Episode B.021 Product & Service Internal Objectives

Introduction
This week we continue our focus on the post pandemic re-opening of business. Other than dealing with customer and employee fears, there is nothing different or special about today's show except urgency. Unlike other expansions at the end of a contraction, this was not a structural - it was imposed. Normally a contraction (recession) is a result of over supply and decreasing demand awaiting a unplanned event to prick the bubble. In this case the demand still exists with diminished supply and we have sufficient information to predict the beginning of an expansion. The purpose of IBGR programming this month is to prepare the entrepreneur for the turnaround. it will require acting with urgency over the next 4 months.
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Show Objectives
Principles of Lowest Cost Producer (LCP)
Fixed Costs & Variable Costs

• Scheduling (Build to Schedule) - improve planned vs. actual scheduling by 10%;
• Efficiency (Use of Resources) - decrease the time and materials for each step in the process by 10%, increase the use of equipment by 10%;
• Waste (First Time Thru)​ - decrease the amount of rework, scrap, and additional service calls by 10%.

Processes to Analyze & Improve

1. Accounts Payable
2. Accounts Receivable 
3. Purchasing & Inventory (Raw Materials, WIPI, and Finished Goods)
4. Attracting, Selecting, and Onboarding People
5. Production or Projects (Work!)
6. Marketing, Sales, and Service

What You Need to Know
Achieving Lowest Producer (LCP)

1. Reducing Fixed Costs. Start with immersing yourself in current financials. Take a hard look at every fixed costs item and ask yourself – how does this contribute to (1) generating revenue, and / or (2) increasing quality (reducing costs). Redline every item that does not fit questions 1 and 2 and determine if it can be eliminated. If not – cut it by 10%. Next – 10% across the board cuts in fixed costs. 
2. Reducing Variable Costs.  This is about product or service quality. How do you schedule the use of resources across projects or jobs? How are individual projects or jobs managed to ensure on time delivery, on budget, on spec? How well are employees looking for and finding waste for elimination? Target a 10% cost reduction or productivity increase for each area – the accumulative effect will blow your mind.
3. Alternative Math for Budgeting.  Let’s change how we think about business finance. The common formula is Revenue – Expenses = Profit. This is correct but implies profit is an afterthought; a left over. It is no wonder real profit is not a result of your investments. What if you managed operations with a Profit – Taxes = Expenses mindset?

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

• Identify all the activities required to create the product or service;
• 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;
• Assign each cost pool activity cost drivers, such as hours or units; 
• Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers;
• Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate; 
• Multiply the cost driver rate by the number of cost drivers. 

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Reduce Fixed Costs 
Although this is much larger than just fixed costs, for now let's identify 10% cost savings and make it disappear, frugality is a great thing.

• Analyze every fixed cost item – 2 decisions (1) yes / no – does it generate revenue and / or increase quality, and (2) if yes – reduce it by 10%, if no - is it necessary?:
• Change the velocity of cash – in faster than out; pay accounts payable immediately to take advantage of discounts or pay at the last date possible without penalty, actively pursue account receivables to move everyone under 30 days or factor the accounts, and double inventory turns by applying JIT (Just In Time);
• Meet with your direct reports – share your fixed costs analysis with all overhead functions, tell them what has been eliminated, assign each a budget, and set the goal for a 10% cost reduction.

Reduce Variable Costs
Determine current capacity – is it at or close to 90% of what is possible;

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

Alternative Math for Budgeting
Let’s get out the box and rethink how we look at profitability:

​Open 3 bank accounts

• 1st Profit Account – predetermine your profit and pay it first;
• 2nd Tax Account – accurately estimate your tax burden and pay it next;
• 3rd Expense Account – whatever left = what it MUST cost to run the business. If the rest is insufficient – go back to fixed and costs and do it again until the numbers work.

Next Show: B.022 Marketing & Sales Internal Objectives