A tool for root cause analysis.
Many of my regular readers (including you in the steel industry!) will be acutely aware of the energy cost situation right now.
Headlines this week have been making connections between meat on (or maybe not?) UK supermarket shelves, with one supermarket chief suggesting a tabloid friendly ‘Christmas is cancelled’ message, and the discussions about energy supply, in particular gas prices.
Amidst much focus on wider supply chain issues (containers, silicon chips, truck drivers…), there is a tool which can help us work our way through what is going on.
The 5 Whys. Very simply, asking ‘why?’ five times.
Let me demonstrate:
- There is a potential shortage of meat in the UK
Why? - There is not enough Carbon Dioxide gas available (CO2)
Why? - CO2 production has briefly ceased, as it’s a by-product of fertiliser production from just 2 UK factories
Why? - The spot price of gas – used for energy in those factories, has gone up by some 250%, making the factories unviable at that cost.
Why? - The gas price has increased because of (bear with me here… I could potentially use a load more ‘whys?’) reduced gas stocks from a cold spring, reduced shipments of liquified gas from the Gulf, gas being used to generate electricity because of reduced renewable electricity caused by calm weather recently….
Why? (One why still barely enough here, but stick with it…) - And reduced supply from Russia, who want to sell gas through the new Nordstream 2 pipeline which does not go through Ukraine, with whom they have a certain disagreement right now…
This is how using 5 Whys can help to understand the causes of a problem, so you can move forward to a solution.
It is less than perfect however: note in this example how there are multiple causes. Yet 5 Whys is just a tool: in practice you can ask as many as you need to get to a place where you can identify a solution. Maybe it is only 2 or 3: maybe it needs 7 or 8 – arguably as this situation does.
In this example, simply explaining price rises being caused by a supply/demand imbalance (which it is…) is too simplistic. At the same time, as an organisation attempting to influence Russian government foreign policy may be a leap too far. But at least you can understand the situation you are dealing with.
As a tool 5 Why’s can also suffer from being seen as a bit childish: remember when as a 4/5/6-year-old you were always asking ‘why?’.
The UK Government have got about as far as 3 whys, and have an agreement with the company producing fertiliser and CO2 to subsidise their gas purchases, so production has resumed. That agreement lasts for 3 weeks. Maybe they have a plan to sort everything else out in the next 3 weeks – and I notice the weather forecast is set to get windier, so those turbines should be turning again.
I offer 2 thoughts from this:
- Simple tools like 5 Whys can be really useful in helping to understand and getting to the root cause of a problem. This is just a tool; you can use it – and its results – in any way you wish. It is there to help your judgement, but it will not make the decision for you.
- How is your long-range weather forecasting? A cold European winter could be a challenge in terms of simply keeping lights and heat going.
Having had training interrupted by power cuts twice in the last 2 years, I am going (online) shopping.
In the long term, it is solar panels and back up battery. In the short term: a generator.
What’s your plan?
Buzzword of the Week – Enterprise Value
Definition – A measure of a company’s total value, used as a more comprehensive alternative to equity market capitalisation, and a popular metric for valuing a company for potential takeover. EV includes in its calculation the market capitalization of a company (multiply the number of outstanding shares by the current stock price) then add short-term and long-term debt and subtract any cash on the company’s balance sheet.
Alternate View – More relevant than market capitalization alone because of the amount of debt used for corporate finance. In a takeover, the buyer will usually have to take on the debt (or repay it!) so debt cannot be ignored. EV then provides a basis for other calculations, notably the EV/EBITDA & EV/Sales multiples, providing comparisons across companies and sectors. More an outcome than something to be managed daily.
Coming Up…
Delighted to be running a workshop at the Speaking Summit, the annual convention of the Professional Speaking Association on Friday October 8th. The rest is pretty spectacular too! https://summit21.thepsa.co.uk/
I shall also be at the CIPD’s Midlands Conference on Saturday 9th October… https://events.cipd.co.uk/events/midlands-annual-event/
7 Steps to Start Up – my joint venture with Rob Harrison and Glued: now on Tuesday 12th October 10.00am