From Break Even to Profitability

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Do you pay attention to all your businesses indicators or just the red ones and those showing a negative trend? If you do then there is a possibility you are missing the boat on a number of things that are just maintaining the status quo and are going unnoticed because they don't get to the red zone of the C-suite visibility, and they might be worth a percent point or more on your profit.

 

Maintaining the status quo is the comfort zone for many, with the excuse of not losing money or not “costing”. Many operations, business units, areas, branches and entire manufacturing plants operate believing that this is right and there is no reason for bringing the business to a profit.

 

Keeping an operation to the level of performance where profits are not being generated might seem as an ok situation for many but certainly not in the best interest of shareholders. A number of this operations have been designed to be this way or the strategy called for such nuance, nonetheless it should be an unacceptable situation, I still have not met anybody who wants no money back from his investments and is willing to stay this way for years.

 

Waste generation is one of the biggest offenders, it is not always obvious and sometimes is thought to be inevitable or an inherent part of the process, if you believe that is the case I suggest you look at how things are being done from the end to the beginning, that simple exercise usually will raise questions and tell you what waste maybe shouldn’t be there; For example , are you buying at your specifications or just taking the specs that the vendor has standardized maybe for other clients? If this is the case have you had this conversation to make necessary corrections? Are you carrying excessive inventory that keeps growing slowly and consistently? Is any of that driven by packing sizes way above your needs leaving product that deteriorate over time and become a nonconformity that just stays there and every so often gets written off? If this is the case you have to clearly define your requirements and have the discussion with your vendors that for the most part will work with you to make your operation better, pay particular attention when you are getting a discount for taking what they sell you instead of what you have defined as your needs, in essence what this means is that they are selling you a problem at a discounted rate.
A medical devices manufacturing plant had a production line that was working at breakeven because of these situations that were corrected in a relatively short period of time.

 

If you are a service provider your biggest issue might very well be in the time you take to process customers’ needs and requirements, maintaining the right resources at the right times is key, nonetheless you don't want to be staffed for your peak periods all the time in any step of the process, remember you want to keep the flow at a pace that make your customers happy while keeping it highly efficient so you can make a profit. Definition of requirements is a key element in maintaining an efficient operation, creativity in how to make it happen might require you to view your own business from a different perspective, not the same solutions apply to everyone so do make an effort in identifying good practices from different industries.
A bank in the Caribbean had a number of branches that attracted a lot of the traffic they needed but since it all came at the end of the month staffing costs were killing the profitability of these branches so having tagged these branches as a necessary loss made sense to the executive team, when a closer look was taken as of the reasons why the traffic was so high at the end of the month it turned out it was being driven by a series of back office functions mostly related to capacity, when resources were reallocated from branches to back office traffic got normalized and branches became as profitable as the rest.  

 

Re-handling of materials is one of those things that most of us take for granted as it is easy to see but difficult to get rid of, things get moved around multiple times for all sort of good reasons sometimes using heavy and expensive equipment or specialized and scarce manpower, other steps in the process might get too much or not enough of what they need on time as resources are being diverted. A copper mining operation had a re-handling process that was created several years back due to equipment capacity and pit design, when conditions changed the process stayed the same and a third party was in charge of executing this daily activity, there was a line item in the budget for this and over two million dollars a year were being paid for this unnecessary activity.

 

When temporary becomes the norm then it becomes invisible; A turbine manufacturer decided that due to an atypical weather condition an additional step in the process had to be put in place to ensure compliance to customers’ orders, this was meant to be a six months exercise, two years later the additional step in the process was still there, everyone had become accustomed to the additional step as it had become part of the overall process and no one really had been made accountable for eliminating the additional cost nor there was an integrated system or routines in place that allowed for the identification of such situations, when corrections were made the particular division was able to increase its margin enough to become a profit center.

    

Using more expensive parts or materials with different specifications also makes its way into everyday routines very easily under the argument that on time delivery is critical, which is absolutely right, what should not be allowed is for that behavior to become an acceptable excuse, while on time delivery will keep your customers happy delivering goods above the costing standards will damage your business. A small concrete structures plant was being maintained with its losses only because of tradition and because it was part of the global product portfolio, no sales efforts were applied but still some large orders came in and the larger the order the bigger the loss, the root cause for the loses was a spirit of over delivering to the client not taking into consideration unit costs, since it had become the norm that the business would lose money then the habit of utilizing more expensive materials than what standards called for was acceptable, once the root cause was identified and corrections were in place Headquarters decided that the product line deserved a dedicated sales force as margins were now in line with the rest of the business units.  

 

It is always a good advice to have these conversations on the regular basis, maybe pushed by an internal communications system that provides you with feedback from all levels within the organization so you can keep challenging yourself and your teams so you don’t become content with the status quo and maybe bring some processes from breakeven to profitability.

 

By: Cristopher Del Angel, CEO at To The Top Management Consulting