Platt Perspective on Business and Technology

Building a startup for what you want it to become 22: moving past the initial startup phase 8

Posted in startups by Timothy Platt on February 15, 2017

This is my 22nd installment to a series on building a business that can become an effective and even a leading participant in its industry and its business sector, and for its targeted marketplaces (see Startups and Early Stage Businesses and its Page 2 continuation, postings 186 and loosely following for Parts 1-21.)

• I began addressing the question of knowing when a new venture has reached a point in its development, where it can be said to be consistently profitable in Part 20 and Part 21 of that, and note in this context that a transition from pre-consistent profitability to generating reliably consistent profits marks a transition into a business’ first early growth phase.
• I then went on to at least begin discussing how different types of businesses would make use of this early developing flow of profits, as liquidity that can retained in the business itself to enable its growth, or that could be taken out of the venture for personal enrichment and profit.

I have been discussing a range of basic due diligence issues that enter into addressing these points, in terms of three basic business model approaches that I identify in this series as following:

• A conservative model,
• A normative model or
• An aggressive model approach.

And my goal here is to at least begin to look more specifically into each of these models. And in anticipation of that discussion to come, I note here that I will at least initially focus in this narrative on two business-shaping criteria: volatility and external timing constraints. And I begin that with volatility.

I began addressing volatility in general terms, in Part 21, and recommend you’re reviewing that line of discussion to put this continuation of it in fuller perspective. But in brief and selective summary of what I wrote there, this is a context where you have to be able to identify and evaluate, and plan in terms of resource need and availability, and as these issues arise in all directions and both within your organization and in its connected context. That, of course means raw materials and preprocessed and assembled parts that you might acquire from other businesses for inclusion in your own products, and parts and supplies that might not end up in your finished products that you need in order to produce them, or to manage their processing and distribution for sale. That includes volatility in your marketplace, and the possibility of rises and fall-offs in the levels and pace of sales made there for the types of products that you offer. Actually, this includes and can include essentially any benchmarked availability criteria that would be of importance to your business, whether that means parts or customers, or shifts in regulatory or other legal requirements that would impact upon your business’ performance and success. And I have only noted a few possibilities here, from what for most businesses would be a longer list. I have, for example, mentioned factors such as weather uncertainties in this type of context, in this blog when severe weather can mean loss of usual and planned for sources of essential raw materials such as citrus fruit, for companies that use them in their products. How does this type of consideration take shape and play out in businesses that pursue each of the three business model types, as identified above?

I will take that at least somewhat out of the abstract here by focusing on necessary raw materials and pre-manufactured and assembled parts that your business would have to acquire for inclusion in your finished products.

• A business that follows a conservative model when addressing that, would plan ahead and according to an expectation of at least some delays and other irregularities in their critical needs supplies flows for this. And the more volatile supply chain and original supplier support is for their production line input, the more incentive they would have as a risk management consideration, for preparing for problems. That, at the very least would mean stockpiling essential materials and parts where that is possible, in order to keep their own production lines active and productive. And where that is not as possible, it would mean actively preparing to switch sources of these necessary goods and materials so if delivery problems arose from one expected source, other such sources will have already been planned for and prepared for.
• There are real trade-offs here, insofar as warehousing what might prove to have been excessive levels of supplies in advance, carries its own costs – from the cost of warehousing per se with the storage space and labor involved, increased likely spoilage and loss, and the prospect of ending seasonal production runs (where seasonality applies) with excess materials in inventory that might not be needed – and even ever. But a conservative business model approach here, would accept a measure of additional costs up-front, as an insurance offset to possible greater costs that would be faced if they had not so prepared – and then found they should have.
• There is, of course a lot more to this system of trade-offs than I have noted here. Adding in two more possible considerations here, that can at least contextually become very important:
• Buying such supplies in larger volumes as bulk purchases can also mean lower per-unit costs from entering into volume purchase sales agreements. And if a raw materials or parts provider can achieve a sufficient stable, reliable sales volume that they can plan in terms of, they are going to be that much more incentivized to customize what they offer – at least for that manufacturer customer, and for precisely what they offer for sale, or in how it is packaged and shipped.
• Conservative model businesses of the type that I write of here can be in a strong position to in effect become the sole customer for at least certain types of goods, from their suppliers – though this possibility can also raise risk management concerns for these providers too.
• And risk management considerations of the type I address here, do not necessarily remain localized for their impact, entirely within the businesses that enter into an agreement. They can have wider-ranging impact that radiates out through larger networks as other businesses have to make adjustments to accommodate change taking place throughout their supply chain systems.

This set of points at least briefly examines how a conservative model business can develop its strategy, tactics and operational systems for managing its flow of manufacturing line supplies in the face of cost and availability volatility (where supply and demand pressures leave those two factors closely linked.) I turn now to consider an aggressive business model approach – and also for managing acquisition and ongoing availability of essential manufacturing supplies. And I begin addressing this scenario by noting a critically important point that is held in common by all manufacturing businesses here, and even on the extreme ends of conservative and aggressive spectrum – at least if they are well run. All of the decisions that I address here and for all business models under consideration, have to be solidly grounded in financially based costs and benefits analyses.

• Now let’s consider an aggressive model business and its supplies and parts acquisition and storage and utilization process flows. Where the conservative model business approaches costs and benefits concerns here, from an insurance-like approach and with a primary goal of maintaining continuity of production in its own systems, the aggressive model business focuses more on immediate cash flow issues, and on limiting the levels of financial assets that could be kept liquid, that it would have tied up in warehoused and otherwise stored goods and materials at any one time. And with that, I address both a key consideration that enters into aggressive business model thinking per se – and a significant factor in shaping the decision making processes and their actionable follow-through at a conservative model business. The conservative model business, in its extreme can keep large amounts of what could be its immediately liquid cash assets, tied up as supplies that have yet to be used and that cannot always be sold off for cash as is, without a loss.
• So the trade-offs that a conservative model business makes, include financial risk trade-offs too. And couched that way, one approach to thinking about them and their aggressive model counterparts is in where they each position their risk – not in how one necessarily acts in a more risk-aversive manner than the other.
• But let’s consider the aggressive model business itself here. And in this context, and for a variety of reasons, they commonly chose to limit or even essentially eliminate in-house managed and owned warehousing of the manufacturing supplies that they would need. And this is where just in time manufacturing enters this narrative.
• Just in time manufacturing, seeks to streamline and speed up both manufacturing, and distribution and sales systems – and as a component of that it seeks to keep invested funds that support all of that flowing, and as liquid as possible while doing so. Just in time here, is supposed to be agile and efficient and very, very quick.
• Think about the additional steps and delays that enter into planning and committing to in-house supplies warehousing, with the purchasing and storing and keeping track of and managing warehoused supplies inventories – with all of the extra staffing and operational processes and systems, and all of the physical space and other capital and expendable resources that all of that entails.
• And add to that, consider how advance purchasing of essential manufacturing supplies that would go into products to be produced, can limit a manufacturer’s ability to change its product line to meet anything like sudden changes in market demand. Warehoused production line supplies can even commit a manufacturer to a production line product portfolio that market change can render obsolete – unless that business is willing to absorb risk created additional expenses in order to update its intended product lines. (The conservative model as discussed here would, as such prove risky as a pure play for businesses that seek to service volatile markets that expect rapid, ongoing change in what is offered there.)
• If a business seeks to follow an agile just in time, and a here-aggressive business model approach, it is no wonder that one of their first steps in transitioning to that would be in mapping out where they pool and store resources and of all types, that could be kept moving and that could be maintained in-house only when they are actually going to be needed.
• So how do they maintain an assured supply of these just in time delivered supplies, so they can be sure they can keep their production lines running too? If they only store necessary supplies a brief period of time in advance, and even just a very brief one, the main risk management approach left to them is to always have a rich system of back-up suppliers and providers available and on short notice to fill in any possible gaps in what they have that they will imminently need.
• Conservative model businesses participate in supply chain systems. An aggressively positioned just in time manufacturer needs to develop a much more robust and wide ranging supply chain and business-to-business ecosystem – with that filling in any potential due diligence gaps that could arise in-house from their business model and its execution, with externally managed and owned alternatives.

I am going to continue this discussion in a next series installment where I will, among other things consider normative model businesses and mixed strategies, and how all three business model approaches under discussion here, approach lean and agile. And I will also pick up on and explore a key word that I used in this posting just before starting my bullet point listed conservative model discussion: “essential.”

Meanwhile, you can find this and related material at my Startups and Early Stage Businesses directory and at its Page 2 continuation.

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