The Cheapest Way to Improve Profitability

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Inflation. Supply chain woes. Gasoline prices. Talent shortages. The R-word That Must Not Be Named (shhh, you’ll make it happen!). Recently Vistage members in Knoxville spent a morning with expert speaker Xavier Douwes. He opened his presentation with this pithy remark: “Operations is really the non-sexy secret to success in every business.” (Proof: 35,000 business books are published each year, and seldom does a book about operations make it on to the pick lists at or Barnes & Noble.) 

We then spent three hours learning about a few principles from Six Sigma methodology accompanied by some concrete actions. If taken with some intention, these actions can improve profitability in as little as 30 days.

Here are some take-aways from the Six Sigma world which can help you to get even more traction with your strategy for the second half of 2022.

Define success.

This is as seen in the eyes of the customer, not us. It’s important to get really specific here, as often what we’re told (and sometimes what we hear) are not what our customers actually care about. We have to dig deeper, and when we do, we usually find that it’s really only one or two things that top their lists because those drive everything else.

Then we have to measure that success. Lord Kelvin (yeah, the temperature guy) said, “To measure it is to know—if you cannot measure it, you cannot improve it.” In my experience most companies are at the extreme ends of a KPI spectrum: some companies measure some basic things that aren’t really dialed in to what’s important, while others have so many metrics that they’re not helpful. How do we decide what’s worth measuring?

Manage inputs, report outputs.

First, remember the GI-GO rule: Garbage in, garbage out. Get crystal clear on which inputs directly drive which outputs.

Second, anything can be measured, even those soft, squishy things which you’ve convinced yourself defy measurement. Outputs are reactive (they’ve already happened) so our focus should be on inputs, because they’re actually predictive of the outputs.

Third, there are inputs which we don’t have much control over (supply chain, anyone?). However, once you take a hard look at all the inputs contributing to your outputs (most business outputs have at least three inputs), there’s good news: If you get really good at managing what you can control, they will make what you can’t control irrelevant.

Know your Vital Few.

This is as compared to the Trivial Many. The success that you defined earlier only comes from mastering the short list of the things that truly matter. Our ol’ buddy Wilf Pareto reminds us to stick to 80/20 thinking: 80 percent of our outputs are driven my 20 percent of the inputs. Stop trying to boil the ocean.

A great way to converge on what’s truly vital is to ask these questions:

  • What needs to be true or in place in order for the outputs we want to happen?
  • What inputs require care and feeding from us to yield the outputs we want?
  • What would it take for us to lose our best or ideal customers?

Focus on and measure those things, both inputs and outputs. Fun homework: Watch/Re-watch the movie “Moneyball,” it hammers this point home pretty well.

Kill variation.

It’s important to acknowledge that variation is natural. It happens all around us and it’s normal. In business it’s the enemy and we must kill it.

This is not to say that we can’t customize our products or services based on what our customers want. Your drink of choice from Starbucks is infinitely customizable, but if you’ve ever taken a peek behind the barista counter, you know that they’re measuring everything out to your specifications – precisely, and to the now-standard recipe which you created from the app on your phone.

To kill variation first we must measure it. How do you measure the variation of your steps and processes? Many companies use averages. Never measure averages, because they lie. They’re not giving you an accurate picture of reality.

We’ll skip a detailed explanation of statistics and bell curves and standard deviations here; suffice it to say that the variations in your processes are eating your lunch more than you know, and averages don’t tell the real story. More useful is range (minimum and maximum, compared to where we want to be).

Relentlessly pursue standard work.

Standard work kills variation. It’s exactly how your customized drink from Starbucks tastes the same no matter which Starbucks you go to. The barista is just following a prescribed series of steps (a recipe) just for you.

For work to be standard it must first be defined at a high level and then followed by everyone. This is done through uncomplicated written procedures, documented processes with flow chart diagrams, and checklists. Think checklists and bullets, not 100-page manuals.

More homework: Check out the book The Checklist Manifesto, by Atul Gawande.

Eliminate losses.

From your first contact with prospects to the (hopefully successful) conclusion of serving them with your product or service, you and the people in your business are following a series of steps. MBA types like to call these things value chains or workstreams – let’s just call it a process. This process has a certain flow in which there are usually several interfaces and hand-offs.

The hand-offs in your processes are they key. Errors are caught and must be corrected. Defects and blemishes need to be buffed out. Maybe some units of product are rejected. In other words, the hand-offs are where a lot of the re-work and inefficiency are hiding.

The key concept here is realizing that errors, defects, and re-work due to variations in our processes are actually multiplicative, not additive. Losses always have more power than gains. Translation: Not getting it right the first time have way more cost in it than you think. In our workshop we learned via simple math (not magic, not statistics) that if we’re able to reduce the number of variations at each step of a process by half, we can actually double our profitability by the time the product or service is delivered to the customer. Whoa!

With some measurement, some math, and having everyone on your team take a fierce and collaborative look at their work with a “my-outputs-are-your-inputs” mindset, there’s no tellin’ how much serious coin you’ll find under the proverbial cushions of your business.

Thanks for reading!

Hi, I'm Kurt Greene, owner of Arrow G Consulting. I also lead CEO/executive peer groups in Knoxville for Vistage.

When I’m not helping CEOs and senior leaders to improve themselves and their companies, you can find me re-arranging the stack of unread books on my nightstand, daydreaming about airplanes, and seriously thinking about getting the ol' college rock band back together. Learn more about the exciting work we're doing here at Arrow G Consulting HERE.