Business executives are demanding more than just operational improvement — they want to see profitability results as well.
“They want real, bottom-line improvements that increase earnings before interest, taxes, depreciation and amortization (EBITDA); they want to see initiatives that focus on the operational profitability of the business,” says John M. Hurlburt, principal with Crowe Horwath LLP. “What we find is that there are certain recurring levers that drive financial results.”
Smart Business spoke with Hurlburt about spotting operational inefficiencies and how to address them in ways that boost profits.
What are signs of operational inefficiencies?
There are some common themes among companies that are not reaching their maximum potential, including low productivity, pricing or margin challenges, unacceptable service levels, capacity management challenges, quality issues and lack of operational visibility. These inefficiencies occur in almost every type of industry from manufacturing to distribution to financial services, to name a few.
Businesses need to identify root causes of suboptimal performance and apply solutions to streamline processes, reduce waste, improve management and enhance revenue.
Where should you start in order to improve performance?
The most logical starting point is with business processes. You can change your people or implement additional software but not necessarily improve performance in the most optimal way — if at all. Focusing on the processes first makes certain that the fundamental drivers and infrastructure are in place to optimize your people and technology efforts. Improvements in processes produce the best results at a lower cost. Process-related initiatives should be measured in weeks rather than months. The focus is on speed.
Can you highlight areas to focus on?
Five levers of change that drive results can usually be found in the following areas:
1. Operational performance improvement. Lean and Six Sigma tools can drive results in weeks, not months, by focusing on efficiency, effectiveness and throughput of business processes.
2. Supply chain and inventory management. Typical issues are long lead times to customers, excessive inventory levels and inefficient operations scheduling. Levers include improving sales and operations planning processes, planning for capacity issues and implementing finite scheduling processes.
3. Estimating and pricing. Improving estimating accuracy and maximizing margins are typical key issues. Tools include initiating hurdle margins (aligning incentives on total sales before quota bonuses), customer segmentation and postmortem reviews.
4. Strategic sourcing. Maximizing volume purchases through a select number of vendors, improving delivery lead-time accuracy and improving product quality are some ways to improve purchasing practices across the organization. Typical tools in this area include implementing approved vendor lists, analyzing purchasing trends across different categories such as direct, indirect, freight, logistics and administrative purchases, and having consistent procurement processes across the entire organization. It’s not uncommon to find 10 to 15 percent savings in this area by improving a company’s purchasing strategy.
5. New product development. Innovation can provide necessary differentiation to capture market share and improve top-line revenues in a crowded market. Opportunities might exist for reducing hurdles and time to market to introduce new products and services.
What are some key ideas that will help make initiatives successful?
- Different challenges require different tools. First, look at the problem and then determine the tools needed to produce a solution. Don’t focus on implementing tools before you know the extent of the problem.
- Focus on initiatives that can be measured. The only way to know if a problem is real or perceived is to have a quantified ROI.
- Focus on impact and prioritize initiatives that produce the greatest results while requiring the least effort and resource strain.
- Make sure changes are sustainable and become part of the organization.
John M. Hurlburt is a principal at Crowe Horwath LLP. Reach him at (214) 777-5243 or [email protected].
Website: For more information on operational improvement, visit www.crowehorwath.com/services/performance.
