This section contains tips and ideas for more effective business processes.
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Benchmarking best practice | Designing for profit | Does your business pass the risk test? | Getting a better deal from suppliers | Is outsourcing the best strategy? | Making the most of your company meetings | Should you buy in or manufactur materials? | Stock answers | Ten reasons to benchmark your business |
When cutting costs is counterproductive
At AVASK we can provide businesses with assistance and advice on a wide range of business issues. The following is a guide to best practice benchmarking.
A profit-driven organisation must be committed to continuous improvement and always strive to be the best in its field. One way to achieve this is through best practice benchmarking.
In essence, benchmarking entails:
- Establishing standards that will help you achieve the best relationships with your customers and the best results on your bottom line
- Observing how others, either outside your organisation or elsewhere within it, attain these standards
- Applying the knowledge gained to achieving and maintaining those standards yourself
Benchmarking is not about copying others' successes but about learning from them. If you want your firm to be a world leader you need to be constantly researching the best practices and adapting them to your own situation.
Good product design is key to the processes of innovation and continuous improvement and therefore at the very heart of a business' profitability.
Smart design gives you a competitive edge, keeps you in touch with the marketplace, and helps you to maximise your profitability.
Poor design may narrow your margins, cause you to lose touch with the marketplace, and ruin your competitive edge.
There are two important principles of smart design:
1. Meet the needs of the marketplace
2. Meet the needs of the production process
Design for the market or market the design?
It is unfortunately all too common for designers to work in isolation, creating products that may be innovative, ingenious, and even practical, but which do not meet clearly identified needs in the marketplace.
The result is that extra energy has to be put into marketing the design - and in some cases actually creating a market for it. Valuable funds that could be used in future product development are used up trying to generate sales of a product that is not necessarily what the marketplace wants.
Smart marketing involves carefully identifying what the end user wants and creating a product that meets that need. It means creating products people want, rather than trying to persuade people to want products you have created.
Marketing is not a short-term activity designed to boost sales, but a long-term investment designed to increase market share by bringing the right products to market at the right time.
It is essential, therefore, that the design process is market driven, with the designer focused on creating products that marketing identifies the customer wants.
Optimise design for production
It is not uncommon for the production of a new product to be held up at the last minute for a design modification. Not only are such delays costly and a considerable drain on profitability, they are also an indication of lack of co-ordination between design and production.
The design of a product affects the costs of among other things:
- Plant and equipment
It is important that from the outset the design process takes production and post-production resources into account and that the design is optimised for production purposes - keeping costs down and production speed up.
As early as possible in the design stage it is helpful to bring together the design and production teams to draw up design specifications that are optimised in terms of production resources, costs, and so on.
The earlier production engineers are able to begin preparatory work the better. This will help to reduce the time from origination to production and thus improve all round profitability.
Most seasoned business leaders will testify to the wisdom of Harold Macmillan, who when asked what he feared the most famously replied 'Events, dear boy, events!' How often do we hear of an unexpected turn of events derailing a business plan or damaging a company's profitability? Do you know what potential risks threaten your business? Have you taken adequate precautions to protect your business against the 'unexpected'?
Take the risk test below to find out. Each 'No' answer indicates a potential risk for which you are unprepared:
These are just a few examples of the kinds of risk that might threaten a business. If you answered no to 2 or more of these questions, your business could be at risk.
The truth is, of course, that risks should not be unexpected. Although none of us can tell the future, we can all anticipate potential risks and take appropriate precautions.
In our experience, there are four common scenarios in which businesses unnecessarily expose themselves to risks:
- Inadequate planning - especially where insufficient attention is given to future funding requirements, staffing needs, etc
- False economy - where short-term savings in time or expenditure leave the business exposed in the longer term
- Rapid growth - where the sheer pace of growth obscures danger signals until it is too late
- Long-term success - where complacency gives rise to the assumption that the factors that have led to success in the past will continue to do so in the future
To avoid these, we recommend all our clients come in for a regular risk assessment and advice on the most appropriate risk management policies to implement.
Are you reluctant to discuss your successes and failures with your suppliers? Do you worry that if they knew the facts they might change their perception of you and offer less favourable terms?
The truth is that most suppliers would prefer you to be frank with them and would be happy to work with you to adjust orders and deliveries accordingly. After all, they want your continued business and that depends not upon your buying more but upon your buying smarter.
Sit down with them as 'partners' and try to work out an arrangement that benefits both parties. Try to identify:
- Products you can order in larger volumes in exchange for volume discounts
- Orders you can discontinue because you can buy more cheaply elsewhere
- Ways to revise delivery schedules to reduce your stock keeping costs
- Opportunities to share marketing or promotional costs
- Ways you can exchange information to improve efficiency at both ends
When it comes to building a market and servicing it, you and your suppliers are on the same side, so build a relationship with them that reflects that.
In a period of economic difficulty or uncertainty, remember that suppliers might raise their prices, so try to negotiate a long-term discount with them.
Outsourcing non-core operations has become very popular in recent years. Businesses now routinely outsource processes from cleaning to customer enquiries.
Other common areas for outsourcing include: payroll functions; human resources (insurance, recruitment etc); marketing; information and IT systems; and delivery.
There are obvious potential benefits:
- Management is free to concentrate on the core business
- The use of resources, including human resources, is streamlined and more focused
- Cost savings are achieved through economies of scale
- Both risks and rewards are shared
- Quality of service benefits from specialisation
- Budgeting costs becomes more reliable in these areas because they are tied into contractual agreements.
But there are also disadvantages to outsourcing:
- Your customers do not draw a distinction between the core services that you provide and the outsourced services supplied by others, so any shortcomings on the part of the contractors reflect on you.
- Some companies have also experienced dissent and demotivation within their own ranks as a result of outsourcing functions such as IT to contractors who do not share the same corporate culture and so do not treat employees in the way they expect to be treated.
A question of balance
As with most things outsourcing is a question of balance. For most businesses there will always be operations they can safely put in the hands of others and achieve both improved efficiency and cost savings.
But equally there will also be operations over which they will want to retain control. The art of good management is to know which is which! We can help you make the right decisions. Contact us today.
Are your board or company meetings as effective as you would like?
Some of these strategies may sound obvious, but it is amazing how easy it is to lose sight of them. If a company meeting is to be effective, it is essential to encourage everyone to offer their opinions without allowing the discussion to disintegrate into a free-for-all; and to make sure that real results and strong decisions are achieved.
Here are eleven tried and tested strategies for getting the most out of your meetings and your board or company members:
- Be prepared. Distribute materials a few days in advance so members have time to review them, but not enough time to put them aside
- Be disciplined about time. Ensure that you start and finish according to schedule
- Prepare an agenda. List the most important points first, and allot time to each - with some extra time for unplanned discussions
- Prioritise items. Identify items that need action by the board, such as approving committee recommendations or developing a policy or proposal. Also identify items included just so those attending can be kept "in the loop"
- Decide powers of authority. Make it clear how a meeting is to be run. The chair must be sufficiently strong to impose order, but does he or she have the power to guillotine or veto?
- Encourage argument. Allow open debate, but encourage consensus decisions
- Be democratic. Involve everyone by encouraging quieter members to present their views and not letting more 'enthusiastic' members dominate the discussion
- Tackle the important issues. Develop an annual calendar that includes important items that need to come up for regular discussion - development, budgets, elections, and so on
- Use a flipchart. Make notes of important points to discuss and good ideas - and display them where everyone can see. This helps people to focus
- Keep your meetings interesting. Add variety by inviting clients or suppliers to make a presentation, show a video of your proposed marketing programme or a tour of the website of one of your competitors that does something exceptionally well
- Be comfortable. Provide refreshments and schedule a half-time break.
Sometimes, manufacturers have difficulty in deciding whether to manufacture materials for a finished product in-house or to buy them in from outside. Although the principal consideration is financial, there are also other factors that need to be weighed.
The following checklist will help you focus on the most important factors:
If not managed efficiently, stock can be one of the biggest drains on profitability for a business.
Holding stock incurs costs in:
Above all, it ties up cash.
In an ideal world, every business would have no stock at all but would operate entirely on a well-tuned just-in-time (JIT) system with materials and parts arriving in the order and quantities in which they are needed for the manufacturing or assembly process.
But we do not live in an ideal world, and many small and medium-sized businesses do not have the resources or the sophistication to implement JIT. So if you must carry stock you need to be constantly on the lookout for ways to minimise the haemorrhaging it can cause to your hard-earned profits.
Reducing stock costs
Here are some suggestions for reducing stock costs:
- Identify those materials that contribute the least to product variety and differentiation - that is, those that are commonly used in numerous different products - and use them as widely as possible.
- Check the quality and accuracy of goods received from suppliers. If you only spot the poor quality at the end of the process, it is too late...
- …However, if you work closely with your suppliers and build up a relationship of trust, you may be able to cut down on the time spent checking the materials that come in.
- Wherever possible, reduce the lead time for ordering materials, but take care not to unwittingly create hold-ups in production
- Constantly review sales trends and cross-reference them with stock requirements.
- Make sure delivery schedules are neatly choreographed with production - try to avoid holding any more finished products than you really have to.
- Try to negotiate discounts on virtually everything that you buy and then negotiate terms for payments and interest rates.
Finally, a note of caution. Although it is generally best to keep stock as low as possible to avoid tying up capital, this might not always be the case if there are really significant bulk discounts available. Also, if you decide to make changes to your stock levels or procedures, be sure to do so within the context of the business as a whole: never make stock decisions in isolation.
More and more businesses are discovering the benefits of benchmarking and of developing a plan of best practice.
Is it something that your business could consider?
What is benchmarking?
In a nutshell, benchmarking involves measuring the performance of one's business against that of others in similar markets. It has been described as "the practice of being humble enough to admit that someone else is better at something, and wise enough to try and learn how to match and even surpass them at it."
A good benchmarking review will allow you to determine how well each aspect of your business is faring, discover areas where you need to improve, and develop a plan for achieving those improvements.
Before you can decide where you are going, you need to know where you are now - and benchmarking can help you do this.
The Government-funded Small Business Service cites ten key reasons for implementing a benchmarking process for small businesses:
- Improving productivity: businesses following action plans can expect productivity gains of up to 40% with a 10% increase relatively easy to achieve
- Beating the competition: learning about adaptability and change is a benchmarking essential
- Addressing growth issues: learn how to develop the right products and services at the correct pace
- Customised to fit all: businesses of all sizes can benefit from the generic principles of benchmarking
- A holistic approach: it is both qualitative and quantitative, ensuring more accuracy in developing a whole picture of your business.
- Opens minds to new opportunities: whilst the results can make uncomfortable reading, the process usually raises new challenges for businesses
- High quality of data: it allows direct statistical comparisons to be made with competitors
- Helps businesses attract funding: in some areas of the UK, it has been used as part of the bidding process for grant aid
- Leads directly to an action plan: Rather than simply highlight problem areas, it undertakes a strong review of turnover and profitability
- Maintain client relationships: by being an ongoing process, benchmarking keeps clients in contact with advisers over the longer term.
When business owners begin to think about developing profit improvement strategies, we often find they are expecting to embark on what is principally a cost saving exercise.
But there is a lot more to profit improvement than simply cutting costs. Indeed, there is a danger of cost cutting strategies becoming counterproductive if too much reliance is placed on them.
In our experience, once businesses have identified and realised major cost savings, the law of diminishing returns dictates that any further attempts to make savings will be less effective. If too much emphasis is placed on cost reduction there is a risk of cutting into productive capacity, and even inadvertently increasing costs.
Moreover, a sustained cost-cutting exercise can damage morale and create an atmosphere of pessimism. After all, you cannot grow by cutting back.
But perhaps the greatest danger of overemphasising cost cutting is developing tunnel vision and missing out on more creative, and often much more effective, strategies for improving profitability.
Profit improvement is a process that ranges across every aspect of your business. And often the most successful strategies develop from the most unlikely places. Profit improvement is as much, if not more, about increasing revenue, as it is about reducing costs.
Focus on profitability, not just cost
This is not to say that cost reduction has no part to play in profit improvement strategies. On the contrary, when included in a comprehensive and creative programme it can result in considerable improvements on the bottom line.
However, the key to successful profit improvement strategies is to ask not how much does a particular process cost, but how profitable is it?