s hard for us to do that. Because then we have to start. Okay, what’s the tolerance on the part? Or is this a press-fit bore? Is this a location, or that’s where things get a little tricky? So we always ask for a model and also a dimensional print.

But then we can kind of compare apples to apples. And I can’t tell you how many times that we’ve gotten print dimensional print or in the model where they don’t match up, things get changed and don’t get updated. So we like to prevent that kind of stuff before it happens.

Sam Gupta 27:20

So let’s go back to the model. So you talk about model light. And my customers or the listeners may not be familiar with the model. So are these CAD files that you are getting from your customers? What exactly are you getting from your customer when you get their specifications from them in terms of designing the parts?

Matt Guse 27:37

it’s a 3D model. I don’t know if most people know what a model is. It’s just like a video game or whatever. But you just take it, you could spin it all the way around, you can look at it. And then you can go into a wireframe, and you can click on it and get your points and get your dimensions.

And you can also download it into our computer system, where it’ll program you can use those numbers to create your program. That’s some amazing technology. And that’s just hitting the floor right now. If anybody’s looking to up their game a little bit, I would definitely ask them to look into Mazek because it takes a lot of the human error out of it. But again, it also boils down to the model.

Matt Guse 28:24

And you got to make sure that model is right. And sometimes model like I said, sometimes models don’t come across that great. But the problem or the problem is schools are there’s so much technology out there, and you go to to your college or for your college. There’s only so much time in the day of the year where you can learn so much. And you learn most you’re starting to feel in the trade.

And I tell kids you know, once you get done with school, you get your diploma, you’re not set for life, you’re set for maybe three to six months, you have to take and go on the internet, learn more, you got to go and trade magazines, it’s continuous improvement. That’s how you advance companies. The more you know, the more you’re going to make, and the more you can devote to just giving it your all. And that’s an aspect of a school that just can’t physically learn it all.

Sam Gupta 29:04

Okay, so when you talk to these customers, let’s say in the aerospace, do you have any stories that you might be able to share about if they need to know anything about the parts and the machining? So do you have any stories which impacted the growth of these companies just because they were not, let’s say, as innovative as you are in terms of streamlining your processes? Do you have any stories that you might be able to share?

Matt Guse 29:30

Yeah, I actually got several such as DFM, which stands for design for manufacturing. We’re the experts here on how to use a CNC machine and make a part, or sometimes the design people have never made a part. So they just think it miraculously can pop up. I love that. I’m the DFM guy.

I just know there’s always a better way of doing things. And I had a customer come to us, and they were making this part and they they were making 40,000 parts a year, and we started making it, and I just questioned them one day, and on the material, they’re making ETD 150, which is really a double tamper material. That’s why they’re doing that. Well, it’s better machining. And I kind of paused them all better machining, I said, There’s also 4143 are the exact same thing.

It just CNC machines a little different. I said with today’s technology. The CNC machine is not the problem. And I said I’ll tell you what, I’ll make you six free samples, and I’ll have you test them. And I guarantee you that 4143 I wrote last ETD 150 point oh, well, anyway, they have the CNC machine where they have this product, and they test it and they run it through like 50,000 cycles.

And then they pull it under a vision system to look for wear and tear, whatever we’re getting about 30,000 cycles off at 150.

Matt Guse 30:34

So they wanted out their game, and they said, Okay, we’ll show Matt. So they went up to 70,000 cycles, and they pulled it in the vision system. That thing looks brand new, yet also they got their attention. The materials, half this class was half the price. And we ended up saving them $100,000 a year on that product alone.

And on top of it, they actually got a better product, though, because you have the word factor in 4140, which is a little better than ETD 150. So that’s the kind of stuff that I like to do. That’s where you kind of my goal every day is to learn something new. And if you’re not safe, you’re not growing. You’re dying. Yeah. So you’re learning new things, then.

Sam Gupta 31:08

You can help people with the material problem that you identify. Do you have any other stories that you might be able to share that were not related to material, anything else that you highlighted that could be exciting for our customers that they can learn from there was another product?

Matt Guse 31:21

This was actually a kind of an automotive aftermarket part where they were welding in their precedent together, and we’re all in it. And they were breaking in the field. And so I kind of looked at it. And I actually reached out to them and said, hey, I think I can make your product a little better, not offending anybody and or you mean so that I took part I said. Can I design something and give it to you? So I took that part and actually made it a solid billet. And they’re like. There’s no way the cost savings can be the same.

So I designed it, we made it, and actually, I was saving them 10% making out of the style of the prusa weldment. Plus, I put in some key factors in there because when they’re out, this product is actually for emergency use kind of away. And in the middle of the night, you can’t take a part that’s painted, it was slipping out of your hand, and it was getting lost in the mud.

So I actually put a neural on it. And now the grip factor was much better, and the paint was chipping off so that I actually chrome got him zinc plated, so though they weren’t rusting and I saved him 10% and all the parts and butter part and now their sales won’t triple just because the part looks better is safer, and they’re happy and all that opened doors for more parts to look at so it was a win-win for everybody.

Sam Gupta 32:28

Okay, I think do you have any other stories that you would like to share? Your stories are definitely very interesting, and I’m really enjoying them.

Matt Guse 32:35

Yeah, I do a lot of fishing, a ton of sports, and I always think they run hand in hand, and I have several quotes that I just came up with that I could share if it helps or not I can probably maybe put some of them on your on a link to the page in my story that helped me along there’s some of them are kind of long, but you know when someone comes to you and gives you feedback, don’t pick as an insult, but take it as a gift.

One of the things I tried to do here is someone makes a mistake. Some guys are going out there and just start yelling, um, you know, what are you doing? Like your dogs at home are being yelled at and he kind of goes leaping to the corner. But that’s not how you treat people here. I always the first thing in my words is what have you learned by how can we improve it? How can we make it better? So don’t ever put fear into somebody; I always use three Fs fail fast, fix fast, and forget fast.

We all fail. It’s a given. It’s how you how you’re going to fix that and then figure it out, fix it and then forget, you’re gonna sit there and dwell on the mistake you made it just kind of put your head down. That’s just cancer, and you got to get over it and just move on.

Because that’s what happens when you appreciate I made a bad call. I fix it. I clean it up. I go tell the coach. I clean it up, and then I forget about it. Otherwise, it’ll affect your whole day or your week.

Sam Gupta 33:42

On that note, I wanted to thank you for your time, Matt. And my personal takeaway from this conversation is going to fail fast, fix fast and forget fast. That’s very insightful and very deep. Again, I want to thank you for your time. I appreciate your insight. This has been a fun conversation.

I cannot thank our guests enough for coming to the show and 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 Matt, head over to mrsmachining.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 Randy Johnson, who discusses how the metal fabrication industries manufacturing processes differ from generalized manufacturing. Also, the interview with Max Krug who discusses what actions businesses need to take if they don’t have product quality or business performance issues.

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 35:00

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 SMB using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.