Startup, Small, and Medium Enterprises – A Lean Approach
As originally published on November 20, 2011
Integrating Lean Six Sigma and Project Management Skills
Part III of III
In parts I and II, we devoted our thoughts to the industrial and academic environment on the value and benefits of LSS and PM skills for this decade. In part III of this series, our field of focus will be confined to startups, small and medium enterprises by sharing how LSS and PM skills can be applied to help them achieve their mission and vision over the coming years.
When it comes to implementing or leveraging the benefits of LSS and PM, it is neither the nature of the institution or corporation nor the size of business volume, but merely how it is customized for that environment.
In an industry situation, it is vital we sustain the sales-to-capacity ratio > 1 and then implement LSS and PM downstream for maximized benefit to the organization in particular to its customers. For a ratio of < 1, the focus of LSS and PM shift to the sales and marketing areas, where the direct contribution to revenue is a constraint. In the academic and institution type sectors it depends on the region where you operate and the ToC concept still applies. In most institutions in the western region, sales-to-capacity ratio is low and they need more students to come in and register. While in countries within the South Asian Bloc the available capacity is always less than the demand due to several reasons. Thus when the sales-to-capacity or demand-to-capacity ratio is high, there is a general tendency for the institution or organization to gravitate toward two undesirable philosophies:
- Complacence toward internal efficiency and effectiveness – Kind of customer arrogance and
- Fire fighting internal process to just say afloat while delivering to the customer
- Not cautious about internal spending and general lack of organizational discipline
- People not willing to change or assimilate best practices in within their industry
In this part III, we will focus on how small, startup, and medium enterprises can adopt the principles of LSS and PM and prevent failures and experience growth and success at a sustainable rate. As for startups there is a higher level concept termed in the LSS industry as DFLSS (as in Design for Lean Six Sigma) by preventing the 3 Ds while launching the company from the very word go. In the case of small and medium enterprises, the focus is on maintaining the high sales-to-capacity ratio to stay profitable.
For the small and medium enterprises, the following areas could lead to a direct benefit toward their EBITDA:
- Process Delays – Lead time to deliver products/services to high volume customers
- Usually have customers with high volume and not diversified
- Highly dependent on customer’s lead time and rapid accounts receivables
- Need cash flow to be able to withstand delay in accounts receivables
- Usually dependent on loans to generate enough cash flow to serve customers
- Product and/Service Defects – Low skilled labor leading to 3Ds
- Material savings can come from:
- Trained labor workforce to avoid 3Ds
- Low skilled labor needed to be mistake proofed for layout efficiency
- In some countries labor availability is a constraint causing delays
- In need of automation to avoid certain manual steps in the processes
- Product and/or Process Deviations
- Deviations results in delays and/or defects
- Reducing and/or eliminating deviations results in materials and time savings
In an enterprise, 3Ds (Delays, Defects, and Deviations) are similar but interpreted in a different manner. Let us assess a few examples and understand their impact:
- Process Delays
- Accounts receivables and payables
- Manual delays in process of day-to-day operations
- Product and/or Service Defects
- Product assembly, build, or appearance in defect mode
- High turnover causing need for training
- Labor on contract lack skill causing defective products
- Product and/or Process Deviations
- Inconsistency across operators and shift engineers
- Non Compliance with safety and environmental regulations
- Applicability of LSS and PM in an Enterprise/Startup:
Most enterprises are dependent on the following factors:
- High labor availability
- Trained labor force
- High lead times for delivery with customer
- Rapid accounts receivables process
- Kick start loan to have cash flow till threshold of cash flow is achieved
- No need for training people on LSS and PM, but just execute the project for them
Once they experience growth and profitability, they would be willing to invest further on a longer term basis. LSS and PM can be applied in an enterprise as well as startup business environment. In my previous experience with enterprises as well as startups, a proactive strategy is much, more relevant as the risk for this category of business is high with the impact of the 3Ds. For startups it would involve:
- Chalking out the business plan for the startup
- Documenting the sales and revenue projections with validation
- Ensuring an intellectual property filing is done promptly
- Verifying that the relevant people are in place for hire once the funds come through
- Drawing plans to have a board of directors ready to swing into action
- Practicing the pitch with “C” level executives to test drive the proposal
- Registering the business name and having an email, website and other aspects in place
- Pitching the proposal to few Venture Capitalist funding agencies
- Screening an aggressive sales team to kick off once the funds are in place
- Bringing some customers beforehand while the idea is being touted to get some traction
Startups tend to fail not due to lack of funds but high risk in their assumptions of how things will go once kicked off. When these assumptions are validated upfront with information on the track record of the team members involved the chances of success increase significantly. To reduce the risk and increase the chances of success, it is worth to hire a team that can bring in the DFLSS and PM skills approach to the startup till it reaches a level of sustainable growth and profitability.
Utilizing the principles of PM and LSS, enterprises and startups can avoid going belly up even if they have a few customers to get started with. The question is to hire the balance of team members on a PT or FT mode and create the momentum for cash flow and revenue generation and then revisit the strategy before growing larger. Understand the economy of the local geography before relying on the team so that the startup or enterprise is not victimized by lack of labor either a high turnover in a great economy or by unwillingness of team members to quit their current job and transition. An ability to strike a balance can be sought by engaging the right LSS and PM expertise to walk the team through this process.
Benefits of ILSS:
ILSS in a startup and enterprise can bring in the threshold of prosperity and success so that the business can maintain and grow from that point. An efficient board of directors taking this seriously is also critical followed by an official and formal filing of intellectual property on a global basis. Conducting internal audits by external agencies also allows the VCs to realize that the 3Ds are unacceptable and can be enhanced by some kind of ISO or CMMI or other certifications that are recognized by the customers.
During the dotcom days several startups and enterprises went bankrupt due to reasons discussed above. Now there is money available in the Asia frontier and so investors are looking to seed funds in startups and enterprises that are promising in ideals as well as action. Utilizing a PM and LSS approach couldn’t have come at a better time.
As in all other situations, change takes time, while it is wiser to apply a piloted effort for the startup and enterprise to evaluate the gaps and success patterns upfront. I am in the middle of handling four enterprises and one startup between the US and South Asian regions and it is exciting to see how the skills of LSS and PM are so relevant. Later by mid 2012 you would also hear from on how these efforts turned out and also have access to a couple of case studies by then.