5.15.80: THE ELITE 5% - MAXIMIZING PROFIT BY REDUCING VARIABLE COSTS - WILLIAM EASTMAN

PROFIT RADIO - "A Network of Entrepreneurs for Entrepreneurs"

Introduction
​We introduced the 5.15.80 Model at the beginning of the Season. It was a combination of research into small business performance and our practical experience from the last 2 decades. You could go to any area around the global with a market based economy and randomly select 1,000 companies, here is the distribution you would find: 5% or 50 companies that own their markets, 15% or 150 companies that are making money, and 80% or 800 companies that are barely surviving.

This series is about how to move from one level up and our concern in this series is the 5%, not how you get here which which is covered in the 15% series; the focus now is how to SUSTAIN market leadership.

LISTEN > ENGAGE > APPLY

Show Objectives
Today we finish 7 of the 9 Disciplines of Market Domination. These are the intermittent disciplines that will move a successful business to a market dominator.

Disciple 7 is the second of two attacks on cost - variable.

Variable costs are a company's costs that are associated with the number of goods or services it produces. A company's variable costs increase and decrease with its production volume. When production volume goes up, the variable costs will increase. On the other hand, if the volume goes down, so too will the variable costs.

Key Issues - Owner Perspective:

1. What should I do to minimize my variable costs without jeopardizing operations or growth?

What You Need to Know
Principles of Lowest Cost Producer (LCP)
Fixed Costs & Variable Costs

• Scheduling (Build to Schedule) - improve planned vs. actual scheduling by 10%;
  • Reduce Total Costs - look for quick fixes to scheduling  and only produce on customer demand, any quick fixes to inventory.
• Efficiency (Use of Resources) - decrease the time and materials for each step in the process by 10%, increase the use of equipment by 10%;
  • Reduce Time - look for quick fixes that reduce the time it takes to finish an activity from start to finish.
• Waste (First Time Thru)​ - decrease the amount of rework, scrap, and additional service calls by 10%.
  • Eliminate Waste - look for quick fixes to eliminate activities that are not adding value to the product or service - or the customer's experience; obstacles to 'First Time Thru".
  • Improve Quality - look for quick fixes between what the customer expects in terms of usage and results, and our final product or service. 

What You Need to Do
Apply ABC (Activity Based Costing) to all Functions:

1. Identify all the activities required to create the product or service;
2. Divide the activities into cost pools, which includes all the individual costs related to an activity—such as manufacturing. Calculate the total overhead of each cost pool;
3. Assign each cost pool activity cost drivers, such as hours or units; 
4. Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers;
5. Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate; 
6. Multiply the cost driver rate by the number of cost drivers. 

Determine current capacity – is it at or close to 90% of what is possible:

1. Map the core processes and eliminate non-value, waste, etc., target 10% in improvements and / or reductions;
2. Assign true costs (fixed and variable) to each step in the process to determine most / least profitable products, services, and customers;
3. Raise the price on the least profitable products and services, top grade your least profitable customers – move your least profitable customers to the competition;
4. Sell more of the highest margin products and services to your best (most profitable) customers.

Next Week - Discipline 8 of 5.15.80: Owning the Future Competitive Advantage

1. Follow the 5.15.80 Series all season.​
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Make sure you leave some thoughts in the comment section below. I am interested in continuing the conversation.