Today, I discuss the definition of value and how different cost and priority perceptions sometimes undermine the true value that we are trying to create in our organizations.
We are excited to discover, with you, the key commonalities and best practices that allow both public and private organizations from capital intensive industries to become stronger at managing their assets over time.
Learn more at: www.durablecapitalindex.com.
Ben Parker:
Today, we're going to talk about the definition of value and how sometimes our cost perceptions undermine the true economic value added activity that we're trying to get to long-term.
Welcome to The Durability Podcast. This is for those that are passionate about helping their organizations plan and prepare for the inevitable future. My name is Ben Parker, management consultant, chemist, creator, entrepreneur, co-founder, and member of The Durable Capital Group. I'm excited for you to join me as we discover what successful organizations do to build longterm durability. We explore the tactics and strategies that allow great organizations to combine the financial wisdom of asset management, the practical street smarts of the maintenance subculture with the real-world paranoia of managing risks to ensure their organizations blast. We uncover what great leaders are doing from all types of capital intensive industries to make decisions, build strong management teams and prepare to meet the future in whatever form it comes. This is The Durability Podcast.
Hello, everyone. Welcome back to The Durability Podcast. I am very excited that you are here today. Today, we are going to talk about the true meaning of value. I like to use that word a lot for some reason, and I think it's because it has some different definitions depending on who you're talking to. And if you really want to get down to the fundamentals, most of that hinges around what the meaning of value has to an organization, what it has to its owners, to its stakeholders and there's obviously a wide range of value that people can assign to different things, whether that's a entity of a corporation, the value that is provided in terms of services, in terms of monetary rewards and profits, or it can be the activities and things that different entities provide to their customers, for example, the transportation department provides roads and maintenance so that we can drive places and a whole skew of other services that fall into that category of providing value.
And our economy runs on the perception of what is valuable, whether that's in terms of exchange when we provide money other means of payment to receive some value in the form of a service or a product. And I think it's very interesting when capital-intensive organizations look at what is valuable to them, how they provide value and how they structure their decisions within their teams, with their customers, with the deals that they do, the things they buy, where they put their time, focus, energy and effort, that either helps support that value, which is the overall goal. But sometimes we find that organizations counter and undermine the value that they're ultimately trying to produce. Today I'm going to share with you a couple of examples. One of them is from the specialty chemical industry that I have been able to partake of for many years now.
I find it a fascinating place to play and do business. One of the reasons is because in the supply chain for almost everything that we do, it's involved at some level, and it's so far reaching, people don't realize how many parts and pieces go into making the products and services that we enjoy on a day to day basis. And when you start looking at supply chain dynamics when you get to larger scale organizations, and what you find is that your decisions can have impacts on your customers, on obviously your own business, but also in the marketplace. And one of the things that I found interesting is I was talking with a colleague several months ago, and there's one example that it happens over and over again but I think it's a good test case for value and a good case study.
And I'm not going to name names of companies or individuals, but it's a situation where a manufacturing company in the specialty chemical area had a very specific piece of equipment, and this piece of equipment is a very large costly piece of equipment. It runs all the time, and anybody who has invested in large capital infrastructure knows how important it is to keep these major assets in good repair and running and operating. And due to various market forces, different maintenance requirements and conditions, there was a decision made to forego the annual maintenance on this piece of equipment because of various circumstances and ultimately, before they could go back in and perform the maintenance, it failed and it failed in a major, major way. It required the company who was responsible for supplying the material that this piece of equipment was critically involved in making, to go back and support the efforts of their customers to keep their manufacturing processes going.
And when it turns out, you start looking at the value that has been provided by that specific product to a variety of different organizations and very specific critical organizations, you'd think about some of the hundreds of thousands and millions of people that could be effected by one product's unavailability, especially when it's in a critical process. And you start to think about the real scale of what that value actually means. So one decision to attempt to save some time and money because of cost constraints in a very localized region of the country in a very localized scenario had a significant impact across a much broader spectrum. And it's the goal of every company to obviously service its customers to the best of their ability to provide value to their organization by selling products and services in generating profit and to be able to meet a specific need.
And this specific example, I know I'm being very vague. I'm not terribly specific just because I want to protect confidentiality. But at the end of the day, the principle is the same. Sometimes we make management decisions in a very narrow, localized way that has a significant impact. And in this specific case, the parties involved ended up being responsible for a supply chain where they had exclusive agreements and they ended up not being able to meet their obligations where it put their customers who were position of providing their products and services in a very awkward place, that they in turn had to go to their competitors, go to the open market and struggle and strive to find enough product to meet their own obligations and their own needs. So there was this dynamic supply chain whiplash effect based on one decision to forego some maintenance activity that resulted in a catastrophic failure.
And organizations make those kinds of decisions all the time, and they're challenging and dynamic and I understand. I don't want to demean the people involved or the complexity of those types of decisions, but a lot of times those decisions are made when we are not looking at all the information. So the misinformed management piece is really destructive to value and you can see that pattern over and over and over again. So when we try to define value in terms of the services we provide, I like to think of it in terms of the monetary value that we're making from our products and the value that we're providing to our customers, and the services that we're giving to people that are then able to provide services and products to others.
So if we look at how those decisions are impacted by what we do, and you look at some of the best companies, the best organizations, both public and private, local, and large multinationals, the ones that do it best are very good at making those value based decisions in ways that protect them and their customers. So it's not just a potential impact to cost calculation. It's not just a potential risk, future risk impact calculation. It's a dynamic process to get to the right value added decisions and processes that really allow them to be successful long-term and stronger, more durable companies over time. And that's the goal.
That's all I have for today. Thank you for listening to The Durability Podcast and join us again next time for another episode. Thank you so much for listening.
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