The Problem with efficiency is to figure out as to what it is that we need to make efficient.
What is it that we are trying to make efficient? In an ongoing concern there are multiple interconnections and interdependent processes that lead to the final result. It may not be wrong to comment that if all segments of the company try to achieve "its own", "maximum" efficiency the final result may not be efficiency to the final consumer, and then, therefore, to the shareholder. I would be wary of those who shed copious tears in the cause of "consumer centricity" and equate all round efficiency to be the deliverer of happiness.
I quote from one of the most important books ever written for running companies. Re-engineering The Corporation by Michael Hammer and James Champy. I bought this in 1998, a few months after I had joined Food World Supermarkets, in Chennai, and didn’t realise that this book would greatly impact what I would think and do there after. I would still recommend it to any one even for a reading again.
In the first chapter the second point is worth quoting in this context
"Often the efficiency of a company's parts comes at the expense of the efficient whole".
Whilst there are other gems in the book in terms of ideas, this for me changed for ever the way I looked at the problem.
Let me quote an example from my retail life. Being in-charge of supply chain as well, I was visiting Indore, and reviewing the performance of each store. One store 3000sft at the bottom of the performance rank was a store, standing alone in a town 80 km away. The sale of Fruits and Vegetables was the lowest. I knew this might be the reason for its under-performance. Why? The head office managers had many theories, to offer. So after hearing it all I called the Store manager on the speaker phone. I asked him, "young man why is your store doing so badly". He said without a seconds delay, "Sir I am low on F&V", Why I asked. He said the load arrives every day at 3pm! How can the produce be fresh then? I looked at the transport manager who was shifting in his chair, as he told me that he was delaying the dispatch so that he can club some other loads as well to lower the transportation cost. It was clear. I mandated a trial. Send at any cost of transportation, produce to the store, to reach at 7am.
This trial at the end of 3 months saw that the bills at store increased 4 times, sales had jumped and losses we hugely reduced. The store was removed from the list of stores to shut down. But what happened to the transportation cost? Well 2 things - the quantity increased and so cost lowered, and two-the rupee gains in stores was more than the increase in transportation cost.
To create a virtuous cycle of retail one must invest in the sales at the front end, albeit sensibly, at higher back-end costs. This is not a rule but directional. The Sum is greater than the sum of its parts. Any takers?
What is it that we are trying to make efficient? In an ongoing concern there are multiple interconnections and interdependent processes that lead to the final result. It may not be wrong to comment that if all segments of the company try to achieve "its own", "maximum" efficiency the final result may not be efficiency to the final consumer, and then, therefore, to the shareholder. I would be wary of those who shed copious tears in the cause of "consumer centricity" and equate all round efficiency to be the deliverer of happiness.
I quote from one of the most important books ever written for running companies. Re-engineering The Corporation by Michael Hammer and James Champy. I bought this in 1998, a few months after I had joined Food World Supermarkets, in Chennai, and didn’t realise that this book would greatly impact what I would think and do there after. I would still recommend it to any one even for a reading again.
In the first chapter the second point is worth quoting in this context
"Often the efficiency of a company's parts comes at the expense of the efficient whole".
Whilst there are other gems in the book in terms of ideas, this for me changed for ever the way I looked at the problem.
Let me quote an example from my retail life. Being in-charge of supply chain as well, I was visiting Indore, and reviewing the performance of each store. One store 3000sft at the bottom of the performance rank was a store, standing alone in a town 80 km away. The sale of Fruits and Vegetables was the lowest. I knew this might be the reason for its under-performance. Why? The head office managers had many theories, to offer. So after hearing it all I called the Store manager on the speaker phone. I asked him, "young man why is your store doing so badly". He said without a seconds delay, "Sir I am low on F&V", Why I asked. He said the load arrives every day at 3pm! How can the produce be fresh then? I looked at the transport manager who was shifting in his chair, as he told me that he was delaying the dispatch so that he can club some other loads as well to lower the transportation cost. It was clear. I mandated a trial. Send at any cost of transportation, produce to the store, to reach at 7am.
This trial at the end of 3 months saw that the bills at store increased 4 times, sales had jumped and losses we hugely reduced. The store was removed from the list of stores to shut down. But what happened to the transportation cost? Well 2 things - the quantity increased and so cost lowered, and two-the rupee gains in stores was more than the increase in transportation cost.
To create a virtuous cycle of retail one must invest in the sales at the front end, albeit sensibly, at higher back-end costs. This is not a rule but directional. The Sum is greater than the sum of its parts. Any takers?
Never an easy answer to this. That store could have easily been shut down in a diff business context or by a different guy at your place. And I am sure they would come up with their wonderful justifications (profitability, shareholder value et al).
ReplyDeleteIrrespective of the eventual decisions, at the very least, the business proposition needs to be properly presented to the market before making a judgemental call on its success or viability.
Rightly said sir...what better example of a part efficiency at the expense of the overall company...in the context of Reliance hypermarts---CDIT team struggled to get trained manpower to achieve a higher sell through for an assisted category like CDIT ,the same kept on being sacrificed to achieve the overall cost rationalisation objective at the CSA level at the store level.
ReplyDeleteYep. Few progressive cos use optimization tools to arrive at the most efficient model considering a set of constraints. The problem here lies in compartmentalizing functions to achieve different goals which can be resolved using such tools. Several cos have used it their advantage and a few of them failed in utilizing it too
ReplyDeletedear friends. All useful observations. I can tell you , every company has such problems, which if refocussed, can lead to immediate gains all round.
ReplyDeleteThis observation seems so obvious once I read the article- Not sure how many "strategy professionals" work keeping this in mind though.
ReplyDeleteMona. You are right, sometimes in the myriads of things that companies have to do, these small but very strategic issues get less priority. The only way to keep sight of these is to always ask, "is this good for the customer"- importantly to focus on the internal customer as on the external.
ReplyDeleteAppreciate the manager who knew his store well.
ReplyDeleteMost of the times if we listen to the store we are exposed to many problems areas(stuff that dont show up on DSS)that when attended can have immediate impact on the bottom line or improve customer experience at no or negligible costs.
Store managers when empowered to raise hell about matters that impact his business can help retailers address many such invisible issues.
The right question makes all the difference.
ReplyDelete"is it good for the customer" vs "is it good for the shareholder". Sadly, many Indian retailers are still to figure it out.