Performance for profit. March 2018
So, how’s 2018 going for you so far? Are you on track for the goals you set during the Christmas break? Hopefully you’re feeling in control, and the business is humming.
Companies only exist if they continue to make money, but business owners aren’t in business merely to exist. They should be achieving more – and the company should be able to provide this. Therefore, business owners need to keep their fingers on the pulse and their eyes on the $$.
But what should you measure, and how do you do this without micromanaging others?
The two most critical elements that make up costs and determine how much gross margin is made are time and materials. The great thing is that these can be absolutely under your control. But it’s important to ensure that your operations people are focused on their efficient use of time and correct use of material (whilst reducing waste).
You’ll have heard the expression, “What gets measured, gets managed”. This is true, but I recommend that business owners don’t manage everything themselves, but put in place simple, visual measures their teams can use to guide them towards higher performance, and that can be immediately recognised. Consider making a “traffic light dashboard”, so that it’s easy to see what’s in red, amber or green. Then ask the right questions to keep your team moving forward and improving.
• Measure downtime, find the overall percentage and by category. Then you can focus on the largest category that you want to reduce first. For companies which don’t manage this, the overall figure is often 20-25%. Getting it down to 10% will bring real gains and put you at the top of your field.
• Measure actual time to estimate, by task or work centre. This is easy for large projects. For small, repetitive jobs, measure the machine rate. Edgebanding and nesting are good examples of this. Measuring Pieces or lineal metres is better for edgebanding, and sheets or parts per hour is better for nesting. Think about how the variation in your job type affects throughput.
• If you have sales people /designers, how do you account for their time? In today’s modern factories it’s not uncommon for overhead staff to be around the same quantity as shopfloor. Their time should be added into your labour cost, to give a more accurate profitability measure.
There are many ways to capture the information, appropriate to the size of your business and complexity of jobs. Once you get a handle on how long things take and how much productive time you have available, you can:
a) Create a plan that is achievable for your business;
b) Offer your customers more reliability on their delivery times;
c) Calculate your hourly charge-out rates with more confidence – leading to improved margins;
d) Understand how much and what type of work produces your best, most profitable results.
• Ensure that the most appropriate materials are estimated and used. Create a process to capture specification from beginning to end.
• Check quantities used match estimate. Understand the variance, and feedback to others.
• If you have assumptions for waste percentage, carry out periodic checks to verify these.
Acknowledge what your customers are actually buying. Product is one thing, but they’re also paying for service and a great customer experience! Premium price businesses offer exceptional service, treat their customers well, anticipate their needs and go out of their way to accommodate them. Understand what’s important to your customers – and then sell that to them. Its not just about the product.
• Use all of the aforementioned information to do backcostings. Depending on your business, you might do this for every job, periodically, or on a sample of different job types. If the latter, be sure to do a large enough sample to make it relevant, and repeat the process frequently.
• Every month, get your key people together to review these figures and agree on actions to improve. Do the actions, review the results, focus on improving the process. Don’t stop!
Ian Featherstone is a business and leadership coach, and owner of Glass Half Full. He specialises in the construction industry, particularly the joinery and cabinetry sector. For more information please visit www.glasshalffull.co.nz