Surviving and Prospering in Recession

MPROVING PRODUCTIVITY AND LOWERING COSTS

24 Jul 2009 Leave a Comment

by richrover in Uncategorized Tags: entrepreneurship, improve productivity, lower costs, process flow diagramming, Product P&L, project management

IMPROVING PRODUCTIVITY AND LOWERING COSTS
A THREE STEP PROCESS TO
BEATING THE RECESSION AND PREPARING FOR THE UPTURN
By Richard Walton
July, 2009

We hear a lot these days about the double whammy of upward pressure on costs coupled with downward pressure on prices. It should be just the opposite, and it can be if the three step process we outline here is followed.

STEP 1, THE BASICS
COMPARE STANDARD COSTS TO ACTUAL RESULTS

The first step is a very basic look at costs, using what we have developed as a comparison of the financial results with a Product Profit and Loss Statement. The PP&L is compiled from the standard cost system and applies the standard costs to all products sold in the period covered by the regular Profit and Loss Statement. The two statements are then compared with the objective of using the standard costs (and selling prices) as what should have happened, and the actual results account for what did happen. If the actual volume for the period was lower than it should have been, then we have reason to believe that prices were reduced below standard. If the costs are higher than standard, this indicates either inaccuracies in cost computations, or inefficiency in the production process.

We then evaluate each individual order for differences both revenue earned and costs incurred. Using this bottom up approach, we can pinpoint products and customers where we are either making or losing money. Costs may need to be re calculated and prices adjusted accordingly. Products may need to be eliminated from the line. Production efficiency may need to be improved. Whatever needs to be done should be done to improve the relationship of actual results to standard costs, assuming of course that standard costs, and related breakeven points show that for a given level of volume, the firm will operate profitably.

STEP 2, THE INTERMEDIATE EFFORT
IMPROVE PRODUCTIVITY VIA PROCESS FLOW DIAGRAMMING

The second step is to view the entire process system, rather than individual products and services. The system includes marketing programs, sales solicitation, customer relationship management, customer service representative operations, inquiry generation and response, cost estimation, customer price quotations, order booking, materials control, plant staffing, production scheduling, quality control, logistics, shipping, billing, and collection processes, among others. We need to be effective in all of these operations, and process flow diagramming, that is developing a picture of how the processes work and interact is a starting point in improving operations by lowering costs and increasing output. Remember that it is not through increasing prices, particularly in a recession that profits are made. It is through lowering costs via productivity improvement, and increasing volume by increasing throughput.

STEP 3, THE ADVANCED PROCESS
CAPITAL EXPENDITURES, ACQUISITIONS, ENTREPRENEURSHIP

At this level we will begin to determine the future design of the firm, which assumes that we are operating profitably, and enjoying high growth rates and increasing market share. Capital expenditures must be considered as a means of stimulating further growth. At this point we should be gathering significant market intelligence, and preparing for major changes in both products and methods of production. This period may be called the great leap into the future, and it requires the highest level of talent and commitment from all concerned to successfully develop and implement plans. It is actually the process of organizational change that is in play at this stage. A key managerial tool at this stage of the process is Project Management, which will specify the goals, the timelines, the tasks, the budget, and the individuals who are responsible at each step of the way. Any major effort undertaken without this degree of control would be unlikely to have a successful outcome.

Changing markets and processes may require investments not only in new equipment but in companies as well either through merger of acquisition. This is a particularly important area to investigate in recessionary times, simply because other firms may be more vulnerable and therefore more open to being acquired. This period also requires a high degree of entrepreneurship in the structuring and operations of new businesses. It is a time for creativity and innovation, and while it is filled with potential risk, it is equally a time of great opportunity.

Small businesses particularly need to establish a method of standing above the day to day activity in order to view a changing landscape that both creates and destroys business value. Operating in the future, rather than in the past or even the present, will be the hallmark of success in this environment.

SUMMARY

We have presented here a basic, intermediate and advanced process of profit building theory and practice. At the basic level, we need to be in control of our costs and be able to predict and attain goals and objectives as well as operate profitably with good cost control. At the intermediate level, we are taking major steps to improve our productivity and throughput, in other words we are building a growing and profitable organization. We are building cost improvements through BPR and TQM, and improving throughput via systems management and Process Flow diagramming. Finally, at the advanced level, we are building the future organization via continuous improvement coupled with capital expenditures, acquisitions, and high level entrepreneurship. At this point, the landscape is wholly new and different, and the organization must be both capable of envisioning and implementing effective change processes.