The Hustle and Grind

I'm a boss with P&L responsibility. I try to know what's involved in all the work that I assign to others just so I can improve the productivity of folks like you Mise. ;)
Ehh, my productivity is pretty high, if you're talking about "extra profit per hour worked" or something. I'm in a role (pricing) where my actions are highly leveraged; if I do something that results in getting 0.5% extra out of our pricing, then that's brings in an extra $30m in profit over the course of the year*. The stuff that I do has a huge impact on the bottom line of the company, for very little actual work. The fact is, I don't actually need to work more than 10 hours a week at most in order to generate an extra $30m to our bottom line. I have a lot of spare capacity, but filling that capacity has a massive opportunity cost: what if, during that navel-gazing spare time, I randomly think of some way of changing our department's operations or develop some new piece of analysis that results in more accurate pricing? That could be worth hundreds of millions of dollars to the company. If I had been made to fill my time doing other things, those ideas might never have been generated.

There are a lot of bright, creative people that stuck in the "hustle and grind", who don't get an opportunity to be creative and come up with new ideas that could really impact the bottom line. It's better that those grinding, repetitive jobs are done by people who aren't creative enough to come up with value-adding new ideas themselves. That frees up time for bright, creative types to think up and implement value-adding new ideas. Give them intrinsic motivators, such as the opportunity to satisfy their intellectual curiosity, and a credible stake in the profitability of the company. And give them the freedom to manage their own time: as long as they get their jobs done, anything extra they do is pure profit for you.


*-More accurately, but less obviously, if I do something that results in our pricing being closer to the profit-maximising price, then we'll make more long-term profit; the extra profit from getting 0.5% closer (up or down) to the profit maximising point is in the order of tens of millions of dollars.

It is always good to be aligned with management. :)
No point in doing something your boss doesn't care about, right?
 
Ehh, my productivity is pretty high, if you're talking about "extra profit per hour worked" or something. I'm in a role (pricing) where my actions are highly leveraged; if I do something that results in getting 0.5% extra out of our pricing, then that's brings in an extra $30m in profit over the course of the year*. The stuff that I do has a huge impact on the bottom line of the company, for very little actual work. The fact is, I don't actually need to work more than 10 hours a week at most in order to generate an extra $30m to our bottom line. I have a lot of spare capacity, but filling that capacity has a massive opportunity cost: what if, during that navel-gazing spare time, I randomly think of some way of changing our department's operations or develop some new piece of analysis that results in more accurate pricing? That could be worth hundreds of millions of dollars to the company. If I had been made to fill my time doing other things, those ideas might never have been generated.

There are a lot of bright, creative people that stuck in the "hustle and grind", who don't get an opportunity to be creative and come up with new ideas that could really impact the bottom line. It's better that those grinding, repetitive jobs are done by people who aren't creative enough to come up with value-adding new ideas themselves. That frees up time for bright, creative types to think up and implement value-adding new ideas. Give them intrinsic motivators, such as the opportunity to satisfy their intellectual curiosity, and a credible stake in the profitability of the company. And give them the freedom to manage their own time: as long as they get their jobs done, anything extra they do is pure profit for you.


*-More accurately, but less obviously, if I do something that results in our pricing being closer to the profit-maximising price, then we'll make more long-term profit; the extra profit from getting 0.5% closer (up or down) to the profit maximising point is in the order of tens of millions of dollars.


No point in doing something your boss doesn't care about, right?
Very interesting Mise. What kind work do you do (or industry do your work in) that allows such small adjustments to generate an additional $30MM in net profit? Why wouldn't you be tweaking monthly?
 
Very interesting Mise. What kind work do you do (or industry do your work in) that allows such small adjustments to generate an additional $30MM in net profit? Why wouldn't you be tweaking monthly?
I don't think I'm writing anything here that isn't public domain, but even so, I don't really want search engines picking this post up. So I'm going to change the name of the company I work for to something... else....

Spoilered for long and possibly boring post:

Spoiler :
I work for Ba Feers, which you probably know is the largest diamond miner in the world; our revenues are high enough that a small change in price leads to a big change in the $ value on the bottom line. We do change prices monthly, but there are a lot of different constraints on our business that make pricing at Ba Feers a lot more challenging than pricing at a "widget factory" in the textbooks. First of all, we're the overwhelmingly dominant player in the industry, which means we can't take prices from the market. There simply isn't a market.

Secondly, our clients are incredibly reluctant to reduce the quantity of diamonds that they buy, partly because they have orders to fulfil that they don't want to lose, and partly because they don't want to lose privileged access to Ba Feers's goods (which they believe they risk losing if they don't maintain high purchases from month to month). They would rather take a hit to their bottom line themselves than refuse goods, but we want them to make normal economic returns, in order that they can continue to buy from us in the future, make investments (and therefore have more money to spend on our diamonds), and engage in marketing themselves (a chore that Ba Feers has historically taken on itself, rather famously).

Thirdly, it's really hard to switch a mine on and off; it takes up to 6 months to get diamonds from the mine to the client, so we have a strong imperative to maintain sales volumes and respond to changes in demand by changing prices.

And finally, our mines come predominately from Botswana, whose government has a 50% shareholding in the mining operation there. The Botswana government wants stable revenues, because the gov'ts revenues are highly dependent on diamonds, so they don't want to have to change their public spending plans. Although we control our own prices, they have a big influence over our pricing decisions.

All of these different constraints make it difficult to get pricing right. We can't just raise prices until we lose sales, and then figure out by trial and error where the optimum price is, because our clients just take the hit themselves. Instead, I have financial models of a generic manufacturing company that try to predict what margin this generic company would achieve on our goods, and plan prices backwards from that, so that they receive normal economic returns. We can't really do "cost-plus" pricing, because in cost-plus, you set your price as a fixed number, and then change volume in response to changes in demand. But we can't do that because it would either mean running higher stock levels (which means higher capital requirements => lower return on capital, and also if we drop prices, we'd have to write down our stock), or turning our mines on and off (which is physically impossible).

So we have to kind of "guess" what our prices should be, which is what I try to do. I already mentioned the financial models of a generic manufacturer, but legal restraints (we're a big bad monopoly!) forbid us from actually asking for key details from clients that allow us to do that. We also have only a vague idea of what our goods are manufactured into, and how much they sell them for in the end, which obviously affects the manufacturer's profitability; I use a statistical model to predict that, too. We also auction a small amount of our goods; I analyse the results of those auctions (or rather, the bidding behaviour of clients during the auction) to extrapolate prices for the bulk of our goods.

All this stuff sounds like it should take a lot of time, but it doesn't really. The models, once set up, run themselves. I spend most of my time figuring out how to make better use of the existing data, where to find new, more reliable sources of data, whether there are other indicators of future short-term demand that we haven't thought of, and so on. But because we don't know precisely what our profit maximising price should be, have basically none of the normal feedback mechanisms for finding it out, and have an incredibly strong imperative to maintain sales volumes, that offers a lot of scope for increasing profit through more accurate pricing.


Now, those are the commercial issues. However, I haven't even gone into the technical issues... You see, even if we did know exactly what price we should put on our goods, there are a myriad technical and logistical issues preventing us from doing that. It's far too boring to go into, but very often, it's almost impossible to sell our goods at exactly the prices that we want to sell them for. You can get them pretty close; how close you get them depends on your ingenuity and skill with the tools you have available. And a lot of my time is spent improving the tools and creating new tools to help us get closer to the price that we want to set our goods at. The closer you get them to the desired price, of course, the more money the company makes, so the creation of those tools, and my ability to use them, directly impact the bottom line. Of course, there are process enhancements in all parts of all businesses, but as I said, because I'm in a role with such a direct impact on the bottom line, those process enhancements go a lot further than they would in some other part of the business.
 
BirdJag, you run a firm, tell us your hustle before it really sustained itself.
 
I don't think I'm writing anything here that isn't public domain, but even so, I don't really want search engines picking this post up. So I'm going to change the name of the company I work for to something... else....

Spoilered for long and possibly boring post:

Spoiler :
I work for Ba Feers, which you probably know is the largest diamond miner in the world; our revenues are high enough that a small change in price leads to a big change in the $ value on the bottom line. We do change prices monthly, but there are a lot of different constraints on our business that make pricing at Ba Feers a lot more challenging than pricing at a "widget factory" in the textbooks. First of all, we're the overwhelmingly dominant player in the industry, which means we can't take prices from the market. There simply isn't a market.

Secondly, our clients are incredibly reluctant to reduce the quantity of diamonds that they buy, partly because they have orders to fulfil that they don't want to lose, and partly because they don't want to lose privileged access to Ba Feers's goods (which they believe they risk losing if they don't maintain high purchases from month to month). They would rather take a hit to their bottom line themselves than refuse goods, but we want them to make normal economic returns, in order that they can continue to buy from us in the future, make investments (and therefore have more money to spend on our diamonds), and engage in marketing themselves (a chore that Ba Feers has historically taken on itself, rather famously).

Thirdly, it's really hard to switch a mine on and off; it takes up to 6 months to get diamonds from the mine to the client, so we have a strong imperative to maintain sales volumes and respond to changes in demand by changing prices.

And finally, our mines come predominately from Botswana, whose government has a 50% shareholding in the mining operation there. The Botswana government wants stable revenues, because the gov'ts revenues are highly dependent on diamonds, so they don't want to have to change their public spending plans. Although we control our own prices, they have a big influence over our pricing decisions.

All of these different constraints make it difficult to get pricing right. We can't just raise prices until we lose sales, and then figure out by trial and error where the optimum price is, because our clients just take the hit themselves. Instead, I have financial models of a generic manufacturing company that try to predict what margin this generic company would achieve on our goods, and plan prices backwards from that, so that they receive normal economic returns. We can't really do "cost-plus" pricing, because in cost-plus, you set your price as a fixed number, and then change volume in response to changes in demand. But we can't do that because it would either mean running higher stock levels (which means higher capital requirements => lower return on capital, and also if we drop prices, we'd have to write down our stock), or turning our mines on and off (which is physically impossible).

So we have to kind of "guess" what our prices should be, which is what I try to do. I already mentioned the financial models of a generic manufacturer, but legal restraints (we're a big bad monopoly!) forbid us from actually asking for key details from clients that allow us to do that. We also have only a vague idea of what our goods are manufactured into, and how much they sell them for in the end, which obviously affects the manufacturer's profitability; I use a statistical model to predict that, too. We also auction a small amount of our goods; I analyse the results of those auctions (or rather, the bidding behaviour of clients during the auction) to extrapolate prices for the bulk of our goods.

All this stuff sounds like it should take a lot of time, but it doesn't really. The models, once set up, run themselves. I spend most of my time figuring out how to make better use of the existing data, where to find new, more reliable sources of data, whether there are other indicators of future short-term demand that we haven't thought of, and so on. But because we don't know precisely what our profit maximising price should be, have basically none of the normal feedback mechanisms for finding it out, and have an incredibly strong imperative to maintain sales volumes, that offers a lot of scope for increasing profit through more accurate pricing.


Now, those are the commercial issues. However, I haven't even gone into the technical issues... You see, even if we did know exactly what price we should put on our goods, there are a myriad technical and logistical issues preventing us from doing that. It's far too boring to go into, but very often, it's almost impossible to sell our goods at exactly the prices that we want to sell them for. You can get them pretty close; how close you get them depends on your ingenuity and skill with the tools you have available. And a lot of my time is spent improving the tools and creating new tools to help us get closer to the price that we want to set our goods at. The closer you get them to the desired price, of course, the more money the company makes, so the creation of those tools, and my ability to use them, directly impact the bottom line. Of course, there are process enhancements in all parts of all businesses, but as I said, because I'm in a role with such a direct impact on the bottom line, those process enhancements go a lot further than they would in some other part of the business.
Bravo Mise! I am not surprised that your work is so specialized and your previous posts now make complete sense. I was expecting you to be in some tech or web business. I sounds like you've been doing it for a while. Should you marry (if you are not already) your missus will expect a big one. ;)

Thanks.
 
BirdJag, you run a firm, tell us your hustle before it really sustained itself.
I taught school (public and private) for ten years after college often under various federal grants. For the last couple of years I was involved in teacher training. I loved it. Regan was elected in 1980 and took the ax to the bulk of the grants programs so enrolled in business school and got an MBA with an emphasis in marketing. I worked for a consulting firm after B school selling their seminars that they used to build the consulting business. In 1990 I moved to NM to manage production for a catalog company and oversaw design, layout, copy, printing and mailing of a couple of million books a year. The company was very successful and was bought out by a NY lawyer during the M&A feeding frenzy of the mid 1990s. It was quickly raped, pillaged and bankrupted for its cash. I took over running a small start up catalog and grew it to the size where we could sell it. After that I opened a specialty manufacturing business with a friend. We focused on creating replicas of museum objects that we sold to shops and catalogs. one of my customers bought the business from me. He did not like having to wait in line for his orders.

My long background in teaching, marketing, manufacturing and the connected operations and financial responsibility positioned me nicely for taking over the company I currently run. It is a small compact company of $15MM in sales and about 10% net operating profit. I have 20 employees.

Condensing things to a few sentences makes it all seem quick and easy, but it wasn't. Learning to run all aspects of a business and keep it profitable is difficult and takes time. But it has been mostly fun and interesting. Even now I face new and interesting challenges every day.
 
Back
Top Bottom