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Promentor’s Geoff Norcott reflects on our past success to assess how best to increase the competitiveness of a business through cost reduction and other methods.
In a recent assignment, as with many others, the client was looking to reduce costs to be more competitive. This, of course, is always a necessity, whether to become more competitively priced or more profitable. At the end of the day though, it is all about return on capital or funds employed (ROCE or ROFE). There are two parts to that equation, namely profit and funds employed. Moreover, clients are often looking for more funding to support restructuring or growth.
The quickest way to generate funds is to use less capital. In the specific example, being a manufacturer of significant capital items, the capital tied up in inventory (particularly Work in Progress) was significant. Throughput time was measured in months and much of the time was dictated by holdups for various reasons.
Promentor mapped the end to end process and determined that the throughput time could be reduced to around twelve weeks simply by eliminating the causes of delays and to nine weeks with some process changes. This means that working capital could be reduced by one month’s cost of production and by potentially seven weeks. In this case $700,000-800,000. Reducing throughput times, by reducing non-productive time, means happier customers (faster delivery), more capacity at no capital cost and a workforce not continually frustrated by delays.
The exercise also highlighted where improvements were needed; ensuring the customer’s order was well documented and agreed, ensuring engineering had time to get the design right before issuing to production (a little more time in planning pays dividends during production) and ensuring quality sign off at each key stage of production (minimise pre-delivery). Much of this will provide direction on where the traditional efforts of cost reduction should be focussed to maximise profitability.
To conclude, of course, profitability is essential as no profit results in no return on investment. It is clear that paying attention to the funds employed often not only improves returns but gives direction to cost improvements.
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The Case for Investing More in People
‘Productivity isn’t everything, but in the long run it is almost everything,’ wrote Paul Krugman more than 20 years ago. ‘A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise output per worker’. There is a virtuous cycle between productivity and people: higher levels of productivity allow society to reinvest in human capital, and smart investments result in high labour productivity. Productivity in most developed economies has been anaemic.
Harvard Business Review’s Eric Garton discusses the need to grow businesses by investing in the productivity of the people, the workers themselves, for the sake of increasing productivity. more
Competing in a World of Sectors Without Borders
Digitisation is causing a radical reordering of traditional industry boundaries. What will it take to play offense and defence in tomorrow’s ecosystems?
Venkat Atluri, Miklos Dietz and Nicolaus Henke explore the importance of competing in a world where business sectors are not divided by nation or land, and what this means for encouraging business growth. more
The Fastest Way to Grow Your Business
Sometimes we make business far harder than it is. We over-think our strategy, complicate our product line, worry too much about our stuff. These are important issues to be sure, but they pale into insignificance compared to the one area of business that contributes most to success. That area? The time spent daily on Sales.
Siimon Reynolds of Forbes Magazine provides a practical perspective on approaching business growth, with a time-orientated framework. more
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This past month saw the Reserve Bank keeping faith in the Australian economy, keeping interest rates on hold despite slowing economic growth. Indeed, RBA’s governor Philip Lowe predicts the economy will pick up, and wages increase. Businesses call for calm in the face of North Korea’s political standing and increasing frequency of nuclear weapons tests. An update of Australia’s deficit shows a worrying doubling to $9.6 billion.
RBA keeps interest rates on hold despite... more
The economy is picking up, and wages are about to climb... more
North Korea: Investors urged to keep 'cool heads'... more
Current account deficit doubles to $9.6b, government spending surges... more
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