A Focused Strategic Plan must be Integrated with Operations and Converted into an Executable Plan
Operations is where execution yields results - measurable results. The best laid plans never go as planned, but through measurable results, it can be quickly redirected to get back on target or alternative plans can be developed.
In order to attain the desired results from Operations, all pieces of the puzzle must be be properly designed , sourced, timed and implemented. If any piece is not optimized, it will not fit, and the outcome will be less than ideal.
The Management team is tasked with effectively communicating and executing the plan. "Management ... has to lead the worker toward productivity and achievement ... Above all, it is responsible for producing the results ... for the sake of which each institution exists." Peter F. Drucker, Management: Tasks, Responsibilities, Practices
This is why it is absolutely critical that your management team thoroughly understands the strategic plan and how the annual plan is a component that yields the desired result. Do you have the right people in the right places - "Aces in their Places"?
"Management ... has to lead the worker toward productivity and achievement ... Above all, it is responsible for producing the results ... for the sake of which each institution exists." Peter F. Drucker, Management: Tasks, Responsibilities, Practices
Performance must be measurable. Benchmarks must be established and continually evaluated for performance. Any deviation must be understood. Each performance metric deviating from its standard level of performance must be evaluated to determine what corrective actions need to be undertaken. The sooner it can be isolated, the sooner the Profit Leaks can be stopped.
A Profit Leak is an excessive expense that consumes a portion of revenue. It is an expense that exceeded a given level of performance to generate the sale. As such it siphons off money from the revenue stream that would have flowed down the P&L statement into Net Operating Profit. Because expenses exceeded its desired level, it eliminated profits that could have been utilized to generate additional revenue streams.
Another way to eliminate Profit Leaks is to analyze the operations for performance improvement. It may be time for your company to ask questions: Do we still need to perform this task? Is there a more efficient process that could yield improved productivity? Would the addition of new technology result in improved performance? Are employees properly trained in the execution of their responsibilities? Often the answers to these questions can be found in the employee most responsible for performing the task. They are the ones who intimately know what works, what doesn't and what obstacles lie in their way.
"There is nothing so useless as doing efficiently that which should not be done at all." Peter F. Drucker
Labor expense is one of the largest expenses companies incur. It is a controllable expense that needs to be continually measured. What component of labor is expanding: salaried, hourly, benefits? Is productivity slipping? Has overtime become an issue? Maybe excessive turnover is resulting in inefficiencies. What about wages - are they higher than the competition? Maybe that is okay because part of the strategy is to pay a higher wage to attract a slightly higher quality employee compared to the competition. Whatever the situation, Labor needs to be tightly scrutinized, for this is one area where significant Profit Leaks can occur.
One of the best strategies is to hire for attitude and teach the position's responsibilities and duties. As long as the employee has a good skill set, training can yield significant efficiency increases. Once trained, the individual's strengths must be tied to the position's requirements. If a person with great attitude is assigned an area which does not utilize their strengths, productivity and creativity will not reach optimization, for one's weaknesses can only be improved upon marginally. As time goes by, the employee who is not utilizing his strengths will not be as productive and attitude will begin to fade - a double loss.
Profit Leaks can also be found in Inventory and the Supply Chain. Inventory must continually be monitored for proper par-levels. Carrying too much inventory in slow moving products consumes too much cash - it remains tied-up in the warehouse until shipped, billed and collected. Product must be evaluated for its movement and decisions need to be made whether to continue carrying the product at all. Slow movement may indicate a timing issue, competitor pricing and market penetration, new technology making it obsolete, customer preference trend changes, etc.
The Supply Chain needs thorough vetting for numerous variables. Evaluate the product for quality and the price-value relationship. Is the customer still willing to pay our price for the value they are receiving? If not, either the price must be adjusted, the quality quotient changed, or maybe the product must be discontinued and an alternative found. Are suppliers charging a fair price for their products? Can they deliver on time and in the quantities demanded? What is their lead time? Do they have significant capacity to yield to quickly moving demand curves? In addition, outsourcing may be a great alternative. Could another company produce the product at a lower cost and thereby free up capital to be utilized elsewhere in the organization? This may be a great strategic move, but it must be thoroughly evaluated.
Another Profit Leak can be found in Facilities and Equipment. New technology is constantly moving the yield curve. Is it time for an investment in new facilities / equipment? Maybe the facility design and layout needs to be redesigned. Maybe new equipment will yield a lower cost structure and higher output levels. All new investments must be evaluated for profit thresholds - net positive cash flows.
Administrative functions can also be a source of Profit Leaks. General and Administrative expenses often rise over time and get bloated. Duplication of effort and inefficient layers of bureaucracy can be pared back or eliminated. This not only frees up capital for better utilization elsewhere, but it also streamlines, and more efficiently integrates, the lines of communications within the organization.
Marketing is often a great source of Profit Leak. Although Marketing is tasked with generating revenue, there is little review of effectiveness. Generally, it comes down to "Did we meet our revenue targets?" But what often happens is there is no efficient analysis of the expenditures. Is the money being spent to maintain customer awareness or to drive incremental sales? Do the incremental sales attain profitable thresholds? If not, new marketing programs must be designed. Every expense must contribute to threshold profitability, otherwise, it must be discontinued.
Each organization must Benchmark its operations. This may include Financial Metrics (financial goals), Performance Metrics (operating efficiency), Product Metrics (product qualities / characteristics) and even Strategic Metrics (competitor business model analysis).
Benchmarking Metrics can be established in many different ways: Internal, External and Competitive. Internal Benchmarks yield insight into a company's perceived functional performance. This yields insights into how multi-unit organizations compare to each other.
The best performing units must be reviewed to ascertain their performance. Is it driven by volume, newer / more efficient facilities and equipment, management, employees, local culture, lower cost-basis, etc.? Once determined, then those factors that contribute to the best performance can be reviewed for application elsewhere within the organization. If it is management and employee driven, maybe additional training is the answer. If it is motivational, maybe one group hired for attitude and another hired for skill. Attitude wins! If it is facilities and equipment, these will need to be evaluated to determine if now is the time to invest in new and more efficient facilities / equipment. Maybe it is simply due to efficiency. One group may have found a process improvement which eliminates wasteful resources or time. These efficiencies can them be transferred to other locations.
External Benchmarks can be a valuable assessment of one's performance. This is a process by which one evaluates practices and methodologies found in companies in different industries. For example, a distribution company may have one of the lowest cost structures in the industry, and they are able to cut delivery times in half. Although the company looking to improve its process may not be a distributor, it may have its own warehouses that are seeking ways to further improve their performance. Oftentimes, looking outside one's industry yields new insights that would not have been gained by staying within the confines of one's own company or industry. Refreshing one's "eyes" stimulates creativity. This is another reason why the benefits of consulting and advisory services can far exceed their cost to engage and employ.
Another area to review is Competitive Benchmarks. Here an industry, or specific companies, are analyzed and evaluated to identify the strengths and weaknesses of their business model and specific processes. Metrics can be established for various products and services, or in total. This aids in understanding the marketplace in which your company is competing.
Does your management team, and employees, understand your company strategies and Strategic Goals? Do you have "Aces in their Places" - Right People / Right Places? Is your team executing the planned strategies? Are you measuring results - Benchmarks / Metrics? Have you identified Profit Leaks? Do you need help answering these questions or implementing solutions? Focused Strategic Integration is the next step.