The Foundations of Profit Operations

Reading time: 6 minutes

"We need to implement six sigma!"

"We need to start implementing lean tools!"

Alberto was clearly agitated.

Quite understandably, he just had a meeting reviewing the latest results.

He was used to make money, not anymore.

Alberto owns a company that makes technical plastic parts.

For years they produced low-volume series, for a big variety of customers and industries.

Until they decided to engage in the automotive industry.

This change allowed them to get new projects.

To get bigger volumes.

With it, a bigger team and bigger challenges.

They were missing deliveries, having quality problems, losing money...

That′s why we were on the phone.

I had to tell him: "before running, we need to know in which direction..."

He looked puzzled so I added:

"I know you want to implement a lot of things, that you′ve been told that there are many tools to implement that.... will help you.

But before that, we need to set the bases, the foundations".

And I will use this story to lay down what I understand as the bases.

It is also a way for me to lay down the next articles by topics.

1- WHAT IS THE CORE OF OUR OPERATIONS?

If you′ve read my previous post you will recall this quote:

Operations is what delivers the value you've promised, while generating a profit in return.

This has two parts:

1. Delivery of value towards the customer: your product or service and, the associated intangibles with it.
2. Delivery of value towards the company: making money for the company.

I don′t know any company that makes money without 1).

I don′t know any company that makes 1) without 2) and lasts for long.

So we need to do both.

Good. Now, why is this important?

Because the balance between both is challenging.

Operations sets all of those processes, systems and whatever it needs to happen, to meet both elements.

In a simplistic but practical way we can use this image:

Your business is the black box.

You deliver value to your customers.

You get paid in return.

Part of that money leaks outside your business.

What is left, is your profit.

(at this point, for the sake of simplicity, we will ignore a big factor, time.

When you pay and are paid, is extremely important)

Easily some questions raise:

What we need to do to deliver value? So we get paid in return...

How can we minimize the leaks? So we get more out of our hard earned money...

But also:

What are we doing that is not delivering value?

In case of Alberto′s company several problems were present:

• They were missing deliveries.
• They were leaking money trying to meet those deliveries.

The problem: they didn′t know why and where they were leaking.

I know, this is extremely simplified.

But is a way to think.

A way to look at the problems you face.

The day to day tasks keep us busy, often times, diverting our attention from what is the core of running the business.

2- ALIGN WITH YOUR BUSINESS MODEL

OK, so now the concept is clear, but next what?

Remember what we′ve just said: we need to setup all the processes and systems that make that happen.

And you need to understand that, is the balance again, what makes a difference.

Let me explain following on Alberto′s case.

They came from a business where:

• Volumes were low.
• Quality was expected to be extremely high.
• Being high complex parts, the sales prices were high.
• Price was secondary as long as the technical function could be met.
• Margins were fairly healthy.
• The customers were highly engaged in the development.

When they entered the automotive industry, they were serving a product where it is expected:

• Fast delivery and safety stock.
• Relatively high volumes.
• Zero quality problems.
• Low prices, and expected a reduction in price over time.
• Margins were in some parts, negative.

As you can see, the setup of one case or the other is very different.

Or at least, you need to prepare beforehand.

You can′t serve high volumes with low capacity means.

In a low margin environment you are much more sensible to costs.

Is volume what you use to drive profit (as an absolute).

On the contrary and most of the time, serving low volumes with high capacity means, is an overkill.

So:

You need to align your operations with your business model.

When the company is growing, the operations also need to adapt with the increased revenue.

Serve more customers.

Deliver more value, or even a different type of value.

The challenge here is to do that, while keeping or minimizing the leak.

Fail to do that, and you might end up with no business.

3- PEOPLE IS WHAT RUNS ANY BUSINESS

Now, all those systems do not appear from the ether.

Is people who creates, runs and develops them.

As is usually said: "People are your biggest asset."

But I want to add or reframe it:

People are the only asset that impacts all your assets and liabilities.

People that make a company:

Run the equipment you′ve bought (an asset).

Orders the inventory you will be consuming (asset).

Setup the paying terms with your suppliers, to whom you pay materials (liability).

Develops the know-how (asset).

etc...

It is also people who take decisions, therefore affecting how the business runs.

So people, are the base of your business.

We people, need care, training, guidance....

We are the strongest link and the weakest at the same time.

People, to me, are the most complex part of any business.

It is quite often, also the biggest cost in a company.

So:

• Who is your team.
• How many members.
• How are you organized.
• How well trained.
• How well communication happens.
• ...

It is extremely important for your operations.

Alberto′s team had grown fast, patching the problems that were being raised.

The team was excellent, just needed space to breathe and guidance.

Their organization and communication needed improvement.

A company of 20 people has different needs of a 200 people company.

Managing team growth is challenging, specially if it is at a high pace.

One note here:

People needs time to learn and adapt to the company and the new job.

It is not "plug and play".

It does not work like with machines: "give me two. I double the capacity."

4- FINANCIALS GUIDE YOUR OPERATIONS

Ultimately, how do you know if you are meeting both elements?

Enter the numbers.

Financials.

I know, there are things that can′t be measured in that way.

But on the long run, financials will show the truth.

You do not deliver? You Do Not get paid.

You do deliver, but leak too much? You don't make a profit.

Numbers are cold, and excuses do not work with them.

At the same time, numbers are a guide and an analysis tool to help your operations.

You will discover what happened and what went wrong.

You will be able to track improvements.

You will be able to find opportunities either to add more value or to reduce the leak.

Operations need to run properly to have clear numbers, and clear numbers are needed to run proper operations.

It is a paradox, that has only one solution: improve all the time.

With better operations you have better numbers.

For example: controlling your inventory or your scrap.

With better numbers you also improve your operations.

For example: with your increased control of inventory, you can see where your cash has been standing still.

Then you can re-calculate and re-prioritize your stock.

Alberto′s company had a quite common issue.

The clarity of the numbers was not good.

They struggled to get proper contribution margins.

Even the fixed costs were blurry.

So making improvements without a clear roadmap is difficult.

Operations need to work hand in hand with finances.

Both need to improve the clarity of numbers.

I can hear some of you saying: "well, but we have operational KPI's like OEE, and Scrap, and..."

That's all good.

But I can't count how many times I've seen a report of an improved KPI and the financials remained the same or worse.

Sometimes two KPI's working against each other (like more production done, just to be stored, increasing inventory value)

Improvements on all of those KPI's should end up improving the financials.

Otherwise, something is wrong.

Use financials as a guide.

5- PROCESSES AND SYSTEMS

You see that I left for the end, what most people talk about.

And it is on purpose.

Here′s why.

Because the systems and processes you setup need to respond to what we talked about in points 1 to 4.

To answer whether those systems work or not, you need to first know what you are seeking to achieve.

Back to value and profit.

Because to build them, you need the right people with you.

Building those, without that guidance, you can be building the wrong thing.

You could be improving something that yields nothing in return.

And it is in some way, the reason why some growing companies struggle.

They build systems to patch things, but the fundamentals are left behind.

And that′s why I told Alberto to first set the foundations.

Because the tools he mentioned are, tools.

And those are fantastic tools, to solve the right problems.

But without the foundations clear, you can be solving the wrong problems.

Now, what are we aiming for here?

Let′s go back to our black box concept.

The systems and processes are the inner workings of that black box.

And we want those:

• As simple as possible: the easier to operate, the easier to fix, the easier to improve.
• As robust as possible: we want predictable, reliable systems.
• As efficient as possible: remember the leak? As small as possible.(This includes being as fast as possible).

And this goes for both your production systems as well as your administrative systems.

How you run your machines.

How you run your communications.

How you retain your know-how.

I know, this is generic at this point.

Bear with me, we will peel the onion step by step.

Alberto′s organization, had fantastic manufacturing processes.

Just not well suited for the capacities required.

The rapid growth led to administration systems that made them unreliable and slow.

They had redundancies and were missing things at the same time.

His organization grew in numbers and in bureaucracy.

All of that, is just normal. Companies evolve, is part of the process.

Fixing it, is the fun part ?? .

FINAL NOTES

What I shared is what I believe are the foundations.

And of course there are simplifications.

The world is much more complex.

But it helps set the base.

It also helps as a check for you, as an owner, to go through.

Evaluate where you are.

And address what needs to be addressed.

Manufacturing can be really challenging and stressful.

Many things to do.

Many levers to move.

Sometimes, going back to the foundations gives you space to breathe and recompose.

In future articles, we will deep dive into those elements.

Thanks for reading me.

↓

I appreciate you've read this far, I really hope you enjoyed it and learned something of value.

If you feel you can contribute with your insights and ideas, please feel free to add comments.↓

This way we can help each other even further.