It's Not Luck (10 page)

“In other words,” I’m trying to digest the concept that Pete has introduced to us, “what you are suggesting is that the buyer will not consider the price-per-unit that he purchases, but rather the price that he pays per unit that he is likely to use. Makes sense.”

I examine the first two pages again. Pete didn’t choose two months out of the blue. For this relatively small quantity (one third of what actually was ordered), we are cheaper than the competitor. That’s smart.

“I have a big problem with this.” Don is more than skeptical. “Not with the concept—that I agree is sensible—but with the impact. I’ll accept that in thirty percent of the cases the entire order is not used, but how much of it is not used? I guess that it all depends on the numbers.”

“What do you mean, it all depends on the numbers? Of course it all depends on the numbers,” Pete rises to defend his solution.

“My gut feel is,” now it’s Don’s turn to tease, “that in almost all cases, I’m afraid, you won’t be able to demonstrate clear savings.”

Usually I enjoy seeing Don and Pete’s friendly arm wrestling. But today I don’t have time, and besides, the issue is much too important. “Don, compare the two cases,” I somewhat impatiently say. “It’s obvious that when the order is for six months, in ten percent of the cases more than two thirds of it is obsolete.”

True to his nature, Pete doesn’t proceed, but rather explains it to Don. “The fact that in two months there is a ten percent chance that something unexpected will make the wrapper obsolete, shows that in ten percent of the cases the additional quantity ordered for the next four months would be scrapped.”

“I see,” Don says. “So, based on this logic you computed the price-per-unit for the usable portion of an order?”

“Yes.”

“By how much was your competitor’s offer more expensive than yours?” I ask.

“Mine was still slightly more expensive, by about half a percent,” Pete answers.

“So why the big celebration?” Don asks.

“Considering the pressure on the buyer to reduce raw-material inventories, and the fact that no buyer likes to get stuck with obsolescence, I think I have a good chance of winning against a price difference of half a percent. But my idea is to do better than that. My plan is to offer a client the option of ordering in two-month quantities while I ship to him on a two-weeks basis.”

“You mean,” I try to understand, “that the price will be based on two-month quantities, but the client will not get the entire amount in one shipment; for two months he will receive smaller quantities every two weeks.”

“Exactly,” Pete confirms. “And after the first shipment, he can cancel the rest, without any penalties, whenever he wants.”

“That’s generous,” Don says. “Too generous.”

“No,” I say, “that’s smart. The client is paying the price for quantities of two months, but suffers obsolescence as if he ordered for only two weeks. That will bring the price-per-usable-unit to be the absolute lowest.”

“And on top of it,” Pete beams, “the buyer will have very low inventories, less than five percent compared to what he currently holds.”

“A perfect breaking of the buyer’s cloud,” I conclude. “Actual price is lower than what he currently pays for even large quantities, and at the same time, he will have lower inventories than what he currently can expect when he orders in what he perceives to be small quantities. From the buyer’s perspective it’s like having his cake and eating it.”

Pete is pleased. “Do you see any negative effects?” he inquires.

“Only the obvious ones,” I answer. “Those you probably already considered.”

“Don’t be too sure,” Pete says. “Let’s hear them.”

“I have one,” Don says. “If I understood you correctly, you are going to hold the remainder of the order in your possession, at your risk. Does it pay? Remember, in ten percent of the cases you are going to be stuck with some of it.”

“Don, this is not a big concern,” I say.

“Why?”

“First of all, do you agree that Pete’s offer would not lead to a price war?”

“Yes. The competition cannot really compete against it. To lower the prices they must go to large quantities, but then the risk of holding the client inventories is too high.” Don starts to get excited about Pete’s idea. “This actually means that Pete gets the large quantity market for medium quantity prices.

“No wonder he can afford to swallow the damage from a little bit of obsolescence. And actually the damage is very small; let’s not forget that the risk of obsolescence for us is much smaller than for our clients. For them it costs the selling price, for us, as long as we have excess capacity, it costs only the raw material. Good solution, I really like it.”

“I’ve calculated the risk.” Pete is visibly flattered, but tries to hide it. “For such orders, it will cost us, on average, less than two percent.”

“Aren’t you afraid that some buyers will abuse your offer?” I ask.

“What do you mean?”

“How are you going to make sure that a client who needs a relatively small, one-shot run, will not put in a large order to get lower prices, and after the first shipment cancel the rest? According to your suggestion they can do it without any penalty or even an explanation.”

“I haven’t thought about it,” Pete says, and after a short while he adds, “I think that we can come up with a good way to close this loophole without insulting our buyers.”

“Yes, I’m sure,” I say. “So you are going to offer the market the best price, relief on cash, the lowest inventories and almost no obsolescence. Coupled with your excellent on-time reliability and high quality, it’s a buyer’s dream. What will be the impact on your bottom line?”

“As I said in the beginning, if I can sell all my excess capacity at those prices, the wrapper department is going to be more profitable than the rest of the operation. It means roughly nine million dollars profit. Big bucks. So, you like it Alex? Do you see any problem with it?”

“I like it. Sure I like it. But I see one problem. So big that it can turn your brilliant solution into nothing but a heartbreak.”

“What is it?” Pete is concerned.

“Your solution is too good and too complicated to explain. I’m afraid you’ll have a hard time convincing a buyer that your offer is real, that he will really get all these benefits. And even if he will see the benefits, don’t forget that a buyer faced with what he perceives to be a seller’s generosity becomes suspicious. It’s going to be a problem.”

“That’s all?” Pete sounds relieved.

“Yes.”

“Don’t worry, Alex. I think that we can sell it. It might be that I have more trust in our buyers than you do, but I really think we won’t have any problems selling it.”

“I’ll take your word for it. It sounds good, very good. Go ahead with it.”

“Sure thing, Boss. We’ll have a much clearer idea of how well it works very soon.” As I accompany him to the door he adds, “Tomorrow we are going to submit two such quotes, and then my sales manager and I will meet with those buyers next week.”

“Super job.” I shake his hand. He has done a super job, his solution is a true win-win solution, but I have my doubts if he can sell it. Until I see the orders rolling in, I’m not going to revise the forecast.

A minute later he sticks his head back in to tell Don, “By the way, as long as we have a lot of excess capacity, we don’t have any intention of printing batches of two months and storing them.”

10

It’s the first time I’m crossing the Atlantic in first class. I’m entitled to fly first class, being an executive vice president, but in the last year I simply haven’t needed to go to Europe. Actually, I don’t think that I need to go now, and if it were my choice, I wouldn’t. I don’t think that we should sell my companies. I think it’s a mistake. The only reason for the sale, in my opinion, is that the board wants to show Wall Street that they are doing something, that they have a decisive plan of action. Baloney. They don’t even know what they are going to do with the money they’ll get.

And the man who stands behind this big empty show, Trumann, is sitting beside me. In the big leather first class couch, big enough to sit two tourists, the most expensive seat in the world. The going rate is over three thousand dollars for seven hours.

They start to serve dinner. You should see the choice of appetizers. Goose liver pâte, lobster’s kastanietas, Caspian Sea caviar. Have you ever ordered Caspian Sea caviar for an appetizer? I haven’t. Not until now, that is. These little black balls cost fifty dollars an ounce. It’s like eating pure silver.

It tastes like shit. Now I understand why they serve it with vodka. Frankly, I prefer pizza and beer.

Trumann sure knows how to handle the caviar. You should see how quickly he spreads it on this small toasted triangle with egg yolk and thin chopped onion. A real pro, I tell you. Why is it that a person who produces nothing, who doesn’t contribute anything, lives in such luxury? I guess that was always the case; slave drivers always lived in better conditions than the slaves.

“How many boards do you sit on?” I ask.

“Right now, only twelve.”

Right now only twelve, I think to myself. Probably last month they closed one company and sold another two. “Why do you ask?” Trumann raises his eyes from the consommé.

Bad mistake. The way that the plane is shaking now, and with these shallow spoons, he’s bound to spill soup on his silk tie. He doesn’t.

“Just wondering,” I say.

“Wondering about what? Do I have enough time to know what is really going on in the companies I serve? Or wondering in general what my job is?”

“Both, actually.”

“Alex,” he smiles at me, “you are relatively new at this game, aren’t you? I don’t recall having heard you speak in the board meetings.”

Trumann is a powerful man. When my companies are sold and I lose my job, I’ll need him. You can’t find an executive position through answering an ad in the papers. You need connections. You need to know and be known by the right people. Thanks to Granby, I now have that opportunity. A whole week is enough time; I have to impress Trumann, to make him know me better.

“Not like some others,” I say, thinking of Hilton Smyth. “I prefer to do, not to speak.”

“Oh,” his smile widens, “so that’s how you see my job—just talk, no deeds.” Before I have a chance to correct his accurate impression, he continues, “I guess a production worker chained to his machine for eight hours a day says the same about you.”

I force myself to smile back. But in spite of all the warning bells, I cannot play the game. “I don’t think so,” I answer flatly.

“Why? What’s the difference?”

There is a difference, a huge difference, but for some reason I can’t find the words to clearly demonstrate it. What is this leech thinking to himself? That sitting in board meetings can be compared to having the responsibility of running a company? Does he know how hard and demanding it is to turn around a losing business?

“Do you know that in the last year I’ve turned three companies around?”

“Alex, don’t get me wrong. In spite of the fact that you never show off in the board meetings, Doughty and I are quite aware of your achievements. We do read the reports carefully, including what is written between the lines.”

“So?”

“So, you didn’t answer my question. What is the difference between your job and mine? Do you produce something with your own hands? Isn’t it true that all your work is done through talking?”

“Yes, of course.” I’m starting to get irritated at my inability to express myself. “I think, I talk, I decide. That’s how the work is done.”

“Why do you think it is different for me?” Trumann continues to be calm and gentle. “I also think, talk and decide.”

He does—at least the latter two. He talks and decides. He talked in the board meeting, and he decides. He decided to sell my companies. The only thing I don’t know is whether he thinks. Selling my companies makes no sense at all. Then it dawns on me. There is a difference, a major one. How can I express it without offending him?

“I guess,” I begin slowly, “that I don’t know enough about your job.”

“Apparently.”

“I have responsibility for managing companies. What are you responsible for?”

“I manage money,” he answers.

I think about it. I guess he’s right. But how does a person go about managing money? Probably through investing in companies, and then . . .

“So your job is to be a watchdog, observing the companies you have invested in?” I think I could have chosen my words more carefully.

He bursts out laughing. “Yes, I guess you could describe it like that. My job is to determine which companies to invest in, and then to be the watchdog. Watching out for local optima.”

This piques my curiosity. “Local optima?” I echo.

“Alex, do you know how many top execs forget that the goal of their company is to make money? They concentrate on production, on costs, on strategies, and so often they forget that those are only the means—not the goal. Take UniCo, for example. Do you know how long the top executives have behaved as if the goal of UniCo is to provide them with fat jobs? Sometimes I get the impression that top executives forget that it’s not their company; it is the shareholders’ company.”