Know Your NumbersFirst, 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.
- Administration, such as email and paperwork
- Internal meetings
- Sick time
- Product support
- Product development
- Project management
- Customer support, which can be broken down further into collection of accounts receivable, problem resolution, billing adjustments, and warranty work.
Take ActionDone 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.
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?