"Going for the Bottom Line"

By Carlos Conejo, Certified Six Sigma Black Belt, member of the ACA Group
Published May, 2010

Increasing the bottom line means increasing profit, and in today’s economy one of the biggest ways to do this is to control costs. If your organization is effective in controlling costs, real costs, then you will be more profitable. This article will give you some great ideas to help you effectively reduce your costs in order to help you increase your cash flow and your profit!

In this economy, going for the bottom line means transforming our organizations fundamentally from top to bottom. It means listening to and satisfying the Voice of the Customer through increased value, while effectively reducing costs by working with our suppliers to help them reduce their costs through continuous improvement methodology and by getting all of our employees involved in continuous improvement. In his article, Jim strong talks about truly effective ways to reduce supplier costs while keeping margins intact.

Going for the bottom line also means that executives and leaders of today’s organizations must have solid goals and objectives with solid metrics to verify movement in the right direction, and shift their management style from a command and control to a more participative style that fully-engages the workforce. Organizations must be able to adapt quickly and easily with the winds of change. Some executives don’t even know how wasteful their organizations really are, piling up huge inventories because the forecast says so. Sometimes the executives themselves are the likely roadblock to improving the bottom line. Lisa Anderson talks about this in her article, titled, Senior Management Commitment & the Bottom Line.

You can improve your company’s bottom line by reducing real costs in your supply chain, as Jim Strong suggests in the accompanying Supply Chain Cost Reduction article.

In addition, there are three major specific categories to take a look at that directly impact your current expenses.

Category 1: Reducing Capital and Operating Costs.

1. Implementing Office Effectiveness, known as Office TPM, involves all people in your company support functions to focus on better overall organizational performance bringing office activities up to the same level of efficiency as your shop floor. Better performance means lower costs, and increased margins through less waste. Positively affecting your bottom line.

Office TPM addresses the 12 Major Administrative Losses:

1. Processing loss
2. Cost losses in areas of procurement, accounts, marketing or sales that lead to higher inventories create a quagmire of costs on top of costs. Cost to hold the inventory, cost to move the inventory around, cost of paying taxes on the inventory, cost of in-house damage, cost of pilferage or shrinkage, and the opportunity cost of producing something that someone else wants or needs, but we are too busy lining the shelves with forecasted inventory. Doug Howardell’s article on Inventory Quality Ratio (IQR) addresses some interesting issues.
3. Communication loss
4. Idle loss-the lines are ready, but we don’t have the right raw materials arriving to the line or run short on the raw materials.
5. Set-up loss- increases our down time. Downtime affects Overall Equipment Effectiveness, or utilization, and this impacts our bottom line through lowered productivity! Lower productivity means less cash flow. When a machine is sitting idle we are losing money and this is a problem for everyone.
6. Accuracy loss- necessitating rework and creating delays. Sometimes we even pay overtime on top of this to remedy the situation and there goes any hope of making a profit.
7. Office equipment breakdown- We can’t afford a more expensive, more effective copier, but the present one is slow, always jams, and the toners cartridges are an arm and a leg. By the way, why not give everyone the capability to fax directly from their PC? This not only saves paper, but increases employee productivity, by eliminating the need to get up to go to the fax machine.
8. Communication channel breakdown-telephone, fax, poorly managed meetings, pontificating executives.
9. Time spent on information retrieval-create a standardized filing system and give everyone access to the hard drive. Read only if need be.
10. Non-availability of correct stock. We call this SWAG. This stands for “Stuff We Ain’t Got.”
11. Customer complaints due to logistics errors- going to the wrong person, obsolete addresses in our database, sent via the wrong carrier, etc.
12. Expenses on emergency dispatches & purchases – because we screwed up in #11, so now we have to overnight it to ally the customer.

Also take a look at what is called the PQCDSM Factors of Office TPM. These are leading indicators to improve overall company performance. They stand for:

P - Production output due to want of material, manpower productivity, production output lost to want of the right tools. Why use a crescent wrench, when an air gun is better?

Q - Mistakes in the preparation of checks, bills, invoices, payroll, customer returns & Warranty, rework, job work content, office area rework. By the way if you aren’t practicing continuous flow and are still set up by departments behind walls then you need to reorganize as well as tear down some walls. Literally and figuratively!

C - Buying Cost/unit produced, cost of logistics, inbound and outbound, inventory carrying costs, cost of communication, demurrage costs.

D - Logistics losses (delay in loading and unloading).

• Delay in delivery due to any of the support functions
• Delay in payment to suppliers sometimes cause delays in the release of raw materials
• Delay in information

S - Safety in material handling, stores and logistics. Safety of soft & hard data. Fewer accidents, less worker’s compensation, more money in your bottom line.

M - Number of Kaizen events in office areas. Rule of Thumb: World-class organizations conduct one kaizen event somewhere in the organization once a week.

Category 2: Talent Costs. These are expenditures for key resources required to operate the business profitably.

1. Critical questions to ask are: Do we have the right talent and skill sets? Are we growing our own talent and skill sets? Do our training programs focus on developing and enhancing employee’s skills and performance and allow them the opportunity to expand their knowledge and reap the rewards associated with job advancement?
2. Do we have a Senior Management Team Succession Plan? Is Senior management fully-committed to continuous improvement as a way of life? Lisa Anderson addresses some very important ideas on getting Senior Management onboard.
3. How do we share intellectual capital and best practices so that we increase knowledge shared and no one person holds all the “gold” or all of the “good ideas?”

Category 3: Strategic Costs: Expenditures for strategic profit improvement initiatives.

As I mentioned earlier, one of the biggest areas of strategic opportunity is inventory reduction. Companies can be very successful in sales, profits and customer satisfaction, but if your company is holding too much inventory in order to protect yourself against spikes in customer demand or finicky customers, then this is an area to strategically, free-up lots of cash!

Freeing up cash can mean purchasing new machinery or technology, making upgrades or converting warehouse real estate previously used for storage into new lines of business and added capacity for more profit for your bottom line.

Going for the bottom line means doing business differently. It means that we must take our organization from Incremental Growth to Fundamental Growth in the way we do business.

Incremental Growth Means:

• Making minor adjustments to improve current performance
• Asking vendors to cut their prices, but never truly partnering with them
• Incremental achievement of sales goals, marketing targets, employee retention

Fundamental Growth Means:

• Establishing new behaviors that require your organization to respond with a quantum leap in performance.

Some examples of fundamental ideas that changed the way we currently do business are:

• The internet
• Facebook and other social marketing, networking and recruitment

In closing, you can achieve your desired bottom-line results if your organization is willing to make a serious commitment to change and continuous improvement and to fully-engaging all of your employees.

Going for the Bottom line for your organization may mean that everything on the table is up for improvement – No sacred cows!

For more information on Going for the Bottom Line please contact the ACA Group.