Everyone wants to “improve” but not everyone understands how to accomplish “improvement”.
Definition of improvement
: an instance of such improvement : something that enhances value or excellence
Every Serious Business Manager Wants To Excel
Why are some businesses more profitable than others?
Let’s take for example, two custom woodworking businesses that are awarded the exact same project for the same sales price.
It would be near certainty that the two businesses realize a different profit when the project is completed.
Since the sales price is equal, profitability will be determined by cost of labor, material and overhead.
Why does profit vary? What could be different between the two businesses that would make one more profitable than the other?
Both have good teams but only one will win the profit contest. What gives the winning advantage?
Material costs are the easiest to identify since material is physical and we have an invoice and receipt for the purchase. Although there may be an opportunity to negotiate better prices, it is safe to assume that both businesses have already done this and will have roughly the same material cost.
Overhead falls into two categories; fixed and variable. Fixed overhead includes costs such as rent, depreciation, insurance etc. Variable overhead fluctuates with the amount of business activity and includes the indirect labor, indirect materials such as manufacturing supplies, utilizes, material handling and depreciation on the manufacturing equipment and facilities. Some of this overhead is “manageable” and some falls into the “fixed” category. If a business has much higher overhead than competitors, they have a built-in disadvantage.
Direct labor includes all labor costs directly attributed to the production of the customer’s project or product.
Direct labor is the most “manageable” cost in a custom manufacturing or woodworking business. More on this soon.
Myths – Some would argue that a business that pays their employees more, would have a higher cost and therefore a lower profit. This is not necessarily true.
A business could pay lower than market wages and still be less profitable than their competitor who pays much higher wages.
Another would argue that it is a matter of everyone working hard. The harder we work, the better we will do. It’s true that hard work has rewards, but hard work that is not executed efficiently will result in lower profits.
It's "What People Do" That Matters
It all comes down to “What People Do”. How everyone spends their time. The more labor transactions required, the more time and money it cost.
From presale through final delivery it is “what” the people do that makes the difference between these two businesses. Every customer contact and every production step will impact the bottom line. Labor is invisible, everyone looks busy and it appears that they are all working hard. But are they working smart?
It is the job of management to identity bottlenecks and inefficiencies and implement process improvements.
How does management evaluate “what people do” and implement initiatives for improvement?
The business that measures “What people do” will have a dramatic advantage – here’s why.
Five Steps To Improve Profitability
Step #1 Measure
The first step is to make a commitment to measuring what is going on in the business.
How often has Peter Drucker been quoted – “If you can’t measure it, you can’t improve it”?
When it comes to evaluating labor utilization, measurements are necessary because they are objective and not an opinion.
Measurements establish the facts necessary to build action plans.
Step #2 Measure What Matters
Measurements have a purpose. They are intended to objectively evaluate significant process steps through the entire organization. It is important that these measurements capture the full range of activity. Think transactions. This should include indirect labor such as presale, order preparation, CAD, engineering, purchasing, project management and material handling as well as direct labor broken down by process steps.
Additionally, set up some metrics such as “sheets per hours through the CNC machine”, cabinets per hour through assembly department, cost per linear foot of cabinet etc. Track rework and warranty call backs. Be careful to avoid tracking too much detail, only track and measure the cost drivers that you can act on.
Step #3 Do It Continuously
Unless measurements are a continuous organic process the information will be inaccurate. You cannot take a “snapshot” measurement and expect that to represent anything near reality. People behave differently when they know they are being measured, they normally perform better. In fact, this is another reason to measure continuously. An effective measurement process needs to be an organic function that goes on continuously.
Step #4 Analyze What You Measured
Once you have measurements, analyze the information. You will need the right tools that will reveal labor costs and metrics broken down by the process level so that you will be able to identify areas of interest.
What is the labor utilization rate? Rework, cost per metric, cost per labor process? Establishing the baseline values may take several weeks.
And although the total cost of a job is very important, pay special attention to the process costs as this is where the improvements must take place. The total job cost consists of several contributors. If you can lower the cost of the process, the job cost will necessarily lower.
Step #5 Implement Improvement Initiatives
Identify the top few cost drivers with the most hours and costs and then implement improvement initiatives to the business process. evaluate the results and adjust accordingly. Once implemented you will have a continuous improvement process of measurement, analysis and action. A well-managed business is more likely to attract and retain quality employees who perform efficiently.,
- Commit to Measure
- Measure with Focus
- Measure Continuously
About the author
Chris Madore is the founder and technology director of Tractivity. Tractivity began as Time Track LLC in 1996 with Chris, Howard Steenwyk and his son “Buck” Steenwyk. Howard and Buck approached Chris to solve a problem they were having in their young sheet metal business. They could not understand why profits varied widely month-to-month and didn’t know what to do about it. Chris developed the first PDC (personal data collector) and software to allow their employees to report time against the jobs and labor activities they were doing. This device was later named a mobileTrac and was the main data collection technology used for Tractivity until 2005. Howard and Buck had tremendous success with their sheet metal business and decided to focus entirely on that business. Chris acquired their interest in the company which later became Tractivity.
Chris has kept the focus on providing software that will help businesses to improve through the process of measuring, evaluating and taking action. Working with customers over the past many years has provided a significant insight and understanding of what makes a business succeed and what to avoid. This experience helps to drive the direction of the Tractivity software as well as Tractivity coaching services.
Chris has been granted five US patents four of which include hand-held computer products and software. He lives in Texas, is married has two daughters and five grand-boys. He is an active volunteer teacher in the Texas department of criminal justice and his local church.