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Hidden Profits: They're Closer Than You Think by
Rudy Lederer and Howard Siegel*
Most manufacturing and distribution companies have
untapped sources of net profit – often as much as 10% of
sales (that is, $4.5 million of added net profit for a
company doing $45 million in annual sales). What often
prevents them from unlocking this potential is a
company's hesitation to challenge the status quo.
Finding new profits calls for new ways of looking at
your business. A Midwest manufacturer with sales of $45
million unlocked 19 different changes to their business
that generated $6 million in new profits in the first
year.
How were they able to identify these opportunities?
They employed a Profit Improvement Program designed to
uncover ways to positively impact net income using a
company's best tool - it's employees. Generally,
management has its eyes fixed on the big picture and is
not in a position to see the small changes that can make
a big difference. Who else is in a better position to
identify ways to reduce expenses or increase revenues
than those who have hands-on knowledge on a day-to-day
basis with the business? Line workers, warehouse
supervisors, customer service representatives, drivers,
secretaries and even the cleaning crew are more than
casual observers of your business.
Successful Profit Improvement
Seeing things differently means shaking things up - a
process that naturally makes most people and companies
uncomfortable. Like anything that causes change, there
are considerations that need to be taken care of up
front before even embarking on a Profit Improvement
Program.
Commit to Change
An organization changes from the top down. If the CEO
and other C-level executives aren't on board, nothing
will happen. It is imperative top management
communicate to the entire company they are committed to
change. If there isn't a change in the process, there
will not be a change in the results.
Use an Outside Facilitator
Change can be seen as threatening if not properly
managed. To dissipate fear and foster an environment
that encourages new ideas, it's usually necessary to
employ an outside facilitator. This individual, by not
being part of the company culture, offers two
advantages: their job is not at stake in the event of
change (they have nothing to lose); and they are free of
sacred cows.
When selecting a facilitator it's vital that not only
can they talk the talk, but that they've walked the
walk. The facilitator must have top level (president or
CEO) experience running multiple manufacturing or
distribution operations to establish the credibility
needed to gain both management and employee support.
Communicate, Communicate, Communicate
Communication is crucial to success. This can't be
emphasized enough. Change represents the unknown.
Keeping employees informed of what is happening and why
discourages rumors that can be damaging. The goal of
constant communication is to make the process open to
everyone so they can feel like partners in efforts to
increase the long-term prosperity of the company.
Tapping Insider Knowledge - The Profit Improvement
Program
Step 1 -
Create Task Force
A
mix of people and perspectives promotes an atmosphere
where ideas can be drawn. First the company management
must name eight to ten people in the organization who
will constitute the company’s Profit Improvement Task
Force. This group of eight to ten employees taken from
all areas of the organization, other than senior
management, can have valuable insights on ways to
improve the bottom line.
To make sure that this PIP Task Force can be successful,
several aspects of the initiative need to be made clear:
-
It's critical from day one that management
acknowledges and supports the Task Force's work. The
CEO or president should appear at the beginning of the
first meeting of the group to "vest" the group with
the power to recommend changes that will be
implemented. The CEO or other senior managers should
not have any further direct involvement with the Task
force beyond supporting their efforts.
-
Every idea (profit improvement project) that is
submitted by individuals on the task force is a task
force idea. Absolute anonymity is essential to the
process. If they feel their jobs are on the line or
will suffer from their participation, the effort will
not succeed.
-
Task Force members need to be reassured they will be
able to perform their core responsibilities with
minimal interruption. PIP process will take no more
than two or three hours of their week.
-
Make it clear the members of the Task Force get all
the credit for the profit improvements, not the
facilitator.
And, there
are some rules:
-
The task force will meet once a week. The meetings
will take no more that one-hour.
-
There will be an agenda for each meeting distributed
to the task force members prior to the meeting.
-
There will be minutes for each meeting taken and
recorded by the facilitator. Each member of the task
force is committed to be at the meetings – either in
person or by phone.
·
Any and all
material distributed to the task force (agenda, minutes,
profit improvement schedules, etc.) will be distributed
to top management – for their information only. All
material distributed at the meetings and discussed in
the meetings will remain confidential and must not be
shared with others than designated top management and
the task force members.
·
Task force
members found not to be cooperative can and will be
removed from the task force.
·
Finally, the
most important rule – anonymity – no one will know the
author of any specific idea.
Step 2- Commit to Measurable
Goals
If
you can't measure it, you can't manage it. At the first
meeting of the group, the Task Force needs to establish
specific targets (what they want to achieve and how long
it will take) so they have something to keep their eyes
on. They must agree and commit to two things:
-
A
dollar amount of net profit improvement they
want to realize. This is stated as additional profit
in terms of a hard dollar amount. The Task Force must
not think small. While increasing net profits by a
factor equal to 10% of sales may seem like a stretch,
history indicates this is normally very
accomplishable.
-
A
date when the profit improvement plan will be
presented to top management. This date should be
between 60 to 90 days following the initial meeting of
the task force. This overall plan, ready for
implementation, will contain a series (probably 25 to
50) suggested profit improvement projects, each one
having a person responsible, a plan for
implementation, specific time frame for implementation
and a measurable dollar contribution to net profits
that has been agreed to by the financial department of
the company.
Step 3 -Write Down 10 Ways
to Improve Profits
Make
ideas definite. The task force members are given an
assignment that is due by the end of the week - each
member must give the facilitator ten suggestions for
profit improvement. The only condition is that each
profit improvement project must be specific and the
profit from each improvement must be measurable. When
you commit to a profit improvement idea on paper, in
black and white, it transforms the shapeless into an
actionable target. To get the maximum benefit, the Task
Force should be told that no idea is to far-fetched.
Determining their practicality will occur later. The
rule of anonymity is crucial, particularly at this
stage. No one will know the author of any specific
idea.
These 80 to 100 ideas, plus whatever additional ideas
the facilitator adds to the pile, will then be shuffled
and compiled in random order by the facilitator. On the
Monday of the second week, each member of the Task Force
will be given a copy of the list of profit improvement
ideas submitted. At its second meeting, the Task Force
will briefly review this initial batch of ideas and for
homework, each member will be asked to provide five
additional ideas by week end. .
You should now have about 120 ideas, after eliminating
those that are duplicates, combining those that
logically need to be combined and eliminating those that
cannot be measurable.
Step 4 -Prioritize Ideas
All ideas are not created equal. The degree of
difficulty of implementation, as well as the company’s
ability to measure the amount of hard dollars profit
improvement each idea can generate will vary greatly The
facilitator along with the task force will be
responsible for giving each idea an initial ranking.
The scale used to establish a projects “ranking” is as
follows:
1 = easy to
implement; easy to quantify savings
2 = easy to implement; difficult to quantify savings
3 = difficult to implement; easy to quantify savings
4 = difficult to implement; difficult to quantify
savings
Step
5 - Target Top Ideas
Focus on achievable results. The whole point of the PIP
process is to identify and initiate efforts that reach
the dollar and time targets set in Step 2. Once the
ideas have been ranked in the 1, 2, 3, 4 matrix, it's
now easy to see which suggestions should be chosen for
the initiative. Focus on the ideas that are easy to
implement and easy to quantify the savings. The idea is
to expend resources on ideas that balance the cost and
the return within the given time frame.
Step 6 - Approve and Implement Final Plan
Take action. Just because a company has gone through
this process to arrive at a list of projects that when
implemented can improve the bottom line doesn’t mean it
will happen. Each project on the list must have a
specific member of the task force that is responsible
for developing a plan for the projects implementation
and a dollar specific measurement to demonstrate the
saving from the projects implementation. The process of
moving the project through this stage will take several
weeks – leading to the comprehensive profit improvement
plan that will be presented to top management.
At
this point, the CEO and other top management need to
step up and embrace the effort to put the plan into
action. By doing so, they truly demonstrate their
commitment to change and of course, generate additional
profit for the company.
Keep the
profits coming
When
a company undergoes a Profit Improvement Program, one of
the larger lessons it learns is that change can be
positive. However, that will take time to instill.
After a Profit Improvement Program, businesses need to
guard against the “rubber band” effect. All too often a
company’s culture will resume its original shape unless
a special effort is made to keep the discipline,
excitement and dedication harnessed during the life of
the Task Force alive.
One
way to insure a culture of continual profit improvement
is to have the facilitator return on a semi-annual or
quarterly basis. They can help the company “re-model”
its behavior so that good ideas for enhancing revenue or
controlling expenses are nurtured and profit improvement
becomes a permanent part of the culture.
A
company needs to remember that a Profit Improvement
Program is not a one-time fix. A business is a living
entity that must evolve in order to grow and survive.
Making a Profit Improvement Program a regular part of
operations can guarantee that the company will be in a
better position to deal with downturns in the economy or
challenges within the industry without needing to be in
crisis mode.
* Rudy Lederer and Howard Siegel
are principals with Chicago-based Horizon Advisors, LLC,
consultants to management in profit improvement, interim
management and turnaround situations. They can be
reached at 312-474-6176 or by e-mail
consultants@horizonadvisors.com.
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