When companies want to grow, they tend to focus on increasing sales and marketing, and new product development. They promise a product or service to a growing market, but can they keep that promise? Picture the captain of a ship standing on the bridge. He hurries over to the engine room communications device and tells the engine room, “Full speed ahead!” What if nothing happens?
This is an understandably frustrating situation for CEOs of mid-market companies. The sales department has new programs for growth, new products are ready for release, commitments are made, but operations can’t keep up.
How can you be sure your engine room is ready? Do you have the fuel and agility to respond to the call for full speed ahead?
There are three things that need to be in place for operations to provide acceleration for growth: the right measures, operations capacity, and inventory turns.
Many companies either don’t measure effectively or measure the wrong things.
Most IT systems collect data related to accounting, but don’t do a very good job collecting the kinds of data that operations can use to fine tune their organization and processes. Keep in mind, key performance measures should help change behaviors and provide focus on those things that will drive change and acceleration. Some of the vital things to measure include shipped-on-time, productivity, margins, asset turns, lead-times, and speed.
Many companies also make the mistake of comparing themselves to industry averages. The industry average is just that: average. Remember, half of the companies are better than average. When I develop benchmark data for my clients, the sources I use show the top 25% or even the top 10% performance. Taking inventory turns as an example, for one industry the average was four turns per year. The top 25% was eight turns. The top 10% was 12 turns. If you want to be world class, stop benchmarking average and start looking at the top 10%.
Inventory turns are the jet fuel that drives acceleration.
Inventory is often the first- or second-largest consumer of cash for organizations. Bear in mind that inventory can take many forms. For service organizations, an available hour is inventory. Keeping this important asset turning (and turning rapidly) provides jet fuel for growth.
In many cases, the cash a company needs for investment in growth is literally sitting on their warehouse shelves. Not only does this inventory tie up cash, the cost of holding it, which can run from 2% to 3% per month or more, reduces profitability. I have one client who had inventory that had been sitting there since 2006, and another had stock in their warehouse that was over 20 years old. Most banks won’t lend on inventory that’s more than one year old. Even if it might eventually sell, what I call “glacially slow moving” inventory eats away at cash and profitability. Quick inventory turns can free up cash.
The third element for acceleration is muscle in the form of capacity utilization.
I’ve helped a number of companies increase their capacity by 40% or more without any capital investment. This really drops profit to the bottom line in the form of fixed cost leverage. Some companies try to use lean tools to help, but lean makes you skinny without adding much muscle. Capacity can be dramatically improved by focusing on flow, lead times, and speed. Vendor partnerships, internal process improvement, repetitive exercise and practice make a company strong. Adding muscle in the form of increased capacity really accelerates growth.
What does your customer want? Speed, ROI, quality, flexibility and agility. The growth accelerators allow you, as the captain of your ship, to call for “full speed ahead” and get a response that throws you back into your seat like a jet taking off.
© 2014 – Rick Pay – All Rights Reserved