Profit Improvement Programs

Finding new profits calls for new ways of looking at a business. A manufacturer with sales of $45 million unlocked 19 different changes to its business that generated $6 million in new profits in the first year—more than a 13 percent increase. They did this by implementing a Profit Improvement Program (PIP) designed to uncover ways to positively impact net income using a company's best tool—its employees.

 

Most manufacturing and distribution companies have untapped sources of net profit—often as much as 10 percent of sales. What frequently prevents them from unlocking this potential is a company's hesitation to challenge the status quo.

Finding new profits calls for new ways of looking at a business. A manufacturer with sales of $45 million unlocked 19 different changes to its business that generated $6 million in new profits in the first year—more than a 13 percent increase. They did this by implementing a Profit Improvement Program (PIP) designed to uncover ways to positively impact net income using a company's best tool—its employees.

Successful Profit Improvement

Seeing things differently means shaking things up—a process that naturally makes most people and companies uncomfortable. Like anything that causes change, there are considerations that need to be addressed before embarking on a PIP.

Commit to change. An organization changes from the top down. If the CEO and other "C-level" executives aren't on board, nothing will happen. It is imperative that top management communicates to the entire company that they are committed to change. If there isn't a change in the process, there will not be a change in the results.

Use an outside facilitator. Change can be seen as threatening if not properly managed.To dissipate fear and foster an environment that encourages new ideas, it's usually necessary to employ an outside facilitator. This facilitator must have top-level (president or CEO) experience running multiple manufacturing or distribution operations to establish the credibility needed to gain management and employee support.

Communicate. Communication is crucial to success. This can't be emphasized enough. Change represents the unknown. Keeping employees informed of what is happening and why discourages rumors that can be damaging. The goal of constant communication is to make the process open to everyone so they can feel like partners in efforts to increase the company's long-term prosperity.

Tapping Insider Knowledge: The PIP

Step 1: Create a task force. First, the company management must name eight to ten people in the organization who will constitute the company's Profit Improvement Program task force. This group of employees, taken from all areas of the organization other than senior management, can have valuable insights on ways to improve the bottom line.

To ensure that this task force can be successful, several aspects of the initiative need to be clarified:

  • It's critical from day one that management acknowledges and supports the task force's work. The CEO or president should appear at the beginning of the first meeting to "vest" the group with the power to recommend changes and then have no further direct involvement with the task force beyond supporting their efforts.
  • Task force members need to be reassured they will be able to perform their core responsibilities with minimal interruption. PIP process will take no more than two or three hours of their week.
  • The task force must know that they, not the facilitator, will get the credit for the profit improvements.

Here are the PIP rules:

  • The task force will meet once a week for no more than 1 hour.
  • Prior to meetings, each task force member will receive an agenda.
  • The facilitator will take minutes for each meeting. Each member of the task force is committed to be at the meetings, either in person or by phone.
  • All material distributed at the meetings and discussed in the meetings will remain confidential and must not be shared with anyone other than designated top management and the task force members.
  • Task force members found not to be cooperative can and will be removed from the task force.
  • Anonymity is guaranteed—no one will know the author of any specific idea.


Step 2: Commit to measurable goals. At the first meeting of the group, the task force needs to establish specific targets (what they want to achieve and how long it will take) so they have something to keep their eyes on. They must agree and commit to two things: 1) A dollar amount of net profit improvement they want to see, stated as additional profit in terms of a hard dollar amount. The task force must not think small. 2) A date when the profit improvement plan will be presented to top management. This date should be between 60 and 90 days following the initial meeting of the task force. This overall plan, ready for implementation, will contain a series (probably 25 to 50) of suggested profit improvement projects, each one having a person responsible, a plan for implementation, a specific time frame for implementation and a measurable dollar contribution to net profits that has been agreed to by the company's financial department.

Step 3: Write down ten ways to improve profits. Make ideas definite. By the end of the first week, each task force member must provide the facilitator with ten suggestions for profit improvement. The only condition is that each project must be specific and the profit from each improvement must be measurable. Committing a profit improvement idea on paper transforms the shapeless into an actionable target. To get the maximum benefit, the task force should be told that no idea is too far-fetched. The rule of anonymity is crucial, particularly at this stage. No one will know the author of any specific idea.

These 80 to 100 ideas, plus whatever additional ideas the facilitator adds to the pile, will then be shuffled and compiled in random order by the facilitator. On the Monday of the second week, each task force member will be given a copy of the ideas submitted. At the second meeting, the task force will briefly review these ideas, and for homework, each member will be asked to provide five more by week's end.

The task force should now have about 120 ideas after eliminating those that are duplicates, combining those that logically need to be combined and eliminating those that cannot be measured.

Step 4: Prioritize ideas. All ideas are not created equal. The degree of difficulty of implementation, as well as the company's ability to measure the amount of hard dollars profit improvement each idea can generate, will vary greatly. The facilitator and the task force will be responsible for giving each idea an initial ranking: 1 = easy to implement; easy to quantify savings; 2 = easy to implement; difficult to quantify savings; 3 = difficult to implement; easy to quantify savings; 4 = difficult to implement; difficult to quantify savings

Step 5: Target top ideas. Focus on achievable results. The whole point of the PIP process is to identify and initiate efforts that reach the dollar and time targets set in Step 2. Once the ideas have been ranked in the 1, 2, 3, 4 matrix, the task force can see which suggestions should be chosen for the initiative.

Step 6: Approve and implement the final plan. Each project on the list must have a specific member of the task force that is responsible for developing a plan for the project's implementation and a dollar-specific measurement to demonstrate the savings from the project's implementation. The process of moving the project through this stage will take several weeks, which eventually will lead to the comprehensive profit improvement plan that will be presented to top management.

At this point, the CEO and other top management need to step up and embrace the effort to put the plan into action. By doing so, they truly demonstrate their commitment to change and, of course, generate additional profit for the company.

Keep The Profits Coming

When a company undergoes a Profit Improvement Program, one of the larger lessons it learns is that change can be positive. However, that will take time to instill. After a Profit Improvement Program, businesses need to guard against the "rubber band" effect. All too often, a company's culture will resume its original shape unless a special effort is made to keep alive the discipline, excitement and dedication harnessed during the life of the task force.

One way to insure a culture of continual profit improvement is to have the facilitator return on a semi-annual or quarterly basis. This person can help the company "remodel" its behavior so that good ideas for enhancing revenue or controlling expenses are nurtured, and profit improvement becomes a permanent part of the culture.

A company needs to remember that a PIP is not a one-time fix. A business is a living entity that must evolve in order to survive. Making a PIP a regular part of operations can guarantee that the company will be in a better position to deal with downturns in the economy or challenges within the industry without needing to be in crisis mode.

Rudy Lederer and Howard Siegel are principals with Chicago-based Horizon Advisors, LLC, consultants to management in profit improvement, interim management and turnaround situations. They can be reached at (312) 474-6176 or by e-mail at consultants@horizonadvisors.com.