Improving Productivity, Removing Cost and Keeping It Out
A recent Wall Street Journal article reported that quarterly profits and revenue at big American companies are poised to decline for the first time since the recession, as some industrial firms warn of a pullback in spending. The authors point out that industrial companies are being buffeted on multiple fronts: slumping energy prices, the economic slowdowns in China and Brazil, a strong dollar, and the potential for rising interest rates.
According to the article, “U.S. manufacturing production rose in September at its slowest pace in more than two years and customer inventories remain high.” Charlie Smith, chief investment officer at Fort Pitt Capital Group said, “The ability for corporations to take a 1% to 2% revenue line [gain] and turn it into 5% to 6% profit growth is waning.”
For many companies this time is the heart of the 2016 forecasting, planning and budgeting season. Business leaders are busy setting revenue targets, finalizing capital improvement plans and allocating business unit and department budgets for next year. Estimating potential efficiency gains is an important element of this process.
When setting productivity improvement targets, we’ve found that most companies set their sights too low. They often budget for 2% productivity gains, or maybe shoot as high as 4%. If you really want to release employee creativity and build a market advantage, business leaders should set their annual productivity targets higher, say somewhere between 6-8%.
In moderate- to low-growth environments, productivity improvements will enhance asset utilization and reduce operating costs. Productivity growth can help to offset negative external factors such as raw material price increases and fluctuations in foreign exchange rates. Don’t just look for productivity improvements on the shop floor. Consider seeking out opportunities to streamline administrative processes in accounting, customer service, and sales and marketing.
Here are three things you should consider when operating in periods of low growth:
1. Rightsize Your Operations
Create the agility you need to adapt quickly to changing business conditions. Whether you’re already embracing a lean approach, or just thinking about it, a focus on rightsizing will drive immediate results that include: rapidly reducing working capital, identifying and eliminating hidden costs that consume cash, and improving liquidity by quickly converting assets into cash. You can do this by focusing on inventory, receivables, floor space and quality to find the cash you can’t see.
- Learn how to work efficiently within a reduced footprint and drive down working capital with optimized amounts of raw materials and finished goods.
- Leverage Operational Excellence to redesign production and distribution processes, improve planning and scheduling processes, and to optimize and reduce finished goods inventories.
- Create single piece flow and rebalance labor in order to reduce rework, scrap and errors.
2. Focus on Lead Time Reduction
Customers often choose to purchase from organizations with faster lead times versus lower costs. Faster lead times often equate to significant competitive advantage. This helps organizations in slow growth periods to take a larger share of market when others can’t compete.
- As much as 95% of the time in any process is wasted time. Reduce defective products or services, unnecessary processing, overproduction, excessive inventories, unneeded transportation, waiting or excessive motion, and the remaining activities will be the highest value-added components of the manufacturing mix.
- Attacking lead time involves improving flow—which results in better quality, improved productivity and less inventory.
- Kaizen events focused on lead time reduction can be very effective—and shocking—because physical changes are made to critical processes that have been running the same way for years. The bias for action compels the team to finish the week with a significantly better process.
3. Revisit Your Commitment to Continuous Improvement
Reliability and responsiveness are a foundation for growth. Neither can be taken for granted. A problem we frequently encounter is that organizations become complacent. Their measurement and feedback systems have atrophied from lack of use and reliability, and responsiveness has suffered. Companies that were once lean tend to lose their way, and managers who have been waiting for an excuse to trash lean often pounce on declining performance as a sign that the lean transformation has run its course.
- Revisit your continuous improvement strategy. Are you leveraging continuous improvement to drive growth?
- Do you have a management system in place that enables accountability for daily performance at the shop floor?
- Are your continuous improvement priorities clearly connected to your financial objectives?
- Are your key performance measures clearly aligned and cascaded down to multiple levels within the organization?
If you, like many industrial manufacturers, are facing a prolonged period of slow growth, get uncomfortable and start thinking of how to take advantage of the situation by outthinking and outperforming your competition. Set your productivity goals to uncomfortable levels and get your team members thinking about creative approaches to stretch beyond the norm. Make sure that a lean-based management system is in place, that everyone understands their role, and that all measures are clearly aligned to performance improvement activities. When you do all that (and it’s not easy), you’ll be ready to accelerate growth even when others are stalling.
