Interview with Steve Sashihara
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio interview between Andrew Zezas, CEO of New Jersey based Real Estate Strategies Corporation and finance executive, Steve Sashihara, CEO of Princeton Consultants.
Visit www.CFOstudio.com to read about this interview and to watch the entire on-camera interview.
Driving Greater Performance through Optimization from the Perspective of the CFO
Zezas: Hi this is Andrew Zezas, your host at CFO studio. I am joined today by Mr. Steve Sashihara, CEO of Princeton Consultants, an information technology and management consulting firm with offices in Princeton, New Jersey and Manhattan, New York. The Wallstreet Journal has called Princeton Consultants project work “revolutionary.” Consulting Magazine has called Princeton Consultants “the best and the brightest.” The company’s clients include companies in transportation and logistics, financial services, media, manufacturing and distribution, and other industries. Steve Sashihara is the author of the Optimization Edge: Reinventing decision making to maximize all your company’s assets, published in 2011 by McGraw Hill and named by the Washington Post as one of its top 5 leadership books. Steve is former chair and current director of the Association of Management Consulting Firms. He serves an officer for the informed roundtable, a group representing top level leaders in applied optimization for large businesses. He’s a graduate of Princeton University in 1980 and serves on the Advisory Council for the University’s Department of Operations Research and Financial Engineering. Steve is here today to talk to us about “Driving Greater Performance through Optimization from the Perspective of the CFO.” Steve, it’s wonderful to have you here on CFO Studio.
Sashihara: Thanks Andrew, it’s an honor to be here on CFO Studio.
Zezas: Thank you so much. Optimization sounds like this big heavy word, and I know it’s not. Share with me the basic principles of optimization, what is it?
Sashihara: Optimization, first of all, is a standard English word that means a search for the best, and a lot of people like to use it in a lot of contexts, but when we we say optimization, we are using a fairly strict usage of it. It’s a word that comes from engineering, and it’s basically a way of changing decision making to improve the way people are making decisions about assets that they manage using a special kind of software that can churn through billions, trillions of combinations, and then give you explicit recommendations for action.
Zezas: So, the software actually churns through, you said, billions and trillions of decisions, and then makes recommendations itself?
Sashihara: Yes, that’s right.
Zezas: Wow, that’s fantastic. So, you’re a specialist in optimization, you wrote the Optimization Edge. What caused you to want to write this book?
Sashihara: We found that optimization is now ready to break out from being a specialty area. It’s the secret behind things like Google and Amazon, large transportation networks, and the military, but it’s now ready to break out and be used by businesses of all sizes now. And, when we look for a book that we could give our executives to tell them what it was, we just couldn’t find one. So, we thought let’s just write our own, and it’s really just trying to make optimization understandable by the executive; not the specialist, not the technician, but by the General Manager, the CFO, and Chief Operating Officer. We are trying to make the light bulb come on so they can understand us and that’s what optimization is
Zezas: So, I’m not an optimization specialist, neither am I an expert in the field. So, if I were to read the Optimization Edge I am going to come away with a better understanding of what it is, how to apply it, and what the likely results will be?
Sashihara: That’s the hope and not just rah rah. We’re also trying to bring out stories of how it’s worked, where there are challenges, where people have misstepped with it. We want people to really understand optimization, to be as excited about it the way we are, but also have a good cold eye at it, know where it could be used, and what circumstances it could be the most valuable.
Zezas: How it can make sense.
Sashihara: Absolutely, absolutely.
Zezas: Speaking about CFOs, why should CFOs today care about optimization today?
Sashihara: Wow, that’s a great question. You know in our experience, and in talking with you, and also in looking at some of the other great speakers that have been on CFO studio, I’ve noticed that the ones I really admire are less about finance, while that’s part of the portfolio, but they seem to me to be visionary and general business managers. I think the sorts of people who should be thinking about optimization for their organizations are maybe the sort of people who are listening on a cast like this; you know they are looking to bring new ideas, to improve the performance of the business. They are not merely just reporting numerically on how the business is doing. It’s important, but the executive, the CFO, who’s actually looking to bring ideas in to improve performance, those are the people who might have an interest in optimization.
Zezas: The most progressive CFOs that we encounter these days are more forward looking than they are historical looking despite the fact that the historical reporting and compliance components of their business are important. So, it sounds to me optimization fits perfectly with that role of the progressive CFO?
Sashihara: That’s right. You know, as we were talking Andrew, you were telling me that in some organizations the CFO is very much partitioned, but in other organizations the CFO really is right on the very top of the organization with the CEO, and in many cases is either acting with Chief Operating Officer in some organizations. He is essentially the Chief Operating Officer. They work right with the IT head or maybe the IT reports to him or her and really they are being charged to look around the company, and instead of fighting fires, which is what most of the organization is doing, looking for thoughtful ways to really improve performance on a sustained basis, and they like to do that using their strength, which is they’re good with numbers. They’re good with trying to turn data into value, that’s what optimization is about.
Zezas: And they’re strategic in their approach, long term in their approach?
Sashihara: Absolutely, absolutely.
Zezas: So, talk to me about the benefits of optimization, specifically to the mid-sized company?
Sashihara: A lot of companies when they look at what they do for a living, they are manufacturers, and they make stuff. If they are a distribution company, they distribute. If they’re in a service company, they service customers. But, if you look what they really do day in and day out, hour after hour, and week after week, they’re making lots and lots of business decisions. Business decisions about who to serve, what to buy, inventory levels, scheduling, and allocation. And, the performance of the company is really based on how well they make those decisions and if you could use optimization, and you can take a good level performance, and you can raise it up just a little bit of a notch. That’s a tremendous value to the mid-sized company. You know mid-sized companies are in a challenging area because they are basically competing with very large scale companies, many of whom are getting business because of their large size. They are also competing with very tiny organizations that sometimes have no overhead, so a medium sized business has to be the best of both. They have to have the scale and the reach of a larger firm, but not the bureaucracy not the slowness of the big company, and optimization is what can capture that real essence of what makes them special and why they should be the next big company in their industry.
Zezas: Give me an example of companies and the results that you’ve seen that have come from optimization?
Sashihara: One of my favorite clients, and we love all of our children equally, but I love this company because they are in the printing business. They are one of the nation’s largest printing companies and I love it because it’s such a hard business. Now, a lot of people believe they are in a hard business; printing is truly a tough business. There are thousands and thousands of literally mom and pop printers. There are only a handful of major printers of which this company is one, and they have spent years with every program known to man, every management consulting firm you can name. They’ve done Lean, they’ve done Six Sigma, they’ve done total quality, they’ve bought ERP, they’ve done everything, and there just trying to squeak a tiny bit more performance out of their assets. If you looked at them from a top line point of view, I think you would call them a large company. They are well over a billion dollars in sales, but really if you look at their bottom line, they may be more like a mid-sized company because printing is such a razor thin margin. So, the fun thing about this company for us was that their belief there wasn’t really anything new to bring to that they’ve spent so much time trying to squeeze every little bit out. To them, a win was a tenth of a percent, just a fraction of percent in some area. With optimization we were able to find that they had 3, 5, 7 percent unused assets in areas they thought “no we are absolutely at 100%, 99.9% utilization.” And the transformation that enabled was not just a win for optimization, it really tilted their whole thoughts about how we measure how utilized we are and what was possible for the organization. They ended up buying their next largest competitor, a real great success story, and we had a part of that win. But, we weren’t solely the whole win. We were part of really a revolution in that company. It was really a lot of fun.
Zezas: That’s tremendous when you are telling me they are looking for one tenth of a point, and in optimization you’ll do 5 and 7 percent results.
Sashihara: Yes, isn’t that great?
Zezas: That’s tremendous. That’s wild, that’s wild. So, from a CFO’s perspective, how does a CFO go about identifying optimization opportunities because this is a new concept to a lot of companies?
Sashihara: Yeah, one thing that we say about optimization is we use the word asset, and I want to make an apology to my financial colleagues, the CFOs. We don’t necessarily mean balance sheet assets or GAAP assets. Of course, those matter. So, if you’re a capital intensive company, that you have very large investments in capital machinery and facilities, transportation assets, and vehicles, you can optimize decisions about that. But, there are also non-balance sheet assets, and by assets we might mean anything valuable that you have some control over. So, if you are a service business: the time of your people, how you schedule them, how you allocate them, also your contractors.
Zezas: Anything from which a company could derive value?
Sashihara: Absolutely, and you think of all those assets when you’re making decisions of where could we apply optimization and improve the way we are making decisions about how we schedule them, how we produce them, how we allocate them, and how we price them. And, that’s where really where optimization is having is having a big growth right now.
Zezas: Is optimization an approach that can be addressed from within? Does the CFO need to go outside for optimization assistance?
Sashihara: Optimization right now is a hyper specialty. There are university degrees in it and it’s something that really if the CFO and the organization have that expertise in that organization then by all means. But, in general, they’re advised to go outside and find real experts to bring that in and help them. The CFO and what their organization brings is the subject matter expert about their own business, and nobody knows their business better than they do. But usually what they want to do is they want to go out and get optimization experts as well to come in and sort of form it as a team.
Zezas: So, I would imagine in most mid-sized companies they probably don’t have a lot of optimization experts living within the organization?
Sashihara: Depending on the company, if the company is involved in high end logistics, then they might have optimization people, but in general that’s right. They go to the outside and find experts either consultants or university professors.
Zezas: Steve, optimization is not a new concept. We’ve talked about this before in that it’s been around since the 1940’s. It’s being deployed now by some best in class companies, some fast growing companies, and even small innovative companies. If that’s the case, it’s been around for so long, it’s not a new idea, why isn’t every enterprise deploying optimization?
Sashihara: That’s a great question Andrew. There have been three things that have been holding back optimization. Optimization is fantastic. It can give you not just a good schedule or better schedule, but it can give you the best possible schedule. It can give you the best possible pricing, and the best possible allocation. So right, why isn’t everyone using this? In areas where they’ve been able to use it…it was invented during WWII for logistics and is largely credited in some of the great victories we’ve had in inventing modern logistics. It’s been used in high end transportation networks and broadcast networks, so in the places it can be used it’s really changed the game. But there have been three things that have been holding it back. One is that in almost every business decision we need to take data and then use that in the optimization program. Most companies didn’t have the data that was necessary to make the optimization work at the time the decision has been made. In most of the companies we are now looking at in the last 3, 5, 8 years, sometimes in the last couple of years, they have now invested in technology information and they are swimming in data. So, data that was always necessary for optimization is now there for the asking. In fact, most companies have all the data they need.
Zezas: So, a company embarking on an optimization program does not need to invest in typically in an information gathering procedure because you are saying the information is there, the data is there?
Sashihara: Which is wonderful. A second thing that has been holding companies back and making optimization everywhere is we’ve been hearing for a long time computers are getting faster and faster and faster, that the laptop you have is a super computer from five years ago. The smartphone you have is a laptop from a couple years ago
Zezas: And more powerful than the first module.
Sashihara: Absolutely, but to be honest, a lot of what we’ve been using computers for doesn’t need to be extra faster. You get it for free so why not. If I’m working on a spreadsheet, sending an email, doing a PowerPoint presentation, the fact that my computer is a bazillion times faster is fast enough, but with optimization, and here’s my point, optimization is very hungry for computers. In fact, it’s probably the most compute intensive application out there. When a bunch of scientists at Bell Labs here in Jersey tried to prove that they can beat a chess master with the computer, most of their work was in building the computer, it was a very large scale, so called parallel processing computer. So, what really has held optimization back is you had to be rich enough; you have to have big enough stakes to get all the data there, and to afford the computer power. Now computer power is so available to us that you have college students, you have high school students putting together cloud apps and running on the Amazon cloud and putting the expense for not buying data centers or putting that expense on their Visa and Mastercards. And so the availability of that kind of computing power means that optimization is now available for practically anyone, certainly for businesses. The third thing that has been holding back optimization and that’s the point of this book, this interview, and thanks for listening; executives have to know what optimization is, and ask for it. Because it hasn’t been available, because it has been a specialty area, people, naturally haven’t cared about it, haven’t asked about it.
Zezas: It’s been off the radar.
Sashihara: But, now that you have the data, and now that you have the computers, you can actually improve your own decision making if you know what optimization is and you ask for it. So, every time you go into your organization, and you see we’ve spent a lot of money on IT systems, but we see people sitting there looking at screens with fingers on keyboard and hand on mouse just dragging and building a schedule or doing a price, it’s like can we use optimization or can we improve half percent, 1 percent, 4 percent? If we can make that rule change, that’s a game changer for us financially, that goes right to the bottom line.
Zezas: Steve, you make a very powerful case for optimization. We are out of time here on CFO studio.
Zezas: I want to thank you very for much for appearing with us and joining us, and hopefully you’ll accept my invitation to come back and see us again.
Sashihara: Wonderful, thanks Andrew.
Zezas: It’s been great to have you here. This is Andrew Zezas, your host with CFO studio, with Steve Sashihara, CEO of Princeton Consultants and author of the Optimization Edge, saying thank you very much for watching. We’ll see you again.
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