Posts Tagged excess inventory

The need for operational excellence (and subsequently, a Chief Operating Officer)

Small companies and start-ups often get off to a good start because of good product(s) combined with good marketing. As the company grows, it hires more sales people and product developers, one to increase demand and penetration, and the other to ensure adequate supply.

An area often overlooked or sub optimized is the operations; the company gets so caught up in increasing its revenues that it loses focus on the operational aspects of the business. Even if there is some focus on operations, the right person is not assigned to manage this area. And here is my theory behind it….

Companies are started by sales people and/or engineers- and their focus is in selling or product engineering. When the company is small with a small list of customers, it is easy to manage the supply/demand situation as well as the underlying operations. However, as the company grows and increases its customer base and potentially the complexity of their requirements, the need for focus on the operational aspects of the biz becomes critical.

While the sales people are out there promising the world to the customer (and prospects), and engineers are busy with product design and features, it is the head of operations, who ensures there is enough supply for the demand being created, and the output meets the desired quality. The head of operations also works with the head of finance to ensure there is enough working capital to keep the shop floor running. He/she also advises the sales people when to turn down an order because of lack of adequate capacity- a skill a sales person is not trained to do, and the engineers what feature(s) is going to be difficult to build and scale – a discipline the engineer does not usually have (since they are too enamored by the features of their product – read the biography on Steve Jobs, you will know what I am talking about).

The head of operations (or chief operating officer) plays in important role in developing and constantly improving the operational excellence of the organization, using data and KPIs; they have to be good @ forecasting, identifying vendor risks, personnel needs and challenges, and the optimal use of all types of resources. Amidst the chaos and ad-hoc nature typical of a company in its infancy, the COO also brings in much needed processes,  discipline, and structure which is often lacking. They are disciplined in their thought process, and tend to be less carried away by unrealistic expectations, and promises, typical of sales people.

Companies that do not recognize the need for the COO, often find that they have overcommitted to their customers (a sales focused issue), have quality issues, and are unable to meet commitments and deadlines. In addition, while they may be profitable @ a unit level, their bottom-line is suffering because of over-capacity, excess inventory, and sub-optimal operational efficiency. Worse, they may be losing repeat customers because of a lack of consistency in the quality and standard of the deliverables.

A good chief operating officer is priceless for an organization of any size and in any industry and has a seat in the table with the CEO. The COO, allows the CEO to focus on strategic areas and in growing the business without worrying about the availability of the right item for the right customer with the best possible quality.

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