profit improvement

Improve Profits by Process Improvement

by Tom Gray | on Jan 13, 2012 |  Comments

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 tgray@tom-gray.com. For information on the scope of Tom’s activities, see www.tom-gray.com. For more on SCORE services, see www.scorefoxvalley.org.

 

“Step Analysis” Techniques for Process Improvement

by Tom Gray | on Jan 11, 2012 |  Comments

After considering process improvement opportunities by simplifying the process as a whole (see Techniques for Process Improvement), examine each of the longest steps in the process map to see how they can be improved. Remember, you are seeking substantial change in costs and speed. The result will be a higher profit margin. Consider equipment, methods, measurement, and people management.

Analyze the Longest Process Steps

Better Equipment: Is one machine a bottleneck, with work queued up in front of it and idle resources waiting for work beyond it? If so, you must find a way to optimize this step. If you have the capital, there may be faster machines, or you may buy a second machine. If you lack the capital or do not wish to take on more risk, there are still techniques available.

Are there any jobs that use this machine but need not do so? Can some work using this machine be outsourced? Inspect any parts before they use this machine, so you are not wasting machine time on defective units.

Is the machine maintained outside of production hours? It should always be operating despite breaks and lunches. Use small lot sizes to retain flexibility for high priority jobs. Find a way to reduce setup time for this machine to a minimum, because it cannot be processing during setup.

More Efficient Processing Methods: Remove unnecessary steps. Defer or remove steps that add value for only a small percentage of the units. Avoid multiple inspections – workers at each step should inspect their own work to minimize rework. In addition, work cells and subassemblies can be used to re-assign work so it can be done more efficiently.

Fail-safe Methods: Design tools and supply kits so mistakes cannot be made, similar to “edit-checks” for valid data entry to software.  Examples are tabs on jigs, or parts that can only be fitted the correct way, or supply kits with a gaping empty spot for each necessary part. The Japanese call this “poka-yoke,” with a meaning something like “idiot-proof.”

People Management: Get out of your office and observe your people regularly to make sure they actually know how to do each task correctly, and coach them on the right methods. Provide job aids showing the proper sequence with photos of right way/wrong way.

Provide incentives for quantity balanced with quality performance. Make sure overtime to do rework does not become an incentive to perform poorly on the first pass. Provide a clear visual signal to identify priority jobs, to be used by workers who need help to finish on time.

Measurements with Standards: For each work operation, establish quantity, quality, and time standards. If you don’t make your expectations known, how can the staff meet them? Monitor the results. When you see a negative trend, personally observe and coach the worker on how to meet standards. Reward those  who consistently exceed quantity standards with good quality.

Efficient processes generate profits. The first set of techniques addresses the layout or design of the process as a whole. Then you examine individual process steps, where the levers for change all start with M: materials, machinery, methods, measurement, and management of the people doing the work.

Have some of these techniques worked for you? Share your success stories in 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 tgray@tom-gray.com. For information on the scope of Tom’s activities, see www.tom-gray.com. For more on SCORE services, see www.scorefoxvalley.org.