Business | Setpoint Systems Blog

Error

JUser::_load: Unable to load user with id: 76

Posts Tagged ‘business’

Value Curves

Thursday, February 11th, 2010 by Brad

As a pretty consistent reader of Harvard Business Review magazine, I find that there are many articles that are good and occasionally there articles that are very stimulating and worth remembering. Those articles make me think and give me new ideas to consider as we steer our business to be more successful. One of those articles that I read many years ago was, “Value Innovation – The Strategic Logic of High Growth”. It comes from the July/August 2004 issue. It is authored by W.Chan Kim and Renee Mauborgne. I pulled it up again and read it as we are trying to chart some new courses in our business. In addition to that article, they also have written a best selling book named Blue Ocean Strategy, you may have heard of it, it is also worth the read.

In the article they point out that most industries compete around the same points of competition and it becomes a race where everyone makes incremental changes in how they compete, but not very often does anyone truly have a breakthrough in how they approach the marketplace. The basis of the article is that incremental points of competition pushes the products or services towards commodity pricing and fights over small changes in market share, no big gains are possible with this strategy.

If you want to make major changes in your industry you have to think differently. Below is an example of their value curve research.

Value Curve

Every industry completes on certain factors. I’ve labeled this example with 6 factors that are along the X axis., there may be more or less in your industry. If there are too many, I’d suggest you boil them down to the few that really matter. It will be hard to figure out what to do if you have too many. Factors vary by industry, some may be the same and some will be unique to your industry. Examples of factors may be cost, features, size, quality, etc. Spend enough time to make sure you really have what the points of competition are, not what you wish they were.

Along the Y Axis we have a relative scale – from high to low, expensive to cheap, many features to few features, etc. depending on what the factor is, you get the idea.

In this example the existing competition is the blue solid line. Based on the factors you can see that the factors fall in different places to the relative scale. In a typical industry the competition will nudge these factors incrementally up and down the relative scale trying to gain market share, but not changing the Value Curve in any significant way.

In this example, a newcomer arrives with a completely new strategy. This is represented with the pink dashed line. You can see that this strategy completely redefines the blue value curve in which the current players compete. Pink is significantly changing how they are going to compete by significantly changing the relative value of factors 1, 5, and 6. If they are successful they should enjoy success and their research says they will enjoy many years of uncontested competition.

Tags: business, business success, Creative Thinking, Innovations
Posted in Creative Thinking | No Comments »

Why does the huddle work at Setpoint Systems?

Thursday, January 14th, 2010 by JoeK

Setpoint Systems is an open book company. This means that our books are open to our employees. Even though we are a privately held company we choose to share our financial information.

When the company started in 1992, the engineer founders Joe Cornwell and Joe VanDenBerghe (aka the Joe’s) decided they wanted to share financials with their employees. As a project based company they found that the way their part-time CPA did the books with them did not give them a good measure of how the projects were performing financially on a week-to-week basis.

So the two Joes with the help of others developed a way of tracking their projects on a weekly basis that included hour tracking by labor section, material costs tracking, and earned value project management concepts. This allowed a fairly accurate measure of the financial performance for projects on a weekly basis. This type of the project financial analysis did not comply with GAAP (The Generally Accepted Accounting Principles). Their CPA did not like it but it made sense to them and their employees.

The weekly tracking process happens on a big white board where projects are measured for material costs and percentage progress every week. The key project number, that every employee follows, is GP or gross profit by project (at Setpoint GP is simply earned revenue by percent complete less actual material costs). After the gross profit by project is measured then we compare that to our week OE or operating expenses. You take GP – OE to measure our profit for the week.

We track closely three measures on our huddle board. First, is GP/OE. For us, 1.2 is good and anything less is not good enough to sustain the business. Second, we track what percentage of our labor is direct to our automation projects. Third, is GP per direct hour charged to projects. Everyone knows that if our GP per hour is over a key threshold and our percent direct is over a key threshold Setpoint will make a nice profit and GP/OE will be well over 1.2.

It’s actually a really simple system. We have a monthly and annual bonus that pays out based on beating minimum GP-OE targets for the month and year. We also train all of our employees on how the huddle board works and what the key metrics mean.

So why does our huddle work? Well I think that there are few things that have made this simple 15-minute weekly meeting work for Setpoint. First, it’s a simple way to track projects and everyone understands it. Second, we tie objective financial rewards to how the board looks. Third, we involve every employee in the process. In the weekly huddle every employee has a seat at the table.

The power of Setpoint’s weekly huddle is evident in the survival and success of this business. When a project is bad on the board, the assembly people blame the design and engineering people, the design and engineering people say the project was under funded when it was sold and blame sales. We are all together in the meeting and it needs to be worked out between these groups or we do not have a business. The huddle creates at Setpoint what I like to call ‘psychic ownership’. Ever though all the employs do not own stock in Setpoint they act like owners because they see the performance on a weekly basis and want the company to perform well.

We have seen this ‘psychic ownership’ express itself in many ways over the years. Recently, when a project was nearing completion some shop people approached our CEO and challenged the percent complete shown on a specific project. They were in final assembly and thought the machine was well beyond 90% complete but our project engineer had the number much lower on the huddle board thus lowering our GP-OE and bonus for the month. In short, our assembly people accused the project engineer of sandbagging on the project. After a brief review an adjustment was made. We’ve also had situations where percent complete has been challenged as being farther along than we really are.

With everyone involved the huddle really keeps us safe and accurate on our business. We believe the huddle process and the systems behind it is the single greatest asset that Setpoint Systems has.

Tags: business, business success, joe knight, open book finances, open book management, Project Management
Posted in Finances, open book finances, open book management | No Comments »

Project Cash Flow Forecasting

Wednesday, December 16th, 2009 by Machel

Bidding on large projects is bittersweet. If you have an opportunity to bid on a project that could be either a blessing or a burden, it is important to manage the cash flow. Because cash is King, it has the ability to put you in a castle or a shack. What kind of living quarters you live in can be decided by cash flow. A significant number of companies go out of business because of lack of cash, not a lack of great ideas.

When bidding on large projects there are a few questions that need to be addressed. First, when are the costs of the project due? Second, when will the majority of the labor be needed? Third, what size of a down payment do I need? When do I need progress payments? Most companies think the down payment question should be answered first, but that is not always the case. It is necessary to know when your costs are going out so you know what size your down payment needs to be and when your progress payments need to come in.

Let’s assume some facts for our example:

Revenue on the project is $3,000,000
Cost of Goods Sold (COGS) are $1,500,000
Operating Expenses are $10,000 for the first 4 months, then gradually less as the project closes

Project Cash Flow at a 30% Down Payment
	Jan-10	Feb-10	Mar-10	Apr-10	May-10	Jun-10	Jul-10
Income
Invoiced	900,000			1,500,000		600,000
$ Rcvd		900,000	-	-	1,500,000	-	600,000
COGS
Estimated COG		450,000	450,000	450,000	150,000
Total COGS	-	450,000	450,000	450,000	150,000	-	-
Est OE		10,000	10,000	10,000	10,000	5,000	3,000
Total Cost	-	460,000	460,000	460,000	160,000	5,000	3,000
Net Effect	-	440,000	(460,000)	(460,000)	1,340,000	(5,000)	597,000
Cum Effect	-	440,000	(20,000)	(480,000)	860,000	855,000	1,452,000

Project Cash Flow at a 50% Down Payment
	40,179	40,210	40,238	40,269	40,299	40,330	40,360
Income
Invoiced	1,500,000			900,000		600,000
$ Rcvd		1,500,000	-	-	900,000	-	600,000
COGS
Estimated COG		450,000	450,000	450,000	150,000
Total COGS	-	450,000	450,000	450,000	150,000	-	-
Est OE		10,000	10,000	10,000	10,000	5,000	3,000
Total Cost	-	460,000	460,000	460,000	160,000	5,000	3,000
Net Effect	-	1,040,000	(460,000)	(460,000)	740,000	(5,000)	597,000
Cum Effect	-	1,040,000	580,000	120,000	860,000	855,000	1,452,000

Following the tables listed above, if you change the down payment from a 30% down payment to a 50% down payment, you go from needing $480,000 to not needing any additional cash at all during the entire project. This is assuming a progress payment is scheduled four months into the project.

A spreadsheet like this does not take very much time to set up. By putting in that extra time your company can go from living high on the hog to searching the couch cushions for change.

Tags: business, business success, financial intelligence
Posted in Finances, Project Management | No Comments »

Whose Decision is it Anyway?

Wednesday, November 18th, 2009 by Brad

It is way too easy to say that because I’m the boss, I decide. That is a very autocratic approach, and your company will only be as good as the dictator at the top making those decisions, and there has never been a dictator that gets it right all the time.

The opposite view might be that you require consensus with all those involved before a decision can be made. In my experience, very rarely will everyone agree unless the decision has no consequences or you have a team of suck-ups. Have you ever heard the saying, “if two people in a company always come to the same conclusion, one of them is not necessary”. Not making a decision because everyone is not at consensus can be paralyzing to a company. Being unable to decide is a decision also, which can have disastrous consequences

Setpoint is unique in that our culture promotes ideas and debate regardless of who is on the other side of that debate. Pretty much everyone at Setpoint feels comfortable enough to tell me when they think I’m up in the night, and that happens all the way up and down the organization.

I have worked in other places where there were taboo subjects that you could not talk about in front of certain executives or owners. That has an unbelievable stifling effect on ideas and choices that come forward and can be considered. The worst part is that those executives never engage their organizations brains and get the benefit from those that are working closest to the challenges.

Creating the right environment for deciding:

You must create an environment where ideas can flow freely, with no repercussions
Make sure it fits into the strategic direction of the company
If you are surrounded by smart people and they are telling you not to go the direction you are thinking, maybe you should stop and listen to them because you might not have the best idea
At the end of the day what you and everyone in your organization should want is the decision that best fits for the direction you are heading
Very rarely will you have perfect information and data to make your decision, nor will the same checklist work for all circumstances
In my career it has been more important to recognize when you are off-course rather than holding off deciding until you have all the data you need to make a decision
If you do not give credit to those contributing the idea, it’s not hard to know who will decide in the future, it will be you because no one else will put their ideas forward
Have milestones where you check the validity of the decision to see if it is on- track or if modifications need to be made

Good luck in creating an environment where good decisions can be made.

Tags: business, business success, Creative Thinking, Lean, Lean Systems, Project Management
Posted in Project Management | No Comments »

The Discipline of Market Leaders Updated with Some Caveats

Thursday, September 10th, 2009 by Brad

In the mid 1990’s I read a book that connected with me. It was The Discipline of Market Leaders authored by Michael Treacy and Fred Wiersema. In a nutshell it said that companies need to pick their marketing strategy from one of three choices, those choices are Operational Efficiency, Product Leadership, or Customer Intimacy. A company that believes they should do all three will fail.

It goes like this:

Companies are most successful when they focus on only one marketing discipline
Companies are mediocre when they focus on two marketing disciplines
Companies will be run over when they think they can do all three

The table below summarizes the concepts of the book:

	OPERATIONAL EFFICIENCY	PRODUCT LEADERSHIP	CUSTOMER INTIMACY
Core Business Process	Sharpen distribution systems and provide no-hassle service	Nurture ideas, translate them into products and market them skillfully	Provide solutions and help customers run their business
Structure	Strong central authority and a finite level of empowerment	Acts in an ad hoc. Organic loosely knit, and ever changing way	Pushes empowerment close to customer contact
Management Systems	Maintain standard operating procedures	Reward individuals’ innovative capacity and new product success	Measure the cost of providing service and of maintaining customer loyalty
Culture	Acts predictably and believes that “one size fits all”	Experiments and thinks “out of the box”	Flexible and thinks ” have it your way”
Company Examples	Wal-Mart - McDonalds	Intel - Nike - 3M	Nordstrom

Over the last few years I have heard nothing from these authors. I wondered are the concepts no longer valid, what has changed?

My feelings are they are as relevant today as they were 10 years ago, with two caveats.

First: it doesn’t matter what strategy you are pursuing, you need to continually look at ways to lower your costs and add more value (from the customers view not the companies) for lower costs. This is a fact in the world we live in today with no exceptions that I am aware of.

Second: adding more features and functions after a certain point where the customers aren’t demanding them will open up the possibilities of a disruptive product coming in and interrupting your strategy. This disruptive concept was originated in the book The Innovators Dilemma by Clayton M. Christensen, it is worth reading.

The Discipline of Market Leaders is still a relevant book today to help companies chart their path, but remember the two caveats.

Tags: business, business success, company culture, management system, operational efficiency, problem solving, Process Improvement
Posted in Marketing | 1 Comment »

Health Savings Accounts

Thursday, August 13th, 2009 by JoeK

Setpoint Systems, like most small companies, has experienced huge increases in health care insurance. We have had our share of health challenges in our small group. As Setpoint System’s CFO, I have been in the middle of this. Several years ago we went to a new Health Savings Account (HSA) type plan that really solved a lot of our problems.

I testified before the senate finance committee on the value of HSA’s to the health care consumer and the systems as a whole. Believe me there are many opinions on these types of plans both for and against. I am for the plans.

A HSA is a tax protected savings account connected with a high deductable low premium plan. Most HSA’s provide for a fully covered annual physical and then a high deductable for any other medical needs. The HSA account carries over year to year and can be used tax free to pay for any medical, dental and most alternative medicine treatments. Upon retirement HSA funds can be withdrawn without penalty for retirement (however funds used for expenses other than medical are taxed as income).

At Setpoint we adopted HSA’s in 2004 and have had them ever since. While this type of insurance takes some getting used to, it has been a real benefit to Setpoint. We have had two very serious medical issues with employees and/or spouses that were dramatically driving up our medical costs. When we went to the HSA I was worried about how this plan would affect the two employees with challenges. (One of the arguments against the HSA is that it costs less for the healthy but more for those with serious illnesses). In our case both of our employees with serious cases found that they saved thousands of dollars when we went to the HSA. This is the reason why. First, Setpoint was able to save on premiums and was able to contribute those savings to the employees’ individual HSA accounts. Second, the employee no longer had to contribute as much to insurance since the premium was down. Third, (and this is the one that is not often mentioned but has a huge impact) in our plan once the deductable is met then you have 100% coverage – that means no co-pays on meds or visits. When you take these three issues together the HSA saved those with health challenges thousands on an annual basis.

So with a better deal for our employees with challenges and lower costs to those that are healthy, the HSA seemed like the right thing to do. Since we have been on the HSA plan our premium increases have stabilized and meanwhile our healthy employees are building up saving for the future. It’s been a win-win for us. Now every plan is different and obviously our sample is small.

This type of plan helped solve our health care problems. Let me illustrate with a personal experience with the HSA’s. I have a large family and use the system quite a bit. When we need some medical care, we let our providers know that we have a HSA plan and pay cash. This usually leads to discounts in coverage. Also, we always ask for and understand costs to procedures. One of the big issues with economics of health care is transparency of costs. Since we have relied on insurance for so long and only had to pay fixed co-pays, consumers of health care have no idea how much their care really costs. In many cases neither do providers. How do we control costs without anyone on the front line really knowing what they are?

In my first year with the HSA my son needed a simple surgery. When I explained to the hospital that I had a HSA plan and asked for a cost estimate the administrator said why it matters if you have insurance. After explaining the new HSA plan the administrator could not come up with a price and it took several calls to get the right number from the hospital. Then I had to get costs from the doctors to put together a total costs. It was a challenge but we were able to get to the bottom line and even got a discount when we paid cash for the procedure.

That was in 2004. Today costs are easier to get on many procedures. There are still issues with transparency but things appear to be getting better. As transparency improves, costs will come down as providers innovate and find ways to deliver services at lower costs. Some argue that the mini-clinics where a physician’s assistant can do a strep test and other simple procedures at low cost of $30-$50 that are near pharmacies are a direct connection to more users on HSA’s.

We believe that more free market based plans like the HSA’s are our best chance to control medical costs. These types of plans do not solve the problem for the nation’s uninsured. I believe that an expansion of the HSA plans for those who have employer provided insurance and can afford it is only part of the solution. Providing for the uninsured should be a second part of a health care solution. What I hope is that any plan we pursue as a nation uses market principles to control costs. We believe that the HSA approach is a step in the right direction.

Download Joe’s testimony for the Senate Finance Committee

Tags: business, business success, health care, health savings account, hsa, insurance
Posted in Human Resources | 1 Comment »

Deciding on the Direction for your Company

Thursday, August 6th, 2009 by Brad

Companies that remain static and don’t evolve will eventually lose their profit margins and sink into oblivion. At Setpoint, as we try and adapt to the changing landscape I have noticed several things in dealing with deciding our company’s direction.

First, change is hard. It is much easier to continue doing what has been done in the past, even if it is not getting the results it used to, and rarely have I seen an idea that just works right out of the gate.

You can’t do everything, and if you try to, it will result in spreading your resources (money, time, people) so thin that you cannot be successful at anything. One of the hardest things is, deciding what not to do. It is difficult because you tend think that you are potentially leaving money on the table, and you may be – but you are doing it to pursue a better idea with more potential.

We have found that some feel more passionately about an idea than others, so we have developed a rule that is simply “whoever has passion about an idea gets less than 50% of the vote”. This helps us make more objective decisions. Key message is, don’t be so in love with a strategy or idea that you can’t dispose of it when all the facts point that way.

You never have perfect information before a decision needs to be made. As a result, assumptions are made in order to make progress. The problem is, unless those assumptions are tracked and noted they tend to become facts over time, and often those assumptions are wrong. You have to revisit assumptions to validate, modify, or eliminate them to reflect new information you now have. Not doing so can lead to less than desirable outcomes.

At Setpoint we try and follow the philosophy of “fail faster”. In other words, if something is not going to work the sooner you identify it the cheaper it is for the company in terms of money, time, and people. Most ideas can be validated or eliminated without much cost or time if the key issues have been correctly identified. The few key remaining ideas can then claim your valuable resources.

The shorter iteration cycles the better; the clearer the objectives, the easier it will be to identify the key issues that need to be proved out in order to validate the direction.

These are some of the techniques we are using at Setpoint to decide our companies direction.

This process is an ongoing part of a healthy company’s life. So get on with it.

Tags: business, business success, Creative Thinking, Creativity, Efficiency, financial intelligence, Lean Thinking, problem solving, Process Improvement
Posted in Creative Thinking, Process Improvement | No Comments »

Cash Flow Traps

Thursday, July 2nd, 2009 by Machel

Sweet!! Your company just received a 50% down payment on a project, let’s take everyone to dinner and buy that equipment we’ve been looking at. Whoa there big fella, let’s think about this first. Yes, you have cash, but the million dollar question is: Can you spend it? Just like a lawyer the accountants answer is “not yet”, let’s look toward the future. Just because you have a positive balance in your checking account, does not mean you have money to spend. As opposed to the Government, they don’t think about this at all.

The next question is: How long will this project last and what costs do I have before the next payment is received from your customer? Assume the project lasts 4 months, the down payment you received up front needs to be used to pay the salaries of the people working on that project, as well as any and all expenses associated with that project. Your company can get upside down in cash before you know it. If you don’t receive any more money until the end of the project, you will have to borrow money from the bank or find some other financing just to finish the project.

Let’s assume some facts: 1st the total revenue on the project is $150,000 and you receive a 50% down upon receipt of order and the final payment is due when the project is delivered. 2nd costs for parts is 60% of the total project and you pay your vendors 30 days after receipt of PO from customer, and 3rd your operating expenses are $10,000 per month.

	Month 1	Month 2	Month 3	Month 4
Beginning Cash	0	$65,000	($35,000)	($45,000)
Received Cash	$75,000	0	0	$75,000
Cash Spent on Parts	0	$90,000	0	0
Operating Expenses	$10,000	$10,000	$10,000	$10,000
Ending Cash	$65,000	($35,000)	($45,000)	$20,000

As you can see, just because you have cash up front does not mean you have cash to use. As a responsible company you want to make sure you have money in the bank to pay the salaries of your employees and pay your vendors. You don’t want to be like California and issue IOU’s. I’m not sure, but I don’t think that would go over well with your employees or your vendors. If your employees don’t mind, please let me know they would be a great cash flow asset here at Setpoint.

Tags: accounting, business, cash flow, financial intelligence, open book finances, open book management
Posted in Finances, open book finances, open book management | 1 Comment »

Importance of Cross-Training Employees

Thursday, November 6th, 2008 by Machel

It’s Tuesday and your payroll clerk needs to enter payroll to make sure all employees are paid by Friday. The dreaded phone call comes. Your payroll clerk can’t come in because her father has had a heart attack and is in ICU. It will be several days before she can come in because it is pretty serious and she needs to help her mother. Do you have someone to pick up where she left off?

Although the chances are pretty slim that something like that can happen, happen it does. My former employer called me because the lady that does all the month-end paperwork and tax quarterlies couldn’t come in for the next month because of an illness. There are two other people in the office, but they were never trained on how to do her job. The policies handbook is 10 years out of date and did not explain the process. Fortunately I was able to help out and they got their taxes filed on time.

This is a great example on how important it is to cross-train important areas of the office. Not all areas of a business need cross-training, because there are some things you can put off. Ask yourself this question, what functions of the business will come to a halt if the person doing it can no longer do it? Identify the most important aspects of your business and start training from there.

Tags: business, cross-training, HR, Human Resources, key tasks, payroll
Posted in Finances, Human Resources | 1 Comment »

Setpoint Systems Blog is proudly powered by WordPress
Joomla! Component integrated by 'corePHP'
Entries (RSS) and Comments (RSS).

LEAN AUTOMATION SOLUTIONS