Innovative Ways Companies can Shave Their Costs and Increase Profitability
By Bob Prosen
Companies in search of proven ways to cut costs while increasing profitability are in luck. In fact, not only can companies cut costs and increase profits, they can do so while increasing customer satisfaction.
The key is to harness the power of operational excellence. In its simplest form, operational excellence is about efficiency, eliminating rework, improving quality and understanding your cost structure in detail.
Get Inside Your Numbers
To begin with, every company must know where profits are being made. Profits should be reported by product, service, line of business, customer, industry, or whatever categories make sense for your company. And it’s just as important to know where and why losses are being incurred so you can take action to reverse the situation. Caution: Do not evaluate results strictly on a consolidated, or rolled-up, basis. When this is done, good results offset poor results, and you can’t tell what actions are required to maximize profitability.
It’s critical to understand exactly what drives cost so you know how to profitably grow your business. Budgets must have clearly defined assumptions pertaining to cost drivers, which lead to better decisions on how to protect profitability against inevitable variations in revenue and pricing. This is the only way to accurately invest in areas that improve profitability and de-invest in ones that don’t.
For example, as revenues increase, there should be a pre-approved cost model that allows specific costs to change according to established efficiency standards. These efficiency standards allow companies to scale up and operate at optimal capacity that achieves maximum profit margins. This means you have to know how much work your people and systems can handle before you make incremental investments.
To accomplish this, you must measure productivity and have documented plans that include time frames for investing in efficiency-improving technologies when certain predetermined thresholds are met. Searching for new ways to do more with less is a never-ending process. One of the best ways to measure productivity is time and activity reporting. This is a rich source of information if it is used effectively.
To get the most from your time-reporting system, follow these simple rules:
• Design the system with a minimum number of accounting categories.
• Avoid using a catchall category like “other.” Time reported as “other” isn’t specific enough to aid decision making.
• Train everyone on how to use the system.
• Most importantly, enforce reporting requirements or people will not comply.
Most often, people are a company’s largest expense. Therefore, knowing how people spend their time will help you prioritize potential areas for cost reduction and automation. Here are some of the reporting categories you should capture, trend, and compare to budget:
• Administration (e.g., e-mail and paperwork)
• Internal meetings
• Internal systems support
• Sick time
• Product support
• Product development
• Project management
• Customer support
Categories such as customer support can be further broken down:
• Collection of accounts receivable
• Problem resolution
• Billing adjustments
• Warranty work
Cost categories will vary by department and company, based on the type of work being performed. What’s important is to get started. Begin by selecting appropriate time-reporting categories, start capturing employees’ time, and track results. You might be amazed at what you find, and more importantly, what you can do to increase efficiency . Every dollar saved goes straight to the bottom-line.
With a full understanding of your cost structure, you can make profitable decisions. For example, if an organization wants to hire new personnel, you should determine what each person would cost and what they will do. If profitability and attainment of the company’s top objectives won’t be positively impacted by adding the person, then your decision is simple: don’t hire. Use the information from your time reporting system to eliminate unnecessary, or less important work so your existing organization can take on important new initiatives. Every cost must be justified by its potential to increase profitability.
Move Swiftly, Watch Every Turn
Operational excellence allows you to quickly zero in on problem areas and maximize profits. When costs escalate, profitability will be affected. Immediate action will be required to correct the situation, or it will most likely worsen.
Poor quality and resulting rework can quickly increase a company’s cost structure and render it noncompetitive. With all the investments made in quality processes over the years, you would think this issue would be very well managed. Yet when I ask company leaders how many of them have defined processes in place to reduce inefficiencies and rework, very few do. I believe the major reason for this is that leaders don’t know which tools to use or how to use them to get results without getting bogged down in the process.
One of the most effective ways to reduce unnecessary cost and boost profitability is to have a robust quality process that utilizes root-cause analysis (RCA) and irreversible corrective action ( ICA). These techniques ensure the company removes inefficiencies and reduces rework by doing the right thing right the first time.
RCA and ICA are the two most important principles you need to know to help reduce unnecessary costs while increasing profitability, quality and customer satisfaction. RCA in its simplest form means being able to determine the root cause of problems and inefficiencies instead of dealing with symptoms. For example, the symptom associated with a customer complaint might be that the delivery date was missed. The root cause was a product shortage that the purchasing department knew about and failed to either obtain approval for expedite charges or give advance notice to the customer.
By addressing the symptom, you will apologize to the customer and possibly issue some form of credit, leaving yourself open for the same problem to happen again. However, if you identify the root cause and implement ICA by training the purchasing department, you will prevent the same problem from recurring. You also will improve customer satisfaction and margins going forward. ICA ensures that the root causes of problems are resolved so they never occur again. This is a very high standard to maintain, but well worth the investment .
Another great way to focus on problem elimination is to hold recurring operations reviews. The process I like best makes the leader who is responsible for each operating area stand up and present his or her results in front of colleagues and senior management. The key to these reviews is the use of trend charts that show results week-to-week or month-to-month compared to plan. The objective is to improve results by reducing the number of problem occurrences. Conversation during these reviews should focus solely on how RCA and ICA are being used to accomplish this goal. Let the numbers do the talking. You’d be surprised what they reveal about the organization’s level of understanding and accountability.
Here are some areas in business that benefit greatly from RCA and ICA analysis:
• Customer service calls
• Billing errors
• Accounts receivable
• Warranty claims
• Refunds and credits
• Customer churn
• Win/loss reviews
• Employee turnover
• On-the-job accidents
• Information system performance
Commit yourself and your organization to RCA and ICA and watch your profitability, productivity, and customer service improve.
Does Your Operational Excellence Measure Up?
To help companies evaluate their own operational excellence, I ask key questions that should each be answered with a resounding yes! Here are three of the most important criteria you can use to evaluate your operational excellence.
Have you defined processes to eliminate inefficiency?
If not, what steps will you take to accomplish this?
How effectively do you manage employee productivity?
List three ways you can do even better.
How accurate are your product and service margins?
How do you know?
Bob Prosen is the best selling author of Kiss Theory Good Bye: Five Proven Ways to Get Extraordinary Results in Any Company. His outstanding how-to book has hit #1 on Amazon for best-selling and investment book, and was awarded the USA Book News Best Books 2006 Award for Best Management Book, Silver medalist by the Independent Publishers Association and Foreword Magazine’s Silver award for Book of the Year. http://kisstheorygoodbye.bobprosen.net