Can You Tell Me How to Make a Penny More on Each Barrel of Oil I Get Out of the Ground?

Introduction

Henry Ford gained huge competitive advantage by investing in technology to improve the efficiency with which cars were manufactured. Toyota then went on to learn from Ford and used Ford's thought processes through a person called Taiichi Ohno to drive manufacturing processes to another level of improvement. You might wonder where I'm going with all this. Well, Henry Ford manufactured cars, but he invested in the infrastructure needed to make cars. Trading organizations trade commodities, but I would argue that the biggest product of a trading organization is information. Henry Ford's problem was that the cars his company manufactured were hand made. Each component was hand crafted, the chassis was wheeled from station to station, and each hand made part was added to the car. Today, information is handmade.

We make deals, enter the deal information into several systems. We sign contracts and enter them into different systems. We manage credit and risk, and keep these numbers in yet more systems. In order to ensure that we know what's going on we keep track of it all in Excel. Then when we need to know what's going on, or when we need to move the business process forward from deals to transportation through to billing, an enormous amount of manual effort ensues which is slow, inefficient and fraught with risk of error. If Henry Ford could reduce the time taken to make a car from 12 hours to one hour, I think we can achieve a similar level of improvement. Henry Ford improved the manufacture of cars around an assembly line. I believe that a similar concept should be used for information.

The Roadmap

Henry Ford learned from the meat packing companies of Chicago that the most efficient method of processing an animal needed:

• Continuous Flow
• Interchangeable parts
• Division of Labor
• Reduced Wasted effort

The good news is that technology today has reached the stage where we can achieve all four of the above objectives. What is required is management commitment to being the best, and a well thought strategy that doesn't bet the farm, but rather provides a clear road map achievable within two years. Let's take today's energy trading organization and put it into terms of Henry Ford's four categories.

Continuous Flow

A modern factory couldn't operate without an assembly line. We need an assembly line to move information from station to station as we add more data to the known situation at each step of the business process. There are multiple proven technologies that provide excellent, cost effective, reliable and scalable information assembly lines. These technologies move information through an organization, but just as you need to think about the optimum layout of a factory floor so that the assembly line doesn't wrap around upon itself, and so that the parts get assembled in the correct order, we need to understand the requirements of the system and architect it appropriately. Fortunately, you aren't the first person down this road and expertise is readily available to solve this problem.

Interchangeable Parts

At the core of Ford's innovation was the concept that parts were interchangeable. Any valve would fit any engine, and any steering wheel would fit any chassis. We must achieve the same level of interchangeability of information. A deal from one system must be able to be accepted into the next system down the assembly line. There are several ways of achieving this, but this is arguably the most complex part of the problem since it has not been commoditized by a product. If this problem is not solved your organization, will be condemned to the highly complex and expensive situation that we have historically been in.

Division of Labor

Your company cannot be at the mercy of a master craftsman. If somebody is sick, goes on leave or quits, you must be able to operate efficiently. Luckily, you have probably got this issue under control, and this is less of an issue for us than it was for Ford.

Reduce wasted effort

Imagine if you enter a deal only once. Information is added to the deal as it flows through the business process but it is not reentered. Imagine all computer systems being in sync with each other, meaning that reconciliation is reduced to a formality. Imagine the beginning of the trading day with a single position report on your desk that is correct. How much time and effort has been saved? I'll bet that it's significant. Now, add on the time and money required to fix errors caused by multiple manual entries. If we can streamline with flow of information, we can reduce a significant amount of wasted effort, as well as reducing a significant amount of operational risk.

The Payoff

Companies like Enron were on the right track. It is well-recognized that they used information for competitive advantage. They knew more than everyone else; much to everyone's chagrin. How did they do that? Through efficient use of information. Henry Ford manufactured 14,000 cars in 1909, by 1915 he manufactured 372,000 and by 1923 it was two million. The price of a Model T dropped from $800 to $350. Ford's market share went from 10 percent to 48 percent and their profit went from $3 million to $60 million. I contend that by investing wisely over a two year period of time, your company can significantly reduce the 30 percent of your IT budget spent on integration of separate computer systems. This number probably pales in comparison to the dollars lost through business losses caused by manual errors and inaccurate information. On the more positive side, if you invest aggressively, but wisely, over a period of time, your company will be in the enviable situation of knowing your position at all times, knowing your overall risk, having accurate forecasts, reducing the costs of letters of credit and being aware of who changed what information in which system at all times for Sarbanes Oxley and audit compliance. In addition, you'll be in a position to reap the benefits of having a clear and available source of information that will enable new business opportunities. It will be you that is better informed than your competitors.

The CEO of a gas marketing organization I met with about three years ago was extremely frustrated. He had just returned from Wall Street and the analysts were skeptical about the value of his book of business. Their argument was that he had multiple different views of his business; a physical view, a financial view, an accounting view and more besides. Until he could show them a consolidated view of his business they would continue to ding his share price. Ouch! It doesn't have to be like that.

In Conclusion

There are companies today that are actively moving towards a business process and architecture as described above. The next steps are up to you. If I were an executive in a trading organization, I'd be asking some tough questions to ensure that I was competitive tomorrow and was not leapfrogged by my competition. You certainly don't want to be Enron'd or Wal-Mart'd by someone like Henry Ford that has figured out a more efficient process. UtiliPoint is aware of several companies that have shown an interest in standardizing a model definition to solve the problem of interchangeable parts. If you would like to know more, drop us a line.