We’ve been trying a lot of new things lately, in order to increase revenue and profit. Unfortunately, while revenue is up, profits are down. I’m getting discouraged. By now I thought we’d be making a lot more than we are. What are your thoughts?
Excellence evolves over time, based on trial and error and learning from mistakes. The more new things attempted, the higher the stress level on all participants, which increases the likelihood of errors and lost profits. Expecting that things will turn around quickly can be a big miscalculation.
The quest for new products and services, in order to stay ahead of the profit curve, is crucial in any company. That means that this owner is right to be searching for additional revenue and profit. The frustration this owner feels may be due to too many trials all at once, not enough budget to fund trials, and not factoring in the cost of the learning curve.
Consider the overall flow of work through the shop. Identify areas that are already getting good productivity marks, and which areas need work. Set goals to improve the low profit groups. Assess whether problems stem from people, machinery or the production demands of the product or service that’s flowing through that area.
Productivity is a measure of output, with the goal of increasing profits by producing more goods or services through a reduction in labor and material costs. Look at how you measure productivity – by product, by time, by unit, by profitability. Get people on the line involved in suggesting ways to measure and improve productivity. Have them track and post results daily. Look for improving trends.
Evaluate production demands being placed on low performance groups. What is the likely throughput for that group, and how close to that threshold are they? Are they trying to produce at or near 100%, which means no ability to recover whenever there’s downtime? Try to set production at 80% of capacity. At that capacity, ask, can we make the money we want? If the answer is yes, keep going. If not, consider whether you should continue to produce the product or service, or cut it out altogether.
If production problems stem from people, work on training, accountability and improving individual performance. If it’s machinery, consider whether it’s time to replace equipment. In both cases, people and equipment, factor in longevity of the product or service. Is there still profitable demand? Should you continue upgrading or should you let it go?
When it comes to new production, lay out a schedule of trials over a multi-year period. Consider who will be involved in each test, and try not to have people dealing with more than one or two tests at a time. Assign new trials to the stronger productivity groups, even if that means adjusting your plan for the order in which new products or services roll out.
Develop a realistic budget for new product or service launches. Make sure that there’s enough throughput from sales to meet minimum productivity requirements. Define the likely loss ratio, and improvement curve. Factor in time and material losses related to training, breaking in new equipment and gearing up production. Before starting, set aside funds equal to 2 – 3 times the estimated loss ratio, as a cushion.
Set realistic timeframes for new trials. One rule of thumb if this: if you’ve never done it before, triple the time and cost estimates. If it’s been done before, but not consistently well, double the time and cost estimates. Only plan on the proposed budget for time and cost once production is routine.
Only engage in trials for which there is money set aside to fund the projected loss ratio. Encourage teams to work to beat the planned loss ratio, but be prepared to fund the losses as planned. When losses exceed plan, stop to take a look at whether it’s time to shift to a new trial, or continue working out the kinks with the current one.
Looking for a good book? Manufacturing Planning and Control Systems for Supply Chain Management: The Definitive Guide for Professionals, by Thomas Vollmann, William Berry, David Clay Whybark, F. Robert Jacobs.
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Andi Gray is president of Strategy Leaders Inc., www.StrategyLeaders.com, a business consulting firm that specializes in helping entrepreneurial firms grow. She can be reached by phone at 877-238-3535. Do you have a question for Andi? Please send it to her, via e-mail at AskAndi@StrategyLeaders.com or by mail to Andi Gray, Strategy Leaders Inc., 5 Crossways, Chappaqua, NY 10514.
