substantial change

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.

 

“Big Picture” Techniques for Process Improvement

by Tom Gray | on Jan 12, 2012 |  Comments

An earlier article (see Improving Profits by Process Improvement) described how to map out a process for a service business or a production environment. Assuming you have done that, you are ready for process improvement — examining today’s process for opportunities to simplify, improving profits substantially. This article describes some techniques for doing so.

First, consider the process as a whole. How can you make it simpler?

Limit Options: Customization and variety introduce complexity. They create multiple branches in the flow. Consider how often customers choose a particular variation. If the answer is seldom, consider withdrawing that option. What do competitors offer? Is your variety crucial to your competitive advantage, or is it simply a legacy not considered valuable by most customers?

Self-Perform: Are there steps in your process that could be done by the customer himself when they order, or after receiving your product? This is one way to simplify your process, especially in a service business. Examples are IKEA and call center voice menus where callers direct themselves to the correct group of agents.

Re-sequence: Are materials being moved significant distances in your facility between steps? This time and effort is waste, because it does not add value for the customer. How could you make this simpler?

Hand-offs: When work moves from one work group to another, the new work group does not attend to it immediately. The work joins a queue, and the time waiting in queue is waste. What if you created a “work cell” able to perform more than one set of tasks, so that a handoff is avoided?

Sub-assembly: Is there one part of one step in the process that could be done independently of the rest, on the side, so that its work product could be introduced in semi-complete form when and where it is needed? This sub-assembly technique works especially well when these tasks use special skills or equipment, which need not be located in the “main line” where the finished product is assembled. Many companies use work cells to build sub-assemblies.

Computer Support: Consider your paperwork flow. Rather than sending paperwork to a clerical group that enters data, you could have data entered by the people doing the work at the time they do it. This saves time, avoids transcription errors, and eliminates the need for the clerical group to seek clarification of illegible or missing entries.Immediate data entry also displays current progress to those working on subsequent steps.

Is your computer system set up to give you the historical data you need to see trends in the business so you can plan? If not, find a way to capture what you need for the future when it is happening in production.

Use these techniques to redesign the process as a whole, with the goal being substantial change in profit. The next article explains a more techniques to improve profits by improving the longest steps within your processes.

Do you have a success story from using these techniques? What has worked for you? 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.