Overcome the downward gravitational pull on profit
Almost every business can be 25% more profitable.
That’s a bold statement, but Grant Thornton National Cost & Performance Management Leader Robert Schwartz stands by it.
“I’ve been leading this practice for the last ten years at Grant Thornton, and we’ve never seen a business where 25% of its profitability hasn’t been locked up inside broken processes, structures and systems,” Schwartz said.
The roots of this profitability tangle are complex, but they extend from one factor: Businesses do not evolve efficiently.
For manufacturers, budgets can creep up incrementally, designs can fail to respond to new customer needs, processes can wander and sprawl, systems can fail to keep up with changing business requirements, acquisition synergies can go uncaptured and transformation projects can drain budgets before they achieve their objectives. Manufacturing leaders often fail to update the performance indicators they track, the paradigms they reference and the behaviors they incentivize.
“All of these factors can combine to create a downward gravitational pull on business profitability,” Schwartz said.
Good enough is good enough – until it isn’t
The downward pull on profit often goes unchecked.
Many organizations do not have a clear owner of overall profitability. Attendees at a recent Grant Thornton seminar indicated that overall profitability is more often in the hands of disparate business leaders working in silos than in the hands of a single executive with end-to-end accountability, focus and authority.
“The tragedy in profitability management is that most businesses realize they have some profit locked up, but they are not very aggressive in trying to unlock it,” Schwartz said. Businesses often don’t take real action until an adverse event such as profit or revenue shortfall, erosion of margin, noticeable customer churn, transaction failure, or technology obsolescence.
“What we want to do is change that mindset,” Schwartz said, “and create a culture where profitability improvement becomes the cultural norm. That’s a culture where your employees are focused continually on ways your business can grow in value. It’s where actionable information is proactively pushed to responsible parties for follow-up without having to launch a major strategic initiative that consumes significant time and financial resources.” Reversing the downward pull on profit means continually asking:
- Where is value trapped?
- What can I do about it?
- How hard is it to unlock?
- What are the rewards?
- How certain are the results?
To rethink budgets that have grown incrementally and untangle inefficiencies from comfortable processes, manufacturers also need to have some uneasy conversations. But, by being intentional and strategic, they can overcome the downward pull on profit.
Profit realization is the pursuit of perfection
Manufacturers can think of the effort to realize profit as the pursuit of perfection. It’s easy to be intimidated by this pursuit, so it’s important to clarify up front that perfection is not a target state, but a comparison metric. It’s a way of saying good enough isn’t good enough, and it’s a pursuit that leads to excellence.
The pursuit of perfection can also clarify next steps. “If I measure myself against perfection, the difference between perfection and current performance always points to new improvement opportunities,” Schwartz said. That’s why it’s important to measure both the current state and the perfect state.
Perfection is not a goal, but a tool. The goal is understanding. If you know where you fall short, you know where you need to improve.
Problems happen upstream, but manifest downstream
Using perfection as a tool means identifying the optimal state of every point in the process, and that means looking at processes across silos. Manufacturers must decompose a process, look at every segment, identify what can go wrong, choose what to measure, determine how to gather that data and then deliver it to an owner who can make change happen.
This holistic view of a process can yield surprising insights. Mike Mills, Grant Thornton Transformation Advisory Senior Manager, cited an example from accounts payable: “We get an invoice from a vendor and the vendor number is wrong. The payment remittance information is wrong, so we make an incorrect payment. The vendor never receives it, so we get a call, but that could be months after the initial invoice date. The gut reaction of a lot of leaders is AP must be broken.”
“But what we find is that, more often than not, issues come from breakpoints upstream,” Mills said. “We might have incorrect or missing vendor data, or duplicate vendor setups may contain different payment information, so our payments go to the wrong vendor. Unfortunately, no one in the organization has end-to-end visibility to these complex breakpoints. The holistic view of a process can reveal the upstream causes of downstream problems. It’s insights like these that can lead to process transformation and performance improvement.”
The holistic view of a process can also lead to meaningful culture change. “By compiling a comprehensive framework, sitting it on top of the value chain, connecting the segments and opening the channels of communication, you naturally start to break down silos and help people work together on solving issues instead of just passing the buck,” Mills said.
How to move from firefighting to fire prevention
“Ultimately, you want to get out of the business of firefighting, and into the business of fire prevention,” Mills said. In the above example, that means not only fixing the data entered for the invoice record so it can be paid, but also fixing the specific vendor master data point driving the root cause of issue. Fixing the root cause prevents that problem from recurring in the future and saves potential rework. While this may not move the needle for one transaction, over time the savings snowball as “fire prevention” activities continue.
Charting a process, such as the order-to-cash cycle, may reveal that the common downstream problem of late customer payment receipts is linked to common upstream challenges in pricing data. By looking into these connections, manufacturers can find inefficiencies and improve their profits. They get increased revenue capture from reduced order errors, better pricing data integrity and a better customer experience from more ease of doing business for the customer. They can also improve customer satisfaction by reducing the mistakes that have driven inefficiencies. By considering both cost and revenue, manufacturers can sometimes improve both at once. But such changes don’t happen overnight. Unlocking profit is an ongoing pursuit. It often helps to start with rapid assessments that can net quick wins. Those quick wins can finance more foundational changes. Once manufacturers achieve some success, they can start to create an improvement framework to provide ongoing support and enablement.
To pursue profit, manufacturers need high-level ownership and commitment across the organization. Real change is prioritized by executives, championed by a dedicated team that crosses silos and enacted by front line employees with enhanced visibility.
Once manufacturers reverse the gravitational pull of inefficiency, good things can happen. Suddenly, they can clearly see meaningful gains in financial and operational metrics, improve liquidity, enhance working capital, fortify the framework that supports transformation and of course, start to unlock more profit.
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