12 – April 28, 2019
“Our culture encodes a strong bias either to neglect or ignore variation. We tend to focus instead on measures of central tendency, and as a result, we make some terrible mistakes, often with considerable practical import.” – Stephen Jay Gould, naturalist, 1941-2002
1. What I’m Reading
Your e-commerce company buys closeout merchandise from vendors consistently selling at decent margins. Your CEO asks you to project cash flow for a $2 million closeout deal. Do you say, $800,000 in gross profit or do you offer instead, “I project our sell-through rate at 60 to 75 percent over the next 4.5 months based on the last 26 deals we’ve done.”? Furthermore, you expect a gross margin ranging from 41 to 43 percent with about 90 percent certainty. You suggest your product management team should probably need to dump the remaining inventory at slightly below cost. Of course, you reveal this information while showing patterns on histograms from past deals.
Which answer is better? Unfortunately, our CEO typically says, “Give me a number.” Should that be his request?
If you are a statistician, you might find The Flaw of Averages by Sam Savage a bit boring. I’m enjoying it, and it’s my second time around.
2. What I’m Writing
Change is hard, but did you realize there is a formula for revealing the path to new and better outcomes? Try this one on for size –
D x V x F > R
You’ll never find spoilers in this newsletter. You can read the article here.
3. What I’m Reading Beyond Books
This past week, I finished writing a speech for one of my clients who will be talking about employee onboarding. Their audience will be HR leaders from Missouri. During my research, I couldn’t help but appreciate this company’s employee handbook. Valve’s employee handbook reminds me of something 37signals (now Basecamp) would write.
4. What I’m Watching
Pictures and images tell a thousand words or far better explain what a simple phrase tries to achieve.
Have you ever used the adage, “That’s the tail wagging the dog.”? What if you had a visual to go along with that description? Better yet, how about a video? When I first saw the swaying of the trailer behind this car simulation, I immediately thought of the tail-wagging saying.
I’m also reminded of the law of unintended consequences when our leaders or even we make decisions that negatively impact what’s really most important.
5. Homework Assignment
We’re all guilty of it. We love our averages. The next time you throw out an average, is it an aggregated result metric, or a disaggregated number?
Let’s take inventory turns for example. Home Depot’s annual turnover is around 5, or it used to be. But that’s one, big number. When you disaggregate or start drilling down into the various departments, you’ll find turnover rates ranging from 1 to 10.
This week, I’d like for you to identify where you normally use an average to represent an entire population. Heat up your laptop and start drilling downward and deep into the data. The results will amaze you.
Thank you for reading. If you like the above and the posts at CFO Bookshelf, may I ask a favor? Feel free to share this with other readers along with commenting on your favorite blog posts on LinkedIn, Twitter, or Facebook.
Take care and have a great week. Always be learning.