700% Net Profit Increase!
The size of the opportunity you have in front of you may be larger than you think. Dramatic improvement stories are common when applying formal improvement methodology to common business challenges. This is the story of one of those occasions, and a few tips for making the most of your improvement opportunities.
They are a small manufacturing business in St. Catherines, Ontario that have been successful for decades. They were under new ownership and struggling to profit as they faced a few challenges common to many businesses. They had three challenges in particular; production capacity (productivity), costly defects in products, and difficulty finding skilled workers. My work with them had a direct impact on the first two and an indirect impact on the third. The key in addressing these challenges with them was focusing on identification the root cause, instead of assuming that workers were inefficient and under-skilled.
We began by redefining the opportunity. Instead of assuming that “the number of defects was causing a lack of profitability”, we said that “the gross profit on all machined goods in the past few years was almost zero”. Then we documented the process to help them discover potential problems within the whole process, not just in the machining activity itself. While doing this, we defined the critical metrics within the process and gathered the related data.
Here is where it begins to get interesting! One major item became apparent and shifted the leadership team’s focus away from “fixing the defect rate“. It became clear that the accuracy of job estimates fluctuated wildly (both overestimated and underestimated) and was way off the mark. However, this was still a symptom and not a root cause. Digging further, we found that a rush to produce estimates in a timely manner was leading to the inaccuracy (still a symptom). Leading to the rushed estimates was a high number of quote requests received from customers (what a great problem, right?). We could have stopped there and said that we will simply turn away enough work to allow us to spend the time required to estimate each job more accurately. However, proper data analysis was still required in order to determine the best sollution.
Interesting had now became exciting! At this point, our focus shifted from the process activities to assumptions that leadership had about process. Through some powerful questions, we found that the need to rush to respond to all quote requests was based one major assumption; this being that more jobs won equals more profit for the business. Thankfully, we had done our work and had some valuable data on hand. Here is was what I present them with:
- 80% of total revenue was generated by only 17% of their customers
- A mere 5% of total revenue was generated by 60% of customers
- Yet, all customers were given the same priority
Exciting then became empowering! This is where the real shift happened. More jobs won did NOT automatically equal more profit for the business. Clearly, some customer were more profitable than others. This led to the application of a new customer strategy while producing job quotes. Instead of responding to all customer quotes requests within 24 hours, customer segmentation was applied. Gold tier customers would still receive their quotes within 24 hours or sooner, Silver tier within 72 hours, and Bronze tier within 7 days (with an option of declining the job if deemed unprofitable). The rush was over!
While we made other small improvements in the months following, this single improvement was the leading factor in the results achieved. Improvement in three key metrics was observed within only 10 months following implementation of the new customer strategy.
An 85% improvement on job estimate accuracy led to a 71% improvement in on-time-delivery. Together, these led to a 700% increase in annualized net profit, and some much happier customers, staff, and business owners.
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