A recent meeting with a prospective client had me wondering about the wisdom of where venture capitalists park their money.
They were working with no systems, a slap-dash layout and painful processes designed almost to guarantee nothing made it out the doors in time. Sales were booming. After touring the operations, I sat with the COO for what became a short and unsuccessful meeting.
“We’re going to raise $100 million in funding and automate the place from start to finish. No human is going to touch a single product. We’re already in contact with a robotics firm out of Boston.”
One thing I have learned in my career is that successful client-consultant relationships begin with a philosophical alignment. If there is too much clash in perspective, the relationship will be short and stormy.
Meekly, I offered, “that seems to be a big leap from where you are today. There are so many basic things you could do by spending a fraction of that money.”
“Why take baby steps? The payback will be tremendous,” the COO lectured.
It had me thinking about that movie starring Danny DeVito – Other People’s Money. Someone else would foot the bill for this COO’s robot dreams. Venture capitalists eager to get a stake in the hottest new company would throw money away on one of the basic mistakes of supply chain infrastructure.
The payback on creating a robots-only distribution center looked huge to the COO but this was an illusion. Doing anything would make the existing situation better. Evaluating all available alternatives begins with making the best situation out of the existing infrastructure. Only against that improved status should alternatives be judged. And then, those alternatives should look at a range of capital investment levels where a mix of technology, materials handling and buildings solve the problem at hand.
In that context, the economics of the COO’s dreams would evaporate against the simpler options. Consider two investment options. Option A costs $5 million and delivers $5 million in annual savings. Option B costs $100 million and delivers $10 million in annual savings. It would take 19 years for the extra $95 million to pay for itself. And that $95 million could go to other things, like rolling out more facilities faster and cheaper than the COO’s grand fantasies would allow.
Last week, a New York Times analysis of Instacart wondered if we were in a new technology bubble with heap-loads of cash priming the silliest pipe dreams. This week, from my little corner of the world, I’m asking the same question. How about you?