ENSC300 - The Money Machine (Operations)

Business
Basics
forEngineers
by
Mike Volker

The Money Machine

Contact: Mike Volker, Tel:(604)644-1926

"Always invest in a company that any fool can run because someday one will!", Warren Buffet.

The "Machine"

It's productive to talk about products, markets, and finance. However, this assumes that we can actually make or deliver the product or service of our dreams. Let's now draw our attention to the "Operations" side of our business. Look at it another way - this is our "Machine", i.e. the machinery which produces the deliverables of our company. It defines what needs to be done and how it gets done.

I like to think of a business or company as a machine or system in the sense that there are various inputs, control loops, and outputs. In any profit-oriented enterprise, there are behind-the-scenes activities that the business work. There are many activities that all need to be planned, managed and coordinated. Products need to be designed, produced, shipped, invoiced, paid for, and then serviced and supported. Someone has to make sure that the customers, employees, suppliers and shareholders are all looked after. Companies that look surprisingly simple may only look like that because of the "systems and procedures" which are in place - and which are working - but which may not be readily apparent.

As a student, I recall working at Bell Canada where I was both impressed and intimidated by the "Bell System Practices" - detailed operations manuals on how to actually do various tasks within the company - be it a credit check or splicing a cable. These are often referred to as "Standard Operating Procedures". These documented guidelines are an attempt to ensure consistency in how things are done within an organization.

Companies need (even though it does sound a bit bureaucratic) documented procedures to ensure that jobs get done consistently regardless of who performs the work. How is a returned product handled? How are sales inquiries handled? Who makes sure that the garbage is taken out?

The Macdonalds Example

Is Macdonalds really a restaurant? I like to think of Macdonalds as a money machine. In one end go the raw ingredients, people, facilities, etc and out the other end comes a steady flow of cash. This is a well designed transfer function. Why? Because it works! Right down to the innovative french fry scoop and the timers and controls on the cooking processes to the uniforms and mannerisms of the staff, this machine was not designed without significant thought. Yet, at the same time Macdonalds has been very innovative - in its products and in the way it delivers them.

I like the way that Michael Gerber, author of the E-Myth talks about the operations of a company. He identifies three important activities: innovation, quantification orchestration. Innovation is pervasive and applies to all aspects of a company. It is what keeps companies competitive, fresh and vital. Innovation in customer service, accounting, and production is as important as product or service innovation. Quantification is essential in measuring performance. Six Sigma companies like General Electric base their success on improving quality to a level of perfection made possible only by quantification of many aspects of its operations. Measuring and adjusting to achieve desired results is key to meeting business goals. Orchestration entails execution and management, i.e. making sure that the tasks get done according to the company's standards.

This is the challenge that faces you in your business - making sure that the company "works". The ultimate test of this is: will it work without you? Are the people and the systems in place that you can disappear - for days or months - and the company will still be there (and be in good shape) when you return?

The Soul of the Machine

You may be thinking that the machine analogy sounds a bit impersonal. Are we reducing our workers to being just like robots without feelings? How much autonomy are we giving our people? How do we encourage teamwork, innovation, and creativity? Some people excel by writing rules and policies. Others excel by breaking rules and policies. Tom Peters, a silicon valley management guru in his acclaimed book, "In Search of Excellence", talks about loose-tight relationships. By this he means that companies need to have both controls in place while at the same time offering considerable freedoms to encourage productivity. One job of management is to cultivate an appropriate culture for the organization and to strike a balance between too much and not enough freedom. One way of fostering such an environment is to give employees a relatively free reign while at the same time holding them accountable for their actions. For example, instead of having to get several approvals in order to buy a new test instrument, let an employee make the decision on her own knowing that she has to justify such a purchase.

The Operation as a Cost Centre

Yes, it is here where you spend your money. The challenge is to spend it wisely and efficiently to produce a product which meets your prescribed specifications and quality standards. Every dollar you save here falls directly to the bottom line. Should you make or buy? Should you contract work out? These are the sorts of questions you have to deal with.

Do you invest in overhead, e.g. equipment and facilities, or should you operate as a "virtual company" and subcontract much of the work. Not only can production be farmed out, but design work, bookkeeping, and so forth can also be done by others.

Where to Begin?

How are your competitors doing it? How can you do it better? Or, let's start with a clean slate and be innovative. In some businesses, especially those which are cost-driven, the real competitive strength or advantage lies within the operating details of the organization. Perhaps the best place to begin is with people - having experienced, qualified people - not just to get the job done, but to figure out the best way of getting the job done. This part of the business should not be underestimated (it often is!).

In reality, many companies evolve. It may not be practical to define every operational detail at the outset. There may not be sufficient funding to set up the company in the ideal way.

A good way to approach this is to have experienced functional managers. For example, a VP Finance will look after financial procedures - billing, credit, etc. A production manager will fuss with inventory, production scheduling and so forth.

Planning

It is a good idea to start with a plan as early as possible. Think of it as though you are designing the money machine. The financial aspects of this have to be an integral part of your financial plan and all costs of the operations - original setup and on-going - have to be rolled into the financial spreadsheets. Start the planning by giving some thought to the "who" part. That is, who will do what?

The Operations Manual

Ultimately, like Macdonalds, your business will need an operations manual(s). I recall from my student co-op days at Bell Canada, the numerous volumes titled, "Bell System Practices", which basically spelled out how to do certain things. It is important for companies to have standardized procedures for performing certain functions, e.g. how to process a sales order, how to handle a warranty return, what quality standard is acceptable, how is payroll to be handled, etc, etc. Even the smallest of companies will have a certain element of bureacracy. Of course, if well designed, you will have a marvellously well-functioning bureaucracy and not a "buroid" which so many inefficient bureaucracies really become! But more important that putting down all these details at early stages of development, it is more important to define the corporate structure and accountabilities and then allow the management team to implement the details.

Corporate Structure

This is the organization chart. Who reports to whom? This starts with understanding the key functions which need to be performed. Early on, one person may wear two or three hats, being both CEO and CFO, for example. With each position a job description is necessary. Titles are fine, but what do they mean? The really tough part in business is finding the right people.

Corporate Governance

"Corporate governance" is becoming more and more important. We often think of this in the context of public companies but it is also very important for private companies. it all begins with having a responsible board of directors. The Board will then appoint the officers and management fo the company. Remember that, regardless of ownership, the buck really does stop with the Board of Directors!

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