Increasing your Businesses’ Sales or Top Line need not be your only or even primary improvement priority. For many businesses it may be wise to consider focusing on Net Profit or Bottom Line growth through improved efficiencies, yield and cost of sales. A solid Plan for improvement in these areas can improve your businesses profitability without any Top Line growth. In fact, the Bottom Line benefit of improvements in these areas may exceed the Net Profit potential of new Top Line Sales and in a shorter period of time.
Take as an example a mid size US Industrial Parts Manufacturing business whose processes were characterized by complicated setup times and multiple production processes. They had an experienced production team that managed these processes with organization and skill, a loyal customer base and an established reputation for high quality and reliability. They were manufacturing well designed and engineered products and often involved their customers in both current production needs and also future new development product initiatives. Their supplier base was made up of long standing suppliers who worked closely with the Businesses’ Purchasing personnel.
The Business Ownership group was eager to openly and honestly examine all their Businesses' strengths, weaknesses, needs and shortcomings. Their goal was to exit the business in the next 3 years. They were in need of succession, strategic and short term planning and also the identification of an optimal financial profile to maximize Enterprise Value. The ownership groups’ objective for exit value exceeded the current market rate for peer companies in their space. Additionally, that exit value objective would not be achievable three years from now even after hitting their Top Line growth targets. Clearly the business needed a concerted focus on Net Profit growth. Research determined that 15% Net Profit levels were in fact consistent with their peers. Internal review and external benchmarking pointed to Yield as a significant Opportunity.
Senior Management and their down line personnel were actively involved in the Business Planning process and able to discuss the same in depth. However, they were able to do as related to their Annual Business Plan but not from a current, ongoing, metric goal tracking standpoint. There was no inner year Forecasting done as a practice. Their Annual Business Plan was heavily weighted towards Top Line growth with primary responsibility assigned to Sales & Marketing or New Business Development. The Manufacturing team was primarily tasked with meeting customer demand, quality and timing requirements. It was hoped that along with Top Line revenue growth the Business might at least enjoy a level of price increases that matched or optimally exceeded any anticipated supplier or internal cost increases. The Businesses’ Net Profit margins had long averaged 10%. They were comfortable with their consistent results. They had done little benchmarking of their competition or peers as relates to COGS, Yield or Net Profit margins.
The business tracked Production Manufacturing “Final Yield”. As such, they tracked the # of parts that passed final inspection vs the # put into production. Their average had been hovering around 90% for years. A closer look at how they tracked Yield to determine when and where in the process measurements were taken found it to be at only the start and finish points. They were not including any points in between or “rework”. When including rework history and practices it was determined that true First Pass Yield was around 85%. The value of the annual cost to the business for every 1% of Yield Loss was determined to be $100,000. They were now thinking about how they might empower their team to go after 1% and more. Their current Business Plan’s Top Line growth goal was 10% new customers sales or $1,000,000. This was a goal that had a lot of tasks in it. If achieved it would generate $100,000 in new Net Profit.
Generic Example - Basic Final Yield is 95%, True First Pass Yield is 85%
They now considered that a 5% improvement in yield could potentially bring as much as a $500,000 Net Profit improvement. To accomplish this with just a Top Line growth focus would require $5,000,000 in new customer sales. Additionally, improving Yield from 85% - 90%, would bring them in line with their peers. The Production, Scheduling, Purchasing, Financial and Sales teams were gathered to meet. This was an exciting meeting where participants who rarely spoke up brought many process improvement ideas forward that had clearly been on their minds for a long time. Before the end of this 2 hour meeting a list of initiatives that included assignments for all participating teams and a goal of improving Yield or “Scrap” by an amount equivalent to 100 miles of material or 5% in 12 months.
Visualizing the amount of scrap generated, product lost and potential cost savings in terms of a distance turned the light bulb on for many in the room. A team dedicated to managing, tracking and reporting daily, weekly and monthly on their progress was formalized. The onus was no longer just on the Sales or New Product Development functions to pursue Top Line initiatives. The business was now working the full profile of their operation from top to bottom. They also learned and were trusted with the knowledge about how their day to day functions impact business, their own incomes, overall results and Enterprise Value.
By the way, they met their Year 1 goal of 5%. That next Business Planning season they focused on locking down the prior years improvements while pursuing another 2.5% Yield improvement through new initiatives. The term “world class manufacturer” began to be discussed as an internal goal and also an external competitive advantage. The businesses Planning process and execution strategy now included objectives throughout all income and cost centers. It would be a team effort, broadly designed with a well communicated and tracked role for all team members. Imagine that.