Original text

In a recession, just In Time (JIT) and Profit Improvement thru Marketing Strategies (PIMS) are tools to consider. Dick Jordan shares some insights.

We hear more and more predictions of a recession in 2023. I remember when Paul Volker, then Chairman of the Federal Reserve, raised interest rates in the Carter years to curb inflation, which resulted in two minor recessions. His actions worked and then there was a period of economic growth.  We have seen in 2022 several increases in rates by the Federal Reserve and the forecast is that more will be coming.

One of my favorite management books is “The Goal” by Eliyahu Goldratt. The novel is a story of a new plant manager whose plant is losing money and he has a short time to make it profitable. The hero contacts a former mentor for help. They meet in an airport and his mentor asks, “What is the goal of a business?”  They conclude the purpose is to make profit. To do that, the plant manager must focus on Productivity to 1) increase throughput 2) decrease inventory and 3) decrease operational expenses. The Goal was to increase throughput by eliminating bottlenecks.  A bottleneck is anything that stops the product from coming off the delivery truck to being shipped to and paid for by the customer. I’ve shared this book with my teammates, and as a team we bought into the concept and measured our results accordingly. When faced with an economic downturn, in addition to “The Goal,” we paid close attention to what I learned using Just in Time delivery (JIT} and the PIMS (Profit Improvement thru Marketing Strategies) program.

The JIT program was a concept that was used by the Japanese as they rebuilt their manufacturing base after WWII. The practice was to have vendors deliver raw materials as they were needed for that day’s production. Imagine the positive impact on inventory costs, manpower and quality. We had personal experience with JIT. Our five major customers wanted JIT and we supported them with JIT for several years. One customer received deliveries three times a day at the production line. We did that without having to make major investment ourselves in inventory or equipment.  They were our most profitable customers. They were also customers with whom we had a very strong working relationship.

The PIMS program was developed at GE in the 1960’s. General Electric owns several Strategic Business Units (SBU’s). The CEO went to the IT head and asked them to find out if there were common practices that explain the success of these companies. After some time, they came back and said 35 items explain 70% of the success. The program was then developed further at Harvard University and in the early 1970’s was set up as a consulting company. There are several thousand SBU’s in PIM’s data base. I worked at Apache Corporation in their Industrial group. Apache owned 20 industrial businesses in many industries. We measured all the operations concentrating on the thirty-five factors. The management teams developed their strategic business plan based on our findings and they all grew in profit and sales from implementing those strategies. The three key strategies were:

• Relative Market Share. Being dominant in your market provides economies of scale. You become more important to your vendors. You also keep on top of technical changes made by the customers and in the marketplace
• Investment Intensity. This tends to be a negative from higher depreciation costs, cash flow demands and an urge to use the fixed assets. Another investment that is a “NO” is in inventory. There are many studies that estimate the cost of carrying inventory is 20-30% of the cost. This includes space, manpower, obsolescence, insurance and damage or theft.
• Relative Product Quality. Quality has a very positive impact on your results. You reduce “pain” for your customers and, in house, improve productivity and reduce costs in all departments

Let’s go back to the story of “The Goal.” What would your business look like if you and your team documented your process from start to finish and identified the bottlenecks that are causing you higher production costs, higher overhead costs, loss of sales, reduced cash flow and a sense of not being a great team. Keep in mind the lessons of JIT and PIMS. Doing that study will give you your business plan for 2023 and increase your success even in the recession. Go for it.

SCORE is here to help you. richard.jordan@scorevolunteer.org or 218-251-4413. SCORE has 10,000+ mentors across America ready to help small businesses like yours.