Trimming the Red Ink

When the economy falls off a cliff like it did in September 2008, is your business going to survive or even thrive?

Most companies reacted to the downturn by cutting the usual costs: training, travel, raises, bonuses, headcount and 401(k) matching contributions. The bad news is these kinds of cuts also put employees in a funk that crushes productivity by one-third or more.

Some companies are cutting corners on quality, but customers are even more savvy in a recession. These shortcuts may save a few dollars now, but ultimately they kill the cash cow because your customers will start shopping around. So how do you cut the red ink without cutting corners or killing the cash cow?

Fortunately, there are simple things you can do right now to cut the red ink, build customer loyalty and recession-proof your business. And, since employees may not be as busy as they used to be, now is the perfect time to simplify, streamline and optimize your business.

Step 1: Spring Cleaning
Any workplace collects clutter: unused forms, materials, equipment, etc. Borrowing from the principles of Lean manufacturing, the first step entails the five S’s: sort, straighten, shine, standardize and sustain the workplace. Go through every nook and cranny and sell or throw out anything that you no longer use or need, because it just takes up space and wastes time and energy. Then organize and label everything. Then put a procedure in place to keep it clean and tidy. Even computer hard drives and servers can benefit from an occasional purge.

Inventory is Evil
Evaluate the levels of raw and finished goods inventory maintains. Do you have a warehouse of unused raw materials? Do you have another warehouse full of finished goods? How much does it cost to manage this inventory? How can you redesign your inventory system to minimize raw materials and redesign your production systems to minimize finished goods?

Step 2: The Fast Eat the Slow
Spring cleaning will start to give you some idea about the existing workflow. Businesses grow and expand organically, but rarely in an organized fashion. A process that started simple may have become wildly complex, slow and error-prone. The gaps between steps in the process are killing productivity and creating too many opportunities for mistakes. The next step is to streamline the workflow.

The 3-57 Rule
Employees work on the product or service for only three minutes out of every hour of elapsed time. The product or service (and customer) are waiting for something to happen for the other 57 minutes. Most people don’t believe this until they map the workflow and put times on each activity and the time between activities. Ninety-five percent of all delay is in the gaps between processing steps. Most companies fail because they try to make their employees faster; the secret is to make your product faster.

The 15-2-20 Rule
Every 15-minute reduction in delay will double productivity and increase profit margins by 20% according to Stauk and Hout, authors of “Competing Against Time.” By redesigning the workflow to eliminate delays, it’s not unusual to reduce total time by 75% or more. Use Post-it notes to diagram the process; put times on every activity and gap; then redesign the process to minimize delays. It’s that easy.

Simplifying and streamlining the workflow can be done quickly with the wisdom of employees, many of whom have been waiting for an opportunity to tune up the flow.

Step 3: Optimize
Do you ever stop and check your order before leaving a fast food drive-through? Why? Experience has taught us that restaurants make too many mistakes and we don’t want to have to drive back. We have all become an unpaid inspector in the fast food company’s workflow, just as your customers have become an unpaid inspector in yours.

What is the cost of billing adjustments, discounts, rework, repeat repairs and so on? What are the return and warrantee costs? How often does a service need to be repeated to satisfy a customer? Probably too often. In most companies, one out of three employees is engaged in the “fix-it factory,” correcting mistakes made by the other two. But don’t blame the people, blame the process—that’s what let employees make mistakes.

Once you’ve simplified and streamlined the workflow, the next step is to reduce the primary causes of mistakes, errors and defects in the product or service.

The 4-50 Rule
While most people mistakenly believe that errors are evenly distributed over the business like butter on bread, less than 4% of the business is causing more than 50% of mistakes, errors, defects, rework, and lost profit. The only way to find and fix these process problems is to start counting and categorizing the mistakes.

First, start counting every mistake, error, glitch or defect. Then categorize each mistake and give it a label. Where did it occur? Was the error in ordering, purchasing, billing, fulfilling, or paying? Did it occur in a certain location, machine, plant or shift?

Then summarize the mistakes. A short period of data collection will start to pinpoint the most error-prone processes, steps, machines, or whatever. Then ask “why?” The most common wrong answers to these questions are: the people aren’t trained or we don’t have enough people, time or money. You don’t need more people, training, time or money. You need a better process.

Redesign the process so that it’s impossible, even for an untrained employee, to make the mistake. Redesign the product so that it’s impossible to put it together incorrectly. Redesign the service so that employees cannot miss a step or do one twice. It takes more creativity and thought to figure out how to mistake-proof your process, but it will prevent problems forever. It will prevent customer calls to the service desk. It will prevent the loss of customers to competitors.

Step 4: Repeat
The good news is you can start today to simplify, streamline and optimize your business to make it recession proof. The bad news is you will never be done. Products change. Services change. Markets change. Technology changes. There will always be something to simplify, streamline or optimize.

The economy will recover, but will you survive until then? These methods are easy to apply to start trimming the red ink without cutting corners or killing the cash cow. When the next downturn comes, as they always do, will you be recession proof?

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