Is your business a “fixer-upper?” Success depends on a solid foundation, whether you are building a house or building a business. You wouldn’t build another level on a crumbling foundation, and you shouldn’t try to grow a business with fundamental weaknesses. The foundation of the business is Operations – the way you use resources to add value to raw materials so that customers want to buy the output.
Thinking about The Business Growth Machine, this means you should work on the Cost Control levers before the Revenue Growth Levers.
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Cost control, along with quality, is how we measure operational success. Revenue Growth and Cost Control can both improve profits, but you have more control over improving your own operations than growing sales. You know your operations and your people, but growing sales depends the unknown – the decisions of potential customers you have not yet been able to attract.
Starting your growth efforts with improving operations makes sense for two reasons:
- More control means less risk, so forecasted results are much more likely to actually happen with cost control than with revenue growth initiatives.
- Revenue growth moves will have a higher payoff if they are based on excellent rather than weak operations.
For example, if 25% of the units produced by ABC Widget Company need “rework” to fix quality problems, adding more sales results in more rework. If ABC can reduce rework to 5%, its sales growth will result in much greater profit growth.
Finding Opportunities: What Needs Improvement?
How do you spot the signals showing opportunities for improvement? Every business has these signals, but owners usually overlook them as they focus on day to day tasks. You need a frame of reference to know what to look for, and an outside perspective to know what level of performance is good. A consultant can offer both, based on broad experience analyzing many types of companies. The next article suggests what to look for.
How to Improve Operations
The goal of operations is high quality production based on efficient use of materials, machinery, and labor. Production is the output. Materials, machinery, and labor are the inputs. Productivity – the end result of cost control – is the value of the outputs divided by the cost of the inputs.
How do you improve operations to achieve better productivity? You use a combination of people management and process improvement.
Earlier articles explained how to motivate and train your workforce. Employees must want to do the right thing, know how to do it, and know why the right methods work best. See Motivating People and Employee Performance
A well-managed workforce is the key to efficient and predictable production, and it’s also the key to improving operations. Here’s why. The best managers invite motivated, well-trained employees to participate in finding better production methods. These employees know the details, the opportunities, and the potential pitfalls you’ll encounter in implementation. This opportunity to improve the design of their jobs strengthens their motivation even more, creating a virtuous circle – a spiral of continuous improvement.
Process Improvement Begins with Mapping a Business Process
A business process is the sequence of steps used to produce an output. Every business has several processes. Examples of “high level” processes include ordering supplies, producing widgets, quality control, billing and collection, hiring and training, and cash management. Most of these have sub-processes, such as accepting, stocking and counting inventory, delivering it to work stations, and the various production steps.
Improving a process is the fundamental route to improving operations quality, cost control, and productivity. Process improvement is the best technique for profit improvement because it produces more profit with every sale, and it’s under your control.
Process improvement generates more and more profit as the business grows because it controls variable costs, increasing the contribution or gross margin in both dollars and percentage of revenue. If fixed costs (overhead) stays the same, then this higher gross margin increases profit by the same amount.
To improve a process, you must understand how it works today. The tool is a process map — a special kind of flowchart. It’s a visual method for showing the process in steps, crossing departmental boundaries and linking it to preceding and following processes. The best process maps show more than the physical output. They also show how long each step takes, who does them, and the paper or digital record produced as well as the physical output.
Once you can see the process as it is today, you can also see how it might be changed. Your goal is substantial change, reducing cost or improving quality by as much as 50%. Following articles tell you what signals to look for, what questions to ask, and how to map and improve your processes, the surest way to grow profits.
Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business, certified as a Turnaround Professional (CTP), Business Development Advisor, and SCORE Mentor. He can be reached at 630-512-0406 or firstname.lastname@example.org. See www.tom-gray.com. For Tom’s new book Business Techniques for Growth: More Tools for Small Business Success, and its predecessor Business Techniques in Troubled Times: A Toolbox for Small Business Success, see http://www.businesstechniquesbooks.com/