As a small business owner, you are always looking for ways to improve your profitability. After all, being profitable means that those things which are important to you can be done and enjoyed. A home, college tuition, a cottage, boat or other “toys.” Right now you may easily have 7% or more of your sales that could become instant profit.
This isn’t smoke and mirrors, it isn’t an overactive imagination. These are real dollars that you are already spending that you shouldn’t have to spend…if you can improve some of your processes with the goal of seriously reducing or eliminating the waste of this money, you turn it into profit.
So where is this money hiding? Like many things, it is right there in front of you. It is the money spent on error and waste. Error is a mistake. Mistakes cost time and materials. Time and materials are money. Examples of error are:
Rework – the job wasn’t done to the customer’s satisfaction and you incur additional cost that you cannot bill for to correct the problem.
Shipping – an order is shipped incomplete or wrong. The customer informs you of it and you incur additional cost to ship the extra parts or to get the wrong order back and ship the correct order. You can also realize error costs when you receive incomplete or damaged product from your vendors.
Administration – completing any document leads to mistakes. The time taken to correct the mistake is a cost. The time involved finding the mistake is a cost.
ALL BUSINESSES HAVE ERROR.
Wastes are cost added activities present in almost any service or production cycle. Activities that cause waste are:
Processing is a waste and does not add value. Velocity asks whether any process can be eliminated, reduced, combined, accomplished somewhere else, or the sequence be changed, or different materials used? Can the process be re-engineered for standardization or a better, more efficient design?
Anything that causes Delay and Waiting is non-value-added and wasteful. Perhaps this is due to a poor layout, people specialization, poor quality or disorganization.
Overproduction is wasteful. When a company overproduces in anticipation of selling something it is creating waste in the form of excess inventory and the costs of both producing and storing it. Overproduction severely hampers a financial statement.
Unnecessary people motion is also a waste. Simple movement such as and delivery of an item to another room or work area that can be eliminated is a waste of time.
Inventory is a waste. Inventory is money for items that belong on your family’s dining room table. Inventory is a statement that your Suppliers need better management.
Scrap and Rework are definitely waste from uncontrollable processes and poor quality.
Transactions are time wasters when they have redundant, untimely or irrelevant information or they are not critical to the fundamental communication of the activity.
Examples of waste are:
- Ordering a lumber in 6-foot lengths and having the cut them into 2.5-foot lengths resulting in a left over 1 foot of lumber. Understanding this and correcting how you order lumber, perhaps in 10-foot lengths, eliminates the waste.
- Your process involves multiple steps in multiple parts of your business. The time between steps is waste and not configuring your business to fit your processes increases the time spent. Time, as we know, is money. Examine your workflow and the configuration of your business will help reduce the time and reduce the waste.
There is a good bit of similarity between error and waste. Measuring and monitoring them both helps you manage them better.
Now imagine that error is costing you 7% of your gross sales. Let’s put a number to that, you sell $40,000 worth of product or services every month. That means your error is costing your business $2,800 every month. That is $33,600 a year in error cost. Now add in the cost of your waste. Reducing or eliminating your error and waste can put that money into your profit.
Sometimes a third form of profit reduction occurs in business. That form is discounts. Oh, we all offer discounts in some manner and some industries, such as healthcare live in an environment of contractual discounts. Managing how you use and accept, discounts will help improve your profits. Eliminating them is a sound business practice. In environments where discounts are tradition or common business practice, your efforts should be focused on reducing those discounts as much as possible.
As business owners, we may become so focused on getting customers that we forget the impact of selling more or getting those customers can create error and waste. Understanding the impact of error, waste and discounts, along with how they occur, will help reduce or eliminate these profit subtractors while improving your bottom line.