The Systems Thinker Blog

Business Improvement: Shut Down Your Fix-it Factory!

Posted byRon Carroll

At the root of most business problems is some form of waste, either defects in products or services, or time-wasting delay. This is what causes customers to go to competitors. This is what raises cost and erodes profit. This is what ultimately drives owners out of business.

Every product, service, or transaction-based business has two “factories” running simultaneously according to Jay Arthur, author of Small Business Guide to Six Sigma. The "Main Factory"—where you focus most of your energy—produces goods and services for your customers just as planned.

The second factory is less noticeable. It is the "Fix-it Factory," which cleans up all the mistakes, rework, breakage, returns, scrap and other problems of the Main Factory. This dark underbelly of the business primarily deals with defects and delay. Every business has a Fix-it Factory that consumes human and financial resources. You might be surprised by the cost of running your Fix-it Factory!

Shut down your fix-it factory

Waste is Expensive

Most small-business owners do not face the brutal reality of waste in their business. However, experts estimate that the average small business has at least 3% waste (Jay Arthur). Many have more. Some have much more!

For a company with one-million dollars in sales, 3% waste amounts to $30,000 in cost. This expense, however, is not paid out of revenue dollars, but is paid out of profit dollars! If the company’s net profit before taxes is expected to be 8%, or $80,000 dollars, 3% waste would reduce the profit to $50,000.

Stated another way, the company has to sell nearly $400,000 more to replace this $30,000 loss in order to achieve the desired profit level. (I don’t want to depress you, but it actually gets worse because there are additional costs to handle the waste.)

Do you realize what I just said? Every waste of time or material comes directly off your bottom line. In this example, waste of 3% of sales translates to nearly 40% in lost profit!

Mistakes are Prevalent

How often have you purchased a product or service and had something in the transaction go wrong? For the last ten years, I have been telling my wife that it seems like half of our purchases have one problem or another.

For example, several years ago our financial services company was teaching workshops to educate our customers on the development of effective business systems and rocesses. In putting together our little workshop facility, I had to buy a variety of equipment, furniture and accessories. Here's what happened:

I purchased eight high-back chairs for the lobby that arrived with the wrong fabric. I had a wall-to-wall counter built that was one-eighth of an inch too long and had to be returned for trimming. Paint came off ceramic candy dishes when removing the price labels. I ordered new blinds for five windows. Four of the blinds arrived together, but the installer had to make a trip back to install the fifth blind. I bought special narrow conference room tables that came with the wrong style legs. The company graciously remade the tables, but this was particularly annoying because it delayed our kick-off date. In the second batch, one table had a large dent in the top. In addition, the skirting on the tables didn’t stay attached so we removed them altogether. The audio-visual person put the ceiling speakers in a different place than I requested. I didn't make him move them, but it always bugged me.

These common mistakes cost the vendors most or all the profit from my business. However, this is only part of the story. The Fix-it Factory erodes profit in another way. You see, I may never do business with some of these vendors again; they caused me too much aggravation. Worse yet, I may tell other people of my bad experience. It is apparent that the overall cost of 3%-mistakes can be quite enormous!

Walmart Gets It

Walmart is relentless at cutting waste from their business. For example, they have distribution centers as large as twenty-four football fields, with up to nineteen miles of conveyor belts. Many trucks are simultaneously loaded at the docks and dispatched to regional stores. Now get this! Walmart measures the efficiency of their loading operation by how much space there is between boxes traveling down the conveyor belts. If the boxes are touching each other, the maximum number of boxes can be loaded. The space between the moving boxes is actually “waste” or inefficiency, and it increases the cost of every unit of product on the conveyor. This kind of attention to detail is what makes Walmart so successful.

Mistakes and waste are a common occurrence in every company. The typical customer-purchase has many choices, options and variables, amidst a complex array of promises, processes, and paperwork. Consumer demand for new and improved products and services—never-ending change—puts pressure on maintaining quality. The turnover of people in the workforce reduces overall competence. Holy cow, no wonder so many mistakes are made! It’s not surprising that we go around frustrated with employees we think have messed up, or mumble when customers take their business elsewhere.

Cut Waste to Survive and Prosper

The truth is that times have changed. To survive, small-business owners of today must accomplish the seemingly impossible. They must squeeze out every possible defect and delay from their business operations. They must execute with consistency and exactness. Every part of their business must be systemized to reduce costs and eliminate customer dissatisfaction.

Here’s the deal. You—the business owner—are in control. It is up to you to create a “culture of discipline” (Jim Collins, Good-to-Great) and drive the waste out of your business. If it's not important to you, it won't be important to others. Make it a top priority!

I invite you to begin turning your business into a “house of order.” Develop effective business systems and processes that will shut down the Fix-it Factory. Start working on the business and not just in the business (Michael Gerber, E-Myth Revisited). You can do it, and I will show you how!

 

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Tags: Improvement, Quality, Efficiency/Speed, Cost Cutting

Lean Six Sigma: 3 Business Process Errors That Drive Away Customers!

Posted byRon Carroll

While attending a defensive driving class many years ago (don’t ask why), the instructor mentioned that the typical motorist breaks the law every three minutes. Surprised? As you become a Systems Thinker, you won’t be. Here’s why.

Our daily lives are filled with unintentional mistakes, and your business is no exception. Each mistake or error robs your company of the money that could be used to hire new people, increases wages, buy needed equipment, or give larger dividends to owners and stakeholders. You probably don’t’ see most of this hard-earned cash disappearing into a black hole.

Money Black Hole

Keep It Simple with Lean Six Sigma

In any business, there are hundreds, perhaps thousands of ways for mistakes to happen. However, from Lean Six Sigma, you’ll be happy to know that you only need to focus on preventing or eliminating three bad boys from your business operations.

  1. Delays – Delay is the idle time between steps of a business process—the waiting time. Typically, the actual time required to produce a product or deliver a service is 5% of the total elapsed time (George Stalk, “Competing Against Time”). 

    For example, it only takes about three minutes to print your photos at a store that offers a one-hour photo service. Likewise, a commercial printer may say your job will be ready in five days even though it takes just two hours once the print-job is started. In most businesses, there are many opportunities to reduce idle work-in-process, and increase overall cycle speed.

    Customers also care if you meet your commitment to deliver on time, on schedule, or as promised. FedEx delivers packages overnight—guaranteed! They've built a large following by keeping this promise. Delay is a frequent reason for the loss of customers and valuable referrals.

  2. Defects – Defects are mistakes that render a product or service unacceptable to one of your five customer types.  Good or bad, pass or fail, the product either meets a quality standard, or it doesn’t. For example, a prescription is filled incorrectly; a steak is overcooked; a travel bag is lost by the airline, or a part is missing in a product to be assembled. All are unacceptable!

    Customers want things according to specifications or expectations. If you fail to deliver what is “critical to quality” in their minds, they will shop elsewhere.

  3. Deviation (excessive) – Neither people nor business systems turn out a consistently exact result. Deviation focuses on how far you can stray from precise specifications or expectations and still have an acceptable product or service.

    For example, if a furniture store promises delivery at 11:00 a.m. and delivers at 11:30 a.m., they have not kept their promise. The deviation in time makes the customer unhappy. However, if they commit to deliver between 10:00 a.m. and Noon, and deliver at 11:30 a.m., the promise is kept and the customer is pleased.

    In another example, an Internet service provider promises speeds up to 30 mbps. If Internet speed is too slow, too often, deviation from the speed-guarantee may cause customers to change providers.

    And finally, a machined part may have a tolerance of .003 inches. If machined outside the tolerance limits, the excessive size deviation will prevent the part from fitting or working properly.

    Don’t wait for customers to report unacceptable deviation. Establish your own internal controls to make sure deviation stays within bounds. This can prevent the build-up of defective inventory, a product recall, and even damage to your reputation or brand.

You Can Be Perfect

For fun, let’s look at an easy example from the game of football. A field-goal kicker has only 1.25 seconds to kick the ball after the snap. Any delay, and the kick has a good chance of being blocked; the team will fail to score. If the kicker does get the ball off, and it goes outside the goal posts, the kick is defective—again, no score. However, the goal posts are eighteen feet, six inches apart. The airborne ball can deviate nine feet, two inches left or right of center and still be good for the score.

I once heard John Madden—former football coach and color commentator—describe a ball that went just inside the left goal-post as a “perfect” kick. Why, because it earned the team three points; the deviation was within bounds. It was good enough!

Are your business systems GOOD ENOUGH to be considered PERFECT by your customers? To reduce the many little mistakes and errors in your business systems and processes, start looking for Delays, Defects and excessive Deviation.

Let me know of what you find.

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Tags: Business Systems, Lean Six Sigma, Customer Retention, Quality

Voice of the Customer: Four Things That Will Earn You an “A”!

Posted byRon Carroll

After all my children left the nest, my wife and I decided to build a smaller home at Thanksgiving Point, Utah. Everyone knows that building a house can be a painful process. Like all customers, I was primarily interested in four things—quality, speed, value, and a pleasurable buying experience.

Voice of the Customer - Home Construction

Following our move-in, I had a casual conversation with some of my new neighbors. We talked about our home-building experience. The consensus was that the builder deserved a grade of “B.” He could have easily gotten an “A” (and also put more money in his pocket), if he just applied a little Systems Thinking.

I tried to offer some constructive ideas along the way. However, the builder always gave me a polite nod and continued doing things as before. He was not interested in listening to the “voice of the customer"—ME!

Quality, Speed, Value and Buying Experience

The builder’s major weakness was related to quality issues. Below are a few examples of needless waste that could have been eliminated with some simple system improvements. 

  • The builder ordered the wrong size door for a closet. It was returned. The replacement door was the right size but opened the wrong direction. It was returned again. The third door had the wrong style hinges. Finally, the right door arrived. The carpenter, of course, had to make a special trip back to hang the door, and the painter had to come again to paint it.

  • The subcontractor who poured the driveway forgot to lay a sprinkler pipe under the concrete. The landscape company had to run two pipes and electrical wire three-hundred feet around the house to get to the other side of the driveway, just twenty-five feet away.

  • The builder buys kitchen cabinets from Missouri (high humidity), where I assume he gets a better deal. The cabinets were installed in the very dry climate of Utah. Five of the cabinet doors warped in the first week. The builder said, “Don’t worry. It happens all the time. They are under warranty, and the manufacturer will replace them.” (Do you see anything wrong with this picture?)

After the footings and foundation walls were poured, Eric, the project foreman, told us we were on a thirty-nine-day schedule to completion and move-in. I calculated the date in my mind and thought he could never do it. To my surprise, the house was finished exactly on time. He gets an “A” for speed!

My wife and I shopped around before buying the house, so we felt it was a good value. The overall buying experience also met our expectations except for the frequent mistakes—most of which were fixed. The problems that couldn’t be fixed, we will have to live with. (I will probably murmur for a while and then forget about them.)

Our real estate agent was great, and Eric the foreman was a gem. He did everything possible to solve problems and keep us happy. He was patient, diligent, accessible, and easy to work with. Eric made all the difference!

A Simple Checklist

So, you can see, the builder did a pretty good job. His quality problems—with the accompanying waste of time and materials—could largely be eliminated if he were to provide a specific “builder’s checklist” to each of the twenty or so subcontractors hired to work on the house.

For example, the checklist for the concrete subcontractor might include: 1) Put expansion joints every ten feet, 2) Lay three-quarter inch sprinkler pipe under the driveway before pouring, and 3) Clean concrete splatter from house siding, door threshold, etc.

A signed checklist submitted with the vendor invoice keeps everyone informed that the task was completed as expected. This simple but important step added to the process will also prevent subcontractors from being victims of their own slip-ups. Everyone comes out ahead!

Let's be honest. Not all mistakes can be eliminated. However, good business systems will avoid the most common and repeated ones. You should strive to be at least a 4 Sigma company, as well as better, faster and cheaper than your competition.

How Would Customer's Grade Your Company?

Eric didn’t ask, but I am going to write him a letter of reference. He was an outstanding foreman and a great asset to his employer.

Good things happen when companies listen and build upon the voice of the customer to create a culture of excellence. Are you listening? What grade would your customers give you? If you don't know, maybe you should ask them!

 

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Tags: Systems Thinker, Business Systems, Customer Retention, Quality, Efficiency/Speed, System Example

Cost Reduction: Make Products and Services Better, Faster, Cheaper!

Posted byRon Carroll

Years ago, I went into a local printing shop to do business. The proprietor had a sign on the back wall that read:

Good-Fast-Cheap

I got a chuckle out of the sign, but at the time, it made some sense to me.  I could understand that:

    • If I want the best quality and the lowest price, I may have to wait.
    • If I want the best quality and the job rushed, I should expect to pay a higher price.
    • If I want the job fast and cheap, I probably won’t get the highest quality.

Of course, like every customer, I really wanted my print job with the highest quality, as fast as possible, and at the lowest price. I wanted GOOD, FAST AND CHEAP!

Breakthrough Principle

Upon becoming a Systems Thinker, I learned that it is quality and speed that create the lowest possible price. You and your customers can and should expect all three!

QUALITY + SPEED = LOW COST


By creating business systems that have minimal mistakes, defects, and rework (good), you will reduce waste and increase process speed. By eliminating delay, downtime, and other speed bumps, you will boost sales throughput (fast). This powerful combination will give you the lowest possible cost and your customers the greatest value (cheap). Remember: Quality plus speed equals low cost.

Side Note: To increase speed without losing quality, don’t push workers beyond reasonable performance standards. Instead, focus your efforts on reducing the idle time in a business process—the time things are sitting around waiting to be worked on. Keep work-in-process to a minimum. Eliminate over-flowing in-baskets and items stacked up in cues or on pallets. Create an even and steady workflow.

Happy Customers and More Profit

In short, low quality and slow speed are what make business processes—and the resulting products and services—more expensive.

Whatever your business—in the office, the store, on the production line, or delivering a service—use well-designed business systems to get work done efficiently and effectively. Increasing quality and throughput (rate of speed) will guarantee happy and loyal customers. And you can take that to the bank!

 

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Tags: Business Systems, Quality, Efficiency/Speed, Cost Cutting

Total Quality Management: Seven Principles to Boost Business Quality!

Posted byRon Carroll

For years, Ford Motor Company has reminded us: QUALITY IS JOB 1. It really should be the goal for all of us. Commitment to quality reflects our personal values and ultimately determines whether we can compete in the game of business. Customers are the final judge.

Retired business executive Jack Welch, said, “The value decade is upon us. If you can't sell a top-quality product at the lowest price, you're going to be out of the game.”

What is Quality?

For many, quality suggests the superiority of design, materials, or workmanship in a product or service. You may think of high-end brands like Mercedes, Gucci, or even Apple. However, “quality” is vital to every business, even if the target customer is at the low-end or mass market.

Dr. W. Edwards Deming, pioneer of quality improvement methods, says that the customer's definition of quality is the only one that matters.  So, what should quality mean to you?

Customer Review

I like to think of quality as a product or service that conforms to—and exceeds where possible— customer specifications or expectations. For example, are the roof shingles the grade specified in the house plans? Has the steel part been machined to engineering specifications? Was the furniture delivered within the promised range of 8:00 a.m. to 10:00 a.m.? Are the restrooms "clean"?

And a customer is not only the end-user or consumer, but can also be the next step in a business process—the often overlooked internal customer (see "Five Customer Types").

In an assembly line operation, station two is the internal customer of station one. The order-fulfillment department is the customer of the order-processing department. The sales process is a customer of the advertising or lead generation process. Each “customer” in a chain of business activities wants their specifications or expectations met.

Quality is achieved when you put measures into a business system or process that prevent mistakes, defects and deficiencies—the waste of the business that drives away customers and robs you of profit.

In short, everything that moves without errors through your business operation—from receipt of order to the delivery of the product or service—represents quality. And you might be shocked by the number of errors and mistakes made every day in a typical business, including yours!

Total Quality Management

Total Quality Management (TQM) is an approach used by organizations to achieve continuous improvement of business processes. A focus on quality will lead your organization to reduced waste and rework, greater efficiency, lower costs, and happier customers.

Total Quality Management (TQM)

Here are seven principles of TQM that provide a foundation for improving quality in your organization.

  1. You can and must manage quality – Quality doesn’t just happen. It is the result of intelligent effort. Many companies struggle with low-grade business processes and reoccurring customer complaints. Operational excellence and quality goods and services can only be accomplished by focusing on the improvement of daily business activities.

  2. Processes, not people, are usually the problem – First look for a weak business process before blaming people. If your process is causing quality problems, no amount of new hiring or training will change the outcome. Put people into an effective business system or process and you will get their best performance.

  3. Find and fix the root cause of the problem – When you have a quality problem, use the 5-Whys Analysis to discover its true source; it may not be what you think. Go observe the process first-hand. Talk with workers. You may even find the source of the problem to be in a different part of the business.

  4. Quality must be measured – Your quality management system is only effective if you can quantify results. Are you achieving at least 4 Sigma on a 6 Sigma scale? Workers need frequent feedback to know how they are doing in relation to the goal. You can’t know how many mistakes or errors happen in your operation unless you measure.

  5. Strive for continuous quality improvementTotal Quality Management happens every day. The work is never done. It is a permanent mindset within your business culture. Real improvements must occur frequently and continually in order to drive customer loyalty, profitability and growth.

  6. Every person is responsible for quality – As discussed, the customer of every business process is the next process in the line, ending with the person who buys your goods or services. Every worker and manager has a part to play for ensuring the highest level of quality—the fewest number of rejects, rework, and returns. Delighting the customer is the core responsibility of every employee and every business.

  7. Quality is a long-term investmentQuality management is not a quick fix—not just problem solving. Creating a business culture around quality requires managers to promote improvement workshops, refine business processes, learn by measurement and feedback, and then to repeat the cycle as needed. Management style and business culture determine long-term success.

Quality is a Choice

Human error and mistakes are normal. How many you will tolerate is a business decision. Remember, without a conscious effort to improve, you will hover in the 2-3 Sigma range and lose a significant portion of your potential profit. High-quality business systems and processes pay for themselves many times over!

I recommend that you strive for a 99% yield, or 1% waste—about 4 Sigma in your core business processes. This is not only achievable but essential in a competitive marketplace. Get your team together and begin today!

 

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Tags: Business Systems, Culture, Quality

Six Sigma for Small Business—Improve Quality!

Posted byRon Carroll

Six Sigma is a methodology employed by many large companies to improve the output quality of their business systems and processes. Small-business owners can profit immensely by becoming familiar with the fundamental principles.

Three major concepts will aid in your understanding.

  1. A "quality" product or service is one that conforms to standards. Quality refers to an acceptable level of performance within an approved range of customer specifications or expectations. For example, are the roof shingles the grade specified in the house plans? Has the steel part been machined to engineering specifications? Was the furniture delivered within the promised time range of 8:00 a.m. to 10:00 a.m.? Are the restrooms "clean"? Simply put, are your products or services up to specified or expected standards?
     
  2. Quality standards are determined by the customer, whether expressed or implied, as in the case of clean restrooms. The “voice of the customer” indicates what matters most to your customers—what is “critical to quality” (CTQ). These essential requirements might include such things as first-class workmanship, on-time delivery, or superior customer service. While no organization is perfect, repeated failure to meet customer CTQ requirements is usually fatal. If you don't provide what customers expect, they will take their business elsewhere.
     
  3. “Variation” is the deviation from customer specifications or expectations. All quality standards have a tolerance for some variation. However, when variation becomes too great, the product or service is defective and unacceptable. Defects, delay and deviation must be kept within the bounds set by the customer.

Acceptable Variation

The output quality of any process is considered “perfect” if it falls within the lower and upper specified limits, as you see in the graph below. For example, if the furniture store mentioned above delivers the furniture before 8:00 a.m. or after 10:00 a.m., it has performed outside the promised limits. Delivery anytime between those hours is a perfect outcome.

Business Process Quality

In football, a field-goal kick passing anywhere between the goal posts is a perfect kick and earns three points; if kicked outside the posts, no points are given. Likewise, a machined part may have a tolerance of .003 inches. If machined outside of the tolerance limits, the part will not fit or work properly.

In Six Sigma, quality standards are either met, or not. There is no in-between. A business owner must completely understand what their customer wants (CTQ) and what variation is acceptable to them—what is their tolerance for error. Effective business systems and processes reduce the unacceptable variation—the defects and delays—thus keeping customers happy and reducing costs. (By the way, the “customer” of one of your business processes may be the next process in the line.)

Sigma, expressed by the letter "Z", is a Greek term that means “amount of variation in a process, set of data, or anything you can measure.” For statistic students, Six Sigma refers to six standard deviations; however, it is not necessary for you to understand the math to apply the principles.

Determining Your Sigma Score

Using Six Sigma analysis, a process is evaluated based upon how many errors occur in one million opportunities for error. No matter how few or how many outputs there are from a given process over a period of time, the result is always converted to “defects per million.” In this way, all quality measurements are compared to a common standard.

For example, in a sample test period, 50 of 1000 prepared payroll checks have errors and employee complaints. Converted to Six Sigma language, there are 50,000 defects per million opportunities. This is done by multiplying the numerator (50) and the denominator (1000) each by 1000.

The fewer the errors, the higher the “Sigma Score,” and the closer the process comes to reaching perfection. Notice in the table below that 6 Sigma (statistically six standard deviations) is 3.4 defects per million opportunities—very near perfect.  Two Sigma is 308, 538 defects per million or nearly one out of three errors. Three Sigma improves to 66,807 errors per million, or one error for every 15 opportunities—a 93.3% yield.

Six Sigma Score

It is important to note that the road to higher business quality gets increasingly difficult and expensive. In Box Theory™ methodology, the goal is 4 Sigma for most processes. Four Sigma is actually one defect in 160 opportunities or a 99.38% yield. This is a very good starting point for the core systems and processes of most organizations.

New companies typically start with processes at about 2 to 2.5 Sigma and progress with “common sense” and “trial-by-error” solutions to achieve control at near 3 Sigma. This may be somewhat shocking to you, but it points out the great opportunity for quality improvement in most organizations. Formal improvement methods such as Six Sigma are usually required to achieve greater results than 3.5 Sigma, a 2.3% error rate.

You Are in Control

Most errors happen because of faulty systems and not faulty people. People want to perform well, and will, if put into an effective business system. Mistakes and defects are normal. How many you will tolerate is a business decision. Remember, without a conscious effort to improve, you will hover in the 2-3 Sigma range and lose a significant portion of your potential profit. This is one reason why effective business systems pay for themselves many times over!

I repeat, YOU are in control and can choose what Sigma level you are willing to pay the price to achieve. For example, the airline industry has chosen to pay whatever it costs to operate airplanes at above Six Sigma—fewer than 3.4 crashes per million flights (the voice of the customer is pretty loud on this one). However, baggage claims operate at 4 Sigma—a lost bag for every 160 handled. This is why airlines put a lost-luggage claim office in every airport. It costs less than improving the baggage handling process, and the customer has proven to tolerate an “occasional” lost bag. The airlines make these business decisions by balancing cost and customer satisfaction.

Look at the table below to compare a 99% yield (less than Four Sigma) to a Six Sigma yield of nearly 100% quality. Then consider for a moment the potential lost profit in your company that is probably operating at 2-3 Sigma.

99% YIELD (3.8 Sigma; 10,000 defects/million) 99.99966% YIELD (6 Sigma; 3.4 defects/million)
20, 000 lost articles of mail per hour 7 articles of lost mail per hour
Unsafe drinking water for 15 minutes per day 1 unsafe minute of drinking water every 7 months
5,000 incorrect surgical operations per week 1.7 incorrect surgical operations per week
2 short/long landings at major airports daily 1 short/long landing at major airports every 5 years
200,000 incorrect drug prescriptions each year 68 incorrect drug prescriptions each year
No electricity for almost 7 hours each month One hour without electricity every 34 years
11.8 million shares incorrectly traded on the NYSE daily 4,021 shares incorrectly traded on the NYSE daily
3 warranty claims for every new automobile 1 warranty claim for every 980 new automobiles
48,000 deaths from hospital errors per year 17 deaths attributed to hospital errors per year
  Six Sigma for Dummies, p. 25

 
Like the Theory of Constraints and Lean Thinking, the principles of Six Sigma apply in product or service-based companies, in the office, the retail store, or on the production line—wherever mistakes can be made.

How many defects, unacceptable delays, or deviation from specifications/expectations occur in your business processes? I think you would be surprised!

With a little attention to the details of your business operations, you can reduce the errors and waste to less than 1%. A small effort to improve business quality can significantly boost customer satisfaction, profit, and hopefully your take-home pay.

Related Articles
The Theory of Constraints for Small Business—Eliminate Bottlenecks!
Lean Thinking for Small Business—Add Value!
Box Theory™ for Small Business—Create High-Performance Systems!

 

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Tags: Business Systems, Laws/Principles, Quality

Repetition—The Boring Road to Riches!

Posted byRon Carroll

Recently, I awoke from a vivid dream. I was standing in line at a Krispy Kreme donut factory and feeling the most pleasant sensation as I watched those hypnotizing pastries pass under the frosting falls and down the conveyor belt toward the finish line. It was heaven.

System Repetition

However, before you jump to any conclusions, you should know that my dream-state was not focused on the melt-in-your-mouth donuts. Instead, I was mesmerized by the manufacturing system that produced six perfect donuts every second of every minute of every hour. (Even when I dream, I’m a Systems Thinker.)

I marveled at the power of this repetitive process to consistently earn money for the business owner. Those little donuts could just as well have been quarters—the profit on a donut—coming off the end of the conveyor belt.

Wouldn’t you like a company where you could open the door every morning, flip a switch and everything would start humming along, making you money? You may not have an automated factory; however, it is possible to create business systems and processes—marketing, hiring, training, customer service, order fulfillment, and so forth—that work consistently every day to accomplish your business and financial objectives.

Repetition Generates Profit

Being innovative gets me excited. I love to create and try new things. Innovation also attracts customers and creates buzz in the marketplace. However, the daily repetition of effective business systems and processes is what generates profit. I REPEAT: THE DAILY REPETITION OF EFFECTIVE BUSINESS SYSTEMS AND PROCESSES IS WHAT GENERATES PROFIT!

Those boring and repetitive routines will make your business remarkable. People will see your company as being organized, consistent, predictable, standardized, reliable, orderly, disciplined, and trustworthy. Repetition increases employee productivity and quality while lowering cost. It engenders confidence in customers and keeps them coming back for more.

Nature is Our Best Example

Ralph Waldo Emerson said, “Nature is an endless combination and repetition of a very few laws (American Poet, Lecturer and Essayist, 1803-1882). Like Nature, a business is a unique organism that operates best when there is a harmonious interaction of its vital systems. Repetition is the steady heartbeat of a prosperous organization.

You can only leverage the profit-generating power of repetition by implementing effective operational systems and processes that consistently produce your version of “melt-in-your-mouth donuts.” There is no other way!

The ultimate reward for creating a systematized business is the opportunity to hire someone who can run it for you, replicate it in other markets, or sell it for top dollar.

Just like Krispy Kreme, repetition is a key ingredient for you to enjoy the sweet smell of success!

 

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Tags: Business Systems, Laws/Principles, Quality, Efficiency/Speed, System Example

Sales Equivalency—The Surprising Power of Cutting Costs!

Posted byRon Carroll

Every dollar you save through cost reduction—one of the primary purposes of your business systems—is far more valuable than the dollars that come from sales. In tough times, cost cutting can preserve your bottom-line profit when your top-line sales are struggling. Let me explain.

A sales dollar is reduced by commissions and other sales costs, the actual expense of the product or service you are selling, and even administrative or overhead costs. In fact, a net profit is all that remains. For example, if you sell a $100 product, and you have an 8% net profit margin, that $100 sale will eventually put eight dollars in your pocket.  

On the other hand, if you save $100, THE ENTIRE AMOUNT GOES STRAIGHT TO YOUR BOTTOM LINE. YOU GET TO KEEP IT ALL!

Cut Costs 

Sales Equivalency 

Another way to look at this is to calculate the “sales equivalency” of your dollars saved. If your company has an 8% net profit, and you save $100, it has the same effect on earnings as $1250 in sales. The formula for calculating sales equivalency is as follows:

 

Amount of Savings ÷ Profit Margin = Sales Equivalent
($100 ÷ .08 = $1250)

 

The smaller your net profit margin, the greater the impact your cost reduction becomes. In the example above, if your profit margin is 5%, the $100 of savings has a sales equivalent of $2000; with a 3% margin, the sales equivalent is $3,333.

What is the sales equivalent of a $100 saved in your company?

Here are a few examples of eye-opening sales equivalents from our company with an 8% profit margin.

  • A tweak to a telephone system saving $50 per month is equal to $7500 in annual sales.

  • Preventing $1000 of lost, damaged, or obsolete inventory in a year produces the same financial result as $12,500 in new sales.

  • An annual saving of $5000 by finding a better supplier of materials or product, reducing freight cost, taking advantage of purchase discounts, and so forth, is worth $62,500 in sales.

  • An improved business system or process that can perform a task with one less employee earning $25,000 per year and no benefits is equal to $312,500 in sales. YES, THREE-HUNDRED AND TWELVE THOUSAND, FIVE- HUNDRED DOLLARS!

Impact on Profit 

Here’s another fact: The average small business has at least 3% waste or excess cost within its operations and often times much more. In our example of the business with 8% profit margin, 3% of waste equals 37.5% of lost profit (.03 ÷ .08). Remember: All waste comes straight off the bottom line!

Improving the quality and efficiency of your business operation—its systems and processes—is the gift that keeps on giving. The payoff continues year after year. In good times and bad, it’s always the right time to be cost conscious!

What's one way you could reduce costs today? Now, go do it!

 

The Next Step...

Tags: Business Systems, Business Measurement, Quality, Efficiency/Speed, Cost Cutting

Four Business Improvement Methods You Should Know About!

Posted byRon Carroll

Some of our nation’s best-run business organizations are driven by a compelling principle the Japanese call “Kaizen”—the ongoing, systematic, incremental improvement in the way things are done. Many companies have adopted one or more formal methodologies to achieve this “continuous improvement.”  However, these powerful strategies are rarely considered by small-business owners—a fact I hope to change!

Continuous Daily Improvement

Four Improvement Methodologies

Below I've listed four widely used business-improvement methodologies and my layman’s description of their essential nature and purpose. Keep in mind that these methods aren’t just for big organizations. They also apply to YOU and your everyday business processes such as marketing, hiring, production, customer service, order fulfillment, and so forth. They are relevant to both service and product-based companies. They can be applied in the office, the retail store, or on the production line. Think about how each may be used to improve YOUR business!

  1. Six Sigma – Every system or process in your business yields an end-result that either falls within a range of acceptability, or does not. Six Sigma measures how often a process meets the required specifications or expectations. It seeks to improve the quality of a process by identifying and minimizing errors, excessive variation, waste, and rework.  

    Six Sigma is a statistical term (six standard deviations) that represents near perfection—3.4 errors per one million opportunities-for-error. Thankfully, airlines have achieved better than Six Sigma, fewer than 3.4 crashes per million flights. Don’t worry; you don’t have to know statistics to benefit from this method!

    Typical small-business systems and processes use common sense and trial-by error solutions to achieve about 2-3 Sigma, or one error per 5-15 opportunities—a profit killer! You would be surprised to learn the number of problems and amount of rework that occurs every day in your business regarding customer invoices, widgets manufactured, applications processed, products installed, and so forth.

    Applying Six Sigma strategies to your business systems will enable you to get errors and rework below one percent and dramatically boost profit. Most of the hidden waste in your business can be eliminated, if you know what you are looking for. And trust me, it’s everywhere!
     
  2. Theory of Constraints – Every process within a business has a bottleneck or weak link—constraint—that diminishes the output of the process. By focusing improvement efforts on the weakest area of a process (or the weakest system of the business), you will achieve the greatest impact on sales, customer satisfaction, and profit.

    Constraints that limit output can be physical, such as the capacity of a machine, number of people working on a task, weather, or availability of materials. Non-physical constraints might include a company policy, attitudes of employees, or limited product demand. In other words, constraints reduce the output speed, or throughput, of your business systems and processes.

    If you eliminate the bottleneck or strengthen the weak link, you will not only elevate the system, but the entire business. For example, a single forklift in a warehouse prevents truck-loading from keeping up with shipping demands; it is a bottleneck. By adding a second forklift, loading is no longer a constraint to the process and all scheduled shipments go out on time. Sales throughput is increased. There are other ways to eliminate this constraint besides buying a second forklift. Can you think of any?
     
  3. Lean Thinking – In Lean Thinking, a step in a process is said to be "value-added" if it ultimately benefits the customer, and they would be willing to pay for it. Things that do not add value to the customer such as idle time, inspection, mistakes and rework, overproduction and storage of inventory, and unnecessary handling or movement, are considered waste. They add needless cost to a product or service. For example, a step to “touch up” furniture scratched in the delivery process (non-value-added task) should be eliminated by measures that would prevent the scratches in the first place.
     
  4.  Box Theory™ – Box Theory™ is a methodology that breaks your business functions down to manageable systems or “boxes,” concentrating on the vital few that drive success, and elevating them to higher-performance levels. You improve business results by applying the basic principles of Six Sigma, Lean Thinking and the Theory of Constraints to your core systems and processes (the boxes). The Box Theory™ Way is simple and intuitive, patterned after nature’s processes. Improvement efforts focus on six essential areas—process, components, people, quality, speed, and measurement. Box Theory™ is specifically designed for the budgets and busy schedules of small-business owners and entrepreneurs, like you!

Continuous Improvement is Endless

Remember, without a conscious effort to improve quality and efficiency—using recognized principles and techniques—you will hover in the 2-3 Sigma range and lose a significant portion of your potential profit. Effective business systems unquestionably pay for themselves many times over, and they're actually easy to develop once you know how!

Don’t let myths about process improvement prevent you from taking the next step.  Entrepreneurs and business owners everywhere will eventually have to learn these principles to stay competitive and excel in the 21st century. I hope you won’t be left behind.

 

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Tags: Business Systems, Improvement, Laws/Principles, Quality, Efficiency/Speed

The Two Critical Purposes of Your Business Systems!

Posted byRon Carroll

Many people believe that creating business systems means getting organized and doing things in a methodical way. If you believe this, well, you're right... sort of. However, you are probably not yet a converted, transformed, and even obsessed Systems Thinker. You're still looking at systems like most of the world. If you want to tap into the real power of effective business systems and processes, then you need to see them through a different lens.

Systmes Thinker Lens

Let's take a look at the TWO critical purposes of your operational systems.

Critical Purpose 1: Create Loyal Customers

First, business systems exist to help you find and keep customers. They do this by making you:

  • Better than the competition (You have fewer mistakes, defects, and disappointments that turn customers away.)

  • Faster than the competition (You have better response time, and consistently meet schedules or deadlines.)

  • Cheaper than the competition (You're able to provide lower prices and more value, precisely because you are better and faster—the primary means of lowering cost).

Your well-run operation—with effective business systems and processes—will give you a competitive edge by attracting more customers and enabling you to consistently meet and exceed customer expectations. Your company will “stand out like a purple cow in a field of brown cows” (Seth Godin, Purple Cow). People would be crazy to buy from anyone else!

You become the best in Your target market because you have the BEST BUSINESS SYSTEMS!

Critical Purpose 2: Eliminate Defects and Delay

Second, business systems exist to squeeze waste out of your operations. They do this by helping you become:

  • Better than before (You have fewer mistakes, errors, and defects to throw away or rework—money down the drain.)

  • Faster than before (You have a less delay, downtime and inefficiencies that waste time—a costly and unrecoverable resource.)

  • Cheaper than before (Quality and speed reduce cost, making you more competitive and more profitable.)

Your well-run operationwith effective business systems and processeswill create a culture of discipline and excellence, where Results Rule! (Randy Pennington). Employees are happier, productivity increases, costs go down, and profit and cash flow are greatly improved.

You become exceedingly prosperous because you have REMARKABLE BUSINESS SYSTEMS!

Better, Faster, Cheaper

Did you notice that the two critical purposes of your business systems and processes are fulfilled in the same way? When you are better, faster and cheaper, everyone benefits—customers, employees and stakeholders.

Good business systems help you rise above the ordinary; they make you extraordinary! There is no other way!

 

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Tags: Systems Thinker, Business Systems, Customer Retention, Quality, Efficiency/Speed, Cost Cutting