As we continue through my series on the 5 common problems I can help business owners to address, we come to a topic that is a repeated aspiration for many leaders but quite often can be really hard to attain or deliver, and that is maximizing Operation Efficiencies.
As a reminder from my previous articles, the more I reflect on my own career and the more clients I work with, I realize that irrespective of, organizational size, the maturity of it, its culture and whether its privately or publicly owned, the challenges that business owners and leaders face are actually quite common.
The complexity of the challenge and the answer too it may well vary, but the problems themselves really are the same.
I’ve grouped these problems together into 5 headings,
Growth & Scaling
Now having touched on Growth & Scaling, Sales, and Employee Engagement I want to discuss the Operational element that is so important to a businesses ability to scale and to service increased sales.
What is Operational Efficiency?
The official definition of operational efficiency is the measurement of resource allocation. It is defined by the ratio of output gained from a business and the input to run a business operation.
It can even be measured by using the formula OE = operating expenses / total revenue
For me though there is a much simpler definition, and that is quite simply;
“only doing things that your customer is prepared to pay you for!”
Unless its for legal, financial, health & safety or environmental compliance, any business should only be doing the things that are value adding activities. By this I mean any process or operation that shapes or transforms a product or service into a final form that the customer will pay for.
~ A customer is not prepared to pay you for quality defects resulting in scrap, re-work or overtime to correct mistakes.
~ A customer is prepared to pay for R&D if they get an enhanced product/service or added benefit (this is why we pay premium prices for Apple product)
~ A customer is not prepared to pay for additional delivery charges when they have received incorrect or damaged goods
~ A customer is prepared to pay a premium to have a really responsive and effective customer service support
~ A customer is not prepared to pay for poor supply chain management and cost control
~ A customer is however prepared to pay for effective marketing that made it really easy to find your solution to their problem.
The list could go on, but hopefully this presents the picture enough for you now.
Identifying the things we shouldn’t be doing.
Any process steps that take time, resources, or space, but do not transform or shape the product or service towards that which is sold to the customer are non-value added activities.
The attached image shows the 8 wastes as defined by Danaher, one of the worlds leading organizations when it comes to continuous improvement and operational efficiency. (Overproduction is in the middle because all the other kinds of waste both mask and create overproduction.)
Dealing with all of these wastes in our processes is taking time, energy, money away from what is considered truly valuable as seen by our customers. Operational Efficiency attacks these wastes and eliminates them from our processes which in turn makes our customers happy.
When we get good at eliminating these wastes, the results are typically shorter lead times which lead to better and more flexible delivery, better quality both internal and external, and lower costs. All of these help satisfy the needs of our customers but there are much wider business benefits too.
Business Benefits of Operational Efficiency
1.) Reserve Capacity!
A significant benefit is the ability to build reserve capacity into the organization.
The majority of clients that I work with have a common challenge, and that is available resource. As the business grows, resource gets added when
a.) the cashflow permits
b.) the business is stressed because its already at capacity in terms or workload for existing employees and owners
Whilst completely understandable this creates capacity constraints and normally results in the business becoming reactive in nature. Reactive to customer requirements, reactive to market conditions / pressures, reactive to operational issues and then to alleviate these pressure points more headcount gets added.
The danger is that this cycle becomes hard to break so as the business continues to grow in turnover, it also continues to grow its fixed costs and headcount too.
Now there are more people to manage so the business leaders have to add more processes, training, policies and support functions which means the pressure pendulum swings back to the sales performance to keep funding this additional resource.
By proactively attacking the waste we free up working hours and build reserve capacity into the business. This saved time allows the business to continue growing without the need to increase resources at the same pace, or allows the available resource to engage in proactive activities that will improve the business performance.
2.) Shareholder value!
This is both a short term and long term tangible benefit.
There is the immediate P&L benefit from increasing sales without increasing costs (even reducing costs), but there is also the benefit of improving the business value as it becomes more attractive to possible investors.
Potential investors look at a number of factors when assessing the value of a business they may wish to buy, and a couple of these include the scalability of a business and its operational efficiency.
Along with a strong repeating customer base (which again is a buy product of removing wastes as we discussed above,) and good financials, operational efficiency also tends to eliminate the dependency and bottlenecks of key employees, which again is a factor potential investors will review in valuing a business they wish to acquire.
3.) Employee Engagement!
I know this was the topic of my last article, but you can see how they all intertwine. The process of identifying and removing wastes from a business, can do wonders for empowering employees, involving them in decisions and solutions that will impact them directly along with building a culture of continuous improvement.
It helps them build empathy for each other, particularly if they work in different functions and breaks down communication barriers, blame & silo mentalities.
4.) Less Anxiety!
When a business is under capacity pressure, it can weigh heavy on its leaders.
When business owners are trying to find extra hours in a day, staying late and taking work home, because despite best efforts there are still tasks not getting completed in the working day, it starts to weigh heavy and effect decision making.
Mistakes creep into the business and then to mitigate them more process gets added. The process adds to the workload and in fact is adding to the wastes which compounds the problems. Extra resource is sought, but who has the time to do the recruitment, the on-boarding, the training?
Now lets throw into the mix holiday cover, sickness and any recruitment activity etc. Its becoming easy to see how this combined with the stress of maintaining business as usual, & trying to deliver strategic objectives, can lead to more anxiety, feelings of pressure & quilt and unfortunately less enjoyment.
By tackling the wastes and increasing operational efficiencies these pressures are alleviated which can completely change the dynamic within a business.
How to go about improving operational efficiencies?
There are numerous tools, methods and ways to address operational efficiencies.
I was fortunate enough to work for Danaher during a significant part of my career and that has equipped me with some fantastic LEAN tools and approaches such as Value Stream Mapping, A3’s and Kaizen bursts.
These tools are extremely powerful and beneficial, but I also appreciate that they are not right for every business.
The culture of the business, it’s processes, people and the progress along its own evolutionary journey all play a part in understanding which tools will provide the greatest impact and results.
The one thing that is consistent though is that every business can gain from maximizing and continuously striving to improve its operational efficiency.
Operational efficiency may be a measure of resource allocation, but when you start to measure it in terms of both customer and business benefits can you really afford to ignore it?
With results typically being shorter lead times better and more flexible delivery, better quality both internal and external, and lower costs. All of which help satisfy the needs of our customers. Any process that can do this in both production and non-production areas throughout the entire value chain surely is a most for any business?
As always I’d love to hear comments, opinions, views.
If you’d like to discuss this or any other topic with me personally, then please don’t hesitate to book a time on my calendly https://calendly.com/jon-corns/30min