While sipping coffee in the cafeteria of an mid-sized organization I visited some time back, it was interesting to see the number of people out there. I observed the occupancy at different times of the day, excluding the lunch hours of 1200-1500 hrs, when of course most of the employees would be in the cafeteria. Nevertheless, it appeared that in the time period of 0900-1200 hrs and 1500-1800 hrs, at any given point in time, there were roughly around 400 people in the cafeteria and its surrounds. I could not resist the urge to do some back of the envelope calculations and ponder about some productivity issues that would be faced by organizations.
The annual time spent by the employees at the cafeteria would be:
400 persons x 6 hours/day x 250 days = 600000 person hours = 600000 / 8 = 75000 person days
Assuming that around 50% of this time is required for having food and general socializing, it translates into 75000 / 2 = 37500 person days not accounted for.
In other words, 37500 person days / 250 days per year = 150 persons per year were hired in a non-productive fashion. For a company size of about 3000 persons, it means about 5 percent of employees were hired for nothing.
Of course, numbers do not tell the whole story. But then, do they, at least point towards something more meaningful for appropriate management action?
The typical layman’s response could be that employee strength is re-evaluated and adjusted for this non-productive number. However, that would be catering to the symptom and not the cause. The important questions that need to be asked and answered are:
- How best can this free employee time be utilized in areas like training and development, internal projects that address current issues ?
- Why were these persons hired in the first place?
- What assumptions were made earlier that are not relevant now?
- Is it the result of the current organization structure and the processes followed?
- Does it require an assessment of the new business realities and responding to them in a holistic fashion, rather than a simple employee count reduction?
Showing posts with label Cost. Show all posts
Showing posts with label Cost. Show all posts
Tuesday, July 13, 2010
Tuesday, June 22, 2010
The Challenge of Product Proliferation
The commonly visible symptoms of the problems affecting organizations include, amongst others, increasing customer dissatisfaction, higher customer servicing costs, more manpower requirements, increasing operating complexity, lowered product quality, increasing lead times thus leading to lowered profitability. While the possible causes for these symptoms are many, they are often inter-related and one of the common causes is indiscriminate product proliferation.
Product proliferation simply means too many ‘me-too’ product variants introduced to cater to minor customer preferences for generating additional revenues (and hopefully increase profitability as well). But as with any economic system, the existing organization set up has its set of limitations. The marginal cost of making, selling and supporting a new product variant soon catches up with the marginal revenue generated by that new product variant and enters into a zone adversely impacting profitability and business viability. Obviously, it is a situation that should be avoided.
If this is so simple a management logic, why do companies introduce these ‘me-too’ variants in the first place? And what prevents the management to detect at what point the marginal costs overcome the marginal revenues? And, importantly, what can be done about it?
First let us look at some reasons why these varieties are introduced in the first place. They are:
• Commoditization of offerings due to lack of fundamental product and process innovations
• Very high competition, need to differentiate and fear of losing market share if minor customer preferences are not accommodated
• Pressure to improve top line revenue
• Shortening product life cycles
• Easy use of existing knowledge to create the me-too variants
• Shared use of operation areas like available production capacity, sales & distribution channels, and common raw materials
These are genuine drivers that lead to product proliferation. What is the reason then, that it goes too far and starts becoming detrimental to the organization itself?
Primarily it is because the manager does not clearly know when the marginal cost starts eating into the marginal revenue and surpasses it. When a new variant is introduced, upfront costs of making and selling it need to be incurred. There is some lag that exists between when these costs are incurred and when the customers start adopting these variants, during which there is a difficulty in estimating how far customers have adopted the new variant. When a better picture emerges, three options can emerge i.e. the variant is a huge success, it is an absolute failure or it is moderately accepted by customers. The first two options lead to obvious conclusions, but the third one is where the ambiguity manifests itself. Many a times, this variant is continued in the hope that further efforts can boost its sales. But as new products get introduced in the market, some of these customers soon move away from the moderately successful variant. The result is that the organization is left with fewer customers and one more product variant to maintain both in terms of product availability and post sale support.
Now the third question: what can be done about it? Multiple approaches can be suggested and their usage in combination with each other can help resolve the challenge of product proliferation.
• Establish and implement strict criteria for regular assessment of the uniqueness, success and continuance of a product variant, both at a variant level and organization level.
• Understand the customer order penetration point into the product manufacturing cycle and structure the operations accordingly.
• Sun-set older variants and their support when new ones are introduced.
• Usage of techniques like Activity based Costing can help in identifying potential candidates for investment, maintenance or retirement.
Thus, one can approach the challenge posed by product proliferation and also address the competitive forces effectively.
Product proliferation simply means too many ‘me-too’ product variants introduced to cater to minor customer preferences for generating additional revenues (and hopefully increase profitability as well). But as with any economic system, the existing organization set up has its set of limitations. The marginal cost of making, selling and supporting a new product variant soon catches up with the marginal revenue generated by that new product variant and enters into a zone adversely impacting profitability and business viability. Obviously, it is a situation that should be avoided.
If this is so simple a management logic, why do companies introduce these ‘me-too’ variants in the first place? And what prevents the management to detect at what point the marginal costs overcome the marginal revenues? And, importantly, what can be done about it?
First let us look at some reasons why these varieties are introduced in the first place. They are:
• Commoditization of offerings due to lack of fundamental product and process innovations
• Very high competition, need to differentiate and fear of losing market share if minor customer preferences are not accommodated
• Pressure to improve top line revenue
• Shortening product life cycles
• Easy use of existing knowledge to create the me-too variants
• Shared use of operation areas like available production capacity, sales & distribution channels, and common raw materials
These are genuine drivers that lead to product proliferation. What is the reason then, that it goes too far and starts becoming detrimental to the organization itself?
Primarily it is because the manager does not clearly know when the marginal cost starts eating into the marginal revenue and surpasses it. When a new variant is introduced, upfront costs of making and selling it need to be incurred. There is some lag that exists between when these costs are incurred and when the customers start adopting these variants, during which there is a difficulty in estimating how far customers have adopted the new variant. When a better picture emerges, three options can emerge i.e. the variant is a huge success, it is an absolute failure or it is moderately accepted by customers. The first two options lead to obvious conclusions, but the third one is where the ambiguity manifests itself. Many a times, this variant is continued in the hope that further efforts can boost its sales. But as new products get introduced in the market, some of these customers soon move away from the moderately successful variant. The result is that the organization is left with fewer customers and one more product variant to maintain both in terms of product availability and post sale support.
Now the third question: what can be done about it? Multiple approaches can be suggested and their usage in combination with each other can help resolve the challenge of product proliferation.
• Establish and implement strict criteria for regular assessment of the uniqueness, success and continuance of a product variant, both at a variant level and organization level.
• Understand the customer order penetration point into the product manufacturing cycle and structure the operations accordingly.
• Sun-set older variants and their support when new ones are introduced.
• Usage of techniques like Activity based Costing can help in identifying potential candidates for investment, maintenance or retirement.
Thus, one can approach the challenge posed by product proliferation and also address the competitive forces effectively.
Tuesday, June 15, 2010
The Balancing Act
While we were discussing the business challenges of a medium sized, $60 million company making specialty polymers, a production planning executive highlighted the age old problem of performing the balancing act between the production/procurement plan with the ever fluctuating sales orders and the regular pains they had to undergo to try to achieve the balance between them. The essential facts of this classic case were as follows.
The company made and sold around 150 polymer grades manufactured out of some hundred odd ingredients. The production runs had to be of specific lot sizes and be planned based on a specific product sequence dependent on the individual polymer grades and their characteristics. The production run had to be scheduled at least three weeks in advance. The raw material procurement lead times could vary from 1 week to 12 weeks. Adding to the complexity, customer orders could come in with lead times of less than a week for out of stock materials and cause disturbance in the existing production schedule. The essential challenge was how to manage the dynamism inherent in the cumulative purchase and production lead times of 4 to 15 weeks versus the 1 week lead time of the unplanned orders.
We decided to further explore the issue by conducting an impact analysis on two fronts.
1. Loss of sales versus better production efficiencies:
A preliminary, but incisive, analysis of the situation brought out that most of the unplanned orders came in from C class customers who accounted for not more than 30% of total sales. The unplanned orders were typically made for some 40 polymer grades and accounted for around 5% of total company sales. The company had an operating profit margin of about 10%, the material cost was around 70% and cost of goods sold typically was 90% of the sale price.
We then asked the question “What if the unplanned orders were not catered to at all? What would be the fallout?” Some quick calculations showed that the real impact on business would be
= $60 million x 5% unplanned order revenue x 10% operating profit margin = $0.3 million.
But on the other side production runs would be smoother with waste reduction of say 1%. This implied a saving of
= $60 million x 70% material cost x 1% saving = $0.42 million
Thus just ignoring the unplanned orders could result in a net business benefit of $0.12 million.
2. Preserved sales versus higher inventory carrying costs:
We decided to push further. What if the safety stock levels of those relevant 40 grades were pushed up to a level that would help satisfy the unplanned orders? Assuming finance costs of 10%, the financial impact of that decision would be
= $60 million x 5% unplanned orders x 70% material cost x 10% finance cost = $0.21 million
Again this has a net savings of $0.09 million
Combine the two impacts, there would be no loss of sales, production efficiencies would be high and the total benefits would be
= $0.3 million (no loss of sale) + $0.42 million (better production efficiency) - $0.21 million (inventory carrying costs) = $0.51 million
Similar impact analysis can be done on the raw material lead times, production plan time fences, warehousing and other relevant aspects to identify potential business improvement opportunities.
Though the situation is much simplified in this example, it can serve as an effective method to further delve into the problem and arrive at relevant business solutions.
The company made and sold around 150 polymer grades manufactured out of some hundred odd ingredients. The production runs had to be of specific lot sizes and be planned based on a specific product sequence dependent on the individual polymer grades and their characteristics. The production run had to be scheduled at least three weeks in advance. The raw material procurement lead times could vary from 1 week to 12 weeks. Adding to the complexity, customer orders could come in with lead times of less than a week for out of stock materials and cause disturbance in the existing production schedule. The essential challenge was how to manage the dynamism inherent in the cumulative purchase and production lead times of 4 to 15 weeks versus the 1 week lead time of the unplanned orders.
We decided to further explore the issue by conducting an impact analysis on two fronts.
1. Loss of sales versus better production efficiencies:
A preliminary, but incisive, analysis of the situation brought out that most of the unplanned orders came in from C class customers who accounted for not more than 30% of total sales. The unplanned orders were typically made for some 40 polymer grades and accounted for around 5% of total company sales. The company had an operating profit margin of about 10%, the material cost was around 70% and cost of goods sold typically was 90% of the sale price.
We then asked the question “What if the unplanned orders were not catered to at all? What would be the fallout?” Some quick calculations showed that the real impact on business would be
= $60 million x 5% unplanned order revenue x 10% operating profit margin = $0.3 million.
But on the other side production runs would be smoother with waste reduction of say 1%. This implied a saving of
= $60 million x 70% material cost x 1% saving = $0.42 million
Thus just ignoring the unplanned orders could result in a net business benefit of $0.12 million.
2. Preserved sales versus higher inventory carrying costs:
We decided to push further. What if the safety stock levels of those relevant 40 grades were pushed up to a level that would help satisfy the unplanned orders? Assuming finance costs of 10%, the financial impact of that decision would be
= $60 million x 5% unplanned orders x 70% material cost x 10% finance cost = $0.21 million
Again this has a net savings of $0.09 million
Combine the two impacts, there would be no loss of sales, production efficiencies would be high and the total benefits would be
= $0.3 million (no loss of sale) + $0.42 million (better production efficiency) - $0.21 million (inventory carrying costs) = $0.51 million
Similar impact analysis can be done on the raw material lead times, production plan time fences, warehousing and other relevant aspects to identify potential business improvement opportunities.
Though the situation is much simplified in this example, it can serve as an effective method to further delve into the problem and arrive at relevant business solutions.
Thursday, November 19, 2009
Recession, Cost Cutting and Employee Motivation
, mThe recession prevalent for the last almost two years has reportedly been the prime reason where companies across all sectors have resorted to a slew of cost-cutting measures which include sales of assets, travel freeze, employee layoffs, freeze on salary increments, and many others.
No doubt most of these measures are crucial to the well being and indeed the survival of some companies. Companies have gone ahead and updated their corporate policies and implemented the same to safeguard the interests of the shareholders. Unfortunately, the employee as a principal stakeholder is sometimes ignored. There are some peculiar instances where employee related austerity measures fail to withstand the the test of common sense and logic.
As a suitable backdrop for this discussion, let's look at an imaginary representative software services company that has say a annual revenue base of around Rs. 1000 cr with an employee strength of 6500 persons. Lets assume, the salary expense come to about Rs. 550 cr and the PBDIT is about Rs. 250 cr. Lets further assume that this company does not reduce some of its manpower (500 persons) due to performance issues and a reduction in business opportunities. It also announces a freeze on any increments for the two years and a sizable cut in the variable pay of the employees as well.
Now that the economy is looking up, and the stock markets have risen consistently for about 7-8 months, the company is upbeat about the future. The company also maintains and thanks the employees for standing by it in trying times. It also announces employee oriented qualitative measures. But, at the same time, the company maintains the need for continual of the austerity measures in view of a possible economic downturn. The employees are, however, not so upbeat due to rising inflation, the continued freeze in salary increments and cuts in the variable pay. And obviously the employee motivation levels turn dangerously negative due to a seeming lack of congruence in the words spoken and the deeds performed.
Assuming the company's reading about the uncertain future is valid, is there anything that can be done at all to boost employee motivation and confidence? Let's evaluate one possible measure and its impacts, both financial and motivational.
Let's assume the company announces a one time cash reward of say an average Rs 15000 per employee. What is the impact?
1. Financial Impact:
Increase in salary cost = Rs. 15000 x 6000 employees = Rs. 9 cr
Therefore, percentage increase in salary cost = (Rs. 9 cr / Rs. 550 cr) x 100 = 1.6%
Percentage decrease in PBDIT = (Rs. 9 cr / Rs 250 cr) x 100 = 3.6 %
Considering the hardships faced by the employees in terms of rising inflation and other factors, this one time extra cost is quite manageable and even negligible to some extent.
2. Motivational Impact:
The motivational impact obviously is difficult to gauge in numbers, but such a step would build up a substantial positivity in the employee. First and foremost, it bridges the credibility gap between what is said and done. It also sends a correct message regarding the future uncertainty, business austerity and the concern it has for its employees. A cash reward of Rs. 15000 though not comparable to the expected salary increment, is substantial enough to gain the lost employee confidence and morale. With the potential increase in employee positivity and motivation, the corresponding impact on overall business operations and objectives would definitely be far reaching.
To put it concisely, it is well upto the company management to think of such bold innovative steps that augur well both for the organization and for the employees as well.
No doubt most of these measures are crucial to the well being and indeed the survival of some companies. Companies have gone ahead and updated their corporate policies and implemented the same to safeguard the interests of the shareholders. Unfortunately, the employee as a principal stakeholder is sometimes ignored. There are some peculiar instances where employee related austerity measures fail to withstand the the test of common sense and logic.
As a suitable backdrop for this discussion, let's look at an imaginary representative software services company that has say a annual revenue base of around Rs. 1000 cr with an employee strength of 6500 persons. Lets assume, the salary expense come to about Rs. 550 cr and the PBDIT is about Rs. 250 cr. Lets further assume that this company does not reduce some of its manpower (500 persons) due to performance issues and a reduction in business opportunities. It also announces a freeze on any increments for the two years and a sizable cut in the variable pay of the employees as well.
Now that the economy is looking up, and the stock markets have risen consistently for about 7-8 months, the company is upbeat about the future. The company also maintains and thanks the employees for standing by it in trying times. It also announces employee oriented qualitative measures. But, at the same time, the company maintains the need for continual of the austerity measures in view of a possible economic downturn. The employees are, however, not so upbeat due to rising inflation, the continued freeze in salary increments and cuts in the variable pay. And obviously the employee motivation levels turn dangerously negative due to a seeming lack of congruence in the words spoken and the deeds performed.
Assuming the company's reading about the uncertain future is valid, is there anything that can be done at all to boost employee motivation and confidence? Let's evaluate one possible measure and its impacts, both financial and motivational.
Let's assume the company announces a one time cash reward of say an average Rs 15000 per employee. What is the impact?
1. Financial Impact:
Increase in salary cost = Rs. 15000 x 6000 employees = Rs. 9 cr
Therefore, percentage increase in salary cost = (Rs. 9 cr / Rs. 550 cr) x 100 = 1.6%
Percentage decrease in PBDIT = (Rs. 9 cr / Rs 250 cr) x 100 = 3.6 %
Considering the hardships faced by the employees in terms of rising inflation and other factors, this one time extra cost is quite manageable and even negligible to some extent.
2. Motivational Impact:
The motivational impact obviously is difficult to gauge in numbers, but such a step would build up a substantial positivity in the employee. First and foremost, it bridges the credibility gap between what is said and done. It also sends a correct message regarding the future uncertainty, business austerity and the concern it has for its employees. A cash reward of Rs. 15000 though not comparable to the expected salary increment, is substantial enough to gain the lost employee confidence and morale. With the potential increase in employee positivity and motivation, the corresponding impact on overall business operations and objectives would definitely be far reaching.
To put it concisely, it is well upto the company management to think of such bold innovative steps that augur well both for the organization and for the employees as well.
Subscribe to:
Posts (Atom)
