AR Period Reduction
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In an attempt to provide additional substance for these categories of leverage points this section will develop a Systemic Perspective of a situation and explicitly point out where leverage points are operating, or not as the case may be. The example entitled "Fire the Bunch!" is adapted from "Once Upon a Complex Time: Using Stories to Understand Systems" by Richard Brynteson.
Contents |
Situation
It seems there was a firm experiencing unacceptable payment delays from its customers. The financial analysts estimated that the company would save millions of dollars a year if they could reduce their average delay of 53 days by only a few days. Management, frustrated with the Accounts Receivable department's inability to effect this reduction mandated that either the delay be reduced to 51 days by the end of the year or the department of three people would be fired. By the end of the year the delay had not been reduced and all three people were fired. Oh what a world!
Pattern of Behavior
Network of Interactions
Mouse over individual items for descriptions.
So what's the problem? The figure represents a simple balancing loop wherein action by the Accounts Receivable department should be quite capable of reducing the accounts receivable delay, or so that's management's position. There are several categories of leverage points that should already be evident.
So what's the problem? The figure represents a simple balancing loop wherein action by the Accounts Receivable department should be quite capable of reducing the accounts receivable delay, or so that's management's position. This is a continuation of.
Mouse over individual items for descriptions.
Boundaries
Challenge Assumptions
Leverage Points
There are several categories of leverage points that should already be evident.
- #2 Mindset of the System. Is it evident that management firmly believes that the people in Accounts Receivable are the problem, whereas from a systems perspective one would ask about where the system is the problem.
- #3 Goal of the System. This would indicate that changing the goal would alter the result produced though in this instance nothing changed. This should be an immediate message that there's more to the network of interactions than depicted in the above causal loop diagram.
- #5 Rules of the System. Changing the rules also had not impact which should further support the idea that there's more to the network of interactions that is already depicted.
Wasn't it written somewhere that the definition of insanity is continuing to do the same things and expecting different results? When you've tried everything that seems to make sense maybe it's time to heed the memorable words of Monty Python, "And now for something completely different." Well, as it turns out, Management did do something different, though not until after they fired the Accounts Receivable department.
Further investigation, click and open B2 period extension on the diagram, revealed that the company was selling primarily to restaurants, an industry faced with economic downturn at the time, Sales, as a means of inducing customers to purchase, were telling the customers that they could delay payment. And what we have here is another balancing loop (B2), only one that doesn't help the Accounts Receivable department in the slightest.
When these two balancing loops are combined it becomes apparent that the two balancing loops operating together create a single Reinforcing Loop where Sales pushes the delay in one direction and Accounts Receivable pushes it in the other direction.
The more that Accounts Receivable works to reduce the delay the more Sales positions the customer to delay payment and we end up with the typical escalation structure, wherein everyone is working harder and harder yet getting absolutely nowhere that anyone wants to be. Amazing isn't it?
Note that a question has been raised as to whether this structure is actually an escalation structure. Initially Sales and Accounts Receivable are not aware they are acting counter to each others goals though the resulting efforts by each to move the receivables delay in a direction that is in their best interest results in a threat to the others' success, and is essentially a threat.
Strategy
Now with an awareness that the network of interactions has two mutually exclusive goals the question is one of how to proceed. If we begin at the top of the list of leverage points and contemplate each in turn it's not until we get to #4 Evolve Structure that there is some apparent potential. Though this probably only works in conjunction with #3 System Goal which is dependent on a #2 Paradigm Shift. The current goal/paradigm is that the company is in the business of selling material to make a profit and the customer should pay on the company's terms. If the goal/paradigm were to shift to addressing the question of how can the company work with its customers to create value might there be a win/win scenario here?
As I depicted in "The Limiting Belief of Either/Or" and Charles Hampden-Turner displays so well in "Charting the Corporate Mind" real insights come from the integration of apparent dilemmas. And in this case the apparent dilemma has to do with figuring out how to delay payment, which the customer wants, and how to reduce the current ar period, which the company management wants?
If we begin to think about the dilemma posed by trying to extend the payment period and shorten the accounts receivable for the answer should quickly become apparent.
Mouse over individual items for descriptions.
An option that might be an improvement for both worlds is to allow the customers to make weekly payments over a period of eight weeks. In this way the customer isn't looking at a sizable outlay all at once, and the company essentially gets to cut their receivables delay by 42%, Considering that the company couldn't budge the delay otherwise this seems like a reasonable approach.
And, because the company believes they will save millions by cutting the delay by a few days, by cutting the delay by 42% they're probably saving enough to offer the customers a couple percentage points off if they pay weekly. And, this could even enhance Sales position as they can offer the customer a discount and the ability to pay over eight weeks, which is actually longer than they were getting before. Sounds like a Win-Win-Win. Does it get any better? Yes, if Management eats crow and hires the Accounting Department back, with an increase in pay!
Click on the + sign next to R2 Cost Reduction to expand the second reinforcing loop. This show the reduction in ar period reducing carrying cost which should increase profits.
While this approach represents a wonderful situation to be in, nothing grows forever. As such, the organization should begin immediately looking for what is likely to show up and create a Limits to Growth Structure, and figure out how to deal with it before it becomes a limit to growth. Also, if someone really wants to know what percent discount would have what impact on revenue and profit increases, and several other dimensions of this puzzle, a simulation is likely to be essential.
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References
- Once Upon a Complex Time: Using Stories to Understand Systems" by Richard Brynteson
| Systems Thinking World Discussions Systems Thinking World Q&A * Gene Bellinger |
