Business Profit Improvement to Reduce Overhead Costs

Answering the question - How do you go about it?

To reduce the cost of any business process we are looking for inefficiency which can be summarized as follows:

• Complexity is the major demon that needs to be slain. Making process simpler not only reduces operating costs by making them faster, but also reduces the cost of training new personnel. I have seen managers who think that complex systems are some sort of badge of knowledge that proves their people are better. This theory is costly.
• Process errors is the another beast. It is always more costly to fix errors than it was to get it right in the first place. This is an insidious problem since most of these errors are of minor cost by themselves. But, they add up fast. You can do the math on this pretty easily by considering how often does it happen in a day or shift, calculate the extra time per error, and multiply.
• Time in Process is the final profit killer that needs to be considered. The biggest contributor to this is the "in-box". Putting things on hold while it waits for approval, especially if that approval is almost automatic, does more than slow it down. It increases the likely hood that errors like duplicated orders will occur.

The steps to analyze your business processes are summarized as follows:

• Identify the starting and ending tasks for the process you are analyzing. For example, the purchasing process in my mind starts with the decision to place an order and ends with the receipt of the products and payment of the vendor's invoice.
• Calculate the total costs that go into the tasks in total for a given period of time, say the last three months. A lot of this information comes from your accounting records, but you will need to do some interviewing and cost allocations to complete this step.
• Identify a form to represent the transactions you will be quantifying. The natural for this when it comes to purchasing is the "Purchase Order". The goal is to figure out all the costs from the starting task to the ending task and divide by the number of PO's issued. The result is the baseline cost per purchase order. We need to wring out costs and steps in process to reduce this number.
• List the steps in the business process. Eliminate steps that are unnecessary. Modify steps that are producing errors or overly complex. A few simple rules help in this process:
  • Modify your software so that the people who are closest to the transactions are the same ones that input them.
  • Eliminate completely any need to enter data twice. Not only is this inefficient, but it is a major source of errors.
  • Insist upon reports that quantify errors in the future. For example, how often must a record be edited after the original entry is a great pointer to system errors.
• Implement the changes and remeasure the costs per form after the break-end period. Followup and fine-tune any problems discovered.

Improving a business process can have immediate positive impact, but the real value is the savings for year's to come.