Studies show that very few
companies generate a sustainable and increasing profitability. Why is
it so difficult for companies to consistently generate strong profits?
This is one of the most serious, complex and challenging issues facing
management today and an issue that many management teams are not
trained to address.
Written by
Tony Zecca.
A culture that promotes profit focus makes it
everyone’s job
Studies show that very few companies generate a sustainable and
increasing profitability. Why is it so difficult for companies to
consistently generate strong profits? This is one of the most serious,
complex and challenging issues facing management today and an issue
that many management teams are not trained to address. Management
teams are trained in managing things, but not profits.
Call a meeting of your management team and ask one simple question –
"What are the five key drivers of our profitability?" My guess is the
answers will sound like sales, cost containment, lower material costs,
productivity, and quality. The problem with those answers is they are
"results" and not "drivers" of profitability. Cost containment is not
a profit strategy unless you know what the key drivers of your
company’s costs are. Most management teams think in terms of functions
and might say that our direct labor costs are too high or our cost to
process an order is too high. But unless you understand what is
driving your direct labor costs, how can you lower it with any
strategic understanding of its impact?
We recently completed a project for a manufacturing client and the CFO
and CEO both knew they had to cut labor costs. Their assumption was
that there was not enough work (although they were working 24/7) and
therefore productivity was too low so scheduling had to be the
problem. Their answer was "let’s just cut the supply (direct labor
personnel) and it will force a schedule correction." What resulted was
a significant increase in QC problems and customer rejections. When we
focused everyone on drivers, it became apparent to all that the key
driver of their labor costs was related to an old myth having to do
with production lead times. When that issue was addressed, production
went to a five day, 2 shift operation, on-time delivery rose to 98%
and QC rejects were reduced significantly while achieving a further
reduction in direct as well as indirect labor costs.
It became clear to the CEO and CFO that they needed to do four things
to create a sustainable profit focus in the company:
1) Define and communicate to everyone what the key drivers of
profit-ability were.
2) Create metrics for each driver providing timely and accurate
"Intelligence” on each metric to management.
3) Train management on how to drive the company’s performance and
profits based on those metrics.
4) Link strategies with accountability based on those drivers and
metrics.
In most companies, there are less than 10 key drivers that provide the
most significant impact on overall profitability. Yet our experience
is that most management teams have little understanding of what those
drivers are and their impact on performance.
