Enron - Ten Years Later

Has it really been ten years?

Apparently yes.

Ten years ago on December 2, 2001, Enron shocked the world and filed for bankruptcy.

It was an incredible story on many levels.  The company came into being in 1985 with the merger of Internorth and Houston Natural Gas.  It was renamed and rebranded as Enron.  CEO Ken Lay, COO Jeff Skilling, and CFO Jeff Fastow became the darlings of Wall Street and the business press as they took the company to astronomical heights.  At one point, the company was ranked #7 on the Fortune 500, employed over 20,000 employees, and had revenues over $110 billion.

In the end, this trio of Lay, Skilling, and Fastow, became infamous as their gross mis-management and criminal acts came to light. It became clear that Enron was a house of cards and a sham.  It all toppled down in very short order. Thousands of their employees were left with nothing. Just a few years earlier, these same employees thought they had it made simply because of the success of the company and the growing strength of the stock price. It is a very sad story in the history of American business.

We never really understood what Enron did. Sure, we read about their leasing and brokering model in natural gas and electricity. It did not seem that magical and that compelling to us. We did not understand the basis for this business model to create the amount of buzz and revenues the company was generating. Maybe it made sense in natural gas and then electricity to some degree. But, when they began to move into broadband and talked about doing the same with water they truly lost us. It made no sense. We did not understand what they did and how they made so much money doing it.

Were we just that smart? In retrospect, possibly. But at the time it was a resounding NO! We actually felt stupid. Why stupid? Clearly, Enron was a raging success. Everyone believed that Enron had created a new business and business model. There are stories of Skilling basically calling analysts and others that questioned the Enron model as morons. While we were never at such meetings, we just assumed there was something we were missing. Thus, we were among the moronic and stupid that Skilling talked about and berated.

We were smart in one regard.  Because we did not understand, we did not invest in the company. We would have certainly felt really dumb had we invested and lost capital.

We are management consultants. We operate in the Supply Chain parts of the business. Critical to our ability to help clients cost effectively improve their planning, inventory management, and customer service is to first and foremost have as deep an understanding as to what they do and how they operate. We need to do this as quickly and effectively as we possibly can. If we do not understand our clients’ businesses, there is very little chance we can help them. If we do not understand their business, provide valuable assistance, and act with integrity, we would not have any clients.

In reflecting on Enron ten years later, there are two age old and related lessons to keep top of our minds.

1. If your first reaction to any business deal or investment opportunity is that it sounds too good to be true, it probably is. Therefore, be very cautious about getting involved.


2. The following is attributed to Albert Einstein, though it is not confirmed, and we paraphrase anyway:  If you cannot explain what you are doing to a five year old, you yourself do not have a good grasp of what you are doing… or might be hiding the real nature of your business.  The parts after the ellipsis is ours.

November 27, 2011 DemandCaster Updates

We have made a number of updates over the weekend that are summarized below:

• Launched Enhanced Event Modeling: We have completely revamped our event modeling process. We will be posting a detailed overview in this blog shortly.


• Modified View of Monthly Buckets in Forecast Table: We have modified the behavior of the forecast table to change to monthly buckets when the forecast graph is changed from a weekly to monthly bucket view. Previously the forecast table would only show the view in weekly buckets regardless of the forecast buckets or graph view selected.


• Changed Multi-Item Linking Behavior: Previously when linking a new item to an old item (supercession), the history table for the new item would show the customer history of the old item. Now the history shows the old item as a single column in history. This allows the user to much easily view where the old history stops and the new history starts. This is particularly helpful when there are multiple items used to form the history of the new item.


• Changed a Few Table Names: Vendors are now Suppliers, Product Classes are now Product Categories, Product Codes are now Tags.


• Locked Unknown Supplier: When an item has no designated supplier assigned (i.e. an internally manufactured item), DemandCaster assigns a default supplier name “unknown.” If a user disable the “unknown” vendor via the data maintenance, all items linked to “unknown” would also be disabled. We have now locked the ability to disable the supplier “unknown” in order to prevent any active item from unintentionally being disabled.


• Modified Selection Interface Item Link Behavior: Previously when clicking on the forecast DemandCaster icon to the left of the item number in the selection interface, the user would navigate to the items forecast list. We have changed the navigation behavior so that the user is directed to the latest forecast for the item. If the user would like to view the items previous forecast, they may click on the previous forecast link in the items forecast detail tool bar.


• Added Current Cost to Two Analytics: We have added the items current cost to stocking and reorder point analytics and reports.

Feel free to contact us with any questions by emailing our support site or calling us at 866-865-2714 between 9:00 am to 6:00 pm CST Monday through Friday.

The Value of an SKU?

Very recently we got a phone call from an old colleague who works for a home decor company. He was about to go into a meeting with the executive committee where he was going to propose an SKU management process. He was trying to justify the need and wanted to pick our brains specifically on determining the total cost of carrying an SKU. He said that he had done an internet search on the subject and came up with nothing.

We were glad he called us. We live for questions just like this.

We offered him the following. Most people that look at SKU management look at the contribution to sales. They evaluate eliminating the lowest contributors. The decision is easier if there are other offerings of the same product to absorb the revenue that is being cut. Not moving on SKU management because of not having the exact costs is just an excuse not to manage, i.e. reduce, SKUs. 

It is not an easy question.  

This problem is the same as trying to find the profit by SKU. This is something that consumer products companies have struggled with for years. It is easy to track revenues by SKU. That comes right off of the invoices.  The hard part is to apportion the cost properly. This can be done but it is not an exact science. The best we can do is approximate the costs. The easiest way is to use the percentage of sales to whatever cost base one chooses to use. This will provide as good as an estimate as one could get in short order. Getting an exact measure would require a very sophisticated accounting system and probably not worth the cost of tracking and maintaining the data to that level of granularity.

If we are to use Percent of Sales by SKU to evaluate SKU costs, why not just use Percent of Sales?

We had another colleague that ran the supply chain of a $1B Latin American subsidiary of a consumer products company. He had a very simple rule for which SKUs ought to be deep sixed. He simply said, “If we sell less than a pallet of an SKU per month, it is not worth keeping. It should be cut.” It was a brilliant and visual rule. It resonated with Sales, General Management, and certainly in the Supply Chain. Even marketing folks, who are always the most reluctant to cut SKUs, could not really argue with this very simple logic. On a sales volume of $1B, everyone understood that an SKU that sold such a paltry amount had to be absorbing more cost per unit than other products. Simply changing over in the factory, several months of supply run, and the inventory carrying costs probably made the costs of such an SKU disproportionate.

SKU management need not be complicated. It can and should follow some pretty simple and clear guidelines. It can be accomodated via spreadsheets or a tool such as DemandCaster which incudes an SKU rationilization component. We have found that this either is something that resonates with the executive team or not. If it does not resonate, they will ask for numbers and justifications they know cannot be obtained.

What are your experiences in this area?

Can you determine the cost of maintaining a single SKU?

What are your rules of thumb for putting an SKUs on the consider to cut list?

The Economy and Jobs: Applying a Keynesian / Chicago Model for Change

In our previous blog posting, we presented our thoughts on a November 6th New York Times article written by Mr. Adam Davidson. We offered that if we want a better future we have to do something collectively to create that future. The old approaches will not work. Mr. Davidson agrees with that much. We need to look at preparing our people, the potential workforce of the future.  

It will be hard to count on our largest businesses do anything on their own.  They are mutli-national at the minimum in their supply chains and more and more in terms of sources of revenue.  Executives will do what they have to do to keep growing revenues and profits. They will provide domestic jobs if doing so contributes to their business objectives.

We have to get our government to act on this. We have to move toward having a long term plan to determine what kind of country we should be into the future. The plan must include how to create the workforce of that future.  This means incentives to become better educated in mathematics, engineering, basic sciences, and computer science. The plan must also include incentives on a national level to attract businesses to invest in the US. It makes no sense for states to compete against each other without a national umbrella plan.  We certainly need finance bankers and attorneys, but we need a larger percentage of our best and brightest to become inventors and innovators.

What we are advocating is kind of a Keynesian and Chicago hybrid.  As neither seem to fit the bill for the predicament we are currently in, we definitely need something different.  The question we ask, is the same that Mr. Davidson asked:  Can our government change, adapt, and step up to this challenge?  Mr. Davidson does not believe so.  He has a good point.  If we look at Greece, Italy, and Japan to mention just a few, his point is even stronger.

Maybe it is a pipe dream, but we believe in this country.  We believe in the American people.  We believe we can compete with the best in the world.  We believe this recession has knocked us on our heels but that we should get up and get going.  This is best done be creating the future we want.  

It will not be easy.  This cannot be done as it might be portrayed in a one hour TV drama or even a movie. This is a long term commitment for a country that currently has a business philosophy of “what are you doing for me this quarter.”

In this blog, we generally provide much more tactical advice and insights. These two postings are the second time in a few short weeks that we have blogged on such a broad topic. It is clearly important us.  We believe it is important to this country.  We are a manufacturing, operations, engineering, and supply chain company. We believe that excelling in these disciplines have to be central to the economic health of the United States. 

The Economy and Jobs

There was an article in the Sunday, November 6, 2011, New York Times on-line.  The title of the piece was “Can Anyone Really Create Jobs” by Adam Davidson.  The author laid out many of the same points we have presented in the past especially in our October 24th posting:  “The Economy - We Need to Something Radically Different.”

Mr. Davidson noted that “Every politician has a “jobs plan,” very often a list of vague proposals filled with serious-sounding phrases like “budget framework” and “regulatory cap” that are designed, for the most part, to mean both everything and nothing at all.”  He is spot on.  We believed and have advocated that this country and its place in the world has changed creating a new equilibrium, the new-new, that we have referred to. 

Mr. Davidson referred to two schools of thought the Keynesian and the fiscally conservative University of Chicago School. In the Keynesian school, the adherents mostly Democrats believe we have to stimulate our way back to economic health. He goes on to say that the goal in the Keynesian school “is to goad consumers into spending again. And President Obama’s jettisoned $400 billion jobs package, hard-core Keynesians argue, is nowhere near what it would take to persuade them.”  This stimulation comes by increasing our deficit.

Then Davidson goes on to note that both schools agree on one thing.  This is an important thing that he claims politicians will never admit at least not in an election year. “An economy is truly healthy only when its people know how to make and do things that others will pay them a decent amount for. Jobs, in other words, are not the cause of a healthy economy; they’re the by product. And that’s another thing most national politicians know but will never say.”

He is absolutely correct.  We have to create products that people want to buy. He does not point out that we have to create products that appeal to global customers and markets.  We are still focused like we are the greatest and end all market in the world.  Consumer product companies have long known to look globally. Companies like Proctor & Gamble, Unilever, Kraft, and Colgate are in every major market in the world. As they grow, it is not likely the jobs growth will be in the US. The growth will be elsewhere in the world where the markets are.

The only hope for growth here is that if transportation costs increase enough, it will make sense for companies to make products here and thus increase jobs.  Even then it is likely states will compete like crazy to attract new manufacturing facilities.  Who is advocating for the nation as a whole?  Who is worried about the citizens here and their long term well being and growth? The multi-nationals will worry about job growth and good citizenry here when it makes business sense.