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Hidden Profits: They’re Closer Than You Think

Most manufacturing and distribution companies have untapped sources of net profit -- often as much as 10% of sales (that is, $4.5 million of added net profit for a company doing $45 million in annual sales). What often prevents them from unlocking...


December 1, 2004
By Pulp & Paper Canada

Topics

Most manufacturing and distribution companies have untapped sources of net profit — often as much as 10% of sales (that is, $4.5 million of added net profit for a company doing $45 million in annual sales). What often prevents them from unlocking this potential is a company’s hesitation to challenge the status quo.

Finding new profits calls for new ways of looking at your business. A Midwest manufacturer with sales of $45 million unlocked 19 different changes to its business that generated $6 million in new profits in the first year.

How were they able to identify these opportunities? They employed a Profit Improvement Program designed to uncover ways to positively impact net income using a company’s best tool — its employees. Generally, management has its eyes fixed on the big picture and is not in a position to see the small changes that can make a big difference. Who else is in a better position to identify ways to reduce expenses or increase revenues than those who have hands-on knowledge on a day-to-day basis with the business? Line workers, warehouse supervisors, customer service representatives, drivers, secretaries and even the cleaning crew are more than casual observers of your business.

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Successful Profit Improvement

Seeing things differently means shaking things up — a process that naturally makes most people and companies uncomfortable. Like anything that causes change, there are considerations that need to be taken care of up front before even embarking on a Profit Improvement Program.

Commit to Change

An organization changes from the top down. If the CEO and other C-level executives aren’t on board, nothing will happen. It is imperative top management communicate to the entire company they are committed to change. If there isn’t a change in the process, there will not be a change in the results.

Use an Outside Facilitator

Change can be seen as threatening if not properly managed. To dissipate fear and foster an environment that encourages new ideas, it’s usually necessary to employ an outside facilitator. This individual, by not being part of the company culture, offers two advantages: their job is not at stake in the event of change (they have nothing to lose); and they are free of sacred cows.

When selecting a facilitator, it’s vital that not only can they talk the talk, but that they’ve walked the walk. The facilitator must have top level (president or CEO) experience running multiple manufacturing or distribution operations to establish the credibility needed to gain both management and employee support.

Communicate, Communicate, Communicate

Communication is crucial to success. This can’t be emphasized enough. Change represents the unknown. Keeping employees informed of what is happening and why discourages rumors that can be damaging. The goal of constant communication is to make the process open to everyone so they can feel like partners in efforts to increase the long-term prosperity of the company.

Tapping Insider Knowledge – The Profit Improvement Program

Step 1 – Create Task Force

A mix of people and perspectives promotes an atmosphere where ideas can be drawn. First the company management must name eight to ten people in the organization who will constitute the company’s Profit Improvement Task Force. This group of eight to ten employees taken from all areas of the organization, other than senior management, can have valuable insights on ways to improve the bottom line.

To make sure the PIP task force will be successful, several aspects of the initiative need to be made clear:

It’s critical from day one that management acknowledges and supports the task force’s work. The CEO or president should appear at the beginning of the first meeting of the group to “vest” the group with the power to recommend changes that will be implemented. The CEO or other senior managers should not have any further direct involvement with the task force beyond supporting their efforts.

Every idea (profit improvement project) that is submitted by individuals on the task force is a task force idea. Absolute anonymity is essential to the process. If they feel their jobs are on the line or will suffer from their participation, the effort will not succeed.

Task force members need to be reassured they will be able to perform their core responsibilities with minimal interruption. PIP process will take no more than two or three hours of their week.

Make it clear the members of the task force get all the credit for the profit improvements, not the facilitator.

And, there are some rules:

The task force will meet once a week. The meetings will take no more that one hour.

There will be an agenda for each meeting distributed to the task force members prior to the meeting.

There will be minutes for each meeting taken and recorded by the facilitator. Each member of the task force is committed to be at the meetings — either in person or by phone.

Any and all material distributed to the task force (agenda, minutes, profit improvement schedules, etc.) will be distributed to top management — for their information only. All material distributed at the meetings and discussed in the meetings will remain confidential and must not be shared with others than designated top management and the task force members.

Task force members found not to be cooperative can and will be removed from the task force.

Finally, the most important rule — anonymity — no one will know the author of any specific idea.

Step 2 – Commit to Measurable Goals

If you can’t measure it, you can’t manage it. At the first meeting of the group, the task force needs to establish specific targets (what they want to achieve and how long it will take) so they have something to keep their eyes on. They must agree and commit to two things:

1. A dollar amount of net profit improvement they want to realize. This is stated as additional profit in terms of a hard dollar amount. The task force must not think small. While increasing net profits by a factor equal to 10% of sales may seem like a stretch, history indicates this is normally very accomplishable.

2. A date when the profit improvement plan will be presented to top management. This date should be between 60 to 90 days following the initial meeting of the task force. This overall plan, ready for implementation, will contain a series (probably 25 to 50) suggested profit improvement projects, each one having a person responsible, a plan for implementation, a specific time frame for implementation and a measurable dollar contribution to net profits that has been agreed to by the financial department of the company.

Step 3 – Write Down 10 Ways to Improve Profits

Make ideas definite. The task force members are given an assignment that is due by the end of the week — each member must give the facilitator ten suggestions for profit improvement. The only condition is that each profit improvement project must be specific and the profit from each improvement must be measurable. When you commit to a profit improvement idea on paper, in black and white, it transforms the shapeless into an actionable target. To get the maximum benefit, the task force should be told that no idea is too far-fetched. Determining its practicality will occur later. The rule of anonymity is crucial, particularly at this stage. No one will know the author of any specific idea.

These 80 to 100 ideas, plus whatever additional ideas the facilitator adds to the pile, will then be shuffled and compiled in random order by the facilitator. On the Monday of the second week, each member of the task force will be given a copy of the list of profit improvement ideas submitted. At its second meeting, the task force will briefly review this initial batch of ideas and for homework, each member will be asked to provide five additional ideas by week end.

You should now have about 120 ideas, after eliminating duplicates, combining those that logically need to be combined and eliminating those that cannot be measured.

Step 4 – Prioritize Ideas

All id
eas are not created equal. The degree of difficulty of implementation, as well as the company’s ability to measure the amount of hard dollars profit improvement each idea can generate will vary greatly. The facilitator along with the task force will be responsible for giving each idea an initial ranking. The scale used to establish a project’s “ranking” is as follows:

1 =easy to implement; easy to quantify savings

2 =easy to implement; difficult to quantify savings

3 =difficult to implement; easy to quantify savings

4 =difficult to implement; difficult to quantify savings

Step 5 – Target Top Ideas

Focus on achievable results. The whole point of the PIP process is to identify and initiate efforts that reach the dollar and time targets set in Step 2. Once the ideas have been ranked in the 1, 2, 3, 4 matrix, it’s now easy to see which suggestions should be chosen for the initiative. Focus on the ideas that are easy to implement and easy to quantify the savings. The idea is to expend resources on ideas that balance the cost and the return within the given time frame.

Step 6 – Approve and Implement Final Plan

Take action. Just because a company has gone through this process to arrive at a list of projects that when implemented can improve the bottom line, doesn’t mean it will happen. Each project on the list must have a specific member of the task force responsible for developing a plan for the projects’ implementation, and a dollar specific measurement to demonstrate the saving from the project’s implementation. The process of moving the project through this stage will take several weeks — leading to the comprehensive profit improvement plan that will be presented to top management.

At this point, the CEO and other top management need to step up and embrace the effort to put the plan into action. By doing so, they truly demonstrate their commitment to change and of course, generate additional profit for the company.

Keep the profits coming

When a company undergoes a Profit Improvement Program, one of the larger lessons it learns is that change can be positive. However, that will take time to instill. After a Profit Improvement Program, businesses need to guard against the “rubber band” effect. All too often a company’s culture will resume its original shape unless a special effort is made to keep the discipline, excitement and dedication harnessed during the life of the task force, alive.

One way to insure a culture of continual profit improvement is to have the facilitator return on a semi-annual or quarterly basis. They can help the company “re-model” its behavior so that good ideas for enhancing revenue or controlling expenses are nurtured and profit improvement becomes a permanent part of the culture.

A company needs to remember that a Profit Improvement Program is not a one-time fix. A business is a living entity that must evolve in order to grow and survive. Making a Profit Improvement Program a regular part of operations can guarantee the company will be in a better position to deal with downturns in the economy, or challenges within the industry, without needing to be in crisis mode.

Rudy Lederer and Howard Siegel are principals with Chicago-based Horizon Advisors, LLC, consultants to management in profit improvement, interim management and turnaround situations. They can be reached at 312-474-6176 or by e-mail consultants@horizonadvisors.com. Copyright 2004.