One of the best ways for small business to improve profits is changing processes to use less variable costs: less labor or materials, less subcontractor cost, less shipping cost. The result is a higher contribution margin.
Process improvement is the BEST technique for profit improvement because it produces more profit with EVERY sale. Unlike a reduction in fixed costs, process improvement generates more and more profit as the business grows. Unlike a price increase, it does not threaten sales volume.
Process improvement increases the contribution or operating margin, in both dollars and percentage of revenue. As sales increase, profit increases, while fixed costs stay the same. Profit becomes a higher and higher percentage of revenue, while fixed or overhead costs become a lower and lower percentage of revenue.
The goal is a substantial change in profit, so look for changes with substantial profit impact!
Start With a Flowchart: The “Process Map”
Process improvement starts with understanding the process itself. The best way to do that is to map the process using a flowchart, a process map.
You can draw this process map by hand, or use an MS Office program called Visio, or even PowerPoint. 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.
This technique works well for both service businesses and production environments. In a job shop, you will start with your Bill of Materials (BOM) and routing sheet. Of course, you will want to make sure they are accurate first!
Your goal for process improvement is substantial change. You want to reduce the costs and time involved by 25 to 50% or more. A faster process reduces inventory holding costs as well as labor hours, and may improve cash flow as well. Faster production can also be a competitive advantage.
Process Map Techniques
To improve your process, pay special attention to opportunities to reduce customization, handoffs, inspections, and approvals. These all introduce delay and overhead. To enable this type of examination, make sure your process map displays each of these time-wasters as they exist in your process today.
The first version of your process map will show the movement of materials and all the major steps of processing them, all the way through shipment. You will show decision points as diamonds with yes/no branches, leading to various alternative outcomes.
The second version of your process map will add notes to show how long each process step takes, how long production waits between steps, and what percentage of the jobs use each branch (such as rework after inspection). It is also a good idea to show the flow of paperwork generated by each step.
Process improvement is the route to substantial change in variable costs and long-term profit. It starts with a process map so you can see what might be changed. The next two articles will explain eleven techniques for improving your processes.
Have you ever done a process map? Did it help your analysis? What tips can you offer? Send your comments!
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), and a SCORE Mentor. He can be reached at 630-512-0406 or email@example.com. For information on the scope of Tom’s activities, see www.tom-gray.com. For more on SCORE services, see www.scorefoxvalley.org.