Thursday, March 11, 2010

Velocity of Information

Dell LogoImage via Wikipedia
Perhaps you've heard of this oxymoron: "old news". There is no such thing as old news, as news must be, well, new. When it gets old, it's no longer "news", or as interesting.

A new "term" coined for this is "velocity of information". In other words, how fast can information travel? While theoretically it can go quite fast (nowadays, we have mobile phones, Blackberries, e-mail, and so on), how fast does the information get acted upon? The information is no good if it's sitting in your inbox unread, no matter how fast it's delivered. And this applies to a lot more area than you think. There was the expression "the check is in the mail." If the check is in the mail, it's not in your bank, and thus it is no good for you.

Velocity of information has a LOT to do with running a successful business and/or investing. It involves getting the right information to the right people who can then act upon them. A company who cannot communicate is a slow company and in this day and age, a soon-to-be DEAD company. Similarly, an investor who lacks the proper information will not succeed.

Dell is probably the most information driven company ever. A lot of its success came from its direct sales model, and its zero-inventory philosophy. HOW it gets to that zero-inventory involves information, information, and more information. In other words, one of the 5 layers of the B-I Triangle: Communcations.

At Dell, inventory is equated with ignorance, in that one cannot predict customer demand, and thus, require inventory to "buffer" the demand spikes. Customer demand is information, pure and simple, and so is amount of inventory and how it will be used. By predicting customer demand properly, inventory can be reduced to a minimum, requiring less capital, and make the entire operation much more flexible, all due to high information velocity. If the prediction is off, just have a promotion selling something equivalent, until the imbalance is addressed. Then "learn from your mistakes".

At Dell, metrics are used to measure productivity, inventory onhand, average time to ship, and so on and so forth, and each is displayed right on the manufacturing line. If there are any problems, supervisors can spot it almost immediately, and if the problem is big enough, corporate officers will know it within a few hours. At a typical large corporation, a problem can persist for days or even MONTHS before it was noticed and acted upon. That cannot happen at Dell, due to its high velocity of information.

Dell enlists its suppliers for the information flow as well. Dell survived the dockworker's strike a while back with no problem at all, because it was warned by its suppliers as much as SIX MONTHS ahead of time, and have a team of logistical experts in place planning contingencies and recoveries. It was able to charter jumbo jets ahead of time from all of the major international cargo carriers, from UPS on down, each of which carries 10 container-full of components, for half a million each, before any one else did. When the strike actually happened, the charter price for a jumbo jet MORE THAN DOUBLED (to 1.1 million per flight), but Dell has already locked in their prices, due to their velocity of information and prompt action. The cost may have gone up, but the business continued without any interruptions. The same can't be said for others.

Dell segments itself into a series of market segment teams, each with its own separate structure, from sales and website all the way down to support and manufacturing, instead of consolidating. Each segment "team" exchanges data in real-time within the team. It is almost a separate company in itself, except they share some common infrastructures with the other teams. Small integrated teams react better than big corporate bureaucracy. Again, high velocity of informaton.

I can go on and on about how the high velocity of information helps Dell beat their competition, but I think I've made my point. [For more complete picture, you can read "How Dell Does It" by Steven Holzner]

The price Dell pays for this high velocity of information is a relatively stressful management, as there can be no slack. Everything has to be nearly spot-on, or the whole system falls apart. The three sides of B-I Triangle: leadership, team, and mission are strong and on the job.

So how, as a business owner and an investor, can you learn from Dell, regarding velocity of information?

Business owner should evaluate the various metrics that defines a business operation daily, or at least weekly, depending on the size. For example, if you have a business that is cyclical: good at mid-month, then steadily falls at the end of the month, picks up against a little at beginning of the month, then falls back down until next mid-month, you can use that cycle to predict demand, esp. if the cycle repeats month after month. You can also use it to predict cashflow, as a business runs on cashflow, not profit. You need to calculate return on investment for almost everything. How is sales growing or shrinking? Do we know who are our best customers, and who are our worst? How many new customers did we get this month? Can you justify another phone line and another sales person? Can you justify a new computer system? Or a faster printer? How about a photocopier? Or other machinery? What sort of revenue is the current one generating? Its expenses? Is it worth keeping? There are a LOT of questions you must ask when it comes to your business, and if you can't answer them, perhaps you're not getting the data, and perhaps, having a low velocity of information.

An investor also needs metrics, but depending on your investment strategy, you can do with somewhat less information. If you're Warren Buffet- type investor, who does all the research ahead of time, and once you buy, you hold forever, information velocity isn't quite as crucial to you, except as initial research. On the other hand, if you're the day-trader type, do a LOT of small transactions, hoping to eek out the tiniest of margins, seeking patterns in the chaos, and all that, then you need EVERY last bit of information possible, from real-time stock quote/chart to instant relevant news alerts and so on.

One more reason why you're recommended to start in the Warren Buffet style of investing... It' s simply less stressful overall, but that's a different article altogether.

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