Follow the Money

By Jay Arthur

Every top cop show on television has one cardinal rule for solving the crime: Follow the Money. The same is true in business. In business, crimes are committed every day that siphon cash from cash flow, threaten profitability and cause customer dissatisfaction. These aren’t crimes of passion or greed, but crimes of neglect. These aren’t criminal acts of employees, but crimes of performance. The best way to solve these “crimes” is to follow the money.

The Crime Against Cash Flow: Every day, businesses lose cash to crimes of all sorts. Most companies suffer from a plethora of performance problems, such as:

  • Credits to customers for mistakes and errors in the product or service

  • Adjustments for mistakes and errors and delays

  • Warrantee costs and returns

  • Excessive inventory costs (raw and finished goods)

  • Rework of products and services to meet specifications and expectations

  • Costs of scrap materials and products

In a typical, profitable company, these crimes can cost a business a third of total revenues. Truth be told, most companies are robbing themselves of huge profits because their systems and processes let these crimes take place. Some are misdemeanors and some are felonies, but together they can rob a company blind.

The Criminals: There are three common criminals in this kind of robbery. They aren’t people. People make mistakes, but they only do so because the process and systems let them or force them to make mistakes. To help companies solve this kind of crime, one can always turn to the usual suspects:

  • Unnecessary delays which increase turnaround time, cause missed commitments and frustrate customers.

  • Preventable defects in the product or service that result in credits, adjustments, returns, and rework.

  • Preventable deviation in the product or service that result in unnecessary rework and scrap costs that devour profits.

Unnecessary Delays: In any business, people are busy, but the product or service can sit idle for hours or days waiting on the next step in its creation or delivery. Most business owners find it hard to believe, but employees only work on the product or service for three minutes out of every hour; the other 57 minutes are delay. One or two delays between steps account for over half of the total delay time. The effects of seemingly “normal” delays impact businesses on a large scale. A recent consulting case revealed that a company had 120 days of delay in a 140-day process.

Another illustrative consulting case involves a hospital, which couldn’t produce a bill on the spot for self-pay patients in the ER, resulting in long delays and unpaid bills. To solve the issue, an Excel-based bill was developed that could be produced on the spot with a few clicks of the mouse. No delays resulted in the ability of the hospital to bill and receive tens if not hundreds of thousands of dollars of previously lost revenue every month.

Delays do not always occur due to a lack of things, but also a lack of people. One credit union HR group took 82 days on average to replace a teller, which resulted in longer lines at the credit union. With a little ingenuity, placement times for open positions were reduced by 20 days and ways to forecast demand that allowed HR to have tellers in the pipeline were created to further reduce future delays.

Eliminate these delays and your business can boost profits by 20-40-60 percent while doubling or tripling productivity. It’s not unusual to reduce total turnaround time by 75 percent or more, just by finding and eliminating the biggest delays.  Where are the biggest delays in your business?

Preventable Defects: Most business processes have a three percent error rate: three items out of every 100 have a defect. This error rate extends to marketing, sales, orders, production, billing, collections and so on. These defects cause adjustments, returns, customer calls, rework and other costs that could be prevented. It’s easy to see how these mistakes and errors can add up to a third of total revenues.

Until their defects were found, one commercial printer was scrapping over a million pounds of paper and ink every year due to mistakes and errors. Analysis showed that the most common type of errors were pages printed out of sequence. The source of the error was not in the printing process itself, but mistakes made in layout. Once the layout process was refined, the company drastically cut its waste, and in doing so raised its profits.

Fortunately, these defects aren’t spread all over the business like butter on bread; they cluster in a few key steps in the process or a few key machines. Perhaps only one step out of 25 produces over half of all defects, mistakes and errors. Counting and categorizing the source of errors will identify the culprit. Then it takes a little ingenuity to figure out how to change the process to prevent the defect, but once it’s fixed, the defect is gone forever.  What are the most common and expensive errors in your business?

Preventable Deviation: Manufacturing businesses suffer from deviation from a customer’s target; products that are a little too big, too small, too heavy, too light, too brittle, and so on. Service industries suffer from variation in turnaround times (e.g., wait times at a bank or durations in a call center).

One beverage company was struggling with the uniformity of its products. At the end of production they were finding too many cans that were under weight and had to be scrapped. The filler was analyzed and one nozzle was found that needed to be adjusted to restore error free production. On the same investigation other nozzles that had to be adjusted to reduce overflows were also identified and remedied.  Where are the deviations in your business?

Catching Criminals Pays: These three criminals – delays, defects and deviation – are stealing profits, robbing customers of time and money and threatening corporate survivability. Stop blaming employees and start blaming the business processes and information systems that perpetrate these crimes.

With a little effort, it’s easy to prevent these criminal acts. Only one gap, step or machine out of 25 causes most of the delays, defects or deviation. Find them and fix them. Put procedures in place to make sure they stay fixed.

Start with the major felonies and work your way down to the misdemeanors. And keep an eye out for new breeds of criminals: new systems or procedures that haven’t been vetted. Isn’t it time to put a stop to crime in your business?

Read other articles and learn more about Jay Arthur.

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