Small Business Techniques

What’s Wrong with Pursuing Your Passion?

by Tom Gray | on Jul 23, 2014 |  Comments

There’s no shortage of cheerleaders giving advice to business people. One of the most common mantras they offer these days is “pursue your passion.” If you love doing something, they say that’s what you should build your business around.

This always sounded a bit off-target to me, because it doesn’t fit my experience. To make a business work, you spend your time on the business, not on your passion. The success of your business has to become your passion – you love how well you do it, the challenges, and the people. It replaces whatever you were passionate about before.

  • For example, you may love sewing and home décor, but when you start a business on these, you stop spending time sewing and decorating. Your focus is the business: selecting fabrics, choosing designs, exhibiting at trade shows, networking for customers, social media marketing, and financing. You hire people to sew.
  • You may love riding and tinkering with motorcycles. When you start a motorcycle repair business, you don’t have time to ride anymore! What happened to the passion?

Take my own experience after I retired from a corporate career in telecom. I was looking for a business to enter, and followed the advice to pursue my passion. My passion was golf, so I decided to start a golf travel company. Fortunately, I did a business plan first, and soon discovered that people would pay me a lot more for advising them how to manage a telecom company than for setting up golf trips. So I dropped that idea, and started a consulting firm instead.

I was good at consulting on management, and people paid me for the value I offered. In contrast, I may have been a good golfer, but I had no particular skill or edge in setting up golf trips. People would not get much more value from my arrangements than they would from using someone else or doing their own, so the margins were low. My passion for golf did not translate to a golf travel business.

Recently I came across a short article that makes this same point so well that it’s worth quoting in full. The article was by Scott Adams, the Dilbert cartoonist, in the Wall Street Journal (10/19/2013).

“When I was a commercial loan officer for a large bank, my boss taught us…the best loan customer is someone who has no passion whatsoever, just a desire to work hard at something that looks good on a spreadsheet. Maybe the loan customer wants to start a dry-cleaning store or invest in a fast-food franchise – boring stuff. That’s the person you bet on. You want to grinder, not the guy who loves his job.

“For most people, it’s easy to be passionate about things that are working out, and that distorts our impression of the importance of passion…Dilbert started out as just one of many get-rich schemes I was willing to try. When it started to look as if it might be a success, my passion for cartooning increased because I realized it could be my golden ticket. In hindsight, it looks as if the projects I was most passionate about were also the ones that worked. But objectively, my passion level moved with my success. Success caused passion more than passion caused success.

“So forget about passion.”

When I was asked to be the interim CEO for Mooney Airplane Company, I found another group of people who agreed with this analysis. The Mooney is a single engine plane for private pilots, but the company’s owners wanted a CEO who was not a pilot. They said they wanted to avoid the passion of the devotee because it could cause bad business decisions, influenced by the emotional love of flying. They were afraid that passion would make success impossible.

So when you consider your idea for a new business, look first at what you do well, not what you think you love. You won’t have time to do what you love when you’re building a business about it. It will lose its charm, and you may lose your love of it. But most importantly, you have a better chance of success working at something you know you do well. That success will breed its own passion, and then you’ll have two loves rather than none: the one you didn’t build a business around, and the business you built.

Contrary to cheerleader advice, work at something that looks good on a spreadsheet, and that you know how to do. Passion will come as you succeed. You’ll love being a successful entrepreneur!

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 tgray@tom-gray.com. 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/

 

 

Business Planning Booklet

by Tom Gray | on Jul 22, 2014 |  Comments

Ready to write your Business Plan? The most important parts of the Business Plan are the Competitive Analysis and the Sales Forecast. These are also the parts that entrepreneurs have the most trouble with. Now there’s a new 60 page PDF booklet with 18 articles covering

  • Creating your vision of the business
  • Structuring the business plan
  • Target market
  • Competitive analysis, differentiation, and positioning
  • Sales funnel and sales forecast
  • Roadmap to Launch

What’s the Payoff?

Use this booklet to learn

  • Imagining Excellence: a technique to create a multi-aspect Vision for focusing yourself and team efforts
  • The Business Plan format
  • Describing The Market, including Competitive Analysis, your differentiation and positioning
  • Sizing your target market
  • Some techniques for Marketing Tactics – the 4Ps
  • Sizing the sales effort
  • How to develop the Sales Forecast
  • How to describe Organization and Operations
  • Format of the Financials section
  • 30 mistakes to avoid in your Business Plan
  • The sequence of steps to launch

Order the low-cost PDF download at Purchase Books | BUSINESS TECHNIQUES BOOKS

Get Some Training Too!

For many of us, the written word is not enough. We want to be shown, then practice, and then chat in person about how to do it better. To meet these needs, Tom Gray created Business Techniques Institute – Chicagoland, a group of 12 face-to-face half-day workshops, partnering with local organizations like Small Business Development Centers, SCORE, and local colleges.

Each workshop provides slides and a workbook to apply the techniques to your own business problem during the workshop, and uses one of the booklets as its text.

Small business owners and managers can attend one workshop or several, depending on the topics they want to explore and the problems they seek to solve. The first series begins in September at the College of DuPage Center for Entrepreneurship, 2525 Cabot Drive, Suite 201, Lisle, Illinois. The second series begins two weeks later at the Illinois SBDC at Governors State University, 1 University Parkway, Room C3300, University Park, Illinois.

The Competitive Analysis and Sales Forecast workshop is scheduled for Wednesday, September 17 at COD, and Tuesday September 30 at GSU, 8:30 AM to 12:30 PM. To register, visit Business Techniques Institute | Get Better @ Business

Sample Session: Attend “Pricing Right” on July 23 or August 20

Get a taste of Tom Gray’s small business techniques and his workshop style by attending “Pricing Right” on July 23 or August 20 at the College of DuPage Center for Entrepreneurship, 2525 Cabot Drive, Lisle, Illinois. Register by calling the Center at 630-942-2600.

The session covers pricing principles, practical techniques for “thinking through” your price decisions, and some pricing techniques such as differentiated pricing, revenue models, shop rates, and promotions. Workbook practice is not provided in this one-hour session, but one-on-one follow-up sessions are available with Tom or the local Small Business Development Center staff.

Why Not Try It Out?

Want to grow your business? Do you know how? Is there something you could learn about writing a Business Plan, finding your competitive edge, forecasting sales, and the steps to launch, or do you know all that already? Why not invest in a booklet and a workshop? For a few dollars and hours, your business could take off to a new level!

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 tgray@tom-gray.com. 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/

 

 

Entrepreneurs – RESPICT Yourselves!

by Tom Gray | on Jul 16, 2014 |  Comments

Every year 600,000 new companies open for business. 30% will close in two years or less, 50% survive five years, and 67% don’t make it past 10 years. The “close” numbers also include firms being acquired, but those are a small minority.

RESPICT

The acronym RESPICT is a reminder of the ingredients needed to be a successful entrepreneur. Investors look for these qualities, abilities, and resources. You should too! Decide if you have them before deciding to start a business.

  • Runway: Expect to be operating at a loss for up to two years, so you need two years’ worth of living expenses in addition to your start-up investment. Think of this as the runway before your venture takes off into positive cash flow.
  • Experience: You have the best chance for success if you have worked in this industry or operation previously. You need to understand your new industry, the operations to make your product, and how to manage a business and its people. You don’t get that second-hand. True, many entrepreneurs start a business without experience in managing one. But how do you think their failure rate statistics compare to those of experienced managers? Experience improves your chances.
  • Skills: Financial management and marketing are the two skills usually missing when a small business fails. You can contract for people to do your books and your marketing, but you cannot delegate the owner’s two major responsibilities: making sure you have enough cash flow, and understanding your customers’ needs and buying behavior.  Unlike experience, you can develop these skills after launch, but don’t wait too long. A business owner must buckle down to understand and manage their numbers, or the business will fail.
  • Personality: Much has been written about the personal traits of successful entrepreneurs. Two of the most important ones are adaptability and persistence in the fast-changing chaos of a start-up. Second, the ability to simplify and to make good and timely decisions are the only way to make sense out of chaos and move the business forward. Third, you must like to work with people. Finally, you must be able to envision and explain a step-by-step process, project, and procedure. The audience is yourself, investors, employees, suppliers, and customers. Here’s a test: try explaining the steps involved in tying a shoe.
  • Idea: You must have a viable business idea with enough value to enough customers that you can make enough profit. Several future articles address generating and assessing the business idea.
  • Cash: Businesses fail when they run out of cash. You need to know how to estimate cash flow and cash needs, have enough to invest your share (25%?), and be able to get the rest from others.
  • Test: Your plan should provide for selling the idea to prospective customers as early as possible. This is how you learn to improve its value, and how to explain that value. Sell with a prototype. Launch with the minimum viable product. In your planning, allow time to develop improvements before sales begin to grow.

You have a chance for success if you can put together a “RESPICT-able” package of abilities/skills/experience/resources and a good idea with a plan for testing.

Entrepreneurial Mindset

The other key ingredient for start-up success is the “Entrepreneurial Mindset.” The word “mindset” means a certain way of looking at the world. Here is how entrepreneurs look at the world and its challenges:

  • They think structurally. They can see the pieces or building blocks that make a business viable. They look at an industry and at their own business in terms of the Business Model: value proposition, customer buying criteria, competitor positions, distributor roles, supply chain, production processes, revenue model, and cost centers. Future articles explain the idea of the Business Model.
  • They apply and connect known elements (e.g. technology, materials, delivery systems) in new ways. For example, phone + camera + browser + memory + touch-screen = iPhone. None of these technologies were new, but the combination was new.
  • They use what they have and reach out to others for the missing pieces without needing to own them.
  • They’re willing to recognize when they’re wrong and adapt.
  • They’re self-confident, persistent in the face of obstacles, and energetic but not foolish. They recognize risk rather than ignoring it, and find ways to reduce it. One technique is moving forward in stages, adapting to feedback at each step. Another is contracting for resources rather than spending their own capital and effort to do it all.
  • They have a support network of business-savvy people, and reach out for their advice constantly.

If you have RESPICT and the entrepreneurial mindset, you have a good chance to succeed in starting a business. If you don’t, find the missing pieces before moving ahead!

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 tgray@tom-gray.com. 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/

Small Business Basics: Entrepreneur and Opportunity Booklet

by Tom Gray | on Jul 15, 2014 |  Comments

Thinking about starting a business? Get started right! Now there’s a new 60 page PDF booklet with 16 articles covering

  • What it takes to be an entrepreneur.
  • How to develop your idea into an opportunity.
  • Basics skills for running a business.

What’s the Payoff?

Use this booklet to learn

  • How to assess your entrepreneurial readiness using RESPICT
  • Develop your Business Model
  • Analyze your opportunity
  • Decide your target profit
  • Choose a legal form of organization
  • How to use your numbers to improve results

Order the low-cost PDF download at Purchase Books | BUSINESS TECHNIQUES BOOKS

Get Some Training Too!

For many of us, the written word is not enough. We want to be shown, then practice, and then chat in person about how to do it better. To meet these needs, Tom Gray created Business Techniques Institute – Chicagoland, a group of 12 face-to-face half-day workshops, partnering with local organizations like Small Business Development Centers, SCORE, and local colleges.

Each workshop provides slides and a workbook to apply the techniques to your own business problem during the workshop, and uses one of the booklets as its text.

Small business owners and managers can attend one workshop or several, depending on the topics they want to explore and the problems they seek to solve. The first series begins in September at the College of DuPage Center for Entrepreneurship, 2525 Cabot Drive, Suite 201, Lisle, Illinois. The second series begins two weeks later at the Illinois SBDC at Governors State University, 1 University Parkway, Room C3300, University Park, Illinois.

The Small Business Basics workshop is scheduled for Wednesday, September 10 at COD, and Tuesday September 23 at GSU, 8:30 AM to 12:30 PM. To register, visit Business Techniques Institute | Get Better @ Business

Sample Session: Attend “Pricing Right” on July 23 or August 20

Get a taste of Tom Gray’s small business techniques and his workshop style by attending “Pricing Right” on July 23 or August 20 at the College of DuPage Center for Entrepreneurship, 2525 Cabot Drive, Lisle, Illinois. Register by calling the Center at 630-942-2600.

The session covers pricing principles, practical techniques for “thinking through” your price decisions, and some pricing techniques such as differentiated pricing, revenue models, shop rates, and promotions. Workbook practice is not provided in this one-hour session, but one-on-one follow-up sessions are available with Tom or the local Small Business Development Center staff.

Why Not Try It Out?

Want to grow your business? Do you know how? Is there something you could learn about your own readiness to start a business, fleshing out your idea in a Business Model, organizing your business, and using your financials, or do you know all that already? Why not invest in a booklet and a workshop? For a few dollars and hours, your business could take off to a new level!

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 tgray@tom-gray.com. 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/

 

 

Measure to Manage Supplier Performance

by Tom Gray | on Jul 09, 2014 |  Comments

“If you can’t measure it, you can’t manage it,” says one old saying. Look at your own business: are there any suppliers whose failure to perform could ruin your business? These are called strategic suppliers. They are important to you, so you need to manage them. Managing starts with measuring.

Since your business depends on these key suppliers, it’s worth the effort to think through what you expect of them. You know you’ve thought it through when you can express those expectations as objective measurements. These enable you to easily monitor their performance. When a supplier could “tank” your business, you need such early warning signs! Chris Gray calls these metrics “Vital Signs.” See DOES YOUR SUPPLY CHAIN MEASURE UP?

What Measurements?

To make the best use of your time, select only strategic suppliers, and select only the measurements that seem to have critical impact on your business. Choose some from this menu.

Incoming Supplies:

1. Accuracy: Percent of ordered items filled as ordered on first attempt.

2. Timeliness: Percent of ordered items received by requested due date and time (just-in-time).

3. Cycle Time: Number of days from requisition to receiving the delivery.

4. Overall Quality: Percent of ordered items arriving without a defect.

5. Impact Quality: Assign a weighting to all items for high(3), medium (2), or low (1) impact on your business, and recalculate 1, 2, and 4 above.

6. Value of Returns: Dollar value of items returned for any reason (e.g., defect, delivery does not match order, too late to be used).

Shipper of Your Finished Products:

1. Accuracy: Percent of items shipped that were actually delivered.

2. Timeliness: Percent of shipped items arriving by committed delivery date and time.

3. Cycle Time: Number of days or hours from pickup/drop-off to arrival at customer or distributor’s receiving department.

4. Overall Quality: Percent of shipped items damaged in shipping process.

5. Value of returns: Dollar value of items returned or written off for any shipping-related reason (e.g. damaged, never received, too late to be used).

How to Use Measurements to Manage

1. Record results: Use a system or spreadsheet to record performance, so all the performance observations in the month can easily be summarized to a monthly number.

2. Based on the past few months (or on gut feel!), decide the level of performance you need. Set a threshold number for acceptable performance on each measurement.

3. Imagine a progressive set of actions you’ll take if results fall short, and then select a trigger for each action. For example:

  • The first level is to share results with the supplier and ask for a planned remedy.
  • The second step, if the results fall short for two more months, might be to ask for different terms, such as a rebate in months when the threshold is not met.
  • A third step, if the results still fall short regularly, might be to launch a search for new suppliers, with deal terms that include the measurements and penalties for shortfalls, called a “Service Level Agreement.”

4. Meet with the supplier to explain how you will measure their performance. Agree to share the results. Agree on a process for remedies. Now you are not just measuring; you’re managing!

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 tgray@tom-gray.com. 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/

 

How to Grow Your Small Business

by Tom Gray | on Jul 08, 2014 |  Comments

You spend all your time working IN the business: dealing with customers, employees, suppliers, lenders, and local officials; resolving issues; and managing cash. How much time do you spend working ON the business? Immediate concerns suck up the time you know you should spend on fundamental change!

If you do find the time to think about how to change your business, you can find zillions of articles and ideas on the Internet. Many are fads. Most are too general to help. You don’t know who or what to trust. You may give up, and go back to solving today’s flare-ups, because at least you can control those.

Two Integrated Solutions: Booklets and Workshops

Veteran consultant Tom Gray now offers the trustworthy help you’ve been looking for.

  • Small Business Techniques Booklets: a series of ten booklets explaining practical and proven simple techniques, each focused on a single business growth issue.
  • Business Techniques Institute – Chicagoland: A series of twelve half-day workshops for startups and existing small businesses, where personal explanations of these techniques are combined with the opportunity to practice applying them to your own business problem.

Booklets

Each 60 page booklet gathers 15 or so short articles on a single topic from Gray’s blog and books. Each article explains a technique for solving small business problems encountered in Gray’s 40 years of experience in business, consulting, mentoring, and teaching in-business MBA students.

Many of these articles have appeared in Gray’s two books, along with articles on many other business topics. Now, the Small Business Techniques booklets focus on a single topic, so small business owners can use a single source document to home in on a particular business problem. Reviews show how useful these techniques can be:

  • About Business Techniques in Troubled Times

“This detailed book provides tools, techniques, and strategies for every aspect of a small business. There is real content in this book. It isn’t a philosophical diatribe about the theory of small business success. It provides tactical, specific ideas for fixing and improving processes and policies. There’s even a section about family businesses!” -Diane Helbig, Seize This Day Blog

  • About Business Techniques for Growth

“Proven Practices for Small Business Growth: Tom knows his stuff. Turnaround specialist Tom Gray’s real world experience shines through. I found at least 10 big ideas in it for any company’s small business toolbox. Ideas like how to start your strategy from a vision, decide if your business is worth doing, choose which growth lever is right for you, and more. What I especially liked about the book is the fact that it covers a lot of ground. Too many books, spend an entire book on one idea. I like the fact that this book takes us through the myriad of challenges and solutions for growing your business. It’s years of experience in a box and I’m surprised to find it all together within a single bound. What a nice surprise!” -JD Meier, Sources of Insight.com

The Small Business Techniques booklet topics are

-        Basics: Entrepreneur and Opportunity              – Business Planning

-        Financing                                                                 – Marketing

-        Sales, Negotiating, and Decision-Making         – Managing People

-        Improving Operations                                           – Growing Revenue

-        Turnarounds                                                            – Selling Your Business

For more information and to order, see http://www.businesstechniquesbooks.com/

Workshops: Practice-Oriented and Personal

For many of us, the written word is not enough. We want to be shown, then practice, and then chat in person about how to do it better. To meet these needs, Tom Gray created Business Techniques Institute – Chicagoland, a group of 12 face-to-face half-day workshops, partnering with local organizations like Small Business Development Centers, SCORE, and local colleges.

Each workshop provides slides and a workbook to apply the techniques to your own business problem during the workshop, and uses one of the booklets as its text.

Small business owners and managers can attend one workshop or several, depending on the topics they want to explore and the problems they seek to solve. The first series begins in September 10 at the College of DuPage’s Center for Entrepreneurship, 2525 Cabot Drive, Lisle, Illinois. The second series begins two weeks later at the Illinois SBDC at Governors State University, 1 University Parkway, Room C3300, University Park, Illinois.

Register in response to an email from a partner, or visit Business Techniques Institute | Get Better @ Business. Workshop summaries and the calendar can be seen there as well.

The BTI-Chicago workshop topics are

-        Basics: Entrepreneur and Opportunity       - Competitive Analysis and Sales Forecast

-        Finding Financing                                             – Marketing

-        Sales, Negotiating, and Decision-Making    - Leading a Culture of Service

-        Positive Communication Techniques            - Managing People

-        Improving Operations                                      - Growing Revenue

-        Turnarounds                                                       - Selling Your Business

Sample Session: Attend “Pricing Right” on July 23 and August 20

Get a taste of Tom Gray’s small business techniques and his workshop style by attending “Pricing Right” on July 23 or August 20 at the College of DuPage Center for Entrepreneurship, 2525 Cabot Drive, Lisle, Illinois. Register by calling the Center at 630-942-2600.

The session covers pricing principles, practical techniques for “thinking through” your price decisions, and some pricing techniques such as differentiated pricing, revenue models, shop rates, and promotions. Workbook practice is not provided in this one-hour session, but one-on-one follow-up sessions are available with Tom or the local Small Business Development Center staff.

Why Not Try It Out?

Want to grow your business? Do you know how? Is there something you could learn about marketing, planning, operations, or managing people, or do you know all that already? Why not invest in a booklet and a workshop? For a few dollars and hours, your business could take off to a new level!

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 tgray@tom-gray.com. 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/

 

How Do I Choose a Price?

by Tom Gray | on Jul 07, 2014 |  Comments

Pricing is the fastest way to grow revenue! Veteran consultant and author Tom Gray will present Pricing Right: Practical Techniques to Design Your Prices in Lisle, Illinois on July 23 at 9:00 AM.

This one-hour session explains small business pricing considerations, techniques for thinking through your price decisions, and selected pricing techniques.

What you will learn:

  • The four most important pricing considerations
  • The six crucial pricing guidelines
  • How to find your Competitive Edge
  • How to calculate the effect of price changes on your bottom line
  • Markup and margins, for original provider, distributor, and retailer
  • Choices for revenue models
  • How to use breakeven analysis to find target revenue and price
  • Differentiated pricing
  • Setting a shop rate and pricing for parts
  • Product line pricing
  • Discounts and promotions

Date and Time: Wednesday July 23, 9 AM – 10 AM.

Location: College of DuPage Center for Entrepreneurship, 2525 Cabot Drive Suite 201, Lisle, Illinois.

To register, call 630-942-2600. Fee is $25.

Tom will also introduce the upcoming series of 12 Business Techniques Institute workshops to be delivered at the same location, as well as Governors State University’s Small Business Development Center, beginning in September.

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 tgray@tom-gray.com. 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/

 

Staffing Strategy and Scheduling People

by Tom Gray | on Jul 02, 2014 |  Comments

You know how many people you need, but how do you fill those requirements: hire permanent or temporary employees, whether full or part-time; build and store inventory in low months; work overtime, outsource, or even accept backorders in peak months? Once you decide this staffing strategy, then you can move on to scheduling people.

Gather Your Inputs

Good decisions require good information. Gather some numbers, survey the market, and set some policies before deciding how to staff.

Numbers:

  • How much does hiring cost: advertise, interview, background check, training hours for instructor and student, low productivity for the first few weeks/months, higher loss rate for new hires?
  • How many people can you hire in a month? Limits include your HR staff and instructor training time available, and the ability of the production team to absorb new members.
  • What does it cost to store a finished item in inventory? Interest expense on the delay in gaining sales revenue is probably the only variable cost, but you may also have to provide more storage space and warehouse personnel.
  • What does it cost to work overtime? Note that often employee benefit costs do not increase for overtime hours. What is the limit on overtime, assuming excess overtime causes absence and quality/rework problems? My advice is to not exceed assume 20% of regular time, or 8 hours per week, for six consecutive weeks.
  • What does it cost to outsource work? Are there suitable suppliers? What do they charge, and what is the shipping cost? Will you incur other costs to deal with them? Any union isues?

Market:

  • Availability of outsourcers?
  • Availability of other employers for employees feeling stressed by overtime?
  • Prevalence of overtime at other employers? Do employees count on some level of overtime to make ends meet?
  • Will your customers accept backorders for deliveries in peak months, or will they go elsewhere?

Policies:

  • When there are more employees than work, will you give them the opportunity to voluntarily accept an offer to go home early without pay?
  • What level of certainty do employees expect about their scheduled hours of work? Can you change schedules every week, or do they expect to have the same hours and days off for months at a time?

Select a Strategy

Having gathered this information, you can select a staffing strategy. Most companies end up with a mixed strategy. They decide not to hire and fire according to monthly demand (“chase strategy”) due to the cost of taking on and training new people. They also decide that working the same hours regardless of demand (“level” strategy) is too rigid and expensive.

A mixed approach employs enough people to meet demand in the lowest month, and stretches to meet peak demand. Some stretch techniques are limiting off-line nonproductive hours, overtime, extending hours of part-time people, and/or hiring temporary workers. If materials are not a major cost element, a few more people can be employed to make extra product in low months, so that inventory is available in peak months.

If non-paid excused time is an accepted tactic, the number of permanent workers can be a little higher, but note that benefits costs apply whether or not the employee goes home unpaid. Outsourcing is not a good match for seasonal peaks because outsourcers do not like peaks and valleys either.

Part-time employees are an excellent safety valve, especially if their hours can be extended without affecting benefits. In addition, these people can be an excellent source of speedy replacements for departing full-timers. However, the downside of part-times is weaker communications, weaker cultural integration with the full-time workforce, and higher loss rates as they find full-time work. The same drawbacks apply to weekend-only workers.

Develop the Schedule

The art of scheduling is to balance the needs of customers, employees, and cost control.

  • Customers want the product or service without waiting. This can cause scheduling more people than needed for immediate demand. Solution: build planned “ready-to-serve” idle time into the forecast of people required (see previous article).
  • Employees want job security and a stable schedule so they can plan their lives. This creates the potential for too few employees at peak days or hours, and too many at slow times. Solution: use a stable schedule for most employees, and provide flexibility with voluntary unpaid time, part-timers who can extend their hours, and overtime.
  • The company wants a perfect match between demand and workers at every hour. This can result in scheduling too few people, relying on “stretch” techniques to meet bubbles of demand. Solution: make a weekly forecast of hourly requirements for each day, using records of past daily and hourly demand. Adjust that demand upward at times when customer waiting experience shows that too few workers were available, because these shortages artificially reduced recorded demand. Then adapt the weekly schedule of offline time and part-timers to cover peaks and valleys within the week.

This approach blends a stable long-term schedule with active weekly/intra-day staff management. It becomes more important for both cost control and customer service as the business grows larger.

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 tgray@tom-gray.com. 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/

How Many People Do I Need?

by Tom Gray | on Jun 25, 2014 |  Comments

Balancing customer service and production level while controlling staff costs is an issue for every business, large and small. It’s an issue because it’s important for key results (customer and employee retention, revenue, expenses, and profits) yet doing it well requires predicting the future. You must anticipate both customer and employee behavior! Other than that, it’s easy!

Forecasting Production Hours

Every solution for planning people requirements involves forecasting the future volume of business and the amount of work an average employee can produce. This tells you production time required. You should forecast each month separately, to recognize seasonal peaks and valleys. Your business could even require a weekly breakdown in the most variable months, such as November in retail. Later, when it comes to scheduling staff, you’ll consider whether volume of business on any particular day is significantly higher or lower than the week average (e.g. Monday may be 110% of average weekly requirement). But stick to a monthly forecast for now.

Refer to your records of demand and productivity to decide:

  • Current demand growth vs. same time last year, and vs. the last few weeks.
    • If work-time per unit varies by type of unit, you may want to make three separate forecasts, one each for big, medium, and little units
  • Expected growth for the next 12 months, based on above or other inputs.
  • Today’s employee work-time needed to produce the average demand element (unit, widget, order, task).
    • If work-time per unit varies by type of unit, you may want to make three separate forecasts, one each for big, medium, and little units.
  • Expected change in that work-time per element for the period you are forecasting. For example, consider a new machine, or a change in staff’s average experience level.

Forecasting Non-Productive Hours

The next step is translating production hours required into people required. No, you don’t just divide by eight hours to find number of people required. Just look in the mirror, and you’ll realize people are not productive all the time! Unlike robots, employing a person involves planned off-line time (e.g. scheduled breaks and lunches, training, meetings, vacations, holidays), unplanned unavailability (absence and unscheduled breaks), and on-line “ready-to-serve” time to make sure someone is available so that incoming customers do not have to wait too long.

  • For planned off-line time, consider your policies. For example, a company may expect 10 days of vacation, 10 holidays, and 12 days in training/meetings (about 2 hours per week), which sums to 32 days or 12% of 260 workdays in a year (52 weeks x 5 days).
  • For a service business, add some level of idle time while employees are on-line, so someone is available for the next customer without excessive waiting. This applies if idle time is not already built into your work-time estimate. First, decide on your target level of customer waiting time. If they leave without buying due to the wait, will they come back later, or buy elsewhere? Then estimate how much on-line idle time is needed to meet that target. 10% is a minimum, or 26 days per year.
  • For unplanned off-line time such as absence, consider your experience. Maybe that uses up 3% of payroll time, or 8 days per year.

Forecasting People Needed

To find the number of people needed, combine production time required with your forecast of nonproductive time per employee, and then divide that by scheduled hours per employee to find “equivalent full-time” (EFT) people needed. Later, you may decide to meet some of these EFT needs with two part-time people each.

  • Total nonproductive time in this example is 32 + 26 + 8 days = 65 / 260 = 25%.
  • To find EFT people required assuming eight hours per day without scheduled break/lunch, divide production hours required by .75 (that is, 1.00 – .25 nonproductive in this example). Assuming you needed 100 production hours in the average day, you need 125 payroll hours, or  16 EFT.
    • Note the arithmetic here. You divide by productive hours by (1 minus nonproductive % of total). You do NOT multiply productive hours by 1.25. If you did that, you would be 5 hours (one person) short.

Knowing how many people you need per month is the first step in deciding staffing. The next step is deciding how to fill those requirements: hire permanent or temporary employees, whether full or part-time; build and store inventory in low months; work overtime, outsource, or even accept backorders in peak months. See the next article for Staffing techniques and for Scheduling.

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 tgray@tom-gray.com. 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/

Tips on Labor and Material Cost Levers

by Tom Gray | on Jun 18, 2014 |  Comments

Labor and material costs are worth examining closely. Each can amount to 20 - 25% of revenue, or run much higher depending on the type of business. In total, they can amount to 40 to 50% of revenue. They are the major elements in variable costs, and thus (together with price) determine the product and business margin.

Tips on Labor Cost

Employees are a critical resource for adding value to the finished product, so we are looking for ways to remove only wasted labor cost, not all labor cost! Three factors drive labor cost:

  • Efficiency of productive time: previous articles show how to reduce production hours that add no value to the finished product, such as waiting within the process, rework, chasing parts, and moving material.
  • Non-productive time: hours devoted to non-product tasks, such as training, setup time, cleaning, maintenance, paid absence, and other miscellaneous tasks that do not produce the product.
  • Cost per labor hour: pay rates, overtime, commissions, and benefits.

Non-productive Time

We humans never spend 100% of our time being productive. We take breaks, get paid time off, spend time learning and planning and getting ready to work, and keep records and maintenance up-to-date. None of these directly add value to the product in the customer’s eyes. They may enable value-adding behaviors, but they don’t add value themselves.

In a good operation, about 20% of paid time is nonproductive. If it is 40% in your operation, you need to make some changes. Do you know what that percentage is?

First of all, it’s important to recognize and measure the difference between productive and nonproductive hours when setting your prices. The common mistake is setting a price based on the variable labor hours/cost, which is job-dependent and 100% productive, but forgetting to count employee nonproductive hours as part of overhead. Your price must recover those costs too, or you will miss your profit target.

The technique is to show each type of labor (and payroll taxes) separately in your P&L or income statement. This way, when you develop your price quote by using a multiplier of wages (“shop rate”) to cover overhead and target profit, the nonproductive labor cost is already included in the overhead. Accountants and software (e.g., QuickBooks) will not do this without special instructions. They like to treat all labor as a variable cost, which overstates your cost of production, or treat all labor as a fixed cost, which understates the production cost.

Hourly Labor Cost

Wages should be competitive in the market. If they are, there are still several tools to control labor cost.

  • Incentives should be a high percentage of a competitive compensation package, and they should be paid only when both quality and productivity minimums are met.
  • Benefits should match rather than exceed the market.
  • Commissions should be higher for selling high margin products, and lower for low margin products.
  • The cost of new recruits (hiring, training, and low productivity) must be considered when deciding how to handle fluctuations in demand.
  • Overtime is usually cheaper than using subcontractors with similar pay scales. Why? Overtime does not change your benefits or fixed costs much, but the full impact of those costs are built into subcontractor fees.
  • However, overtime should be limited to 20% of regular hours to minimize quality problems, declining productivity due to fatigue, and employee turnover.
  • Unfortunately, the extra pay for overtime can be an incentive to reduce regular productivity, making proper performance standards and rewards even more important.

Tips on Material Costs

You want to avoid excess material costs. You want enough material with the right quality at just the right time for the best price. Your enemy in this effort is complacency: accepting that the status quo is good enough, without trying to find better alternatives. Here are some improvement techniques:

  • Keep statistics on supplier performance: timely delivery, percent rejects, and your satisfaction on special orders.
  • Schedule supplier reviews, where you look at the marketplace to find other potential suppliers, and request bids to find the best offers. Do this every two or three years for your most important materials. One approach is to schedule one review. i.e., competitive bidding process, every six months.
  • Negotiate everysupplier offer. Offer a longer commitment, or choose a lower grade, or suggest less processing by the supplier to make it worth their agreement. It costs you nothing to ask. The only risk is that they say no!
    • It’s worth doing! If you can cut your material cost by 10%, and material is 25% of revenue, that savings of 2.5% of revenue becomes a profit increase. If your profit is 15% of revenue and you grow it by 2.5 to 17.5%, you boost profits by 1/7 or 14%.
    •  If your gross margin is 50% of revenue with material costs at 25% of revenue, negotiating supplier prices down by 10% reduces variable costs by 2.5%, increasing gross margin to 52.5%. In terms of profit as a percentage of revenue, this 2.5% margin gain is worth the same as growing sales by 5%. Which one is easier and more under your control?
  • Review your replenishment order schedule to reduce inventory and improve cash flow. Forget the concept of “economic order quantity.” Calculate how much safety stock you really need according to the supplier’s best delivery interval and frequency. Then set up your internal “pull” signals to trigger a replenishment order when your safety stock reaches the minimum. Order just enough to tide you over until safety stock will reach that level again.
  • Reconsider material storage. Find ways to store it near the operations that will use it. Make sure it’s visible, not buried in a warehouse. This prevents the buildup of excess.

Fixed Cost Levers

Small business owners usually have a pretty good handle on their fixed costs such as rent, utilities, and professional services. However, some of the these tips apply to fixed costs as well, such as periodically considering alternatives, negotiating prices, and minimizing usage.

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 tgray@tom-gray.com. 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/

Proven Techniques for Removing Waste from Processes

by Tom Gray | on Jun 11, 2014 |  Comments

Robots are not the answer for a small business! To produce value at optimal cost, small businesses need simple techniques, not expensive robots and complex MRP systems,. Your processes should be able to produce a high variety of outputs at high quality levels with fast cycle time, low operating cost, low inventory, and good information flow.

Start with understanding your process today, displaying it on a process map. In the book Lean Thinking, Womack and Jones described the mindset for process mapping this way: “Can you put yourself in the position of a design as it progresses from concept to launch, an order as information flows from initial request to delivered product, and a physical product as it progresses from raw material to the customer, and describe what will happen to you each step along the way?”

Process Design Principles

1. Standardize: Define how your process should work, and how you measure whether it does, at each step along the way. Standards enable a common assessment, a common understanding of success, and a shared basis for analysis.

2. Simplify: Shorten the flow so less can go wrong. Remove steps that do not add value, either eliminating them or moving out of the critical path with work cells, subassemblies, or shifting tasks to other steps, or to the customer, supplier, or outsourcer.

3. Balance the Steps: Organize your process into major steps so that each requires the same time interval (called takt time by Toyota). This enables work to flow through the process at a continuous pace, without wasting time in queues waiting to be processed.

4. Use a pull system to obtain continuous flow: Each work step pulls what it needs from the prior step “just in time.” You don’t order or produce large quantities that wait for subsequent processing. Instead, each step produces only small buffer quantities, not mountains of “work in progress.” Continuous flow is the opposite of “batch and queue.”

5. Visual Alerts: Design visual signals for monitoring progress, prioritizing work, triggering the pull (and ordering) of inputs, and displaying incomplete sets of parts (“kitting”). Visual signals enable quicker response than burying these key measures and events in expensive information systems.

6. Find and Optimize the Bottleneck: Identify the one process step that determines the pace for the entire process. Focus on improving its throughput to drive the productivity of the entire process. See below for tactics. Once you improve the bottleneck, rebalance the steps for a faster cycle time, and look for the next bottleneck.

7. Continuous Improvement (kaizen in Japanese): Improving one process affects other processes. Modify them, and then return to the first one to improve it further. This yields constant gains in productivity and profits, rather than delaying benefits by waiting for the perfect overall solution before implementing.

Some Proven Tactics to Implement the Principles

A. Standardize

-        Establish time, volume, and quality metrics for key steps; these enable workers to inspect the quality of their own work. Monitor results per person and per product. Investigate and correct shortfalls.

-        Rejects must be corrected by the group who produced them.

-        Design work processes and tools so they can be used only in the right way or edits to prevent input errors, e.g., tabs on jigs (mistake-proof, or poka-yoke).

B. Simplify

-        Create subassemblies removed from the main flow.

-        Condense work steps or subassemblies so several are done by a single person or work cell. This removes handoffs, which often result in batch-and-queue delays.

-        Use your computer system rather than manual records for recording and storing information about process flow and task completion.

-        Limit options offered; customization is inefficient unless it comes with a high enough price premium.

-        Look for ways to offload tasks. Consider whether customers or suppliers can perform some inputs themselves.

-        Periodically assess outsourcing alternatives for non-core tasks and processes.

C. Balance the Steps

-        Reorganize tasks into equal-length work steps.

-        Use work cells and subassemblies.

-        Recognize that one worker can operate more than one machine.

-        Prescribe and limit the size of buffer stocks.

D. Pull and Continuous Flow

-        Prevent overproduction in any one work step by triggering replenishment of the buffer stock via a signal from the following work step.

-        One example is a colored card (kanban) placed within the buffer stock so that it is exposed when the stock is low enough that replenishment is needed.

E. Visual Alerts

-        Kanban is one form of visual alert.

-        Another is kitting: making a box with a shaped spot for each part in a set to be delivered to a work operation, to reveal when the part is missing.

-        Colored flags can show whether a work step’s progress is in danger of missing its time target.

-        Jobs waiting for bottleneck processing can be marked with colored tags to show priority for customer due dates.

E. Optimize the Bottleneck

-        Offload work by (1) re-examining product design to avoid the need for the bottleneck processing, (2) outsourcing, and (3) inspecting for rejects before they reach bottleneck processing.

-        Minimize bottleneck downtime by scheduling operators and maintenance.

-        Maximize the bottleneck throughput by adding more capacity such as a bigger machine.

-        Optimize its flexibility to adjust to shifting priorities by organizing the work in small lots and streamlining setup routines.

-        Improve the operations within the bottleneck step.

-        Place the bottleneck as late in the production process as possible.

F. Continuous Improvement

-        Implement improvements quickly to gain immediate payoffs. Just as small lot sizes improve efficiency, small improvement steps improve quality and profits.

-        Plan for a series of process improvement efforts.

-        Reflect on newly-learned methods and expertise, and standardize them so the same type of gains can be applied to other processes more quickly.

This article draws on “Lean” techniques based on the Toyota Production System, and the Theory of Constraints first demonstrated in Eliyahu Goldratt’s The Goal. GE’s famous Six Sigma methods support these approaches by stressing measurements and analysis techniques at each step of the analysis and improvement effort.

Creativity in Process Improvement

Operations people often have limited opportunities to use their natural human creativity at work. So when they have the opportunity to use that creative ability to map a process and then improve it, the employees enjoy the change and appreciate the owner’s trust and respect for their abilities. They get great satisfaction from designing improvements, and go beyond the norm in their efforts for successful implementation.

Employee motivation, teamwork, and satisfaction all get a boost, at the same time company quality and profits grow. Use their creativity! It will be one of your best investments.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.  For Tom’s new book Business Techniques in Troubled Times: A Toolbox for Small Business Success, see http://www.businesstechniquesbook.com/

The Process Mapping Conversation – Seeking Improvements

by Tom Gray | on Jun 04, 2014 |  Comments

The excitement starts for the team once they’ve collected their observations to show how the process is actually done today. Listen to their buzz – that’s the sound of creativity, teamwork, and engagement. It’s the sound of motivated employees!

Step 4: Map the Current Process

Gather the observed information. Write the major elements of the process on post-it notes (because they can be moved around easily) and put them on the wall in order, so the entire team can see them at once.

Then insert components (on post-it notes) under each of the major elements: decisions, inspections, rework loops, approvals, record-making, and sub-processes used to create inputs or specialized steps. Some of these sub-processes will be important enough to require their own process maps.

The second level of analysis puts all these post-it notes in order, showing the sequence in which they happened. Now you have a high level map.

Like any early mapmaker, you will see areas of unknowns. Some may be important enough to fill in based on further observation. After adding these post-it notes in another meeting, you’ll have a mid-level version of the map. Test this version by reviewing it with those who do the work, and insert their corrections.

Step 5: Analyze the Map for Possible Improvements

The goal here is to simplify the process (and the process map) by identifying wasted time and effort. Some questions like these may trigger important ideas:

  • What would happen if this step were eliminated? Are any steps redundant?
  • Can rules such as approval levels be changed to make any steps unnecessary?
  • Can visual signals be introduced to avoid delays or smooth the flow of priority tasks?
  • Can some steps be done in parallel rather than waiting for completion of a previous step, such as by using subassemblies?
  • Is the step being done by the right person?
  • Is the step a work-around due to poor training or parts shortages?
  • Is the step a rework loop? How can you eliminate the need for it?
  • Does the step add value to the product or service in the customer’s eyes? If not, what would be the result of eliminating it?
  • If more work was added to one step, would that eliminate a subsequent step and save time overall?
  • Which steps seem to have the greatest impact on cycle time? Do we need to know more details about them to make them more productive?
  • Do current computer systems have unused functions that could be “turned on” to replace time spent on record production, gathering inputs, or production steps?
  • How could we use a wireless computer (e.g. tablet) to speed up some steps?

Step 6: Estimate the Value per Improvement, and Collect Data to Verify Estimates

The team is not finished until it can predict the value of its changes – do they deliver the target level of improvement on the chosen measurements?

Significant changes must be tested in operation, observed, and measured for their impact and unintended consequences. Predictions without verification aren’t worth much more than telling you what to test.

The testing effort also helps clarify how implementation should be done. The team’s final recommendation will include changes, measured effect, implementation plan, and timeline. The implementation plan must consider communication, training, job aids, measurements, and incentives, i.e., all the aspects of setting your employees up for success. See Setting Up Employees for Success, or Failure.

The Extra Dividend is the Conversation

You went through a few weeks of extra effort, and what did you get from it? What value was added?

  • You understand a key business process better than ever before.
  • Your employees found improvements that will boost quality (sales) and productivity (profits).
  • Your employees were honored by your trust in their judgment; their motivation has never been higher.
  • Your employees began to think like an owner, which promises more improvements both in their daily work and when you analyze the next process.
  • Your employees developed better team spirit from working together on an exciting project.

So what do you think? Does it seem worthwhile to map and improve a key process? Are you or they working on anything more important right now?

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 tgray@tom-gray.com. 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/

The Process Mapping Conversation – Getting Started

by Tom Gray | on May 28, 2014 |  Comments

“A picture is worth 10,000 words.” The visual nature of a process map makes it understandable. Once employees can see the process laid out in steps, they can start communicating with each other about their experience with it and their ideas to make it better.

A team of employees creates a preliminary high level view called SIPOC (see below), and then uses observations to create a first draft process map from observations. Then the team members improve the first draft by adding decision points, customization steps, rework loops, response to shortages of parts, and pursuit of approvals. At the same time, they’ll ask aloud, “Why do we do it that way? What if we did this activity differently?”

Developing the process map as a team triggers discussion of ways to improve the business. This interaction is a major benefit of process mapping, in addition to the process improvements themselves.

Google offers plenty of examples of process maps. At least one has an embedded video showing the development of a process map for peanut butter and jelly sandwiches! See Process Maps / Flowcharts. Slideshare is a good source as well. A good tutorial on process mapping can be found at Balanced Scorecard’s “Handbook for Basic Process Improvement”, especially pages 21-24 in the PDF page count.

In keeping with our focus in techniques, this article and the next will focus on the step by step process for building a process map and seeking ways to improve it, with an emphasis on the conversation along the way.

Step 1: Choose a Process

Make a list of the “high level” processes that define your business. A previous article offered some examples, such as ordering, production, invoicing, receiving, and inventory management Choose one, or a sub-process within a high level process, where changes would offer major impact on quality and productivity. After you have worked through one process, you can repeat the effort for a different process later.

Decide how to measure success in the chosen process, e.g. widgets per hours (or hours per widget) with x level of quality. What level of performance does the current process deliver, specifically, in numbers?

Next, how much improvement is your goal? It should be major. Maybe a 50% improvement?

Step 2: Assemble the Team, Define the Rules, Develop the SIPOC

The team should not exceed five to seven people. They must be knowledgeable about the process. All the departments with a major role in the process should be represented. Appoint a team leader, whose job is to manage progress and team dynamics, and keep bosses informed. The leader’s job is to foster the conversation, not to insist on their own view of the right answer!

Team rules include the target completion date, how much time they will spend per day or week, their authority to arrange tests of improvements, and approval of any resources they will need. Rules also include ground rules on meeting preparation and behavior

SIPOC is a summary view of the process at a very high level. The acronym stands for Supplier, Input, Process, Output, Customer. As you can see, the name is the sequence for adding value. Here’s an example for Car Repair:

Supplier
Input
Process
Output
Customer
-Vehicle owner -Customer service representative
-Facility manager
-Parts window
-Repair inquiry
-Vehicle for repair
-Permission to proceed with individual recommendations
-Open bay
-Parts for approved repairs
-Observations
-Schedule visit
  -Diagnose problem
-Prepare work order
-Source parts
-Perform repairs
-Notify that service is complete
-Appointment date and time
-Repair recommendations and cost estimates
-Work order
-Parts for approved repairs
  -Telephone/e-mail/text message notification
-Repaired vehicle
-Vehicle owner
-Mechanic-Customer service representative

 

A more complete example would also show completion time targets and other “critical to quality” requirements for each input and output. Later, the employee team’s process map will add detail to every entry on the SIPOC.

Step 3: Observe the Current Process

The team must fully understand the process before trying to change it, to avoid creating problems rather than solutions! Understanding starts with observation (usually several times) and recording what they saw, in detail. It helps if they know what to look for! They should try to answer these questions:

  • What inputs are needed, and how are they gathered, by who, when?
  • What are the processing actions taken, decisions, inspections, and approvals?
  • Again who does these, when, and how long do they take?
  • What are the exceptions, and how are they handled?
  • What documents are produced or updated, and what is done with them?

The team will take pains to record what really happens rather than what is supposed to happen! They will focus on activities in all the involved departments, especially on handoffs from one department to another.

The Extra Dividend is the Conversation

You know the team is already trading ideas for doing things better, even before they create the first draft of the process map. How valuable is that interest and engagement?

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 tgray@tom-gray.com. 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/

 

Techniques to Manage Bottlenecks

by Tom Gray | on May 21, 2014 |  Comments

When one operations step controls the flow of the whole process, that choke point is called a “bottleneck.” The previous article explained how to find bottlenecks. What techniques can solve or manage this traffic jam? This article explains those techniques, sorting them into three types.

Type 1 Techniques: Don’t Waste the Bottleneck

Since the availability of the bottleneck is in short supply, you certainly don’t want to spend its time on unnecessary tasks, or let it sit idle. You don’t want to waste a scarce resource. What does this mean in practice?

  • Check product design to see if you really need to use the bottleneck for all the products or processes using it today. Maybe product design can be changed.
  • Check for outside suppliers who can do some of the bottleneck functions for you, thus adding capacity.
  • Don’t use the bottleneck to make spare parts when customer orders are waiting.
  • Inspect for faulty inputs before they go through the bottleneck, because any time spent processing faulty pieces will be wasting the bottleneck’s time.
  • Have a small “buffer stock” of inputs ready to be used by the bottleneck without further transport, so it does not sit idle waiting for a new batch to be prepared.
  • Schedule staff so someone is always available to keep the bottleneck running, including breaks and lunches.
  • Schedule maintenance of the bottleneck for times when customer orders and due dates are less demanding.
  • Don’t let the bottleneck break down!

Type 2 Techniques: Optimize the Bottleneck’s Operation

Watch the operation, map it onto a flowchart, and brainstorm ways to do it better. To prompt ideas, consider using a Fishbone diagram (see “Measure to Manage Quality” article) . Here are some techniques: using a different grade of material for inputs to smooth and speed up processing, shortening or deleting processing steps, shifting them to other processes, using subassemblies as inputs, training, posting job aids to minimize rework, and restructuring employee incentives.

Note that small batch sizes make the bottleneck more flexible, and thus better able to respond to customer order priorities. They also result in smaller inventories of inputs. But smaller batch sizes use more setups, so at the same time setup  or “get ready” processes must be optimized as well.

Type 3 Techniques: Change the Operations Environment to Fit the Bottleneck

The operation can only produce as much as the bottleneck can process, so the bottleneck’s pace is the pace of the whole operation. It makes no sense to build or buy more inputs than the bottleneck can handle, and there is no need for downstream capacity greater than the bottleneck’s output. This means you can reorganize the entire operation into steps that move at the same pace and quantity as the bottleneck. One balancing method is to group faster-paced steps into subassemblies, perhaps produced by a multi-skilled group of employees called a work cell.

Once the operation is reorganized to match the bottleneck’s pace, and the process is shifted to focus on small batch sizes, the whole operation can shift to a “replenishment” mode. Rather than making inputs according to some master schedule, this means each step calls for its inputs when it is ready. The prior step then delivers that quantity and begins to process its own inputs to make the next batch ready, that is, to replenish a small buffer stock. Often companies use visual cues, such as a yellow card inserted in the pile, to show that the buffer stock has dwindled to a point that replenishment is needed.

Replenishment applies to purchasing as well. Orders for supplies (inputs) are staged according to the expected “pull” of the first step in the process, to replenish the safety or buffer stock only when needed. Orders are delivered “just in time,” and inventory costs plummet.

Taken together, these techniques increase throughput, reduce labor costs, and reduce inventory costs as well. The process becomes more efficient, so customer satisfaction and profits both get better. That’s the payoff for managing bottlenecks!

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. Contact Tom via tgray@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/

 

Bottlenecks Are Opportunities

by Tom Gray | on May 14, 2014 |  Comments

When looking for opportunities to improve operations, look for the bottlenecks. Picture how the top of a soda bottle narrows, letting less liquid flow through. A bottleneck in your operations slows “throughput” in the same way. You can’t fix it until you find it, so where should you look?

Finding the Bottleneck

“Where should you look” is a reminder that to find a bottleneck, you watch the operations – you look. You do more than listen to people’s reports or read the numbers. You go out of your office and watch how they actually do the process you designed. Was that what you had in mind? Before jumping to how you would make it better, pause to consider why people do what they do at that time. Are they working around some obstacle, such as a stopped-up bottleneck in the process?

While you are watching, look for piles of work waiting to be done (“work-in-progress” inventory). Whatever it is waiting for is probably the bottleneck. At the same time, look for people or machines that are waiting to work. Whatever they are waiting for is probably output from the bottleneck.

Which of your people seems to be busiest? Can they handle an unexpected task quickly? If not, maybe they are the bottleneck. This doesn’t mean they are slow; it just means there is too much work for their capacity. That could be because the work is not organized well, or contains errors that need to be resolved, or just requires more hours than are available from this one person. We’ll talk about managing the bottleneck in the next article.

You might also look in the mirror. Most of us have tasks that we put off, either because we are not sure how to do them, or we feel inadequate doing them, or we just don’t like the work involved in doing them. Maybe it’s marketing, or sales, or preparing quotes, or invoicing. Could your own delay in completing such tasks be delaying your company’s throughput? Is there a pile of such work not done? Are there downstream steps that are waiting for you to finish these tasks? To paraphrase the cartoon Pogo, “We have met the bottleneck, and he is us!”

Capacity Itself Could Be the Bottleneck

Your system’s capacity could be the bottleneck itself. If capacity equals overall demand, there will be times when a temporary spike in demand exceeds capacity. Imagine a “catch-up” situation, where delays at the front end are resolved, unleashing a flow of work to the back end. Capacity that assumes steady demand will not be enough when the real world varies the timing of demand. When throughput is limited by your capacity, capacity is the bottleneck.

To maximize throughput, capacity must be somewhat greater than demand. With people, we stretch their capacity when we ask them to work overtime. Their capacity is really 48 hours per week, not 40. This means they have adequate capacity to handle bunches of work, even if normal demand requires 40 hours per week. Now consider the rest of your operational resources: do they have capacity beyond normal demand? If not, they will be a bottleneck when demand is bunched into a spike.

For a memorable image of bunched demand, consider the “pig-in-the-python.” A python can swallow a whole pig, and as the digestion process goes on, you can see the shape of the pig as it moves through the snake’s body. That snake is your business or your process, and the pig is bunched demand. The snake is flexible enough to stretch to accommodate that bunched demand. Your resources and your process need to be able to stretch, too. Those elements that cannot stretch enough become bottlenecks.

Wait, There’s More!

Operations are often said to flow, like the flow of a river. Bottlenecks restrict the flow. We’ll discuss techniques for widening and relieving that bottleneck in the next article. Once you have done so, you’ll find another bottleneck! The wider flow, which was restricted before, will now exceed the capacity of some downstream person, machine, or process. Once you widen that second bottleneck, a new choke point becomes apparent.

Don’t worry! Be happy that you can progressively improve the pace and reduce the cost of your business. Every bottleneck is an opportunity to do just that. Faster production of more units with less waiting means less inventory cost and less production cost per unit, which means higher profit per unit, and more units/more profits overall. So be glad each time a bottleneck presents itself. Fix it and enjoy the flow while you turn to fixing the next one.

For the original analysis of bottlenecks, see The Goal, by Eliyahu Goldratt and Jeff Cox, North River Press, 2004 (3rd edition).

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 tgray@tom-gray.com. 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/

Managing Quality in Seven Steps

by Tom Gray | on May 07, 2014 |  Comments

No one can tell a small business owner how to define quality, and no one can tell an owner when the firm’s quality is good enough. But when it comes to measuring quality, and finding the underlying reason when your quality falls short, some proven techniques can help you figure out what you really have to fix – the “root cause.”

Step One: Decide What Matters

Start by deciding which elements of your product or service matter to customers, and which ones matter to company cost control. These will be the items you want to measure. You want a fairly short list of key quality items, and you do NOT want to fill it up with the owner’s personal preferences if they do not matter to customers!

A quality item matters to customers if they will pay more for having it, or if they refuse to buy as much or at all when it is missing. It matters to company cost control if its absence raises costs significantly.

Step Two: Specify Your Standards

If you don’t know what you’re managing for, any result is acceptable. But the idea of quality is that some things are NOT acceptable! You cannot manage quality unless you define what level of performance is the target, and the limits of variation you will accept.

Your standard is a measurement: the target or ideal result for that quality element, the upper and lower limit of acceptable variation (called “control limit”), and the method of calculation. For example, the target is 16 ounces per package, acceptable variation is 0.1 ounces above or below, and the calculation is percent of packages within the acceptable range per day’s production.

Small businesses are famous for not writing things down. Don’t make that mistake with your quality standards. Put them in writing and display them. Your employees deserve to know what they are held responsible for, and putting standards in writing provides you with the discipline to clearly specify how to make your product or deliver your service.

Step Three: Measure Performance

Perform the calculation as designed and when planned.

Step Four: Find a Pattern in the Results

When measurements show variation beyond the acceptable control limit, you must change something to restore quality – to make sure it does not happen again. You can only do that if you find what caused the variation. The first step in finding the cause is to identify patterns, such as day of week, time of day, workers involved, materials or machine involved, type of variation (e.g. over vs. under), etc.

Often several types of patterns can be found, so you need to focus on those happening most often. Fixing these will solve most if not all of the problem. A good tool for this is the Pareto chart, based on the 80/20 idea: 80% of the problem is caused by 20% of the inputs. For example, 80% of the complaints come from 20% of the customers, or 80% of the failures happen on Fridays, or use a certain machine. The SORT and graphing functions in Excel can put this into a simple bar graph.

Step Five: Brainstorm to Find the Root Cause

Why does that pattern happen? Don’t just jump to a conclusion. Open your mind and think about the potential reasons that might appear under these headings: Materials, Machinery, Methods, Manpower. Other categories can be Technology, Processes, and Facilities. A tool called the Fishbone or Cause-and-Effect Diagram can remind you what to consider. For an example, see Cause and Effect Analysis (Fishbone Diagrams) – Problem Solving Tools from MindTools.com.

In the brainstorming session, generate ideas by asking what is being done, when, by who, where, how, and how well according to your measures of quality and success.

Step Six: Select a Remedy

Selecting the remedy can be a creative moment. These same six brainstorming questions can trigger ideas on what to change. Your solution might be incentives to change behavior, or managing suppliers for better materials, or redesigning a process to deliver better output faster. See future articles for more on process improvement.

Recognize that this step requires testing your guesses. You can’t be sure you’ve found the root cause until you correct it, and see that the problem goes away. So there may be some repetition as you try various solutions, or realize that something else is the root cause.

Step Seven: Thoughtful Implementation

Armed with your test results, you can now decree how things will change. But if the people don’t follow, nothing will change. How do you get them to want to change to your new plan? It’s not easy. Decrees are not the answer. People don’t like change. To make it work, you need their buy-in (commitment) and you need to train them.

Buy-in comes from shared vision/values, explaining the reasons for the change, and how the change enables reaching the vision better than the old way. Training is a wide umbrella. It includes role changes as well as methods changes. You’ll need to explain the new way and why, show test results, demonstrate, and then have the staff demonstrate. You’ll need visual reminders (”job aids”) as well as training material. You’ll need to measure performance to see that the change was really implemented, and measure results to see if it worked as planned. Did it work? If not, why not? Are there incentives to make the change, or are incentives working against it?

If you want better results, you’ll have to change something. These techniques help you find that lever, and then make the change happen.

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 tgray@tom-gray.com. 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/

Finding Opportunities for Operations Improvement

by Tom Gray | on Apr 30, 2014 |  Comments

To make a diagnosis, doctors ask patients about their history and symptoms. They’re looking for signals pointing to a problem. A ship’s pilot looks for familiar landmarks to find the safe channel. A business analyst uses the same approach, looking for familiar signals to find improvement opportunities, based on experience in assessing many companies. The analyst starts with a set of questions.

When the analyst asks what you do, why you do it that way, and what you don’t do, resist the natural tendency to be defensive! Remind yourself that every weakness today is an opportunity to improve quality and profits tomorrow. Rather than withholding information and rejecting new ideas, work with the analyst to seek out the signals to start your growth engine! You wouldn’t withhold symptoms from the doctor, so don’t hide signals from the analyst you hired to make your business healthy.

What to Look for: The Eight Wastes

Waste is any activity that absorbs resources but creates no value in the customer’s eyes. You and the analyst will identify opportunities by examining your operations to find the Eight Wastes (muda) made famous by the Lean movement, based on the Toyota Production System. They are:

1. Overproduction: Some steps or some entire processes produce more than is needed now; excess sits in inventory. The solution is small batch sizes, and quick set-up time between batches.

2. Inventory: This is money sitting idly, adding no value. It could be raw material, or partially completed production, or finished goods awaiting sale. The solution is ordering in small amounts (“just-in-time”) while managing shipping costs, and processing in small batches to avoid stockpiling finished work. This requires good demand forecasts and efficient setup routines.

3.  Waiting Time: Work waits in queues if it is completed before the next step is ready to handle it. People wait for work (shifting to nonproductive tasks in the meantime) if the prior step takes longer than their step. Both types of waiting time make production slower, resulting in resources adding cost without adding value.

Many solutions can be considered. The first is balancing the workflow, so all the steps take the same amount of time, called takt time. Another is eliminating handoffs, so there are fewer waiting queues. Quality initiatives can minimize rework, which makes all the downstream steps wait for nonproductive do-overs. Other solutions include shorter set-up time, parallel processing, and subassemblies.

4. Transportation: Time and effort spent moving materials, partially finished assemblies, and finished goods add no value to the finished product. These tasks delay finished goods and sales, tying up resources in the meantime. Solutions deal with logistics: locating production closer to markets, locating supplier and storage closer to production, shipping at night, receiving at night, and ordering with proper lead times.

5. Over-Processing: Avoid time and machine hours spent producing “bells and whistles” which add no value for customers, i.e., they do not enable a higher price. The solution lies in revising product design, especially any design element that requires use of a crucial or “bottleneck” machine also used for key production steps. You want to make sure the load on such machines is limited to only the essentials, since their availability determines your pace of output.

6. Motion: Time spent moving people or materials from one place to another within the production process adds no value in the customer’s eyes. The solution can involve layout of the production facility’s machinery and storage, assignment of tasks to workgroups, and finding faster ways to move.

7. Defects: Poor quality production results in wasted material (scrap), wasted labor hours for rework, and warranty costs. These not only waste resources themselves, but can slow the entire output cycle, delaying cash flow and making downstream resources less productive due to waiting time.

Solutions involve standards and measurements, in-process inspection by the workers themselves, designing methods and tools that prevent mistakes (poka-yoke), holding each workgroup accountable for correcting its own mistakes, and incentives for achieving both quality and productivity targets together.

8. Underutilizing Skills: When people can do more than they are asked to do, the money spent on others doing that work is waste. The solution is to look to your own staff first. Recognize that one person can operate more than one machine, and fill more than one role. Consider work cells where one or more people handle a variety of tasks as a team. Challenge the team to invent new methods for significant change.

Keeping in mind the Eight Wastes, you and the analyst will look for signals that point to Waste, to find opportunities to remove it.

Operations Signals

  • Piles of Work in Progress indicate an unbalanced production line, bottlenecks, and parts shortages. These can signal several types of waste, such as overproduction, waiting time, over-processing, defects, inventory, and wasted motion to move around the piles.
  • Scrap, field failures, and warranty costs indicate defect wastes.
  • Rework hours indicate defect wastes as well.
  • Machine downtime can indicate wasted hours as employees wait for work.
  • Uneven line speed is another indicator of employee waiting waste.
  • People waiting for work, and work waiting for people.
  • Absence of visual progress indicators hides quality and delay issues, resulting in waiting and defect wastes.
  • Absence of standardization and measurements also hides quality and delay issues, and hampers improvement decisions.
  • Employee workpaths, such as chasing parts and visually checking inventory before taking an order, can reveal inaccurate inventory waste as well as excess labor hours.
  • Transport time and costs involve their own expense and delays.
  • Excessive customizing suggests wastes such as over-processing and waiting.
  • Absence of any recent 5S event suggests wasted inventory costs, potential safety issues, processing delays for finding the right tools, and wasted motion as workers move around barriers such as surplus materials and machines.
    • 5S stands for Sort, Straighten, Shine, Standardize, Sustain. It is a Lean technique to transform a sloppy shop into a smooth-running machine by disposing of unnecessary supplies, tools, and equipment, while sorting the remainder into a clean layout that supports efficient production. The morale boost is an additional benefit!

Purchasing Signals

  • Inventory turnover analysis assesses money tied up in unused materials and finished product. One benchmark is a two-week supply. Comparing your turnover to industry benchmarks reveals the waste.
  • Absence of performance measurements for key suppliers suggests possible part shortages, quality issues, and even cash management problems.
  • Absence of recent competitive bids indicates that material costs may be too high.
  • Absence of outsourcing comparisons signals opportunities for process improvement and cost savings.
  • Asset utilization measurements reveal bottlenecks and surplus, each representing their own types of waste.

Management Signals

  • Absence of forecast vs. actual comparisons indicates potential for excessive inventory or staff, as well as cash flow issues.
  • Absence of measurements on “% quotes accepted” can reveal pricing and differentiation problems, which can turn into wasted inventory and hours.
  • Statistics on the timing and accuracy of invoices and payments can suggest problems in these processes. These can threaten cash flow, the lifeblood of the business.
  • Absence of documentation for key processes, often due to over-reliance on the knowledge of a few key workers, creates greater risk if they leave, potential internal controls problems, and wasted opportunities to improve those processes.
  • Weak internal controls create the risks of fraud and poor cash flow. Internal controls are methods to ensure the integrity of operational, financial, and accounting information. They also ensure that management policies are followed throughout the organization. One example of internal controls is the requirement that at least two employees are involved in every financial transaction.
  • Distributed authority to reduce prices creates the risk of poor margins, damaging cash flow.
  • Operating more than one IT system indicates unreliable information flow due to discrepancies between systems (e.g. inventory, variable cost, margin analysis). Wasted hours is one result.

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 tgray@tom-gray.com. 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/

Business Techniques for Growth

by Tom Gray | on Apr 28, 2014 |  Comments

As a small business owner, you know you need to grow. You need more revenue to offset overhead. You need efficient operations to make a profit on every unit. No has to tell you small business operates on the edge. There’s no cushion. You see it every day.

You know it’s risky to remain unchanged. Competitors pass you by. Customers move away. Technology enables alternatives to your methods. But change is risky too, and resources are tight. Every small business owner asks “How can I make the right decisions to build size and profits?”

Which path to growth makes the most sense for your business? Which has the best balance of risk and return on investment? When you choose a path, how can you make the most of it?

New Book from Tom Gray: Business Techniques for Growth

Now there is a new book filled with the answers you’ve been looking for: dozens of practical techniques, clearly-explained and proven by experience. Business Techniques for Growth helps you see opportunities and manage risk to grow your business based on prudence, not passion.

“How can a small business change to keep up and grow? This book explains all the levers, from employee performance to revenue growth and operations improvement,” says Mark Petrilli, State Director, Illinois Small Business Development Centers

  • Managing People: Results improve with high-performing and well-motivated employees.
  • Growing Revenue: From quick wins to new distributors, new markets, and new products.
  • Improving Operations:  The fastest and least risky way to grow profits.
  • Negotiating and Deciding: Key skills to choose your course and make it happen.
  • Selling Your Small Business: the ultimate test of growth.

Each of these “parts” of the book contains one or more chapters, composed of a series of short articles explaining business techniques. It’s designed as a “toolbox” for hands-on owner-managers, so they can jump directly to a topic to find a proven technique. They can return again and again for more solutions as their business evolves.

Want a Taste? Here’s an Excerpt

“Imagine yourself as the operator of a business growth machine, with dials to show changes in key business results, and lots of levers that enable you to cause those changes. You are the ‘great and powerful Oz’ – the small business owner! Which levers should you pull first, and when will the results change?

“Start with reading the labels on the levers. What are the techniques for growing? If growing profit is the goal, then our search for growth goes beyond increasing revenue. It also includes cost control and even additional investments to enable more profits. The revenue row levers are…”

Why This Book Now?

Business Techniques for Growth is especially timely because small businesses produce most of America’s new jobs, and jobs are the critical ingredient to sustain families and our budding economic recovery. Will small businesses keep pace and help America grow? With Gray’s book, they can see all the levers and choose the path to growth that fits them best, building successful companies and making America a better place to live.

This book builds on Gray’s first book, Business Techniques in Troubled Times: A Toolbox for Small Business Success, designed for start-ups. This new book continues the thread, targeting the need to build a sustainable and growing bottom line. Together, the two books form an invaluable set of clearly-explained real-world-tested solutions for growing a small business.

Both books are available from Amazon.com in paperback, or as e-books from Kindle and Nook. To learn more or order, visit http://www.businesstechniquesbooks.com/. Tell your friends, and post a review on the book’s page at Amazon!

Want Some Training?

Later this year, watch for the launch of Tom’s Business Techniques Institute – Chicagoland, offering half-day workshops to explain techniques and coach you to apply them to your own business issues.

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 tgray@tom-gray.com. 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/

Improving Operations: The Low-Risk Path to Growing Profit

by Tom Gray | on Apr 23, 2014 |  Comments

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.

Cost Control

Variable Cost

Fixed Cost

  •   Labor hours
  •   Labor wages
  •   Labor benefits
  •   Material amount
  •   Material cost
  •   Subcontractors
  •   Shipping
  •   Sales commission

 

  •  Rent%
  • nonproductive labor
  • Marketing
  • Office supplies/misc.
  • Your salary/benefits
  • Professional services*
  • IT systems
  • Interest
  • More!

*Professional services includes consultants, lawyer, accountant, other outside services

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.

People Management

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 tgray@tom-gray.com. 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/

Successful Cold Calling Techniques

by Tom Gray | on Apr 16, 2014 |  Comments

Growth is the most fundamental challenge to a small business. Will you take the passive approach, relying on marketing, word-of-mouth, and a small customer base to generate incoming transactions? Or will you use marketing as only the base, and build on it with active selling to potential prospects?

Cold calling is part of the active approach, growing the client base and replacing the natural erosion of current customers. It’s a great opportunity to bypass propsects’ current suppliers, pre-empt competitors, and open up huge new possibilities.

The ingredients for a successful cold calling recipe are your attitude, prospect list, script, communications style, and follow-up. Without the right attitude, the rest of the ingredients don’t matter!

Attitude

As always, start by understanding your goal. Fundamentally, you want to your business to survive and grow by finding new customers. Your goal in cold calling is to open a dialogue so you can find prospects where there is a fit between what they need and how you can help them. For those people, your goal is to continue the dialogue so they can make good decision. This might be an appointment, or just an agreement to keep in touch until they are ready to buy. Rather than focusing on your needs, let them guide you to the outcome that meets their needs best. Don’t try to make the sale in a phone call!

The dispiriting aspect of cold calling is rejection. Handle this by recognizing it in your goals, and reflecting on what works.

  • Set a schedule, such as one hour per day, and set a target, such as two appointments per session. If you reach the goal in less than one hour, stop calling and celebrate success!
  • Set the situation to fit your positive approach. Eliminate distractions and background activities. Stand up when calling. Focus on the needs of the prospect.
  • After each call, think about what you could have done differently to make it a success, or what techniques or words seemed to work best to open dialogue. Then adapt your approach for future calls.

Remember, you are looking for people who want your help, not trying to force your attentions on those who don’t.

Prospect List

Call people like those who are already your customers, e.g., same industry, circumstances, geography. If you already have some connection with them, they are more likely to listen. Do a little research on their industry, company, or circumstances before you call, so you can show your interest in solving their problems. If you decide to rent a list from a list broker, experiment with small segments to find the right kind of list.

Script

A three or four line script makes it easier to call, but sounding like a script means you get treated like a robo-call – a quick disconnect. In the first 30 seconds, you are seeking permission to continue dialogue into a needs analysis.

  • Identify yourself and your firm in the first 5 seconds.
  • Express respect for the prospect’s time in the first 10 seconds.
  • Communicate a compelling and quantifiable customer benefit in the first 20 seconds. Defer details.
  • Ask for permission to continue the call in the first 30 seconds.

The second part of your script is a few questions designed to understand their needs and how they make decisions on meeting them. Listen to the responses! Your replies must position you as an expert advisor, not a seller. Your “close” is an arrangement to be involved and coordinate a solution for their needs.

Practice your script with someone. Anticipate objections, craft your response as part of your script, and practice natural and respectful delivery. The goal is to know your message well enough so you can concentrate on what the prospect is telling you, rather than being focused on your response.

Communications Style

Cold calling works when your communications focus on the customer needs, not your own. The image you want to project is the professional expert advisor. This table sums it up:

How sales people typically see cold calling How customers see cold calling done poorly What successful cold calling should be
fearfulboring,   repetitiveunpleasantpressurizedunimaginative

rejections

thankless

confrontational

unproductive

demoralizing

unhappy

numbers game

nuisanceunwantedindiscriminate,unpreparedpressurizing

tricky, shifty

dishonest

reject, repel

shady, evasive

contrived

insulting

patronizing

disrespectful

honest/openstraightforwardinteresting/helpfuldifferent/innovativethoughtful/reasoned

prepared/informed

professional/business-like

efficient/structured

respectful

enthusiastic/up-beat

informative/new

thought-provoking

time/cost-saving

opportunity/advantage

credible/reliable

demonstrable/referenced

Source: Cold Calling Techniques – tips, cold calling that works for sales introductions, telephone prospecting and other examples for cold calls in selling

With this approach, you will naturally end the call when the prospect offers three objections. End it with respect, and keep the door open to future contacts when the buyer feels a more imminent need.

Gatekeepers

When you cannot reach the prospect directly, don’t give up! If you reached their Voice Mail, leave a short message saying who you are and why you called, promise to call back on a certain date, and mention you would appreciate a callback. Then make that follow-up call as promised!

If you reach an assistant, ask if the prospect is in the office. If not, say you’ve been trying to reach him or her, and ask for a good time to call back. Make the gatekeeper your friend: treat them with respect, make a personal connection, and mention briefly why the prospect might want to talk (compelling and quantifiable benefit).

Cold calling is a tool for growth. Treat it positively, and do it regularly. After all, helping customers meet their needs is the reason you’re in business. Cold calling helps you stay that way!

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.  For Tom’s new book Business Techniques in Troubled Times: A Toolbox for Small Business Success, see http://www.businesstechniquesbook.com/

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