The Profit Improvement Process
Cost Reduction and Beyond
A Profit Improvement
Process (PIP) engages the collective intellectual capital of the
company to identify and harvest opportunities for profit improvement
in all three areas of the profit
equation: expense, loss, and revenue.
This balance moves profit improvement far beyond traditional cost
reduction efforts both in terms of profit results and the impact on
personnel. People engaged in the Profit Improvement Process
report better morale and improved attitudes as opposed to the
negative impact often seen in cost reduction. The book
Achieving World-Class Profit Improvement is the resource for this article.
Here's an
example Profit Improvement Process case summary.
All employees are
informed of the process and key employees are engaged in teams to
enable change. Skill
training includes the most advanced creativity and innovation tools
available today. The
training, process structure (figure below), annual goals, and
continuous reporting create an environment that is conducive to
positive change.
Figure
1
Profit Improvement Process Structure
A significant benefit of
a PIP is the fact that all employees are aware of the cost-benefit
of their investments and the profitability of their sales decisions. This focus on the profit equation keeps the company sharp and
the employees in a learning mode.
Employees learn that they are part of the profit solution
rather than worrying constantly about what others are going to do to
their jobs (i.e. layoffs and cutbacks).
Results are rapid and
significant. In nine
months one insurance company added over $5 million of sustainable
profits to the bottom line with a two-year return in excess of 100
fold on its initial program investment.
The backlog of potential profit improvement projects was in
excess of $100 million after the first year.
A $20 million revenue manufacturing and distribution company
generated $1 million in profit improvement ideas in a few weeks.
Within two years in a depressed market all of their profits
could be attributed to the changes they made through profit
improvement projects.
A key to success, beyond engaging the entire
company in a positive way, is the use of the profit
equation to balance growth and cutting.
The price of forgetting the profit equation and not having a
self-sustaining profit improvement process can be extreme.
A July 9, 2001 article on the front page of The Wall Street
Journal (Hilsenrath
2001)
reports, “While the U.S. economy is showing tentative
signs of stabilizing and could even stage a modest recovery by the
winger, the corporate cost-cutting that started late last year could
go on for quite some time.” The
article also reports that Ron Nicole of the Boston Consulting Group,
tracking the overhead costs of America’s 1,000 largest companies,
found that many of them lost site of their revenue/cost ratios while
building sales volume. He estimates that they are currently overspending by $150
billion per year. An
executive vice president of International Paper said that the
company has taken its first comprehensive, company-wide look at
overhead costs since 1985. They found layers of costs that it didn’t need and
opportunities for process improvement.
They laid off 3% of their workforce in June and are 25 to 40%
of the way done.
Cost Reduction in the absence of revenue consideration
all too often leads to bad decisions that reduce profit in the
near and long-term. PIP brings that needed balance.
The cost of using consultants to
initiate a profit improvement process is considerably less (a few
percent) than that for massive programs such as TQM or Six Sigma.
Training for implementation is one to two days depending on
the level of involvement planned for the trainee.
Companies, depending on size and complexity) usually choose
to use consultants to train the core 10% of their staff and then
bootstrap from there using internal trainers and peer training.
Consulting and training fees are
variable depending on company size. They range from about ten
thousand dollars for a small company with less than a hundred
employees (train a dozen on more staff) to over one hundred thousand
dollars for a company with a few thousand employees (train hundreds
of staff).
The cash flow payback is usually a
matter of a few months at most.
Long term payback is as large as the profit goals allow.
Like any change process, top management
commitment is critical to success.
It all starts at the top and it will end there if management
is not clear in its support. While
the process does help significantly in overcoming barriers to
change, hypocrisy or inconsistency from the executive suite can kill
potential faster than a speeding bullet.
Even in this age of “employee
empowerment” managers are often loath to cede any influence to the
employees. Managers
will find excuses not to train their people in profit improvement
methods because they fear that they will lose control.
They fear that some of their propensities and delinquencies
will be exposed. They’re right. It
takes motivation and confidence in the executive suite to engage in
a Profit Improvement Process.
The Profit Improvement Process requires
the following for success:
The Profit Improvement Process (PIP)
incorporates the best of what has been used over the last century
while avoiding the pitfalls. PIP
is a synthesis of good business practice and the powerful tools of
creativity and innovation methods embodied in Creative Problem
Solving. This
combination taps the intellectual capital of your employees to
enable positive change. Profits
flow from there. PIP
incorporates change methods that help create the readiness for
change that is critical to success
.
Companies can undertake these
initiatives on their own or they may engage expert consultants such
as Business Solutions – The Positive Way to get them started.
The essence of the process is embodied in the models and
tools that are summarized in the book “Achieving
World-Class Profit Improvement”.
Companies that want to accelerate the process and maximize
profit impact engage experts to get them started.
The flexibility of PIP allows the use
of any of the tools associated with six-sigma and other quality
programs without having to embrace the entire concept.
Almost any productive tool or method is appropriate to the
PIP continuous improvement model.
Ultimately there are only four
approaches to cost reduction and profit improvement.
Here is a summary.
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