It has become accepted that many businesses are increasingly focusing on the top line and the desire to grow the turnover figure, but this does not always lead to increased profitability.
In fact, a review of costs can be more effective. With up to 30 per cent of operating costs arising from non-value added processes and procedures, the reduction or total removal of these will increase efficiency and ultimately profitability.
To eliminate waste, business leaders need to understand exactly what it is and where it can be found. Using Toyota’s model of “Seven Wastes” can provide management with the answers.
What is waste? Waste can be defined as “any process or procedure which doesn’t add value to your product or service”.
There are seven key areas to examine for waste:
Overproduction is doing something in excess of what’s required. Are you producing more than is needed or before it’s required? Have you done more for your customers than you agreed to do? Have you bought more than you need, giving storage and cashflow problems? By overproducing, you tie up valuable resources such as cash or people, and you may not receive payment for the work that you’ve done.
Waiting occurs whenever time is not being used efficiently and someone is always waiting for something somewhere in a system. Whether you are waiting for a decision, repair, quality check, review, delivery or a payment from a customer, resources are used up. Where do goods or operations wait within your organisation? Can your processes be streamlined and speeded up? Consider talking rather than emailing to help progress work quicker!
Transport can be external freight but, equally, it can be the internal and external movement of goods, equipment, information and people within your system. It is a cost that customers do not want to bear. Every transport event is an opportunity for damage, loss or quality issues to arise.
Inappropriate processing. Are you “using a sledgehammer to crack a nut”? Are you using the right tools, process or person for the job? Does that person have the right skills, training and experience? Could a process be computerised rather than being undertaken manually? Can a junior person do the work rather than a more experienced person
Unnecessary inventory is something that we purchase, produce or develop that is not sold. It is a direct result of overproduction and waiting. It could be raw materials, work-in-progress, finished goods or debtors, and is inventory that isn’t being turned into cash either now, or in the future. What impact would a change here have on your working capital?
Unnecessary motion. Think ergonomics. It is seen in all instances of bending, stretching and reaching. Think about your factory, office or desk layout. Where are the tools that you need to perform your work, whether it’s your calculator, computer or piece of equipment? Are they readily accessible?
Defects arise from errors. They cost you money now or later and only hit the bottom line. They can arise as a result of poor planning, workmanship or missed deadlines. They can be internal defects identified before the sale, incurring scrap or rework costs, or delays in delivery. Or, they can be external defects found after delivery and incur costs from warranty claims, on-site repairs or the potential loss of reputation and customers. Generally, the cost of a defect increases tenfold for each production or supply chain step. Do you know where defects arise within your organisation? Can the level of occurrence be reduced or eliminated?
With these seven areas in mind, identify where the waste exists, take steps to eradicate it and make waste reduction integral within your organisation’s culture.
If the end result is increased efficiency and profitability, what are you waiting for? Removing waste is your opportunity to make a difference.
Fiona Morgan is a partner with chartered accountants and business advisers Henderson Loggie in Aberdeen.
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