Identifying Areas of Waste in Your Business
Do you remember when you started your business and you were lean and mean with the expenses? You looked for every efficiency and pinched every penny to make ends meet and keep your business growing and profitable. Then it happened. Your idea took off, the phone started ringing and orders started coming in. Before you knew it, your priorities shifted from cost containment to service and product delivery. The emphasis was on expanding the facility or adding people to meet the demand. At some point your growth started to level off and now, as you look around your business, you see waste. Or, you see symptoms of waste or problems due to inefficiency in your business.
Waste in your business may be rearing its ugly head due to the soft economy. Are you looking at ways you can cut your costs and still keep the employees you have invested in over the last several years? Alternatively, you may be one of the lucky (or smart) ones whose business is growing despite the slow economy, but you want your business to run leaner. Whatever the reason, constantly seeking ways to cut waste will allow you to enjoy the long term viability of your business.
Toyota developed a waste reduction system to address and eliminate the inefficiencies in their business. You can apply the same system to your business by identifying inefficiencies and, with your management team, put a plan to address these issues into place. We offer these seven starting points for your convenience.
A company over-produces for an order in anticipation of waste or damage. In a manufacturing setting, an example of overproduction would be producing 10 component parts for an assembly that requires only eight. It may occur when purchasing buys extra parts anticipating spoilage or damage. In a service setting, overproduction would occur when staff spends too much time on a project that can only be billed at a certain price.
This is the amount of time that your product or service spends waiting in the system for someone to add value to it before it goes out the door to the customer. Think about the path your product or service takes from the time you get the order to the time you collect the cash from your customer. Think about all the points where value is added to the product or service as it goes through the system and how much time is spent waiting. If you can eliminate the waiting time by 50% (which is a lot) you can reduce your cost and improve your cash flow tremendously.
This is the critical path that your product/service takes though the plant. What inefficiencies are there in that path? What time or waste can be eliminated from that path? Do you remember the Ford production model where raw steel went in one side of the plant and a finished automobile came out the other end? Think about the flow of work in your organization and ask yourself, “Does this flow make sense for your business?”
4) Inappropriate Processing
Are you using the right tool or process for the job? For example, using a 20 ton press when a 10 ton press will do the job. Are you using an experienced senior executive to do a job that a staff person should be doing?
Think about the inventory in your business. How often do you “turn” your inventory in a year? How much old or outdated inventory are you storing and counting each year that is not going to sell or be used. Think about reducing your inventory to what you will actually use and/or sell.
6) Motion and process improvement
At first this may sound much like transporting, but this deals more with the waste of motion that people in your office or shop may encounter as they do their job. Think about time and motion studies and how you can make the workplace more ergonomic for your employees. When your employees sit down to perform a service or work on a product, do they have all the parts, tools, plans and schematics that they need to complete the job? Do they have to get up and waste time looking for something they needed to complete the task?
This is probably the biggest waste area of all. Where do defects occur in your business? The answer is EVERYWHERE. Most defects and mistakes occur due to poor processes, lack of training, or lack of proper equipment. Defects and mistakes cost you money and customers.
By identifying the areas of your business that are most likely to accumulate waste, you can then develop a plan to reduce or eliminate this waste. The next issue of Route to Profits will detail how to perform a waste reduction audit with your management team. Stay tuned!
Byron Hebert, CPA, CTP, is a director at PKF Texas and practice leader for the Entrepreneurial Advisory Services group. PKF Texas can provide assistance to companies looking to implement the techniques detailed in this issue
- Byron Hebert: 713-860-1455, firstname.lastname@example.org
- Karen Love, Director, Practice Growth – 713-860-1459, email@example.com
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