Are You Postponing Profit?

By CFO.University Contributor Rick Pay 

It seems like there’s always a better time to do something, and that time is “later.” Many companies believe that improvement initiatives – like Lean, supplier partner programs, global expansion, or new product launches – will wait. The trouble is that while they’re waiting, their competitors are moving forward.

What executives don’t always realize is that return on time (ROT) is often much greater than return on investment (ROI). Waiting until empty positions are filled or current priorities are completed before beginning a new, profit-boosting project doesn’t yield a very good ROT.

Recently a client delayed the start of a project until they could hire a new production scheduler, which took six months. Then something else came up which delayed the project further.

In another case, a company postponed an operations improvement initiative for almost a year while they searched for a new VP, Operations. Once that person was hired, they tried to do it themselves and about six months later, after failing to make much progress, the new VP left the company. These delays cost months or even years of lost profit.

How to Get It Done Now, Not Later

To move initiatives forward quickly, companies need a clear strategy and vision for improvement. A client recently told me that because of the strategy and roadmap we created, they achieved results far beyond their expectations in a very short time frame. In fact, the results were so quick and dramatic that a university studied the process to see how it was done. Vision is key to driving change and defines where the future state is.

Another company had been using the Entrepreneurial Operating System® (EOS) for over a year. Accountability techniques like EOS and Rockefeller Habits can be excellent in the right situation, but if your company hasn’t defined a vision, or “future state,” and the associated operations strategy to achieve it, you won’t be able to set meaningful accountabilities. When we reviewed the company status reports, I noticed that most “rocks” were red and were usually moved forward to the next meeting, still red. 

They had two problems:

1. Too many priorities
2. No vision to put things into context

The vision provides a clear picture of the future, often using a time frame of two to three years. It clarifies the general direction for change, sets clear goals, and provides the means for people to establish and reinforce priorities. It elevates focus to the big picture: the “why?” of initiatives rather than the “how,” which allows for flexibility in the specific approaches used.

While EOS, done well, handles the priority issues, when this company defined their vision, they cut the number of short-term actions the team needed to address, productivity improved, orders shipped, and inventory levels declined.

Innovation

Companies can also use “disruptive” approaches to open the door to profit by fostering innovation. For example, one client partnered with their suppliers, allowing them to raise part prices and manage the flow of inventory directly to the point of use. Letting a supplier raise prices seems counterintuitive, but the company improved inventory flow, reduced inventory by 70%, and yielded millions of dollars of savings in warehouse costs. At the same time, service levels rose to 98%.

Employee Engagement

Engaging people in the process by setting goals, providing feedback, and personalizing change encourages employees to move the needle quickly. One company had a serious morale problem, high turnover, and low productivity.

After talking to employees, we found they did not understand what was expected of them, or whether they were meeting expectations. We developed a clear charter, created teams, posted measures of their progress, and got the managers to circulate, observe, talk to employees, and model behaviors. Morale, productivity, quality and shipped on time all went up, and turnover went down. In the end, a company that had so little value that the parent considered shutting it down was sold at high value to a buyer who kept the plant open and the workers employed.

The Cost of Doing Nothing

Waiting rarely provides the same benefits as action, yet most companies overlook the cost of doing nothing. This can cost hundreds of thousands or even millions of dollars in missed opportunities and reduced company value. For some companies, even a few weeks’ head start on the competition can mean dramatic increases in market share, value and profitability.

Many companies in industries where speed is paramount have learned to do things fast. Zara, the Spanish fashion brand, is clearly focused on ROT in the form of speed. It takes less than three weeks to release new designs so consumers can have the latest and greatest, quickly. Excited customers often line up at Zara stores to be the first to buy the new designs.

The Take-Away 

How fast could your company move using a clear vision, disruptive ideas and employee engagement? Don’t underestimate the power of ROT. Don’t put off profit until later.

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