Increase profits from reducing waste
One of the key challenges that is faced at the moment is the increase in costs and thus squeezing of profit margins.
Despite predictions it would fall, inflation is still very high. We’ve seen the Bank of England increasing interest rates several times, now at the highest it’s been since 2008! The overall aim of this huge increase is to encourage people to spend less and save more.
One way you can look to improve profit margins is to consider your costs and how you can not only cut out unnecessary spending, but we also want to assess the waste in your business. Waste is any activity or outcome that doesn’t link to the value of a customer.
If you eliminated wasteful processes in your business, how much could you save? It is estimated that most businesses waste the equivalent of 20% – 30% of their turnover each year and if these wasteful acts and costs were removed, it could be converted into greater profit.
So how do you identify waste? A model often used in management is the seven wastes audit.
Overproduction and overservicing
If you produce more than what is needed, or too much before your customer needs it. This looks at the ‘just in case’ instead of ‘just in time’ method that is wasteful and in a service business this could be demonstrated by producing too many reports, having too many fee earners on once piece of work or in a manufacturing business it could be producing products that you have no guarantee of selling.
This occurs when time isn’t being used efficiently. Much of the process is being held up waiting for the next operation. For example, in a production business where there are long lead times, production takes too long or distances between each of the processes is too far. Whilst this may contradict over production, waiting times should be reduced to make processes more efficient. Waiting also occurs in service businesses – waiting for payments, waiting for information etc.
Customers do not want to pay for transportation between processes and this is a clear source of a non-value cost.
Also, every transport carries with it the risk that damage or loss will occur, or the quality will deteriorate. For example, a manufacturing business needs to choose carefully which couriers they use. In a service business an example of this is travelling to clients when meetings can now be carried out remotely. Or using the right type of communication – instead of spending time writing a long email, why not pick up the phone for a chat to the person instead.
Are you using the right tools, person, or process for the job, in other words do you use a sledgehammer to crack a nut? Also are you thinking and acting for others, doing someone else’s work, or doing tasks that could be done by someone more junior to free up more of your more valuable time.
Sometimes doing less helps you to do more and reducing work in progress allows problems to surface which can be dealt with more effectively. If you don’t deal with problems as they arise, then eventually you will hit a stop. In a service business this could be seen as ‘idle time’ or irregular billing. It can also be seen as stock piling items for a rainy day or buying items because they are a ‘bargain’ or on sale as opposed to if you need them.
In any business this is the number of physical movements which need to be made to complete a task which could be rectified with a review of the layout of a building or processes, machinery, equipment etc to reduce movement. It could also be the location of the business, is it easy for employees to get to and is it close to your key customers and markets. Can you change the layout of the office? Does it take a long time to locate and pick the stock ready to send out?
Defects and mistakes
Defects and mistakes cost money and have a direct impact on the bottom line. They can be physical internal product defects which take time and money to rectify or dispose of or they could be external defects which might be delivered directly to the customer, and they then incur the cost of rectifying the issue. Mistakes such as misread orders, not checking for errors, failure to meet deadlines and obligations and ineffective or insufficient training can also contribute to this.
You could argue unused creativity should be added to this list; however, it is likely to lead to one of the seven points above. It is therefore always worth considering how you better use creativity in your business.
Once you have a list of key issues you can estimate the cost of them to your business. From this you can prioritise tackling the biggest waste. You should then appoint people on the team to look at how they can implement change needed to eliminate the waste, the timeframe over which it can be done and what KPI’s will be used to measure the cost. This should be reflected in your updated business plan with the actions recorded and who is responsible for them to keep people accountable.
You should then repeat these five steps process every 6-12 months to ensure it doesn’t happen again.
If you would like advice on ways to make your business more profitable, get in touch with our team today.
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