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GOLD! Second-Order Effects - The big lesson 2020 taught me

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amp0193

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To run a great business, you need to be a great leader.

And part of being a great leader, is having the ability to foresee and prepare your company for the future.

Your employees and their families are depending on your ability to do so.


It's easy to think your Nostadomus when everything is going great, and the growth chart is up and to the right.

Everyone's a genius in a bull market... as they say.


But when crisis comes out of nowhere and leaves a giant bag of shit on your doorstep, and then lights it on fire... you learn what your true abilities are.


And my abilities were the equivalent of stomping on the bag.





Second-Order Effects - How asking "Ok, what's next?" will allow you to prevent a chaotic situation from getting worse.


March was a desperate time for my business.

My business is in the bicycle vertical which is very spring/summer seasonal, and we only made it through the bleak sales-less winter by the skin of our teeth.


My mom even paid for payroll one week. Thanks mom!


But it was all good because March sales were going to save us.


NOPE


Covid changed all that. San Francisco shut down. Everyone shut down. The country went on hold.


No sales. No phone calls. No emails. And one week of expenses in the bank.


My response: go full hedgehog, stop all outbound payments, prepare employees for furloughs, cut the sales forecast for the rest of the year by 60%, and bend over and prepare for what's coming my way.


But if I had asked "Ok, what's next?", I may have predicted what was about to happen.


So, here were the facts:
  • Everyone is stuck at home.
  • Nothing to do, everything closed.
  • Can't go to the gym, need exercise.
  • Don't want to get on a bus or a train
  • School's closed and kids are bouncing off the f***ing walls
  • Stimulus checks hitting everyone's bank accounts.

Ok, what's next? hmmm.... how about THE BIGGEST BICYCLE BOOM IN THE HISTORY OF MAN






Ok, admittedly, this was a big leap that even the titans in the industry were completely blindsided by.


But did I learn my lesson? No. Instead, I reveled in the relief of weeks of glorious sales... breaking daily records. And then breaking them again. and again.


Pop the champagne baby, we just turned the corner, and we're making it rain.






When sales exploded, I only saw the first-order, immediate effect. i.e. We're not out of business anymore, yay!


Had I asked "Ok, what's next?", I would've seen:
  • Increasing scarcity of bikes creating a toilet-paper frenzy of consumer demand for anything on 2-wheels
  • Factories getting completely overwhelmed with new orders from around the world
  • Distributors running out of all spare parts and accessories. (There was a month where no bike shop in the country had a spare tube to fix a flat)

The 2 weeks it took me to realize that the above was happening, and get my next order in, cost me 2 months of being out of stock.

I had to painfully sit on the sidelines, during peak season, while the entire world saddled up and got riding on anything they could find.


But that wasn't the end of my lack of foresight...


Yes, we were out of stock, but it ended up being all good, because people were cool to buy bikes and wait 8-10 weeks for delivery. So cash kept coming in.

And then I got the itch... Time to bring on a couple new salaried hires to help us prepare for a boomin' 2021! And no big deal, I'll just adjust the forecast to place my factory orders a couple of months earlier than normal. Great, that's taken care of, let's do this!


Here's what should have been going through my head:

Ok, what's next...
  • Every manufacturer in the world is going to try and put in their spring factory orders 2 months early
Ok what's next....
  • A surge of backups that exponentially increase lead-times not by 2 months, but by 6-8 months (I'm lucky, there are bike factories right now with a 14 month lead time...)
Ok what's next....
  • There is going to be a lot of cash required, in a very short amount of time, for anyone who wants to sell a bike before 2022.



And that last realization is what finally hit me upside the head this month. In a span of 3 weeks, the delivery date for new orders went from February to June.


Had I considered Second-Order Effects, I would have had a few months to prepare and find money... loans, investors, lines of credit.

Instead, I had 3 days to find enough money to immediately finance 2 shipments of inventory, and had a matter of weeks to find money to finance the rest of 2021's inventory.



When you're always reacting to the situation in front of you... you're never in control.

Plan for the future and think through scenarios.

Take time out of your week to just think and ask... "What's next?"
 

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Last edited:

biophase

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I think this comes with experience and also as your business matures. I see most people in ecommerce just thinking about when to place their next order when their current supplies run low. I did this probably the first 7 years in business. It was always, "ok, how many XYZ do we have left, and how many do we sell a month? Ok, let's order X amount, it should last us the next 3 months."

I think when you are running a business that you aim to become a big brand, you need to think at least 2 years in advance. When the 2021 Corvette comes out, you need to realize that back in 2015 some team was in charge for designing it. Somebody right now is designing the 2025 Corvette. Think about that. Are you designing your new 2022 bike model yet?

In fact, I have PO's in place of over $1M now to get me enough inventory to last until June 2021 at a 20% increase. I only place 2 PO's a year at each supplier, but they are uuuge! It also doesn't mean that I need to pony up $1M today. I still pay them as they arrive. But this way, my manufacturer can schedule their materials and labor. And if a competitor places their $100k PO for Xmas today, guess what, it's too late because they are at 100% capacity working on my stuff!

Even with all that planning, I still screw up my inventory and run out of stuff!
 

amp0193

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Even with all that planning, I still screw up my inventory and run out of stuff!

I had a plan going into 2022 for inventory, yeah. And still got blindsided.

I wasn't paying enough attention to how the landscape was shifting underneath me, and how my plan would need to adjust to it. All the info was there, I just wasn't thinking downstream.


We're good to go on bike designs through 2022. That's all rolling. I'm starting to think about 2023/2024 now.
 

Kid

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To run a great business, you need to be a great leader.

And part of being a great leader, is having the ability to foresee and prepare your company for the future.

Your employees and their families are depending on your ability to do so.


It's easy to think your Nostadomus when everything is going great, and the growth chart is up and to the right.

Everyone's a genius in a bull market... as they say.


But when crisis comes out of nowhere and leaves a giant bag of shit on your doorstep, and then lights it on fire... you learn what your true abilities are.


And my abilities were the equivalent of stomping on the bag.





Second-Order Effects - How asking "Ok, what's next?" will allow you to prevent a chaotic situation from getting worse.


March was a desperate time for my business.

My business is in the bicycle vertical which is very spring/summer seasonal, and we only made it through the bleak sales-less winter by the skin of our teeth.


My mom even paid for payroll one week. Thanks mom!


But it was all good because March sales were going to save us.


NOPE


Covid changed all that. San Francisco shut down. Everyone shut down. The country went on hold.


No sales. No phone calls. No emails. And one week of expenses in the bank.


My response: go full hedgehog, stop all outbound payments, prepare employees for furloughs, cut the sales forecast for the rest of the year by 60%, and bend over and prepare for what's coming my way.


But if I had asked "Ok, what's next?", I may have predicted what was about to happen.


So, here were the facts:
  • Everyone is stuck at home.
  • Nothing to do, everything closed.
  • Can't go to the gym, need exercise.
  • Don't want to get on a bus or a train
  • School's closed and kids are bouncing off the f***ing walls
  • Stimulus checks hitting everyone's bank accounts.

Ok, what's next? hmmm.... how about THE BIGGEST BICYCLE BOOM IN THE HISTORY OF MAN






Ok, admittedly, this was a big leap that even the titans in the industry were completely blindsided by.


But did I learn my lesson? No. Instead, I reveled in the relief of weeks of glorious sales... breaking daily records. And then breaking them again. and again.


Pop the champagne baby, we just turned the corner, and we're making it rain.






When sales exploded, I only saw the first-order, immediate effect. i.e. We're not out of business anymore, yay!


Had I asked "Ok, what's next?", I would've seen:
  • Increasing scarcity of bikes creating a toilet-paper frenzy of consumer demand for anything on 2-wheels
  • Factories getting completely overwhelmed with new orders from around the world
  • Distributors running out of all spare parts and accessories. (There was a month where no bike shop in the country had a spare tube to fix a flat)

The 2 weeks it took me to realize that the above was happening, and get my next order in, cost me 2 months of being out of stock.

I had to painfully sit on the sidelines, during peak season, while the entire world saddled up and got riding on anything they could find.


But that wasn't the end of my lack of foresight...


Yes, we were out of stock, but it ended up being all good, because people were cool to buy bikes and wait 8-10 weeks for delivery. So cash kept coming in.

And then I got the itch... Time to bring on a couple new salaried hires to help us prepare for a boomin' 2021! And no big deal, I'll just adjust the forecast to place my factory orders a couple of months earlier than normal. Great, that's taken care of, let's do this!


Here's what should have been going through my head:

Ok, what's next...
  • Every manufacturer in the world is going to try and put in their spring factory orders 2 months early
Ok what's next....
  • A surge of backups that exponentially increase lead-times not by 2 months, but by 6-8 months (I'm lucky, there are bike factories right now with a 14 month lead time...)
Ok what's next....
  • There is going to be a lot of cash required, in a very short amount of time, for anyone who wants to sell a bike before 2022.



And that last realization is what finally hit me upside the head this month. In a span of 3 weeks, the delivery date for new orders went from February to June.


Had I considered Second-Order Effects, I would have had a few months to prepare and find money... loans, investors, lines of credit.

Instead, I had 3 days to find enough money to immediately finance 2 shipments of inventory, and had a matter of weeks to find money to finance the rest of 2021's inventory.



When you're always reacting to the situation in front of you... you're never in control.

Plan for the future and think through scenarios.

Take time out of your week to just think and ask... "What's next?"

Don't be so harsh on yourself Amp. And as Bio said its matter of experience.


The real lesson here is that "thinking" however sexy it might seem is not the solution.
 

MJ DeMarco

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Awesome write up straight from the trenches. Marked must read, or in this case, GOLD.
 

amp0193

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Don't be so harsh on yourself Amp. And as Bio said its matter of experience.

I'm not being harsh on myself. I'm reflecting on my mistakes, and taking away a lesson learned from it.

As a whole, I've had a kick a$$ year!


The real lesson here is that "thinking" however sexy it might seem is not the solution.

That's the opposite of the lesson learned here.

More thinking is required, not less.

I need to get outside of reacting to the day to day and obvious conclusions, and think deeper about long term implications of events and decisions.
 

amp0193

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Second Order Thinking - Finding Opportunity


When Covid came in full force, everyone and their barber looking for a quick easy buck thought of selling 2 things:
  1. Masks
  2. Hand Sanitizer

As a rule, if you are operating in herd mentality, you are operating in First Order thinking.


If this, then that.


Second order is going the next tier down.


Ok, so yes, people are going to need hand sanitizer. But, what are people who manufacture hand sanitizer going to need?


Here's a quick 5-minute brainstorming session of me + Google. Let's see:
  • Isopropyl Alochol
    • And Isopropyl Alcohol suppliers will need more sulfuric acid
      • And sulfuric acid suppliers are going to need more 49 gallon drums
        • And 49 gallon drum suppliers are going to need...
  • Bottles
    • Bottle manufacturers going to need polyethylene
      • polyethylene manufacturers going to need ethylene
        • ethylene manufactures going to need more distillation capacity.
          • distillation equipment manufacturers going to need....
  • Bottle labels
  • Fragrance
    • Fragrance manufacturers going to need a variety of raw organic materials

And so on.

That was 5 minutes, and I only focused on manufacturing needs. I didn't touch distribution, transportation, merchandising, etc. of any of the above.

What if you spent a full 8-hour day, or a week, going down 2nd, 3rd, 4th order thinking through all of the possible opportunities created by an event, or crisis, or a new technology or innovation in a market.


You would fill an entire notebook with all of the opportunity.


If you're reading this, and haven't started a business yet, because you don't have any ideas... get busy!


There is opportunity EVERYWHERE
 

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