The New Blind Spot
By John L. Mariotti
driving along, and you decide to change lanes. You check your rear
view mirrors; a quick sideways glance; and activate your turn
signal. Suddenly a horn blares and a fender flashes in your
peripheral vision. You react, but were you fast enough to avoid the
imminent collision? A car was in your blind spot. What does this
have to do with global business? Everything. There is a “new blind
spot” going unnoticed.
certainly in the most complex business era ever. Complexity grows
daily. The range of issues management must consider is
staggering—terrorist threats, foreign exchange, off-shoring,
financing debacles, illegal immigration, new regulations,
energy/commodity shortages, and technology that’s growing at warp
Layer of Complexity—The “Blind Spot”: As if this array of issues
isn’t enough, there’s another layer of complexity, a new “blind
spot” if you will, just waiting to cause problems. What is it? The
layer of complexity caused by the desperate pursuit of double-digit
growth in low (or no) growth markets. Emerging mega-customers
command huge buying leverage, as competitors fight for growth around
the globe. Just as a well-intentioned lane change exposed the
danger in your blind spot, this relentless search for growth causes
a new blind spot—complexity caused by proliferation, done with the
well-intentioned quest for growth where there is little, or none, to
be had. This new blind spot exists because of two factors, which
together cause tectonic shifts in global competition.
Latent Overcapacity for everything, somewhere in the world. If
it isn’t on-stream now, it can be in a very short time. Just like
that car lurking in the blind spot, it can hit you before you ever
see or hear the warning. Competition comes on faster than ever.
Rapid Knowledge Transfer due to communications and information
technology combined with the speed of air travel means that
knockoffs/copies are upon you in a blink. Just like the car in the
blind spot, warning time is little—or none. Parity is the norm.
Are All ‘Here’…” An MCI Network TV commercial, (aired 10 years
ago, before its time) showed this: A young Anna Pacquin (award
winning actress) dances among rocks on a beach and says, “The
universe is information; information can be digitized; digital data
can be transmitted; every book, every movie, every piece of
knowledge in the universe; right here.” In another version she
says, “…there is no there, there is only here, and we are all
here—with the network.”
idea, knowledge, design, or skill set can be instantly transferred
anywhere, followed quickly by people who know how to use it. This
enables an incredible number of adjacent possibilities to expand.
When pressured for growth faster than markets are growing, managers
resort to proliferation of all kinds. They develop new products,
but usually derivatives of the old ones. They enter new markets,
but the markets are only new to them. Entrenched incumbents await,
ready to defend them. Proliferation leads them to enter more
markets, open more locations, add more variations, create more
choices. The result—complexity abounds.
Measures = No Warning: And yet, none of the vaunted 21st
century accounting systems captures the financial impact of this
layer of complexity. Why? It’s hidden in the blind spot.
Complexity costs hide in the accounts used as “catch alls” with
titles like: returns, allowances, deductions, variances,
non-recurring charges, miscellaneous, obsolescence, bad debt
reserves, premium freight charges, closeouts, rework, scrap, and
interest costs. Complexity also hides in higher levels of S. G. & A.
(Selling, General & Administrative) and Overhead.
the expenses are “recorded” – but only after the fact – and without
an identified cause. These are blameless crimes perpetrated with
the best of intentions, but a frightening unawareness that these
profit killers are lurking in new blind spots – unnoticed – until
the end of accounting periods. Then, at month-end, quarter-end, or
year-end, the top line may go up, but the bottom line almost always
It; Fix It—Use It or Lose It: What should management be doing?
First, recognize that this hidden drain on profits exists.
Complexity not only hinders current earnings. It strangles the
future. Complexity keeps coming back like weeds after a spring
rain. You must know where it hides, how to find it and how to
measure it. Once you understand complexity, you face a strategic
“fork in the road. Choose to remove the complexity and keep it
out. Or decide to structure your business to capitalize on
complexity. Selling customized, high variety can be very profitable
– but only if done right – and with a focus on using managed
Unknowns That Should Be Known—Specifically
SKU Count: Meanwhile, institute new measures that most companies
simply guess at, if they even do that. Know how many SKUs you have
(Stock Keeping Units). Not “approximately” … exactly. And know how
they are distributed among various business units. Know the annual
sales per SKU, by division, by customer, by product line. You have
all the data needed to calculate and keep these up to date. Is the
SKU count growing? Yes, of course it is, and it will keep growing
until you do something about it.
Order Processing Costs: Know what it costs to process an order
from end to end?. Do you? Of course not! There are budgets for
each department involved. Add them up and divide by the number of
orders processed. Add a percentage factor for the “overhead” of
senior management, and that’s a good approximation, albeit a little
low. That’s every order you process, and some orders (and
customers) don’t generate as much net profit as it costs to handle
It, Study It—Separate Winners from Losers: It’s time for the
good part. Sort your annual sales revenue and gross profit dollars
in descending annual value for customers and products. That will
give you four lists. Make sure you’ve included “cumulative value”
and “percent of total” columns. Now draw a line at the 25 percent
and 75 percent levels. Above the 25 percent are your winners.
Below the 75 percent are your losers. “Love” the winners—sell them
more. “Lose” the losers. The middle 50 percent is a potential gold
mine—or it can contain “fool’s gold.” Upgrade the “high potentials”
into winners, or push the “low potentials” down and out along with
other losers below that 75 percent line.
Reduced Work = Fewer Faces in Fewer Places: Finally, recognize
that as you remove complexity, you will remove work, which means you
must cut staffing too. Eliminating facilities and locations
releases a virtual gold mine of savings from reduced complexity.
Look hard at this golden opportunity to reduce complexity.
Calculate dollars per location and see what it shows.
You Can See It—Manage It: There you have it, the “ new blind
spot” for management—and the accounting profession. It’s like
having some of those new convex mirrors and a rear-facing video
camera. You can see so much more. Now it’s up to you to watch
what’s in the blind spot and make sure that you never let this level
of complexity “blind-side” you again. Your bottom line – and your
shareholders – will be much better off because you did.
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John L. Mariotti.
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