Boost profits without increasing sales? Not possible, you may say. However, there are proven ways to cut costs to generate increased profits and 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.

Some think it's simply not possible for a company to consistently offer top-quality products and services and maintain top-ranked profitability. If that's true, then how do you explain Apple ( AAPL), Intel ( INTC), Procter & Gamble ( PG) and Walt Disney ( DIS)? Each is listed among the Top 35 companies for both Getting there takes attention to detail at all phases of the operation.

Know Your Numbers

First, every company must know where profits are made and should report them by product, service, line of business, industry, or whatever categories make sense for that company. The same holds true for losses. You need to know where and why losses are incurred to take corrective action.

Caution: Don't evaluate results strictly on a consolidated basis. This allows good results to offset poor results and keeps you from knowing what actions are required to maximize profitability.

Second, it's critical to understand exactly what drives costs to know how to profitably grow your business. Budgets need clearly defined assumptions pertaining to cost drivers. This leads to better decisions on protecting profitability against inevitable variations in revenue, cost of goods and pricing pressures.

The renowned Cleveland Clinic, touted for its ability to provide cost-efficient, stellar health care, has found tremendous success in using the efficiency model. As with other admired medical systems, the Cleveland Clinic has drawn on principles of engineering and industrial production to make sure medical care is delivered in a predictable, reproducible way.

Third, before making incremental investments, know how much work your people and systems can handle. Measure productivity and, once predetermined thresholds are met, have documented plans that include time frames for investing in efficiency-improving technologies. Searching for new ways to do more with less is a never-ending process, but one of the best ways to measure productivity is time and activity reporting. Follow these simple rules to get the most from your system:
  • Design the system with a minimum number of accounting categories.
  • Avoid using catch-all categories like "other." This isn't specific enough to aid decision-making.
  • Train everyone how to use the system.
  • Enforce reporting requirements or people won't comply.

People are often a company's largest expense so knowing how people spend their time helps prioritize areas for cost reduction, reallocation and automation. Below are some of the reporting categories you should capture, trend, and compare to budget:
  • Administration, such as email and paperwork
  • Training
  • Internal meetings
  • Vacation
  • Sick time
  • Production
  • Product support
  • Product development
  • Documentation
  • Project management
  • Customer support, which can be broken down further into collection of accounts receivable, problem resolution, billing adjustments, and warranty work.

Understanding your cost structure allows you to make profitable decisions. Here's an example: Before an organization decides to hire a new person, it should determine the cost and function of that person. If profitability and attainment of the company's top objectives won't be directly impacted with the new hire then don't make that hire.

Reporting categories will vary by department and company based on the type of work performed. The key is to get started. To begin, select time-reporting categories, capture employees' time, and track results. You might be amazed at what you find and what you can do to increase efficiency.

Take Action

Done well, operational excellence allows you to quickly identify and address problem areas to maximize profits. When quality declines, rework increases, costs escalate and profitability is affected. Immediate action is required to correct the situation before it worsens.

Poor quality and the resultant rework can quickly increase a company's cost structure and render it noncompetitive. Toyota's ( TM) current woes highlight the missteps in operational excellence. In its "undisciplined pursuit of more," Toyota lost sight of the "Toyota Way," a management doctrine built on 14 principles of quality, with No. 1 being, "Long-term philosophy beats short-term financial goals." While successful in its quest to become the largest automaker, Toyota's commitment to safety first, quality second, and volume third became skewed as it "pursued growth over the speed at which we were able to develop our people and our organization," the company's CEO said last month.

With all the investment in quality programs to reduce inefficiencies and rework, I'm amazed at the number of leaders who don't utilize the time-tested methods. One of the most effective ways to reduce unnecessary cost and boost profitability is to have a robust quality process that uses root-cause analysis, or RCA, and irreversible corrective action, or ICA. These techniques ensure the company removes inefficiencies and reduces rework while promoting increased profitability, quality and customer satisfaction.

RCA allows you to determine the root cause of problems and inefficiencies instead of dealing with symptoms. ICA ensures root causes don't reappear.

For instance, let's say the problem is a customer complaint, with the symptom being a missed delivery date. The root cause is a product shortage that the purchasing department knew about but failed to either expedite or give customer advance notice of the delay.

By addressing the symptom, you will apologize to the customer and possibly issue a 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 prevent a future recurrence and improve customer satisfaction and margins.

Another great way to focus on problem elimination is to hold recurring operations reviews. 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 focuses solely on how RCA and ICA are used to meet goals. At the Cleveland Clinic, where measuring quality can be difficult, CEO Dr. Delos Cosgrove requires departments to "measure quality and report it on a regular basis" so that problems can be identified and fixed, Fortune reported.

Let the numbers do the talking. You'd be surprised what they reveal about the organization's level of understanding and accountability.

Business areas such as customer service calls, billing errors, accounts receivable ad warranty claims, benefit greatly from RCA and ICA analysis.

Commit yourself and your organization to RCA and ICA and watch your profitability, productivity and customer service improve.

How Does Your Organization Measure Up?

Here are some questions to evaluate your level of operational excellence.
  • 1. Have you defined processes to measure and eliminate inefficiencies? If not, what steps will you take to accomplish this?
  • 2. How effectively do you manage employee productivity? List three ways you can do it better.
  • 3. How accurate are your product and service margins? How do you know?
  • 4. How timely is your financial data? If it takes too long to get accurate numbers what will be done to speed up the process?

I pledge to you that if you act on these directions, you will achieve results you may never have thought possible.

"At the beginning of the day, it's all about possibilities. At the end of the day, it's all about results." -- Bob Prosen

--Written by Bob Prosen in Dallas

Prosen is president and CEO of The Prosen Center for Business Advancement, where he shows current and future leaders how to rapidly increase performance, productivity and profit. The Prosen Center delivers the nation's only leadership and mangement training focused exclusively on business execution. that enable them to convert plans into results. Along with being a frequent guest on MSNBC and FOX News, Prosen is the bestselling author of Kiss Theory Good Bye, which gives leaders the tools and step-by-step directions to achieve extraordinary operating and financial results. Prosen earned his B.S. from Texas Tech University, an M.B.A. from Georgia State University and holds postgraduate certifications from MIT, Duke University and The Wharton School.

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