What Blocks Your Profit & Profitability?

Are you like me frustrated by too little growth in profits and profitability? Is your business under severe pressure from your competitors that seem to be more successful than you? Do your customers pressure you for more – lower prices, better service, better products?

How do you react? What actions do you take? Do most managers primarily resort to cutting operating expenses? Look at annual reports. Most companies will report they are acting to make their business more efficient and lower cost. Most companies will talk about their new product pipeline. Very few discuss actions (beyond new products) to increase prices and sales volumes.?

Is cutting cost the best way to more profit and profitability? Remember, you cannot cut costs to zero. Your business will be gone well before costs are zero.??There is no limit to sales. Look at Apple sales (and profits).

Dr Alan Barnard asked the question, “Which improvement has the greatest impact on your bottom line?”?

·??????A 1% decrease in operating expenses?

·??????A 1% decrease of totally variable cost? (The materials and components you buy.)

·??????A 1% increase in sales volume?

·??????A 1% increase in price?

The table shows the impact. You probably knew that a 1% price increase has the greatest effect. You probably argue that the competitive situation does not allow a 1% price increase.

What prevents focus on sales – gaining volume and price? What would cause the market to buy more and at higher prices? If the market does buy more, what will be the impact on costs?

We know we can challenge you and your colleagues to think differently about your business. We know we could help your company find high leverage opportunities. We know how, once improvements are achieved how you can capitalise on them. We know the things you need to do to sustain what you have achieved. We know that once we have challenged you that you can make a lot of the planned improvements yourself. We would like to be a part of your improvement team.

We talk about unique and different solutions. Your business will operate in a significantly different way. A lot of business common practice will go out the window. New paradigms and work processes will be developed. You need to decide to be different.

The graphic below is the dilemma we want to put you in:

Companies must decide which way they want to go. (If you think about most companies’ actions, they do a little bit of both. They compromise. Florence Hanson wrote: If you constantly compromise things in your life, how will you ever realise your full potential? Are businesses any different?)

I have a short story to illustrate an organisation’s decision to do something new and, for them at least, unique:

The company is one of many in a large corporation. It was not doing well and was under constant pressure to show a better bottom line. The corporation directed them to improve without adding personnel. Management tried to get two new design engineers to strengthen their ability to engineer to order. They had a good story. The engineers would cost 100k€ each and would soon deliver 5 times that amount due to higher sales. The corporation did not authorise the requested engineers.

They still had to improve bottom-line performance. How could they possibly do that without the proposed added engineering capacity?

We took their sales organisation through a discussion of what they could do to improve the bottom line. They learned that many of their big orders put a lot of pressure on design engineering. Big orders were usually complex and required many design hours. We asked the salespeople to calculate the gross margin these big orders generated per hour of design time. They did that for the smaller and less complex orders too. You can guess the result.

The sales organisation changed their focus. From that meeting on they sold much more of the less complex smaller orders and fewer large and complex ones. They effectively protected the bottleneck from work that produced little gross margin per hour of design.

The result was a 20% increase in sales and a significant boost to profits. The table shows what happened.

This sort of solution is not without its traps. Too many simple and small orders will eventually cause design engineering to lose expertise relative to competitors. Small simple orders are also less challenging and less satisfying for ambitious engineers. The company risks losing their better people.

Should corporate eventually agree to more engineers careful thought must be given to the sales mix. The bottleneck will no longer be the bottleneck. The financial and economic situation will be different. Management’s responsibility is to respond to the change and help decide the best direction for salespeople to take.

This story is a small example of what we do. More is almost always possible. We might have looked at all the tasks the bottleneck engineers perform. When we do this, we often find tasks that are not needed or tasks that could easily be performed by some non-bottleneck resource. Add 10% capacity in the table above. Profit increases to 135 and return on sales to 10.4%.

WE do such as the above, and if you need it, we have the software to sustain the?advantages you achieve

My email: [email protected]