The Importance of Situational Context

February 19th, 2018

Our son is in sixth grade and is just starting to enter the stage in life in which he knows everything.  He is blessed (or cursed) with the gift of gab, so sometimes his circular logic actually sounds quite convincing.  (In all seriousness, we are blessed to have a great young man.)

Last week, he had an opportunity to do an extra credit paper for his English class.  Demonstrating his grasp of everything, his essay was titled, “Our School System Needs to be Changed.”  He cited facts that our approach to school evolved in the late 1800s and early 1900s when society moved from agrarian to industrial.  Methods of teaching were designed with a “one size fits all” approach.  He asked me to proofread it.  We went back and forth.  A missed period here; add a comma there.  I told him I wanted to take one more look at it.  He proudly handed it to me.  I tore it up.  The look on his face was priceless.  I calmly explained, “While I appreciate your efforts and think you have some valid points, do you think your teacher will appreciate your essay?”  After a few minutes of hemming and hawing, he got the point.  Instead, he wrote a great essay about how our dog wakes him up in the morning.

I explained to him that there’s a time and place to express your views.  Even if you are “right,” your message will be lost if it is not delivered in the right situation.  I asked, “Would your teacher appreciate your efforts and give you extra credit based on this essay?”  I challenged him to talk to his teachers about how he thinks he could learn better.  (To my knowledge, he has not done that, back to the all-knowing kid!)

The saying “It’s not what you say; it’s how you say it” needs an addendum: “and when you say it.”  Whether it’s a difficult situation with a customer, a negotiation with a supplier, or any other situation, understand the setting, timing, and personalities of who you are communicating with.  You’ll be much more successful in getting your thoughts across.

Debt is Your Friend…Until It Isn’t

February 13th, 2018

It looks like Congress settled on a budget by agreeing to increase spending on virtually everything.  Republicans get defense spending increases.  Democrats get increases in non-defense discretionary spending.  Apparently who is going to pay for these increases is not important anymore.  It is also apparent that the Republicans that preached fiscal austerity and discipline during Obama’s presidency are no longer “the party of no.”  Fiscal conservatism is dead for now.  Cutting revenue (tax decrease) and raising spending is generally not a good long-term strategy.

Not to be outdone, consumer debt rose in 2017 for the fifth consecutive year (Federal Reserve Bank of New York).  As a percentage of GDP, household debt is still well below its 2009 levels (68% today vs 87% in 2009).  Economic bulls point to this ratio as a sign there is still room for consumers to borrow more.  Economic realists suggest the pain inflicted by the recession makes consumers more cautious about increasing their debt loads.  Consumers remember foreclosures and car repossessions.  Our government, on the other hand, just turns on those printing presses.

To the best of my knowledge, there are two ethical and legal ways to pay back debt: sell assets or generate income.  Taking on debt to purchase an asset that generates cash (equipment for example) is generally a good thing.  Taking on debt for a vacation is probably not a good idea.

As long as someone (the rest of the world) is willing to lend us money, the US will frolic along and our leaders will kick the proverbial can down the road.  It’s not a question of if, but when, our lenders decide we have a debt problem, the Great Recession will look like a party.  I don’t know when that day will come but with the lack of fiscal discipline from all forms of government (federal, state, and local), it is not an exaggeration to say it could be the end of the economic (and real) world as we know it.  It’s time to have an adult conversation about what our government is doing with our money and our future money and our children’s future money and our grandchildren’s future money…

Confirmation Bias is All Around Us

February 7th, 2018

Last week, President Trump delivered his State of the Union address. Below are excerpts from two leading journalistic outlets, The New York Times and The Wall Street Journal.  Both excerpts are admittedly taken from articles that appeared on the respective paper’s editorial pages.

The word that came to mind most often as I watched Donald Trump deliver his first State of the Union address was “pretend.”

He pretends to be a statesman, and we’re supposed to pretend that hundreds of vulgar and recklessly divisive moments before this — thousands, if we’re adding tweets — don’t negate that claim.

Taken as a whole, the speech may represent an attempt by the president to change the capital’s tone—though critics will note that steps in that direction often have been upended in short order by presidential tweets and off-the-cuff remarks. He steered clear of some of the enemies who have been the targets of recent attacks, including the press and the leaders of his own government’s top law-enforcement agency, the Federal Bureau of Investigation.

Of course, The New York Times tends to lean to the left side of the political spectrum and The Wall Street Journal tends to lean right.  Most readers of each paper also share that paper’s political views.  Therein lies the problem we face: confirmation bias.  Confirmation bias is a term psychologists and other social scientists use to describe the phenomenon that we look for evidence to support what we already believe.  If I think Trump is an idiot, I watch MSNBC and read The New York Times.  If I think Trump is great, I watch Fox News and read The WSJ.  I don’t look for evidence that is contrary to what I think and believe.  Clearly, confirmation bias contributes to the political rancor in the world today.

We don’t just have confirmation bias in politics.  We look for evidence to support our beliefs in every facet of our lives.  Think about work.  Do you engage with the same coworkers every day?  Do you avoid some colleagues because of a past experience without giving them a chance to show you what they can do?  Do you find yourself saying, “[Insert name here] always does that wrong?”  Think about what you believe to be true regarding your business.  Do you ever challenge those beliefs?  Examine the confirmation bias in your life.  You’ll be amazed at what you learn about yourself.

Fines, Fines, Everywhere There’s Fines

January 30th, 2018

Wal-Mart recently announced it is increasing its requirements for suppliers to meet delivery windows to avoid fines.  According to The Wall Street Journal:

At an annual conference for suppliers this week, Wal-Mart executives plan to announce that large suppliers need to deliver full orders within a specified one- or two-day window 85% of the time or face a fine of 3% of the cost of delayed goods, said Steve Bratspies chief merchandising officer for Wal-Mart U.S., in an interview Monday. Previously, suppliers had to hit a 75% threshold to avoid fines. For smaller suppliers the on-time threshold will move to 50%, up from 33%. The change will take effect in April. (WSJ 1/29/17 )

Wal-Mart needs to have products on its shelves to compete with online retailers.  Lost sales caused by stock-outs don’t come back.  Wal-Mart also wants its suppliers to hold inventory as long as possible to improve cash flow.  In the world of big data, Wal-Mart is going to manage its inventories as tightly as it can.

Given the freight challenges of today’s environment, this is a pretty big ask.  Wal-Mart’s suppliers are going to push down on their freight companies as well as their suppliers.  My guess is the costs associated with tighter delivery requirements will be absorbed for the first several months until companies figure out the true amounts.  Once they do, costs are going up.  Another arrow in the quiver supporting the “inflation is here” thesis.  Don’t ignore the signs.

If you’ve got time, check out the links for two versions of the song, “Signs,” from which I created my title.  I’m usually partial to original versions but Tesla’s live version is incredible. (It contains explicit lyrics).

The Greatest Business Lie Ever: We’ll Make It Up In Volume

January 23rd, 2018

As I’ve written about quite often over the last few months, we have entered an inflationary environment in labels, packaging, and freight.  It has been quite a while since prices have gone up.  I understand using pricing, especially in a time of price increases, as a competitive tool to gain market share.  I would be lying if I said my business has never done that.

I think it is time to revisit how pricing impacts profitability.  Below is an example that illustrates the impact of absorbing cost increases.  This is nothing fancy and has been done many times.  (I encourage everyone to read Confessions of a Pricing Man by Herman Simon.  It is the pricing book bible and certainly one of the top ten business books I’ve ever read.)

Today 5% COGS Increase, No Price Increase New Revenue Needed to Keep Pretax Income Constant
Revenue  $  100.00  $ 100.00  $     117.65
COGS  $    75.00  $       78.75  $    92.65
GP % 25% 21% 21%
Gross Profit  $    25.00  $       21.25  $   25.00
SG&A  $    15.00  $    15.00  $   15.00
Pretax Income  $    10.00  $     6.25  $    10.00
% Change in Pretax Income -38%
Revenue Growth Required to Keep Pretax Income Constant 17.7%


For simplicity, I assumed sales, general, and administrative costs (SG&A) remain constant.  Note the dramatic drop in pretax income.  If you absorb a 5% increase in your cost of goods sold (COGS), you need to grow revenue almost 18% to maintain the same net income!  Doing the math shows why “We’ll make it up in volume” is often met with snickers among business people.  Yet time and time again, companies convince themselves that volume will magically appear if they lower prices.  (Constantly absorbing increases is the equivalent of lowering prices.)

One of my favorite business quips is “I’d rather compete with a crook than an idiot because at least a crook wants to make money.”  Idiots lower profit pools for everyone.  As a customer, I want a good deal and like lower prices.  As a business person and member of society, I also understand profits are necessary for businesses to invest and to improve their products and services.

We live in a competitive world.  My business plays in competitive markets.  Competitive pricing is a given.  We also operate (for the most part) in a free market.  Buyers and sellers are free to transact or not transact with each other.  If a low price is the only value you add to your customer, be prepared for an idiot to come along and lower the price.  The race to the bottom is often lost by everyone.


Fun with Freight

January 16th, 2018

In case you missed it, freight rates are going up.  Below is a graph of indexed LTL rates (less than truckload shipments) over the last five years.

Here is an excerpt from a recent Wall Street Journal Article highlighting capacity issues in the truckload market.

From the WSJ 1/5/2018

By the end of last week, just one truck was available for every 12 loads needing to be shipped, according to online freight marketplace DAT Solutions LLC. That is the most unbalanced market since October 2005, after Hurricane Katrina, and compares with a roughly 1-to-4 ratio at the end of 2016.

Some companies are delaying nonessential shipments rather than scramble to find a truck. Others are paying a premium to ensure big rigs will be waiting at their warehouses when they need them. The cost to hire the most common type of big rig shot up to $2.11 per mile, including a fuel surcharge, in the week ended Dec. 30, a 3½-year high, DAT said.

Virtually every product we buy is on a truck at some point in its life.  Increased economic activity and changes in regulations are leading to capacity constraints in the freight industry.  Capacity constraints lead to price increases.  In addition to worrying about costs, it is time to start worrying about lead times and transit times for freight.  As I’ve written in the past, it does not matter what you pay if you do not have the product.

We’ve lived in a low-inflation economy for a long time.  That trend is showing signs of changing.  Start talking to your customers now about freight prices and capacity.


Stuff Happens in the Real World

January 9th, 2018

I traveled with a colleague earlier this week.  We flew to Charlotte from two different locations.  Our flights were scheduled to land around the same time.  Fortunately, our flights landed when they were supposed to, despite bad weather in the north.  We decided to rent one car.  Unfortunately, we had a Seinfeld moment at the rental car counter.  ( Worth 2 minutes, even if you’ve seen it hundreds of times.)  We had to wait about a half-hour for a car to arrive.

As we waited, I thought about how challenging it is to have products in the right place at the right time.  The rental car company had a reasonable estimate of its demand; most people make reservations.  But storms throughout the country altered their supply.  For example, I’m sure customers kept cars longer after flights were canceled.  They probably returned cars to different locations as well.  No amount of big data analysis could have predicted the rental car company’s supply challenges.  Even if the company knew it was going to be out of cars, weather would have prevented it from moving cars to the locations where they were needed.

We all want to optimize our supply chains and carry as little inventory as possible.  Excess inventory costs money.  We all know that.  But what are the costs of not having a product?  Does your line shut down?  I’m sure that costs a lot more than a little inventory.

We expect technology to solve all of our problems.  Real-time data certainly helps us run our businesses better.  But “stuff” happens in the real world.  Shipments are delayed.  Machines break.  Power outages occur.  Spreadsheet analysis gives us a false sense of security.  Our “just-in-time” world often relies on every facet of our supply chain/operations running smoothly.  Take a look at that analysis.  Perhaps a better question to ask is not how to optimize every process but what are the risks if something goes wrong.

Three Trends for 2018

January 3rd, 2018

It’s hard to believe the calendar has turned again.  I was talking to one of my colleagues this morning and he said, “I swear it was just January 2017 and we were talking about the year ahead.  I must have blinked because it’s over.”  Time goes fast when you’re busy.

Without further ado, here are three things to pay attention to in 2018.

1.  The return of inflation. Yes, I’ve thought this would happen for a while.  It took six years for label prices to go up.  I don’t know if there will be more increases this year but the overall trend for commodity prices is up.  Pay attention to oil.  If the Russians and OPEC are finally convinced that fracking is here to stay, they will restrict output and let prices rise.  While US producers will fill some of the gap, they will like the higher prices as well.  Don’t discount politics either.  We have a president that loves debt.  Debtors benefit in times of inflation.

2.  More consolidation in every industry. Technology and customer demands create advantages for those that scale.  That will continue to accelerate in 2018 and beyond.  I say this every year and it’s the one thing that I’ve been consistently right about!

3.  Environmental concerns start to impact the packaging industry, especially in the U.S. The dramatic growth in internet retail has led to an explosion in packaging consumption.  If I were a bricks and mortar retailer, I’d be screaming about how environmentally unfriendly this trend is.  Prior to the recession, environmentally friendly packaging was a hot topic.  Once the recession hit, companies wanted to be environmentally friendly as long as it did not cost more money.  Smart companies will figure out how to make being environmentally friendly a strategic advantage.  Expect Amazon to announce a major environmental initiative.

I hope you enjoy a healthy and prosperous 2018!

There Are No Bad Christmas Songs

December 24th, 2017

I was running last minute Christmas-related errands yesterday with my son.  We had Christmas music playing on the car radio.  I asked him, “What is your favorite Christmas song?”

He responded, “Well, I like ‘Sleigh Ride.’  I also like the one that starts, ‘Chestnuts roasting on an open fire.’”  He continued, “You can’t go wrong with Jingle Bells or Silent Night.”

We bantered back and forth a little bit and then he said, “Dad, there are no bad Christmas songs, just some that are better than others.”

May the wisdom of an almost twelve year old be bestowed upon all of us for 2018 and beyond.  Merry Christmas.  Happy New Year.

Are Corporate Tax Rates Really the Problem?

December 19th, 2017

Of course, I’d like to pay less in taxes, just like everyone else outside of a few very vocal billionaires.  (Have any of them ever made voluntary contributions to the government?  Hmm.)  I also know I’m fortunate to live in a country that has great infrastructure, a reasonably well-functioning legal system, and other conditions that allow and encourage wealth creation better than any society in history.  Those conditions cost money.  Taxes finance the conditions that allow individuals and businesses to prosper.  Every reasonable estimate of the tax bill’s consequences conclude US government debt will increase by over $1 trillion dollars.  What’s a trillion when you already owe over $20 trillion?  That’s the attitude our leaders appear to be taking.

The current tax bill that Congress is expected to pass this week greatly reduces the corporate tax rate.  Proponents claim a lower corporate tax rate will make US businesses more competitive with the rest of the world.  In theory, the lower corporate tax rate should lead to capital returning to the US from overseas.  Opponents deride the plan as a tax cut for the wealthy.  Of course it’s a tax cut for the wealthy; the wealthy pay the majority of income taxes in the US.  But that’s topic for another day.

I think supporters of the corporate tax cuts are focusing on the wrong problems.  Proponents of corporate tax cuts insist high tax rates are reducing investment in the US.  In other words, they claim the cost of capital is high due to high taxes.  I’ve anecdotally surveyed business people, from small businesses to large public companies, and not one has said access to capital is a problem.  The problems they cite most often are: regulatory burdens, access to talented workers, and a lack of demand from customers.

If this bill is passed, it will be an early Christmas present to large corporations.  I doubt they’ll share their gift in ways Congress promises.