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Step 5: Determine Leverage
The last element in following
money trail is to review leverage – which process improvement will create strongest return on investment (ROI)? Keep in mind both time and money, and determine what process inefficiency is consuming all of your cash. Why is that process eating away your money, and should it be? But keep in mind, too, element of risk: what will happen if I make a change, and what will happen if I make no change?
For gauging your ROI needs, examine five parts we’ve discussed so far: your business model, process map, your financial statements, velocity and leverage to make your customers happy. Answer these five questions, and you should know where to start.
Let's look at an example in play...
Review a Case Study of Core Business Processes
A manufacturing company interested in ISO 9001 quality was experiencing poor customer service and very low inventory turns, and needed help. The company’s perceived problem was not that they carried too much inventory but, instead, that they had poor customer service and employee performance in processing and fulfilling orders in a timely manner. Because of this, they wanted us to focus on those areas. But with such a pile up of inventory we saw a red flag. And we asked company: where is root cause of problem?
As we took a further look, we immediately saw a connection between poor customer sales service and a large stock of inventory. The company's manufacturing cycle efficiency was so low that it created a perceived need for higher inventory. And customers weren't happy because of long wait times to receive products that they ordered. In other words, customers weren’t getting velocity that they had expected and wanted.
The company insisted that it needs more inventory to keep customers happy. But this is just another bandage to fix symptom of problem and not root cause.
Inventory is a result of purchasing, manufacturing and sales cycles. And so we examined financials, business model and system velocity of company. From there we created a process map of these three core processes, as well as defined company’s leverage points that would ensure a healthy ROI for any process changes made. We calculated an improvement of five times in velocity. By removing inefficiencies out of system, inventory decreased significantly, turns increased greatly, and customers were happy. We helped reduce total amount of inventory. And we also helped increase speed of inventory cycle by focusing on purchasing, manufacturing and sales.
Create a Gap Analysis
And so with this example, we can now answer our original question: where do you start? As we've discussed, follow money trail through five key steps: define your business model, create a process map, examine financial statements, set velocity and determine leverage. But what pulls it all together?
We pull all of this together with a Gap Analysis. An operations assessment (also called an audit) results in a Gap Analysis and this report of gaps, or inefficiencies, found in system shows you where to start to achieve your target. A Gap Analysis helps you identify your core processes and performance metrics in order for you to achieve your objectives.
Look Ahead
Next time, we will look at a process map more in-depth. We’ve identified where to start, but we will learn how to create a process map - one of most important documents you need for your organization's success.
Chris Anderson is the managing director of Bizmanualz, Inc. and co-author of policies and procedures manuals, producing the layout, process design and implementation to increase performance.
