Full Speed Ahead

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How can you create more speed in your company?

  1. Eliminate anything that isn’t needed. Rather than just trying to work faster, assess the process and eliminate unnecessary steps. One way to do this is through process mapping and asking the questions, “Why do we do this?” and “Does this step provide value to the customer and would they pay for it?”
  2. Shorten setup and changeover times in production and distribution. Reduce materials handling and waiting. Reduce part count, number of suppliers, and product assortment. One of my clients cut maintenance technician time by 30 minutes per day by changing the way the technicians’ vans were restocked. The result was over 60 hours per day of savings—15,000 hours per year. Not only did that reduce costs, but often the technicians could do an additional service call per day, which increased revenue as well.
  3. Measure lead times, cycle times, and on-time delivery. These measures drive problem-solving efforts and increase speed. A manufacturing client improved its shipped-on-time from 24 to over 80 percent simply by measuring and posting the results for the staff to see. Knowing the score inspired staff to make quick changes, which dramatically improved results.

Remember to get good first, then get fast. Also, slow down to speed up! Speed is often sacrificed to rework and mistakes or using larger batches to try to be efficient.

 

© 2018, Rick Pay. All rights reserved

This is an excerpt from Rick’s forthcoming book, Moving Into the Express Lane, coming this spring from Business Expert Press.

Rapidly Increasing the Value of Your Company

Many business owners consider succession planning as they age, change life objectives, or decide to move on from their business to something else in their life. Many baby-boomers are considering the sale or transfer of the company they’ve spent their lives building and they want to maximize the value they receive in the transfer. These transfers can include an outright sale to either a financial buyer or a strategic buyer, or transfers to the management team, family members, a trust, an ESOP, or other “buyers.” Regardless, the objective is to maximize value so the owner’s wealth is also maximized.

A rule of thumb for establishing a company’s value is a multiplier times EBITDA (earnings before interest, taxes, depreciation and amortization). For manufacturers and distributors, that multiplier is usually between 5 and 7, but that can vary with industry and buyer. Sometimes the value is significantly different due to the buyer’s strategic objectives. An example is when Krave sold their jerky operations to Hershey for almost 10 times revenue, a number that greatly disrupted industry valuations in the snack meat industry.

If you want to quickly boost the value of your company there are five elements you should consider. The first three are often used by private equity firms and others to help determine value:

  • Profit growth
  • Revenue growth
  • Free cash flow

The next two are used by both private equity and strategic buyers:

  • Strength of the management team
  • Innovation

Take a look at these factors in your company to see how you can quickly improve the value of your company and its attractiveness to potential buyers. It could really move the needle in a positive way for your personal wealth.

© 2016 – Rick Pay – All Rights Reserved

Which is Better, Margin or Turnover?

Last week I was fishing with a friend who is CFO of a significant ski industry company. He mentioned he’d been looking at their retail operations wondering if it’s better to make more margin or have higher turnover. After significant study, he concluded that turnover wins every time. Then our guide, who owns one of the leading outfitters in the region, chimed in and agreed that turnover is the key to success.

Many companies focus on improving margin, but if inventory sits on the shelf, what difference does margin make? The key is to move the product, even at a lower margin, achieving a turnover that produces revenue. Considering that holding inventory can cost 2 to 3% per month (or more if your industry is seasonal) and lack of movement means holding things until next season, turnover is the obvious choice. Clearly selling at a loss isn’t productive, but holding inventory to squeeze out a few more points of margin is a recipe for failure.

Are you turning your inventory quickly? If you aren’t achieving six to eight turns or more, call me.

© 2015 – Rick Pay – All Rights Reserved

Maximize Profit Through Smart Pricing Choices

To raise profits, many companies turn to across the board price increases. They analyze the business’s performance, decide that profits aren’t high enough, and then implement a price increase to produce higher returns. The problem is, all products don’t perform the same, and this kind of price increase can actually reduce profits by driving away business, and reducing total return on your best products.

Examine the Data

In order to maximize profits, seek first to understand. One of the most powerful tools I use to help understand materials and product flow is the “Turn and Earn Report.” This report lists revenue, cost, inventory levels, turns, margins and several other key metrics by stock keeping unit (SKU) or part number. It’s used mostly in wholesale distribution environments, but it can also benefit manufacturing companies to help assess return on products.

Increase or Decrease?

First, look at which products comprise the top 10% of total profits and those that yield the bottom 20% of profits. Often you’ll find that the bottom items actually have negative margins. When you adjust prices, you might actually try reducing prices on the top items, as it may cause them to sell even faster, raising the total profit produced.

Raise prices on the lower profit items, which will either raise profits, or drive demand from the lower demand items to the higher demand items that have better margins. Then you might be able to eliminate the lower items, which will reduce costs and create even more profit.

Don’t just take the easy way out. Examining the data can help you make smart choices about pricing and increase your profit without increasing prices on every item.

© 2014 – Rick Pay – All Rights Reserved.

A Positive Economic Forecast!

Earlier this week I attended the 2014 ISM International Supply Management Conference in Las Vegas. One of the keynote speakers was Mark M. Zandi, an economist from Moody’s Analytics. His thoughts on the US economy and our position in the world over the next several years were very positive. Some of his comments included:

  • Contrary to what many politicians are saying, the harsh weather this winter in the eastern US had little or no impact on the overall economy. What little impact it did have will be completely recovered by the end of Q3.
  • All 18 manufacturing industries they track are reporting growth expectations for 2014. This is the first time ever that all 18 are positive.
  • The non-manufacturing sector expects growth in revenues of 2.2%, growth in prices of 2.2%, growth in capital investment of 10.8% and employment growth of 1.4%
  • Our economic growth over the past couple of years has been held back by the policies of the administration (stimulus et al) by about 1.5%.
  • The ACA is not curbing growth in healthcare costs. This issue needs to be addressed by the end of the decade or early next, or it will become a wet blanket on the economy.
  • Housing is improving as under 30 year olds finally find jobs and move out of their parent’s homes. This could result in 700,000 new housing starts this year with about 2.1 million new jobs.
  • Short-term interest rates will be going up to as high as 4% (now about 0%).
  • The US worker is the most productive in the world. Taking that and currency into account, the US unit labor cost is one of the lowest in the world right now, well below China.
  • Overall, expect strong growth in the US, commodity prices will grow at 1% per year,  there will be a big wave of reshoring and US companies will be very competitive on the world market.

© 2014 – Rick Pay – All Rights Reserved

Variable Costs Drive Change

Fixed costs are fixed and variable costs are variable. It’s a basic tenet of accounting, yet many companies don’t seem to understand it. The problem is that in the short run, you can’t change fixed costs, and therefore the more fixed costs you have, the more limited your cost reduction activities will be. The trick is to make as much of your cost structure variable as you can.

Variable costs are those costs that change directly with changes in revenue. Those typically include sales costs like commissions and freight out, materials costs, the variable portion of labor like overtime and temporary workers, and a few other costs like freight in. Most companies focus on labor costs in their cost reduction activities even though there are much greater opportunities in the other variable cost categories.

In a recent article in the Wall Street Journal (GM Cuts Costs for the Long Haul, October 14, 2013, p. B1), General Motors cites over $40 million in savings by moving just one supplier plant closer to its production facilities. While most of the savings come from reduced shipping costs, additional savings come from reducing quality issues, such as scratches and dents caused by shipping items over a long distance. GM spends over $1 billion per year on logistics, which is a variable cost. By restructuring the supply chain and partnering with suppliers, they are reaping savings in areas where they didn’t even look just a few years ago.

Focusing on your variable costs can yield great savings in the near term. Knowing how to change costs from fixed to variable can yield great benefits for your company.

© 2013 – Rick Pay – All Rights Reserved

Annual Budgets: Your Company’s Value Might Depend on Them

Many companies see the process of developing an annual budget as nothing more than an accounting exercise and often don’t give it the time it deserves. What they don’t understand is that many private equity firms see the budget as an indicator of how proficient management is in forecasting the future.

When the potential buyers come in, one of the first things they ask for is the revenue projections for the next several years, along with expenses and profits for the period. If management’s projections can’t be trusted, then the value of those potential increased revenues and profits can’t be used to help increase the value of the company.

When you develop the annual budget, consider it a test of how well you can predict the future. Give it the time and effort it deserves. The value of your company might depend on it.

© 2013 – Rick Pay – All Rights Reserved

 

What Do Business Buyers Buy?

When thinking about process improvement in your business, the first thing to consider is, what do business buyers buy? I recently spoke at a CEO peer group about how to improve business processes that lead to increased valuation of the company. That increased value might drive a higher price for a sale of the business, greater value in a transaction with the management team, or higher return when transferring to family members or other related parties.

In my experience with several business transitions involving private equity, the buyers were looking for three things – revenue growth, profit growth and cash flow. When you think about this, the reasons are obvious: buyers want a high return on their investment, and growth and cash flow provide that. They don’t typically buy a level of revenue or whether your company is Lean or not. They are interested in an expanding return for their investment.

When you ask the question, what business processes should I improve, the answer is, any process that results in increased revenue, increased profitability and improved cash flow.

© 2013 – Rick Pay – All Rights Reserved

Avoiding the Dreaded Hockey Stick

The profit improvement you could get by keeping a level workflow might amaze you.

Many companies experience the dreaded hockey stick – the big push at the end of the month or quarter to make the numbers. The hockey stick has an enormous, often unrecognized cost: it can actually reduce profitability and morale.

The big push at month-end is often done to satisfy someone who doesn’t even care. I know of companies that do this to make their monthly statements look good for their banker, but many bankers admit they don’t look at monthly statements; they just drop them in a drawer.

Like running a marathon, pace matters in business. Once an organization has reached a certain pace in its work, increasing it becomes relatively easy, which is why it’s important to achieve level workflow in Lean environments.

In order to avoid the hockey stick…

  • Manage work by the day and week rather than by the month
  • Hold short team meetings daily to review yesterday’s results and set today’s targets
  • Aim for each week to be even with (or slightly better than) the prior week

Big spikes at month end (or any other time) will hurt quality, increase labor cost (usually in the form of overtime) and reduce morale. Keeping a level workflow, on the other hand, can boost profit.

© 2013 – Rick Pay – All Rights Reserved

Capacity Needs To Keep Up

I drove through the Bakken oil fields near Williston last week while visiting family in North Dakota. The activity in the region is truly astounding. There are so many workers flooding into the area that there are literally no rooms at the inn for them. Many stay in row upon row of temporary buildings, and some stay in motels as far away as Minot, a 125 mile drive. Some of those motels are booked solid for the next three years.

One thing I noticed is that the highways have not been improved much, if at all. I suspect there are plans for that, but as of yet, there has been little effort to widen the roads to accommodate the fleets of heavy oil trucks and workers’ pickups.

Why is it taking so long for infrastructure to catch up with demand? The boost in oil production began in 2008. Surely someone realized that local infrastructure would need to keep up. New motels and other businesses are springing up, but five years after the initial boom, where is the road improvement?

In business, infrastructure often lags behind during periods of growth. Many businesses take time to plan revenue growth and new product development, but they often forget to plan for the increase in operations and supply chain to support that growth. Operations and supply chain strategy should develop in close concert with revenue growth plans to assure that products can be delivered on time and customer service levels exceed expectations.

Without adequate operations and supply chain planning, companies end up like the towns of the Bakken oil fields: suffering from lack of worker housing and inadequate roads – the very things that make further growth possible. When the capacity to support growth is an afterthought, growth itself becomes stunted.

© 2013 – Rick Pay – All Rights Reserved