Profit Improvement – Simple Communication

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Pretty much every company wants to increase its profit, and most managers devote a large portion of their time to trying to increase revenues and margins, or reduce costs. As a financial manager and consultant, I have been involved in many profit improvement initiatives. Here are some examples – they are mostly from construction, retail and land development, but the concepts can be applied to any business.

Communication

Sometimes a simple conversation will solve your problems. This can be a natural process, or the result of an expensive and time-consuming structured organizational review. If you have a problem, talk about it.

A telephone call – The sales department of a homebuilder often selected lots for sale in such a manner that the engineering department had to return to the city with new plans for approval. This caused time delays for sales and frustration in the engineering department, and resulted in increased plan approval fees. A Six Sigma team approached the problem, creating wishbone charts, pareto charts and other analyses to identify the underlying problem, but could find no statistical pattern. Finally, the head of engineering telephoned the head of sales, and the problem was eliminated in five minutes.

A meeting – The buyers at a retail company weren’t getting all the information they needed from the accounting department, so they appointed a full-time administrator to track and report on outstanding orders and merchandise receipts. A meeting between the buyers and the accountants resulted in an automated report that solved all the buyers’ needs, and the administrative position was eliminated.

Bottlenecks – A land developer was experiencing chronic delays in processing grading permits. Business was booming, so every day represented delayed revenue and additional carrying costs on multi-million dollar developments. A Six Sigma team spent several weeks of process flow-charting and statistical analysis, only to learn that the manager in charge of grading applications was swamped, and had a long backlog. They added a part-time clerk, and the problem was solved. Asking a few simple questions much earlier would have been a lot easier.

Does your CFO encourage your operating team to communicate with each other?

Profit Improvement – Cost Reduction

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Pretty much every company wants to increase its profit, and most managers devote a large portion of their time to trying to increase revenues and margins, or reduce costs. As a financial manager and consultant, I have been involved in many profit improvement initiatives. Here are some examples – they are mostly from construction, retail and land development, but the concepts can be applied to any business.

COST REDUCTION

Reducing costs can be as simple as finding a new supplier, but sometimes a more detailed analysis or a global approach can be effective.

Looking at the details – A retailer’s payroll is typically its largest expense. At one company, the standing order was to maintain payroll at 10% of sales. This worked consistently, but when we started to look at customer traffic patterns, we saw that staffing was not being increased at peak times, or decreased during the slow hours of the morning or evening. A new staff planning system improved customer service and brought payroll under the 10% target.

Statistical analysis – A homebuilder had a problem with windows leaking during rainstorms. Nobody really knew why, but replacement was costly, and it was a serious customer satisfaction problem. We formed a Six Sigma task force to gather and analyze the data. We broke down the data by community, by subcontractor, by supervisor, by manufacturer and installer until a pattern became evident. After a few changes, leaking window problems were reduced by 60%.

Centralization – At another retailer, repairs and maintenance expenses were the responsibility of the local management, and no amount of threats or encouragement could stop costs from increasing. We centralized the function in the corporate office, and made low cost arrangements with regional contractors, reducing costs by over 30%.

Glaring opportunities – A land developer always paid for up-front infrastructure costs – roads, sewer, etc. – on its development projects. This had a huge impact on cash flow and ROI. I learned that most cities are willing to finance these costs with municipal bonds. It wasn’t a secret, but the company never took advantage of the opportunity. I set about becoming something of an expert on the subject, and initiated over $100 million of cost savings that went straight to the bottom line when the developed properties were sold.

Planning – At a homebuilder, we carefully reviewed the cost of every house, and construction (or even purchase of the land) would not be approved until we were certain that projected profits met our investment return guidelines. Marketing would sometimes change design specifications, but the purchasing managers were often the ones who would drop the cost per square foot by changing a material or redesigning a minor architectural detail. This was sometimes a painful process, but the result was a low cost, high value product.

Does your CFO encourage your management team to look at cost reduction in a comprehensive way?