Defending OCF as the One Best Supply Chain Metric

"Say, do you test positive for OCF?"

cash stairway.jpgThat is the opening salvo in the column I wrote for the August 8, 2012 Supply Chain Digest entitled, “The One Best Supply Chain Metric.” The article appeared in editor Dan Gilmore’s weekly First Thought column, a space that Dan does not give away freely. Knowing the placement, and how many people receive and read Dan’s weekly e-mail newsletter, a column appearing here should be something outstanding and bold.

So I took a bold approach, and claimed that most of the metrics that we supply managers use to manage our business are somewhat effective at best, and potentially worthless at worst.

Talk about heresy. This was sure to get some people’s attention.

Supply chain and logistics managers are all about measurements. We believe in data and reporting to manage our kingdoms. We measure all the angles of execution, of inventory, time, and value. We hire industrial engineers to measure the distances people travel, the time it should take for a picker to pick an item, the time it takes a ship to cross an ocean, and the number of widgets you can stuff into a container. We measure everything that moves. And if it does not move, we figure out why it does not move and measure that too!

I want to suggest that there is only one meaningful supply chain metric. This is the one that all others bow down before, a metric to which everything else contributes, a metric where the buck literally stops:  operating cash flow.

Judging from the feedback that Dan shared with me, there are people who agree, people who don’t agree, and people who don’t know what operating cash flow is.

I am tempted to say those who did not agree are stupid. Note, I said “tempted to say.” They may not know any better, which means that there is hope for them. If you don’t get it, relax; there is hope for you too!

I’m not posting the article here. If you have not read it, you should. Now. You did not see it? Stop. Click HERE to read the article. The rest of this post will not make sense until you do. Go ahead, we'll wait.

Did you read the article? Yes? Good.

Why Am I fixated on Operating Cash Flow?

I adore inherent simplicity. My goals should align with my boss’s goals. My subordinates’ goals should align with my goals. All of our goals should align with the goals of the company.

Simple, yes? OK, so what are the goals of your company?

Goals = Mission. If you are confused, look at your company’s mission statement.

Here are a few quotations that may spark some thinking—and some debate.

“It is the Mission of Advance Auto Parts to provide personal vehicle owners and enthusiasts with the vehicle-related products and knowledge that fulfill their wants and needs at the right price. Our friendly, knowledgeable, and professional staff will help inspire, educate, and problem-solve for our customers.”

“Profitable growth through superior customer service, innovation, quality, and commitment.” – ARGO

“American Standard's mission is to be the best in the eyes of our customers, employees, and shareholders.”

“We are a market-focused, process-centered organization that develops and delivers innovative solutions to our customers, consistently outperforms our peers, produces predictable earnings for our shareholders, and provides a dynamic and challenging environment for our employees.” – Ashland

“Our vision is to realize the tremendous potential of The Burlington Northern and Santa Fe Railway by providing transportation services that consistently meet our customers' expectations.”

The second and fourth statements are complete in my book. The rest are missing a key element. In fact, I would say they are missing the most important element!

Go back and read the five examples above. Identify what is missing in #1, #3, and #5.

Need a hint?

I have two fundamental views about the goal of any business.

First:  the owners have the sole right to determine the goal of the enterprise.

Second:  from the viewpoint of investors (owners) in a business enterprise, a company’s goal is to make more money, now and in the future.

Money is cash, not profit (or earnings). Money is what sustains the company and helps ensure its future. Profit is a number at the bottom of the Income Statement. Cash is in the bank and you can write checks to spend it. Profit is nothing but a theory that fools so many people.

Here is a bit of intrinsic simplicity. As a business owner, the primary vision I have of my business is that of a MACHINE that PRINTS MONEY. Everything else is subordinate to and supportive of that vision. The only measure of the success of that vision for my MONEY-PRINTING MACHINE is the Operating Cash Flow it creates. We make our MONEY by making sure that our clients’ MONEY-MAKING MACHINES are operating effectively. When our clients MAKE MONEY, we MAKE MONEY.

That is the DKS & Co. mission statement. Can you buy that?

I think it is nice that Advance Auto Parts is so customer-focused. I might want to go there as a customer. As an investor, I will put my money elsewhere. American Standard wants to be the best in the eyes of its employees, customers, and shareholders. They’d better crank out some serious cash and kick out some serious dividends to me as an investor if they want to be the best in my eyes.

I suspect that Uncle Warren has the folks at BNSF focusing on cash generation, so that they can realize the tremendous potential he invested $15.87 billion in cash into.

The trouble with mission statements is that they often leave out the most important item:  generating CASH. Being profitable is good. Profitability means that the company is generating more money on paper than it is spending. Providing the best customer service, being the market leader, supporting the community, or having the greatest employees—all are important and have a place in a mission statement. Leaving the Business of the Business out of the mission statement is leaving profit generation as an assumption.

Should a business just assume that it is in business to make a profit?
There is a fundamental problem with assumptions – they makes ASSES out of YOU and ME.

The reason so many companies fail is that the managers who are running them forget that the company is in Business! If a company is going to thrive and survive, it must generate sufficient Operating Cash Flow to continue to feed the going concern.

How about privately held businesses? Should they be focused on cash generation? Hell, yes! Privately held can mean many different things today. There are huge concerns that are private, Like US Foodservice, or Cargill, Mars, or Publix. There are private companies held by Private Equity Groups. Rest assured, those companies are fixated on cash generation.

I looked at 100 Fortune 500 mission statements for this article. Only two mentioned “cash flow” or “cash generation.” Eighteen said something about shareholder value (whatever that really is) and eight said that they wanted to be profitable or make profits. The rest said nothing about the Business of Business.

Let me be brutally frank. It is galactically stupid to not have the goal “make more money, now and in the future” as part of your mission statement. It is a massive mistake not to use operating cash flow as the key metric that everybody in the enterprise watches.

The article continues after the jump...

Hello! My name is Dave Schneider, I'm founder of WATP. In 30 years, I've never found a more important Supply Chain metric than OCF.
I'd love to help you get started tracking it.
Give me a call anytime at 877-674-7495.

If you are looking for a true mission statement, look no further than Cooper Tire:

“The purpose of the Cooper Tire & Rubber Company is to earn money for its shareholders and increase the value of their investment. We will do that by growing the company, controlling assets, and properly structuring the balance sheet, thereby increasing EPS, cash flow, and return on invested capital.”

I think I will go buy a few shares of Cooper.

Have I Made the Point?

Look at your company mission statement again. Is it part of the two percent club? You know, that two percent that actually have the goal “to make cash” in their mission statements?

No? Fear not. All is not lost.

Now we get to why I do not think that supply chain managers who do not agree that OCF is The One Best Supply Chain Metric are stupid. The company they work for assumes that everyone understands that this is a fundamental part of their mission. It is so fundamental that it does not need to be stated in simple bold words.

It is assumed. And when something is assumed, well, a whole bunch of us become donkeys.

Here is a statement to consider when you are thinking of measurements.

Tell me how you will measure me, and I will tell you how I will behave. If you use illogical measurements you have no right to complain about my illogical behavior.

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