Proven Strategies to Accelerate Growth, Productivity and Profits with George Stalk, Jr.
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I think the one sentence description of time-based competition or competing against time is giving your customers what they want, when they want it, where they want it faster than your competitors can do it. It starts with the customer and says, "How do I get what they want to them faster than competitors?" That's the essence of competing against time.

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Today, my guest is George Stock Jr., a senior partner in the Boston Consulting Group who focuses on helping companies create sustainable competitive advantages using time. George first came on my radar when Tim Cook told all Apple executives to read his book, Competing Against Time, How Time-Based Competition is Reshaping Global Markets. I

After reading the book, I wanted to know more. So I reached out and here we are. In this conversation, we go beyond the book and explore what it means to compete against time, the relationship between cost and time, speed and complexity, the hardball manifesto, and so much more. You'll learn how to speed things up and use time as an effective tool that's surprisingly hard to compete against. This interview took place at our studio in Ottawa, Canada. It's time to listen and learn.

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You said that winners in business play rough and don't apologize for it. That's right. Where does that come from and what does it mean? I wrote this book called Hardball and it was the subtitles. Are you playing to play or playing to win? And I wrote it out of frustration and maybe anger because I thought the business press was misleading, mainly MBA students and middle managers and the thinking that business could be played nicely. Co-optition was one of the big words at the time and the Europeans were masters of co-optition.

might also call it collusion, but the notion was cooperate with your competitors, don't fight them. Well, all my clients were either winning and trying to preserve their winning position, or they were having trouble, maybe even losing and trying to survive. So that was very much a survival mode, whether they were winners or losers. So as I mentioned, Boeing, depending on the year, is either number one to Airbus or number two to Airbus. So to them, competition is day-to-day. Komatsu versus Caterpillar, Ford versus Toyota,

to versus Honda and Nissan. And there is no time to stop, set back and take your breath and relax. It's a continuous battle. So the book had 12 strategies that always worked, but they were hardball strategies. And they were based around clients' experiences. I think almost all of them had the client's permission to use their names. And these companies put the edge in competition and the results showed in terms of their bottom line, their growth,

and their market shares. What are some of those strategies? What are the ones that are most valuable? The one that always works is know your costs better than your competitors know their costs. Because most people don't know their costs. They think they do. They know the cost it gets between the revenues and the profit line. And those are all averages. And they don't go behind the averages. And if you go behind the averages, what people will discover is that some things cost more than they thought they did and some things cost less. And some customers are more profitable and some are less profitable.

And if you know your costs better than your competitor, though their costs, you could do nasty things. Gain market share because you would understand how the costs work, your costs work and not what the volumes mean. So what may appear to be a less profitable customer is actually the high volume customer, produces a whole bunch of economies of scale and reduces costs. But that all gets lost in the averages. So that's a big winner.

But one that works very well is be faster than your competitors at providing your customers what they want, when they want it, and where they want it. And if a company can do that two or three times faster than its competitors, it'll usually grow two to three times faster. It'll be twice as profitable. And that was the story of Walmart versus Kmart for many years. That's the story of Toyota versus most of the rest of the auto industry. It's a BMW and Mercedes.

Hardball M&A was another one, buying companies to round out a competitive position or extend one. One client was in the medical devices business, the second best competitor was beginning to grow. And so they just bought them out. Now there are people in Washington and Canada that are paid to stop that kind of stuff from happening. And indeed the clients that we've worked with that do do that usually have to justify it pretty carefully.

But at least people should start thinking about that. They shouldn't assume that they can't get away with it. So it was things like that, but it required a mindset that says, we got to win. These are not things you can do.

in a relaxed way as you're saying that i'm thinking sort of about corporate culture too and we we sort of have this notion that the workplace is like a family that's part of the softening of business i mean the flips i mean an analog to family is a tribe and people understand what part of the what part of what organization they're a member of uh

And I can tell you people at Caterpillar know they're competing with Komatsu. Komatsu has a sign that says Maru Capital. Excuse me, Maru Cat over its headquarters door. Maru Cat means encircle Caterpillar. And that becomes part of the culture. It doesn't become the whole culture, but it becomes a very good part. You know, I think Amazon is a good example where Jeff Bezos says, your gross margin is my target. And people are expected to find businesses where they can basically reduce the gross margin, grow by half.

fewer prices and move in. That's why they've moved out of books and all the things they've moved into. What surprised me about Amazon though is they haven't gotten into the ticket masters business. I still don't understand that because the margin ticket masters are huge and the business is available to the internet. But that creates a culture. Do you think that cultures are the ultimate source of competitive advantage? I would say yes and no.

On the yes part, if one's losing in part because one's culture is not competitive to an opponent, trying to make the culture competitive is really difficult. I've been caught in situations like that where from a technical standpoint, I know how to beat the number one competitor, but the organization doesn't have the culture for doing that. In that situation, the CEO decided to sell it. But it's not the starting point.

I think it's necessary to bring culture into the equation if there's a transformation process going on that one needs to cement the outcome. At Federal Express, Fred Smith came up with this phrase called the world on time. And so FedEx thinks a lot about time and the organization thinks a lot about time. And ideas for improving time performance come from all over the organization. That's a cultural effect.

But he was able to start that culture because he'd already had a culture that was oriented around speed the next day delivery.

How do you think about a culture that you mentioned, competing with Caterpillar and encircling Caterpillar, which is outwardly focused, focused on the competition versus one that's inward focused, which is maybe serving the customers the best and letting that take care of itself? If somebody says my culture is built around serving the customer best and I'm working with this company, they have to prove to me that relative to the competitors, they can do that. People often use these

descriptions of the culture without any quantitative representation. If the culture is not being responsive, one of the fastest way to make them responsive is to do the competitive comparisons and demonstrate to people that somebody is doing what they think they're doing well, much better than they're doing it. And that's usually a big wake up call. If people observe that wake up call and take the actions and follow through, they can produce pretty dramatic results. But that's not an easy path I just described.

We had a case with a company called Wausau Paper and Wausau Paper is based in Wausau, Wisconsin. Small paper bill, basically owned by a family trust, under invested in the equipment and ended up in the wrong place of the paper business. And that place is too many small, narrow, slow machines and a high cost position and chronic loss of money. But no turnaround plans for that. And it was a trust.

that brought us in because they were afraid they'd have to close the bill. And the last thing they wanted to do was close the bill that created the trust. So they said, can you find a way to fix this thing? And we did. The way we found a way to fix it is we made this company able to make specialty papers in small volumes and deliver them next day within the greater Midwestern area. In the end, that was maybe 20% of the effort because even though the organization didn't have any options,

they couldn't bring themselves to implement that strategy. So for example, the sales manager was not at all interested in changing his merchant relationship, his distribution relationships. And for this company to give up on the commodity papers and focus just on specialties, they had to have a broader distribution to produce the volumes they needed. So that scared the hell out of him. He didn't want to go. I mean, the worst thing about finding a new customer is having to go back and tell your old customer that it's been done.

The logistics guy hated it because we said, okay, the deal here is the truck goes out whether it's full or not. Now, this is an industry that's been oriented at cost. And so less the truckloads is not something you do. All trucks go out full. All trucks carry 40,000 pounds. That's a lot of paper. Most people don't buy 40,000 pounds of especially great paper. But we had to do that because we're promising people next day delivery. And the reason we're promising the next day delivery is we could change their economics. We could change the merchant or distributor's economics.

because next day, delivery meant they could operate with less capital. You talk about competitive advantage. At that point for a competitor to knock us loose, they would have to be as fast as we are and they'd have to get their merchants to invest capital in their business that already been invested in ours. Now, the logistics manager wouldn't do that. He would not send a truck unless it was full because he's always measured on that. We had to retire that guy.

But it worked. Wausau Paper for many, many years created the highest shareholder value of any paper company in the world until it ran out of capacity. But it took a new CEO, it took a new sales manager, it took a new logistics guy. It did take a new manufacturing person because once the person understood, the manufacturing person understood that we would put the equipment in, he needs to be flexible and be able to handle short road nights, he was happy.

So one has to take on the culture. And now, if you read their annual report, I mean, they got it. It was like BCG never existed. It's in their genes at the moment. How hard is it to take an existing culture that's headed for certain doom in this case and then pivot that to an uncertain future? It sounds like a lot of people were holding on. They would rather the certain doom than the uncertain potential of surviving. I mean, to a layman, to me,

If you run out of options and the remaining option is bankruptcy, you'd think there should be no argument here what we do on Monday, but there is. People just can't bring themselves to make that change. So the size of the prize has to be big enough for management to be willing to take on the organization, take on the culture. I had the experience of turning around a client's factory to prove that it could be made more flexible and much faster at hospital beds, making hospital beds in their competitors.

In the end, 80% of management turned over because they couldn't handle the changes. They couldn't run smaller batches. They couldn't more frequently schedule a facility. They just didn't believe it would work. And that's another example. A company was on the edge of going out of business, a Canadian company, by the way. The culture is the hardest thing to change. It needs to be changed. It needs to be changed to freeze the benefit of a new strategy.

But one can't start there. I think it'd be very difficult to start at Wausau Paper and say, "We're going to be the most flexible company in the world, making the greatest product, greatest amount of specialty products and not being in the commodity business." Which is exact, every one of those things is against the mentality of anybody in the paper business. I want to talk a little bit more about time-based competition later on before we get to that.

What are some of the advantages relative between private companies and public companies? What can private companies do that public companies can't? For the last 10 years, my client work has almost been exclusively for owners of family companies. So I've been deeply immersed with the families and the owners. The owners of family companies are most worried about their reputation being smeared by poor performance. That's their number one concern.

The second concern in owners is how will my children do? I mean, all of them are afraid of their children becoming playboys. And after that kind of trickled out a bunch of different things. But a few years ago, we did a project where we looked at family companies that were publicly traded and had publicly traded competitors. So like in Canada, Rogers Communications,

The owners own that one share that owns 100% of the company, but there's a second or there's a class C stock that's owned by the public, but no voting rights. And so you could compare Rogers to a family company, to a non-family media company, but you could do that at a bunch of industry like Nestle, you compare a food company with Nestle. And when you look at the literature about performance of family companies versus public, what people will often say, first thing they'll say is family companies have longer time horizons.

I'll come back to that. The second thing they'll say is family companies are more profitable than public, or somebody will say they're public are more profitable than families. So we did a project where we said, this is wrong. People are doing this the right way because what they're doing is they're looking at it at a point in time and it really should be looked at over a business cycle. In fact, we looked at it over two business cycles. And what was really interesting that came out of that was the family companies were not as high performing on profitability and the up

turns of the market, but nor were they as poor performing as public companies in the downturns. So we didn't have a lot of this behavior by management to exercise stock options that are driven by quarterly stock prices or yearly stock prices. You had a culture that was based on let's keep the business surviving and growing and being healthy. So if you take those two curves, you take one curve, which is the public companies, it goes up really high and it goes out really low and then managing it has changed down here.

And a public company, it doesn't go up that high, it doesn't go that low, and management doesn't change. The area under the private company's performance is greater than the public company's. So my answer, of that respect, is the private companies are more profitable. And not because it's longer term, but because they're much more risk averse than I see public companies, the management of public companies being. So I think that's the biggest challenge for a public company against a private company is how could I manage the risk?

And a public company maintain a risk profile that's easy for private company to maintain because they don't have to explain it to anybody. One of the eye-opening examples I saw was a very large family company, no publicly traded shares, but the non-family management, which was like 99% of the population because the family had all taken their money and gone to their vacation homes and things. They decided to put the 99% on a phantom stock performance plan, which converted them into a quarterly business behavior.

to meet their own internal goals to get their stock pushed. So you can actually wreck a family company's orientation by making it behave like a private company, excuse me, behave like a public company. And actually I think if one of the not very discussed things in business today is the number of companies traded in the US stock exchanges that are public are down by half. Half of these companies are gone in numbers and they've been taken private by the LBO firms, so what people like to call private equity firms, that's the polite phrase.

but the leveraged buyout firms. And so the private model of ownership is becoming the predominant model of ownership. If one steps away from Canada and the US, the family ownership profile is the most characteristic ownership around the world, not public companies. The closest to Canada and the US is England. I work a lot in Brazil. There's a public market, but the predominant wealth of businesses in Brazil are owned by families.

And even those that are family controlled, sometimes they have this second stock trading. Go to Argentina, which I've done, very few public companies. They're all private. Go to Asia, the Philippines and Indonesia, there's very, very few public companies. It's all families. In Japan, Kikoman, a family-owned company is hundreds of years old. A lot of good things have to happen to last 100 years, not just being family. But it's rare to find public companies that last that long. There's a couple of things you said there that I want to follow up on.

And one of the observations I made as you were talking is it seems like during the, you said two life cycles. Two business cycles. Two business cycles. On the upswing, private companies are always underperforming, underperforming the public companies. And they can do that because they're private companies in a way. Exactly. I mean, nobody's insisting on ever greater returns, which will force the management of public company to, I mean-

returns are a risk reward. And if one wants higher returns, one usually has to take more risk. And so when the management of a public company is rewarded for taking risks that produces returns, that works. But it usually comes from leverage, usually comes either from financial leverage or leverage of management talent or financial risk. So when it goes into the downturn, the price for taking those risks comes home to roost.

And as I mentioned earlier, it does for the family companies, it just doesn't happen as deeply and as bad. So it's almost like they're trading a little bit of tomorrow or- That's a better way to put it. The family companies will trade performance today for long-term performance in the face of adversity. And it almost seems like public companies try to predict the future. So they maximize for going all in on what's working right now, assuming that the environment won't change.

Whereas I think of family companies positioning for a broader range of possible futures and never sort of like putting all in on a certain particular future. My experience at family companies is from a business operations standpoint, the management and the owners of family companies behave like the management of public companies in many, many respects. It's the owners that demand the caution.

I'm not getting too, too extended. And it's the owners that bat down the hatches so things don't go as bad as quickly, not the management. So if a family has an external manager, they're going to behave differently, but the family acts as a counterbalance? Yes. If the family has an external manager, they still own the company. And the manager, unless we have this phantom stock program going on, the manager's working to build wealth for the family. And the family, if they're smart, most of them are, will reward their

They're non-family management. That's one of the big issues with family companies is, are we an operating family or are we an owner family only? And that usually is a debate that occurs by the third or fourth generation. Do people want to be in the business or not? I mean, one of Caterpillar's biggest problems right now is most Caterpillar dealerships are family owned. And Caterpillar's dealership franchise gives Caterpillar the right to okay change of ownership.

And changing ownership is something that happens when somebody wants to retire. And it's true at Ford. It's true at a number of companies. Sherman Williams is like that. But the problem at Caterpillar right now is if your father is a Caterpillar dealer and you want to be a lawyer, the last thing you want to do is stop being a lawyer and go be a Caterpillar dealer, even though it's a pretty lucrative thing to do. And so the families grow out of the business.

And today's world is hard to commit to continuous family ownership of the business. Is it important that those are family operated and owned? Or why wouldn't Caterpillar just take control and hire somebody to run those stores? In Caterpillar's case, what they want their family ownership to represent is a value in the relationship with the customer. And they want the dealership, as a family owner dealership, to put the customer first and not have to worry about

reported earnings. I mean, the largest non-family Caterpillar deal in the world, I think is Tormont here in Canada. That's a rarity. The rest are all family. So they want that steady hand. I wouldn't call it long-term perspective. I just call it steady hand. Not too high return, not too low return in the business. But to return to the problem, the problem is getting the offspring to do it. By the third or fourth generation, the offspring often loses interest in the business.

I want to go back to something you said about time horizons. Can you tell me more about that? Specifically as they relate to, say, public companies with professional management versus family companies perhaps with or without professional management. Well, I should clarify something. Family companies that bring in professional management fall into two groups. One is an involved owner group and one is a non-involved owner group.

And the involved owner group, I may bring in non-professional managers, but I'm watching them closely because I still own the business. I still want to see the business do well. And a non-involved ownership group, I might just be very happy to turn this whole thing over to person A and let them run the business. And I have to find a way to reward them to keep them from being hired away by a public company. But it's doable. In terms of time horizons, I think the family involved

business expects to say in the last more than one generation expects the next generation to take over the business. Would you say that when one says the next generation, one's talking about 40 years because managed generations are about 20 years. So you get at least 40 year time horizon. If you expect it to go a third or fourth generation, we're saying, how do we keep this thing going for 60 to 80 years? And what that does translate into is, is,

I may want to invest in a certain type of business or asset because it will have that longevity. I think that's why you see so many family companies in shipping because these ships last 20 years and their investment decisions that one makes to buy a ship that's going to be with you for a while or you sell the ship. And so people expect to make their returns over the longer cycle. And public companies, I would say with only a few exceptions,

people's time horizon is about three years, management time horizon. The average CEO tenure is less than five years right now. And so they're looking for their investments to produce rewards that they can be compensated for under a shorter time horizon. Which increasingly puts them trading tomorrow for today. Exactly. Right? It's like when a new coach takes over a team, they'll often trade away players in like a

or trade away draft picks to get players to win now, but they're setting themselves up for the future or they'll sign free agents at incredibly lucrative contracts in order to boost the performance of the team next year. But they're setting themselves up for an increasingly difficult position over the life of those contracts. Now, this is where I mentioned that the disappearance of the public company is so important because the businesses aren't going away. It's the ownership that's changing.

And for many years, I always thought if my client had a competitor that did an LBO, that was the time to pound on the competitor because they'd be paying off debt. They have limited financial flexibility and it's easy to fight somebody they can't fight back because they don't have any flexibility financially.

But today's world, I think the LBO, excuse me, the private equity firms today actually do have a longer horizon than the ones did in the '70s and '80s. And they're willing to stick with the business longer. So if somebody goes private and I'm public, I'm going to have a competitor that's going to make investments that I might not make. And these investments could conceivably hurt me. And if I try to do something about it, I could conceivably hurt myself in terms of compensation and my own wealth creation.

So what people like to call the agency problem starts to take over. If I'm in a public company, who am I working for, myself or the company? Now, in the family involved ownership model, the families watch me pretty carefully and we're talking a lot. So we could prevent the non-family management from going off in their own direction to meet their own financial goals because we control it, we can decide. Now, the world's becoming more like what I just described than it has been in the last 50 years.

Because more and more companies are private now, not necessarily family owned, but private than our public, just within the Fortune 500 or the Fortune 1000. Now, in general, frankly, the family ownership model is the predominant worldwide ownership model. It is the ownership model that people have to compete with, ultimately. Toyota is a family company. It's also a public company. But when things go wrong at Toyota, the family gets involved. It's not the whole family.

but it's usually something with a T in their name. It sounds like what's really happening in a lot of cases, not all cases, is that you're matching the

timeline expectations of the shareholder to the management. So if you take a company private, you can take a longer horizon. And by the nature of the investment vehicle and being a shareholder, it's harder to exit. There's almost very little liquidity. So you can lengthen the time horizon that management has to operate. And you can take a 10, 20, 30 year view. Whereas with a public company, like you said, you're operating on these cycles of quartering

quarterly. But if you're a new CEO, you know you have maybe two years to start showing results before the pressure starts building. And shareholders have an increasingly even short time horizon where they're expecting management to make these investments that last 10 or 20 years, but they're holding shares for like a week or two. Well, Clayton Christensen, who's a professor at Harvard, he's dead now, unfortunately, made some really strong arguments that

you perform to the shareholders you want to satisfy. And so if the shareholders I want to satisfy are willing to trade my stock on a moment's notice, I have to have a short-term performance orientation. If they're going to buy and hold, I need to understand that so I can have a longer-term view of the business. Now, what is longer-term? Japan stands out in its own category. Profitability is that companies are something, once a company is profitable,

they can decide when they want the profits. Do I want them now or do I want them, do I want a certain amount now or do I want a bigger amount later? And if I want a bigger amount later, it's because I believe I can grow the company. I can bring my costs down and increase my margins and make more money in the future than I can make now. So I'll forego it now to take it in the future. And what happened in the 60s, 70s and 80s and 90s with Japan is the Japanese didn't want to be profitable right now. Well, they wanted to be profitable not to grow the business, but they want to be profitable

at an obscene level, and you butt that up against a system that has public shareholders, they want their profits sooner rather than later, or they're going to trade the stock. The two systems work perfectly well together because the Japanese take to get the growth, they invest to get the growth, and the public, usually American companies, give it up. And eventually they become less profitable and the Japanese become more profitable.

So that model, I don't see very often elsewhere in the world where people say, I can take my money now or I can take it later. And if I decide to take this later because I expect it to be a bigger pot later. But family companies are perfectly positioned to make that decision. I mean, I would say half the family companies I work with take very little out of the business. They keep a lot in. In fact, I'm always amazed at looking at some of these companies, the level of wealth exhibited by the family members doesn't match the dividend flows. So that's sustaining a lifestyle.

on dividends. What they're really doing is taking advantage of the wealth creation that will happen over time. Now, a dark side of the family business that is rarely seen in the literature, in fact, it's only seen in the literature I've helped write with my colleagues, is that families grow exponentially. Businesses don't grow usually exponentially. And so there's many cases where the pie gets bigger, but the per person share of the pie actually in absolute terms goes down

Because the business isn't growing fast enough to take care of the family. That's a challenge that family companies face if they want to have ownership distributed on what people inherit. Now, they don't have to do that. I mean, your business doesn't have to go to your two children. It doesn't have to go to their eight children.

Most of it will go like that, but it doesn't have to. And you can begin to say, no, we're going to split the ownership group into two parts. One that keeps the ownership concentrated, one that has an economic play in the business, but it doesn't have any ownership to try to break that. We can try to grow faster, but you basically have to grow about 50% faster than the family's growing to keep the pie big enough.

I want to go back to something you said there about how a lot of the family-run companies aren't taking out as much capital as they could be taking out in order to compound it. Why do you think that that philosophy exists in private companies, but not necessarily in public companies? Well, I think we touched on it a moment or two ago, is that the managers of public companies are being compensated on current performance. Sometimes they're compensated on

multi-years performance, but not very often. Where the family companies are compensated on current performance, but there's a big chunk of compensation waiting to be taken in the future through inheritance or sale of the company. And so that puts people in two different time horizon plays.

right away. And it also positions them completely different, right? So if your company has a lot of capital in the public market, that might be considered like a bloated balance sheet. Yeah. But in the private market, that's positioning for multiple possible futures. If we have a lot of cash on the balance sheet, we can go where the wind's going instead of being forced into positions. You know, one of the phrases I hear a lot in family companies, but I rarely hear in public companies is we got to keep our powder dry.

And when I hear that phrase, what they're really saying is I got to keep money in reserve for contingencies, both positive and negative contingencies. That's so interesting to me because if you look at history, I mean, most of the successful companies, if you go back to Carnegie or Rockefeller or

They were always playing offense. They always had dry powder. They always went into negotiations with a lot of money. They inevitably waited for downturns and then took advantage of them. And then go. And they knew they were coming. And so they would build up their balance sheet.

Then they would go all in during the downturn. They'd build up their balance sheet and go all in during the downturn, but we don't seem to be able to do that today. Oil companies would be a great example. We know this commodity changes prices, and yet during the good times, we distribute all the cash flow, and during the bad times, we cut distributions. It's interesting you bring oil companies up because they do invest in the long term. Because to develop an oil field can take a decade. Now, they may rate it at some point.

But they are unusual in that factor. They're longer term investments. Well, especially now because you have a five-year planning cycle, I would imagine, for a lot of these assets to even get online. For now in the energy business, that's true. Yeah. But the Irvings in Canada are in the petroleum business. It'll be interesting to watch how they play out. I think what's implicit what we're talking about is I think public companies are underinvested in understanding how private companies compete. And therefore, they're vulnerable to

to private companies behaving differently than they do because they have a view of the world or they have the possibility because of the dry powder to take advantage of circumstances that public companies don't. If they see it, they don't want to act on it because they can't afford to take the personal risk financially that it would take to act on it. It's almost like any disruption is good if you have dry powder and any disruption is bad if you don't. Yeah. Now's the time to be in the housing market if you got money. Yeah. Yeah.

You wrote a book. This is how we ended up getting connected. You wrote a book called Competing Against Time. It was, to my knowledge, it's the only book that Tim Cook has recommended all of the Apple executives read. And I'm wondering, can you talk to me a little bit about competing against time? What does that mean? I think the one sentence description of time-based competition or competing against time is...

giving your customers what they want, when they want it, where they want it, faster than your competitors can do it. It starts with the customer and says, how do I get what they want to them faster than competitors? That's the essence of Kavika's tie. Then there's a whole bunch of fallout from that. Most people, I would say more so 10 years ago than today, if I was to go through an annual report, the only time I would see in the annual report would be

the time of the income statement, start and stop, and the date of the balance sheet. There may be a lot of yakking about responsiveness, but they're not really managing time. If one introduces time as something that can be managed alongside a cost, then a whole bunch of things pop out, gain visibility that don't when time is not included as a variable. And those things can be things like the price preview my customer will pay for faster delivery, the

as it turns out, the lower capital requirements that resulted. If I compare two factories, one that is twice as fast as another factory, the one that's twice as fast usually has faster working capital turns, has higher productivity and lower cost. And people get to that point because they've looked at cost and time. It's not time instead of cost, it's cost and time. In fact, it's cost, time and quality. Because if one's looking at organization through the lens of time, one will see where the quality problems are.

Because anytime one has a quality problem, whether it's manufacturing or in an information business, it means rework. And anytime you have rework, it means lost time. And so for people to be faster than competitors, they have to be higher quality because they don't get the speed. I remember talking to the CEO of Motorola, who was one of the earlier users of time as a weapon. He says, we sell the organization on quality, but we're actually taking time out.

Which is true. A lot of people say, whoa, why do I have to do things faster? And they assume doing it faster is walking faster, completing things quicker. It's actually just taking out all the dead time. Most organizations, if we look at the time required to produce an output, either an insurance policy or a manufactured product, if they're not looking at time as a management variable, value is only being added between a half a percent and 5% of the time. 95% of the time and more is wasted.

And people don't see that unless they start measuring time. And then that 95% is a whole bunch of costs that go away if one starts taking time out. So time is a very powerful lens to look at how productive one can be. And the outputs are just astounding when you get a fast competitor up against a slow competitor. What are some of the things that get in the way of velocity in organizations?

It's a long list. Let's see, the most obvious ones are I do things in batches. Batches are usually thought of as manufacturing, but also be in white collar in a knowledge business as well. I manage a business on a set cycle. Batches are the result of what people consider to be an economic order quantity. And of that 95% of the time that's wasted, about a third of it goes to being in a batch. About a third of it goes into being in a batch that isn't being worked on yet, but it's been scheduled.

And a third of it goes into managing all the batches. And so if one shrinks the batch time, one goes through cycles of batches faster. Batch A, B, C, kept faster if they're smaller batches. And you can't do that unless one organizes the factory floor or the back office to handle small batches. But when one can do that, that last third of the time, which is managing the flow of batches throughout the organization, goes away.

I went to Tokyo for BCG in probably 1981, a long time ago, 1980. Just before I went, the founder of BCG, Bruce Henderson pulled me aside. "We need to know something about Japan that we don't understand, George." I said, "What's that?" So he pulls out this paper and it's done by the Ford Motor Company. It's done by Ford Europe actually, comparing good factories at Ford with good factories at Mazda and Toyota. And there was one chart in particular

where the Japanese factory was a third the size of the Ford factory, had three times the product variety and was twice as productive. And Bruce said, if we can't explain that, we're not giving our clients good advice because at the time we were telling clients, there's two things you need to go for. You need to go for scale and you need to stay focused because scale produces a continual reduction in variable cost.

and focus removes complexity and overhead. So the focus factory, the focus factory that's big was the winning factory. And in this example, we had a Japanese company, a factory that was not as focused as the American factory, didn't have the volume in the American factory, and was twice as productive. They said, this does not compute. We've got to find out why. And what was really interesting, this is in the early 1980s, people attributed the Japanese productivity advantage to their culture.

into the worker management relations. And if I looked what we did, I looked into the numbers, all the productivity advantage was in overhead. It wasn't in the line workers. And it wasn't just a little bit in overhead, it was a lot in overhead. It was like one-tenth the overhead. So these companies were simpler to manage, even though they were smaller and more complex. And so very often the bulk of the productivity advantage

a Japanese factory might have comes from overhead productivity, doesn't come from direct labor. There is some direct labor productivity. And so that got us to say, we got to understand this. And what we did when we got to Japan, when I got to Japan, is I figured out how they did it. And if one facilitates small batch production, you have to have short setup times. You have to have limited material movement.

You have to have on the floor scheduling. And if you can put all those things together, a whole bunch of costs come out and a whole bunch of working capital comes out and it produces the basis of somebody that could be a time-based competitor. One doesn't become a time-based competitor just by taking time out. You become a time-based competitor when I use my time against a competitor. And that's when the fun starts because the competitor usually doesn't know what's happening to them. In the case of Wausau, I saw it happen. It took 10 years.

for the leaders of the paper company, paper industry to understand what Wausau was doing. In part, as you mentioned earlier, they were too inwardly focused. They really didn't see what was happening or they dismissed it as a sideshow. That's another great strategy for hardball. It's what we call anomalies. Anomalies are things that happen in the business that management explains away because 90% of the business doesn't behave that way. The anomaly in Wausau's case was Wausau had a fairly high share

of its paper business in Chicago and with one particular merchant and that didn't compute. And so we went and talked to the merchant. Oh, we went and talked to the sales guy. Remember I mentioned this guy earlier. His response was, well, the salesman in Chicago has a great relationship with the paper merchant. Remember we're in turnaround situations. So great relationships are not useful in turnarounds because they take a while to build. So we went and visited the merchant and we said, tell us why are we doing so well with you here in Chicago?

We're told that our salesman has a great relationship with you. And the guy says, yeah, it's a great relationship. I tell the salesman, if there's a truck at my dock tomorrow morning, we're friends. If the truck isn't at the dock, we're not friends. And that was the beginning of understanding, whoa, there's a fast satisfaction cycle here that we could take advantage of. Or can we scale it across the whole company? And we could, but it was hidden in an anomaly.

So anomalies are always a great opportunity to find a new way of doing business. But most management teams don't take the time to understand anomalies. They explain them away. Another anomaly was one, it was an office products company that had its own service force. And one customer insisted on all service being done between midnight and 6 a.m. That's an anomaly because that's not the way we schedule service. But for this company, the local people did that.

And it turns out that company that wanted overnight service wanted it because they didn't want their production interrupted or the use of the equipment interrupted. And in those situations, this client had a higher share of the business. In a medical device business, Adomaly was the European competitor, always had a sales, always had a service representative on site at the hospital. It's the medical devices. That looked like a high cost thing to do. We didn't do that. Our client had a service force that was moved around hospitals as needed.

But it turned out the uptime for the equipment that this onsite service person was taking care of was higher. And it turns out that the share of new business that this competitor got was higher. So we have an anomaly here. He's doing something. It doesn't make sense. But if one starts looking at the numbers, it does start to make sense. So anomalies are a great way to find a new way to do business, a great way to find growth. Because usually they're small. And the question at Wausau is, could we make it big? It's tough to answer that question.

You mentioned earlier that Walmart sort of attacked Kmart with Velocity. Can you tell us that story? Walmart's story, as it was described early in the years of Walmart, was about a local five and dime competitor, grows in boondock markets, has greeters at the door to make people comfortable and help find their way around the store, has a Daryl product offering, and that's their success.

That's just the tip of the iceberg, what Walmart was doing. Walmart was actually a logistics company. They concentrated on how fast can we move product from when our supplier gets it to us to when it leaves our store. And they organized around that, how to be faster. And they did that by having their own trucking, not outsourcing it. They did that by scheduling deliveries once a week instead of once every two weeks or once a month.

They did that by incenting their suppliers to deliver to a very strict and onerous schedule by paying the suppliers faster than their competitors paid it. They did it by having very big stores. In fact, it wasn't until recently that Walmart began to change its model on store size because they found that big stores were lower cost and people were willing to drive 30 miles to get lower cost. They're not willing to do that today. Actually, it's more expensive to do that today.

So, behind the scenes was a whole different model at play. I don't think I came here actually ever figured it out. They began to see some of the surface differences, but they always outsourced their trucking. They under-invested in IT. Doesn't happen today, but Walmart used to have the store managers fly into Bentonville every two weeks.

and talk about what's going on in the business so they can make adjustments. Kmart did this, you know, Troy, Michigan. Back in Michigan, they decided what was going on inside the stores. Walmart was able to change its mix of product much more quickly to local market conditions than Kmart because at Kmart, you had to go up the hierarchy, get some decisions, come back down the hierarchy. And Walmart, the hierarchy was flattened and distributed into the store managers. And then Walmart went into warehouse stores

Sam's is their version. And warehouse stores are actually like what most people thought Walmart was, which is a narrow offering, very high velocity. But the big difference in warehouse stores is the way they get paid because their customers either pay cash or credit. And so you get almost instant accounts, non-existent accounts receivables. In fact, you get negative working capital. And that was part of the model that Walmart discovered

going in is that they could have a negative word capital business, but so could the other competitors as well. Now it's interesting watching them today because you have Walmart versus Target. I think Target has found a way to move itself to the side. But I think very much if there's an analogy in Canada, it would be Loblaws versus Sobeys. I think Sobeys has positioned itself as slightly more upscale, more of a specialty retailer shopping experience than a Loblaws. Now I don't know the business well enough to say

which one's the winning strategy. And in fact, they're probably both going to be winning strategies because I think Target will find a way to coexist with Walmart. I think Walmart's biggest competitor problem right now is with Amazon. How would you compete with Amazon? I do know for a fact that people tried to compete with Amazon in the obvious way, which is, okay, Amazon is logistics. First, you order online. Second, then the logistics systems kicks in. And now if you're Walmart trying to catch up with the distribution system of Amazon,

I can't really use much of my current distribution system because it's made up for dealing with large volumes, selling large volume stores. And I have to come up with a distribution system that has much more distribution centers. I don't know if you've noticed how many distribution centers there are around small towns that are Amazon distribution centers. That's a very expensive thing to replicate. What's the relationship between focus and time? Well, it's a very direct relationship because

Imagine two factories. One factory has 10 product line and one factory has 50 product lines. So one factory is much more focused than the other. If I'm going to speed up both factories, I want to be twice as fast. It's actually more doable in the 10 product line factory than it is at the 50 product line factory. There's more complexity in the 50 product line factory. There's more batches. There's more distinct processing steps. And so a focus factory is always focused.

more easily made faster, more focused organization. Because factories are basic organizations. People tend to think you have factory, non-manufacturing. In both businesses, you have people running the businesses. And so people running the 10 product line business have an easier job than people running a 50 product line business. And so most of our very successful time-based competition situations, one has to start with focusing the organization, deciding which products

We want to focus on Wausau, we decided we're going to focus on specialties. We could have decided to focus on commodities. We would have gotten killed. And the big paper companies that Wausau was getting killed by were quite happy to focus on the commodity business. That's why it took them 10 years to figure out what Wausau was up to. Because they didn't like that business that Wausau was going after. And I suspect with Amazon, the winning formula is going to be picking a part of the business that Amazon doesn't really want to have. So automatically

one's setting yourself up for a smaller business. But there's something funny about retailing and it's something we call the heavy spender phenomena. And the heavy spender phenomena is that 20% of the customers at a retail store account for 80% of the volume. And what's so special about those customers? It turns out those customers have a different need than the 80% of the customers that account for 20% of the volume. Those 20% of the customers that account for 80% of the volume want more choice. They want more understanding of the product.

They want a positive touch feel with the consumer. And if I can do that, I attract what we call the heavy spender. And every retail category has a heavy spender. What's your hobby? This. Yeah, your hobby. Yo, this. Oh, you're doing this. Doing this. I mean, what do you spend your money on then? Let's say ski equipment. Ski equipment. Yeah. Is there a special place you shop? Yeah. Are you a preferred customer at that place? Yes. So you're probably in that 20% that accounts for 80% of that.

outlets, business, and they know how to take care of you. Yeah. And they know your name when you walk in and the, yeah. And I doubt you buy your ski equipment from Amazon. No, no, no. Do you even look at ski equipment on Amazon? No. I don't either, so I don't know if they have any. My reckless spend of money is on model airplanes. I build these gigantic radio controlled airplanes. Each plane costs thousands and thousands of dollars.

And so there's only a few places I can find the stuff I want for each of these airplanes. And I buy a lot from them. So I'm a heavy spender in that category. I had a woman that worked for me that was a heavy spender in shoes. This is very, about 20% of the women account for 80% of the shoe sales in Nordstrom or the Bay. Those people have these needs I just described. They do selection. They need to be, the product explained to them so they're buying it for the right reasons. They need to be treated well, which means if they bring me back the shoes, it's not a grief situation.

driven experience. It's a pleasurable experience. In fact, remind me, this one woman who's a big spender, she spent 20% of her disposable income on shoes. She said, George, you know, I was interviewing her about this because what I heard about it, I said, here's what I'd be spending. I want to know more. She said, if I'm in a bar and some guy walks up to me, she's a pretty woman and says, I love your shoes. He gets an automatic 20 minutes. I said, most guys I send away right away. So shoes is a big part of her life. And

So you can think of all sorts of retail cosmetics. Shoppers has been so successful with cosmetics because they actually set it up for the heavy spender, probably the middle income category on cosmetics. And it's been very successful for them. Automotive parts, another one, heavy spinners. Virtually every category has heavy spinner segment. And that's probably, you know, my model airplanes, which have a huge amount of electronics in them. I'll look at the electronics at Amazon, but I don't buy it from Amazon. Right.

Because you want somebody to talk to selection, reliability, because they're niche, right? So they also have all the things that you're looking for. Probably answer the phone when you call too. Yep. Talk to me about cost and time. How do those two things relate? If we come back to the Japanese and Ford example, we had a Japanese factory that was three times as complex, half the size and twice as productive.

I didn't mention the time dimension. The product went through that factory 10 times faster than through the Ford factory, 10 times faster. The 20% productivity advantage was about a 20% cost advantage, which is a big number for an automotive component. But the time advantage was 10 times. That's what triggered our thinking about strategy. Because up until then, BCG was...

predominant strategies were based on cost. How do I have lower costs in your, how do I help you have lower costs than your competitors? And that, as I mentioned, drove us to scale and focus. But here's time. Here's another dimension people aren't managing. And what could you do with 10 times the speed? That was the question we started asking. How can you compete with that? Wausau was one of the early applications of that, which is I can compete with next day delivery versus delivery every two weeks.

And if I could have next day delivery to the merchants, that allowed the merchants to order more frequently and operate with less capital. That's where the advantage kicked in. And so that's where cost and time worked out. We added cost to the process to get time out the other side, but the time benefits were so overwhelming that the cost didn't really matter anymore. But most often what we see is that if you could speed up a factory or any kind of process by a factor of four,

In other words, I take 20% of the time, 25% of the time I used to take. Productivity is about, cost position is about 20% lower because I take out overhead. Overhead doesn't speed things up, overhead slows things down. But overhead comes out because I'm being intelligent about how I manage, not because I'm just slashing the overhead. These factories are simpler to manage, even though they're more complex because the management's pushed down onto the floor.

There's a lot of autonomy pushed onto the floor because it's organized and managed to run by itself. There is central scheduling, but it's not a big department. In a traditional factory, there's a big scheduling department. It tells every single piece of the factory what to do when. In a Toyota factory, that scheduling is pushed onto the floor. So by producing one product, another part of the factory discovers the need to replenish. So overhead comes out, so costs come out.

And so if people have a cost problem, we often introduce the dimension of time to figure out how the processes could be set up differently to take time out. And usually we eliminate costs in doing that almost always.

eliminate costs in fact the cost almost always enough to pay for whatever it takes to get the time out is there a way to use your balance sheet strategically to create a time advantage and what i'm thinking about that is maybe you sell commodity parts and those those parts are to spec and they're widely available but most people don't have the inventory

So the depth going back to your model airplane, they don't have all the components. So if you had all the components and you had them in stock, your balance sheet's going to be bloated because you're going to have a huge inventory level, but you're probably able to sell them even if they're not high velocity parts, but you could sell them at a huge premium because you would be, even if they're less frequent sales. Are there other ways to use the balance sheet to sort of compete with speed? - Well, I'll give you an example. We've done this quite a bit with chemical companies.

So when I say chemical companies, you imagine big production facilities, a lot of steam coming out and everything. We've looked at the company at cost, of course. We looked at the company quality, of course. We looked at the company at time, how does it deliver. But one of the interesting things that we often do is look at something called working capital productivity. And I just define working capital productivity. It's accounts receivables, receivables.

plus accounts inventories minus accounts payables. So cash isn't in there. But actually I use something called absolute working capital productivity, which is accounts receivables plus inventory plus payables. Because people can get their productivity of capital up just by delaying payment to their suppliers. So I don't give them credit for that. So I put the three numbers together. And it turns out if you take a look at an organization's working capital productivity and find out where it's being dragged down,

almost always it'll have something to do with time. They can't ship the product on time. Why can't they ship the product on time? Because it's not all parts of the product order are available. So we have to hold the order till they're available. And so once you're digging into this layer at a time through the lens of working capital productivity and finds opportunities to do things that are balance sheet related,

that improved productivity, improved the performance of the balance sheet. But what if we don't want to improve the performance? We want to use the balance sheet strategically to improve the business competitive position. Like an example of that would be maybe I'm going to pay all my invoices in 24 hours and I'm going to let my, I

accounts receivable go out 90 days. Instead of trying to rein that in, I'm going to actually lengthen it, which means I'm requiring more capital to operate the business, but now it's harder to compete with me. You're dead on. The example I described with Walmart, which is they pay their suppliers faster than Kmart were paying them. And they were paying them faster because they wanted a different level of performance from the supplier, which is exactly what you described. And you would find that by looking at the word capital productivity. You could say, well, geez, you know,

I have all this inventory because here's my replenishment standards, but I can afford to pay them faster if I can reduce the inventory. And that's one way to use the balance sheet. Another way to use the balance sheet, and we skated right on by it, is if one's big and one's already low cost, one can carry more variety at a lower penalty on the balance sheet because the volume's there.

So in your example of skis, if that local distributor or retail store is big enough in the business that you're interested in selling, they can actually have more available. So their balance sheet, you might say, well, gosh, they have a lot of inventory laying around, but they're turning it a lot faster because they're selling it to customers who buy a lot of stuff and buy it frequently. How does speed transfer from the factory floor to software companies? Let's talk about what's similar.

What's similar is they're both people and they have organizations. What's similar is they add value. What's similar is they take time to get things done. What's dissimilar is that factory, I can see things happening. Software, I can't see things happening because it's all happening in the ether, people thinking. But I've done a lot of work in speeding up software organizations. And for many of the same reasons that

Factories are slow. Software companies can be slow. They can be compartmentalized, just like factories can have manufacturing centers based on processes like a heat treatment and stamping. They have quality problems, which slow things down, just like these have quality problems. They have batching problems, which they say our development process is going to be 18 months when it really could probably be three, four-month periods. In fact, the whole agile thing,

that's going on is very much of a version of time-based competition at the factory translated to software. That's what I was thinking because so much of this planning and forecasting, like what the world's going to look like in 18 or 24 months, you have no idea. And the farther out you get, the less certain you are

So if you're planning, all that planning is just sort of, I wouldn't say wasted, but it's definitely not very productive. And then you have a whole cohort of people who make a career out of planning. And so then they justify the planning and they sort of... And like the factory, they're people. So that's why I've never...

I've received over the years, people say, well, we're a different business. We're not manufacturing. In fact, I said, somebody said it to me yesterday. The fact of the matter is a software, a development facility in software very much behaves like a people operating system in a factory. The version of batching in software would be major changes to the offering. That's the code of large batches. The time-based version of batching in software companies is the agile version, which is how to have the minimum acceptable product.

and then improve on it. It's like small batches. And I think people get there the same way. If I look at a factory through the lens of time, I see a different set of things that are important. If I look at a software development process through the lens of time, I see a different set of things that are important than people normally manage themselves to. I stopped worrying about the differences many, many years ago between factories and non-factories. Well, one of the advantages I would think to software is you can get your feedback, the time from...

shipping to feedback can be instantaneous. Whereas with a factory, you got to ship it, it's got to go somewhere, the customer has to look at it, use it, come back to you. It could be weeks, months before you're getting feedback that that part isn't good or the quality is not right. With software, you can get this feedback within seconds. I'm surprised you say that because most software releases are followed by another release.

and the second release is not instantaneous. Well, the reason for that, there is the variety of devices that it's going to, which is one of the reasons I think that Apple has started to sunset some of their older devices because releasing an update that works across technology that was invented like 12, 15 years ago is really hard. And the testing cycle for that is inherently hard too because each of these devices also has

their own unique configuration. So you're really testing a billion unique circumstances of which there's probably only 10 variables that really matter. But I think that's why we get some of these, oh, here's another update, because here's an edge case that we didn't see happening or plan on happening. - But you're actually talking about policy, upward compatibilities, the phrase that's usually attached to that. And it's very difficult over the long term to maintain upward compatibility.

and managing a transition from one platform to another because I can no longer make the original platform Upwork compatible. It's very hard to do. And it usually results in offering an older product right alongside of a newer product. And it usually happens with the newer product being priced at a premium over the older product. So people don't abandon the older product altogether. And then one's left with how do I help people who are stranded because they have the older product? I'm going through this right now because my Apple iPad

has lasted me years. And I just got a notice from the Boston Consulting Group IT department that it's no longer, for security reasons, it's no longer going to have upward compatibility. And they're going to cut me off the system. And their answer is go buy a new Apple. My answer is how can I divide my world so I don't have to go buy a new Apple? But I'll probably end up buying a new Apple. So it's a policy decision. And it's hard to do it in a way that makes the customer feel good. It's not impossible. The example I was thinking of,

is medical devices, medical robots. And you got to make the new platform so much more attractive that people pay a higher price. And the people that don't want to go to the new platform will feel like they're getting a good value by staying with the old platform. Now you're still up for the down-seem problem, which at some point we don't want to support the old platform anymore. Then I think Apple sort of plays, I don't really watch Apple that closely, but I think they have a trade-in policy.

Which means if I really go back to them and say, I want to buy a new Apple, but I have this perfectly fourth generation one that's working fine. They'll give you something. Give me a deal. You feel good for it. Yeah. I feel good about it. So it requires thinking this through. How do I make the customer feel like they're not being abused? And respecting them, right? They purchased it, they put their money into it, and you're sort of nudging them to upgrade. And at time period, they might not be ready for it. A couple of years ago, I had a project I called the ugly duckling of retailing.

And the ugly duckling of retailing is returns. And returns actually are a very large part of a retailer's business. It's like some online stores, I guess it's like 20% or something. Oh, it's huge. It's huge. But that's where I was heading is Zappos is one of the first companies I ran across where they use returns as a marketing opportunity. Whereas other people, at that point in time, if you go to Walmart, look at their return policies. I mean, it was astoundingly complex.

and didn't look very customer friendly at all. And Zappos was buy what you think you need and send the rest back. In fact, I was in a UPS store in Palm Springs, Palm Beach, Florida, mailing something back to the office. And I noticed that all the boxes behind the counter, of all the boxes behind the counter, about nine out of 10 of them were Zappos boxes going back. And so they found a way to use returns as a way to make the customer take the risk of buying online. Well, now there's no uncertainty.

Yeah. I know worst case, I just go back and I return them. And they have the return labels. And it's easy to do versus Walmart where you go and you stand in line for like 45 minutes to an hour. And so if you factor in a cost of time for you to return something, it's- I don't return it. I give it away. It's not even worth returning half the time. When I did the architecture work, there was a couple of interesting examples in Canada. I interviewed a bunch of women about different kinds of products. And Sears-

which I never thought of as a woman's place to shop, was picked out as a place these people like to go to because they had a great return policy, made it easy to return products. Zappos was in that category. But we don't even do this on the internet now. You can buy a New York Times subscription in three seconds online, but if you want to cancel it, which is effectively a form of return, it'll take...

a week or two hours on hold with customer service. It should be a click of a button. It's that simple. If you bought it at a click of a button, you should be able to get rid of it at a click of a button. Yeah. Well, hopefully somebody listening to this at the New York Times can do that. But the point of the ugly duckling work is how do I make returns a marketing advantage? And Zappos is one of the earliest examples of how to make it an advantage.

But we have buy now. We could have cancel now. We could literally have one-click cancellation. That would be a marketing advantage if you're The Economist, you're The Wall Street Journal, The New York Times. But there's some mathematics that they're going through where they're like, that would make sense to a certain cohort of customers. Probably, Shane, it's probably two departments. It's like two different parts of the factory. True. It's not my department, so you got to go to this department.

I hate it when they say that to me. Nobody's responsible. You'd like people to say, "I own your problem." Yeah, or I'll fix it, or I will take ownership of it and I'll get your resolution. The least expensive innovations I've seen is when people say, "If you don't feel like waiting, leave a number." That's almost satisfying. A callback number?

The problem is I'm not always ready to answer my phone. Yeah. Like I wouldn't want to answer my phone right now. Yeah. So I'm not sure when I get a call back. I did that once at our Canada. They called me at like 3 a.m. Oh no. I want to mix a few subjects together and sort of like talk about this in relationship to each other. So like,

Lean manufacturing, just-in-time inventories, balance sheet, which we talked about and how it can be used as a weapon, and the supply chain crisis that we're currently undergoing. And I'd love to hear your thoughts. Let me break that in a couple of parts. Lean manufacturing and just-in-time are, from my experience, are described in the same phenomena. The small batch, minimum material handling, self-scheduling manufacturing process.

that Toyota pioneered in the 50s. And interestingly enough, it was a solution Toyota had to come up with to compete with Nissan. Because in the 50s, Nissan was Japan's largest car company and Toyota was just getting into cars. So Toyota didn't have scale, it didn't have the breadth of product line offering. So it had to figure out how to compete at low scale and with more complexity than it might want to use. So it created the just-in-time system.

Ford had the digital time system as well, but it was high volume focused Model Ts type of stuff. So those two are very similar. The effects of them being together, the effects of them on the organization do show up on the balance sheet. They show up on higher asset productivity in the form of higher working capital productivity and higher productivity of plant equipment. So those are together. I've been looking at supply chains as a source of strategic advantage for about 15 years now. And I just finished a paper for the Harvard Business Review

that was originally titled, "How to Use the Supply Chain Crisis Against Competitors." And I'm explaining this because I want you to understand my perspective. I really don't care about the supply chain crisis. What I care about is how do I use the crisis in a way that puts my competitors at a disadvantage? Because I can't, as a company, I can't fix the supply chain crisis. I have to figure out a way to live with it and live with it in a way that creates advantage for me. And there are several ways you can do that.

First one has to recognize that the supply chain crisis is a system phenomena. We have a very complex system that was working fairly smoothly and then it was disturbed. It was disturbed by government lockdowns. And when a system that's complex is disturbed, it has a response that's often called the bullwhip effect. And basically all parts of the system start to oscillate. The factory overproduces and underproduces. Inventories become stock outs and overstocks.

And one can try to fight that on the ground, or one can try to fight that in the air. And fighting in the air says, the way to minimize the impact of the supply chain crisis on me that results in me being a higher performer than my competitor are often things that people will want to do because they look like they cost more. So for example, one thing I can do is I can order more frequently and pay whatever penalty it takes to get that. I can, and this has been happening, I can...

except I could arrange containers that aren't full so that the container's not waiting to be filled up before it comes. I'll pay the difference of premium. I can pay a premium when it arrives to get off the ship first. I could pay a premium to be loaded last. I could pay a premium to put the box onto a train that doesn't stop. There are companies that do this, and it goes straight to New York without stopping from the West Coast. That takes time out.

It turns out the time and the supply chain crisis is incredibly important because the longer is the supply chain time, the more exposed it is to these oscillations. And so if I can become more time-based in my supply chain, I basically insulate myself relative to my competitors. I still have problems, but not as bad as my competitors have problems. So some of the things I described are with the existing supply chain air freight.

The logistics cost of a TV set that is shipped by Ocean to Best Buy is about 5%. It's pretty damn good. If I ship it by air, it's going to cost me like 12%. If I have a stock out on a flat screen TV, it could cost me 50% of my margin. If I have an overstock, it could probably cost me all my margin to get rid of the product.

If I can find a way to make all that cycle happen faster, I'm less exposed to the supply chain oscillations. And therefore, I end up having higher in stocks and fewer out of stocks, which the customer likes, but I make more money. And as soon as I can get the thing to a point where I'm making more money than my competitors, I can use it against my competitors. And so much of the supply chain work I've been doing has been around how to take time out of the supply chain. And very often the fight with management is over time.

Not what the benefits are, but who gets the benefits. Shouldn't they just go? I mean, if you put them to the customer, eventually, if most of them accrue to the customer, then it becomes a flywheel almost, doesn't it? True. The answer to the executive's concern starts with the customer. If I can get so much time out of this process I produce for my retailer, fewer stockouts and fewer overstocks, that makes him

happier. There's a cost associated with that. And so where does that cost occur? Some of those costs occur within my four walls. Some of them occur outside my four walls. That's where the problem starts to come up, is where the costs are. If one starts building into the profitability analysis of a product, the cost of overstocks and the cost of understocks, you can actually accept the fact that I'm going to pay more

for my step in the supply chain. So somewhere further down, I get the benefit shows up and I get a premium of some sort. That's the hard part to get people to do that. I worked for a woman's lingerie manufacturer at one point, and it took them weeks to get the product from Asia where they sourced it to their retail stores. The gross margins on these products are 90 to 95% on a woman's lingerie. The on-ocean shipping cost, terminal to terminal, is about a percent and a half of sales.

The air freight's about four. So if I'm the ones to accept almost a factor of three increase of my shipping costs to avoid a 95% cost of a stock out, I end up being a more profitable chain and it ends up being faster. And so that's what happened. They went from 20%, oh shit, I got to have it right away to put it on a plane to 90% is always on a plane now. And so we've taken on the ocean shipping now way down.

And because the benefits of avoiding stock outs and overstocks is so high, we can afford to pay the cost of the air freight. There's so many ways to strategically use your supply chain, your access to raw materials, all of this stuff. But it always, in the moment, it usually never looks like the right decision because it's costing you more. Like if you're a manufacturing company and say you had a year of raw materials on hand before COVID hit,

you can keep pumping through, even though there's a supply chain, you're the only one in business. You're going to make more money in that 12 months than that inventory ever cost you to hold and acquire. But you don't want to do it because you have investors, they have a different timeline. It looks like bloat on the balance sheet, looks like inefficiency. How do you weigh those things against each other? It's a difficult thing to do. It requires that people look at the entire system

and optimize the system performance first before they figure out what their portion of that optimization is that they're going to keep on a crew. Stanley Black & Decker was one of the companies that early on in COVID lockdowns, we've got to put them together. So lockdowns have produced the problem, not COVID. Well, we can say COVID produced lockdowns. Decided they were going to stock up and it paid off immensely, but it's a bet. The longer the supply chain is in terms of time, the riskier it is.

It is for the company and the consumer to source from it. An example of using the supply chain against a competitor would be Dell versus HP in the, say, the 2000, 2015 time period, where because their time consumption of the supply chain was so much shorter than HP, Dell could be introducing products with more up-to-date technology while HP was still trying to get products from the old through its supply chain.

and begin to make the HP products look old. And once your product looks old, about the only way in high tech you could sell it is at a lower price. And so that works very well. But it does, it puts back to time. I think again, I don't sound like I'm addicted to time, but it's just so powerful that if one takes a look at supply chain through time, one sees real opportunities to do a bunch of things differently that can be done if one doesn't take advantage of time. The one big unknown

which probably won't become prevalent management theory for another 10 years is what I call variance analysis. And if one list of supply chain that has a much faster flow through than a supply chain that has longer throw through, not only is it faster, but it's less variable. So there's less distribution of outcomes in the supply chain. If you take two supply chains, one that has an eight week time and one that has a

two week time, the variability of the output at the one that's two weeks will be about one eighth variability of the other. So there's a high variance advantage that's possible. Just a footnote on that is that variance comes from two sources. It comes from changes in the outside world. In the case of an airline, it comes from a storm, something like that, air foreclosure. Or it can be self-generated. And it turns out

The supply chain that has a high amount of time on high variance, because they always go together, even if the outside world doesn't change very much at all, it'll generate its own turbulence inside. And turbulence equates to cost. And so a supply chain that's fast and low variance is much a higher performing supply chain that's slow and high variance. And again, I don't have to fix the supply chain problem. I just have to make mine better than that, than my competitors, so I can do nasty things to them.

I say it's going to take a while to fruition because most people don't think they can manage the variance in the supply chain. The answer is you can manage the variance in the supply chain. Canadian Tire is a perfect example. They use something called flow casting at Canadian Tire, which means on a daily basis, they're looking at each element of their supply chain and trying to figure out how it's doing, where the variances are. And then where they have problems, they throw people at it and get it fixed, even though they don't own that step of the supply chain. So managing variances is a mindset that's going to be

very challenging for people to achieve if they haven't achieved the time mindset to begin with. But it's the next, I think it's the next wave. And you're writing about that now, right? Am I writing about that? Yeah. Well, you know, Cesar, I took the work because a lot of people, for example, the reason I did the work, every time Toyota has a glitch, the management press trashes the Toyota production system. Now they've had it. Now they're going to run it worldwide. They had something called a J-valve factory in Japan burned down.

And because it just is this slide, 95% of the J valves, which are part of the brake system of Toyota cars worldwide. And they couldn't make cars. Yeah. So the president can't make cars. They're dead. They had this thing up and running again in two weeks. And we can't take the time to explain how they have a time orientation at Toyota. They found they had ways to do it. They did it. And they were up in two weeks. At the same time that happened, there was an airbag factory in Ohio that burned down.

This company that owned the factory supplied 90% of the airbags to Ford. Ford ended up making cars at the auto industry they called put it against the fence. Semiconductors this year were missing, so people built cars without semiconductors and put them against the fence. And when you got the semiconductors, you went back and fixed it. You know that's expensive. So Ford started doing this. The airbag factory that burned down in Cleveland never came back on stream.

And the consequence of that was this particular supplier whose factory burned down went from supplying 90% of their bags to Ford to supplying like 30% because they felt they had to diversify the supply base. So customers are very sensitive, can be very sensitive to variants. Now, so I did this analysis and showed that the total production system recovers much faster from a disturbance than does a traditional supply chain manufacturing system does. I put all this work together, I took it to a

a company called WW Granger. WW Granger is a leading industrial supply company, basically a distributor of industrial supplies, huge range of offerings from, from mops and gloves to electric motors and stuff. It's really amazing. So I was talking to the head of Granger Canada, except these guys got it, a complex distributor, high performing business. And the notion that he could manage variance in a supply chain was just more than he can handle. He said, George, you know, I like what you're saying. I know it's right. I can't do it.

So, at some point, somebody will say, I like what you're saying. I know it's right. And I'm going to do it. Southwest Airlines, that's why I mentioned airlines earlier, has very low variance in its performance. They have low variance in schedules. They have low variance in the plans they operate. They have low variance in the crew assignments. They've taken a lot of the variance out. They recover from disturbances much faster than the other competitors. So, they're on the way. They'll figure it out.

But I don't think I'll, in my lifetime, I'm going to see a company step back and say, okay, now I got cost, quality, time, and variance under control. At this point, I'd say that's only Amazon, Walmart, and Toyota are probably the only three companies I can imagine that are even close to being able to do that. But it's the next big, to me, it's the next big wave is variance. But it's so far out. Oh, in fact, the Grainger guy said come back in 10 years or something like that, which is about how big it was going to take. So I put it back on the shelf for a while. I'll send it to you if you want to see it. Yeah, I'd love to.

That's a great place to end this conversation. I want to thank you for your time today. I really appreciate it. Thank you. Great questions. I enjoyed them. Thanks for listening and learning with us. For a complete list of episodes, show notes, transcripts, and more, go to fs.blog slash podcast, or just Google The Knowledge Project. Until next time.