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Increase Profitability With Six Sigma

Learn how to improve your small business by implementing six Sigma problem solving methods.

Entrepreneur

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In any business, there are crucial decisions to be made about pricing, product, sales, accounting, marketing and hiring. Larger organisations rely on teams of employees and consultants who pool experience, knowledge and resources to make the business decisions that impact the company’s operation and growth.

Small business owners rarely have that luxury. Entrepreneurs are typically the sole decision-makers, wearing many hats and solving problems through trial and error. Their personal investment in the business makes it challenging to base decisions exclusively on facts and data, rather than emotion.

Taking a page from the corporate playbook, however, small business owners can use a proven, problem-solving methodology that results in greater efficiency and profitably. Six Sigma for small business can reduce mistakes and waste, uncover hidden costs, streamline processes, improve overall quality of products and services, and increase customer satisfaction.

Why Six Sigma is Important

Small business owners often discount Six Sigma because they think it isn’t applicable to their business. In reality, the methodology can be applied to nearly any chronic problem or “defect.”

One example: The owner of a seafood restaurant often advertises an all-you-can-eat special on crab legs. Half the time, however, he runs out of crab legs before the end of the evening. That same owner regularly throws out pounds of spoiled food. Both incidents represent defects that can be eliminated or significantly reduced using Six Sigma to define and measure the problem. The solution is buried in the receipts and sales data over time. We know how many people are coming to eat, we know how much inventory is consumed, but the owner does not numerically associate the inventory input to the output over time.

The list of potential problems is endless and different for each business. What all have in common, however, is the negative impact on a company’s bottom line. Every mistake or problem results in waste, a loss in terms of time, customer satisfaction or money and, ultimately, profit. Time is perhaps a small business owner’s most precious commodity. Exerting time and energy to address recurring problems is inefficient and compromises profit. Likewise, unhappy customers can cripple or close a business, since small businesses typically lack the variety, resources or volume to overcome a dearth in customer satisfaction. Six Sigma shows small business owners how to ask the right questions and uncover and eliminate waste and defects that may be erroneously accepted as part of the processes and considered a normal “cost of doing business.”

Implementing Six Sigma

The heart of the Six Sigma methodology is DMAIC: define, measure, analyse, improve and control. The best project is the one that will provide the maximum payback. To find it, business owners must consider the probability of success and the effort required in terms of resources and time in relation to the return on investment. A good rule of thumb is to select a project with a low ratio of effort to impact.

Let’s use our seafood restaurant and its spoiled food as an example. (Running out of crab legs during the all-you-can-eat buffet is a different problem, also solvable using Six Sigma.)

1. Define

During the past six months, the cost of spoiled food was R115 127, an average of more than R18 000 per month. The objective of this Six Sigma project is to reduce this “defect” by 50%, achieving a cost savings of R9 000 per month.

2. Measure

Using receipts, stock levels and purchasing records, we ensure that these records accurately represent the continuous level of waste. We perform a “measure system analysis,” which compares what was ordered by the owner to what was purchased by the customer, and repeat this comparison for the past two months. You may find that some records were recorded in error, but now we have a measurement system that is repeatable. We have our problem definition, the defect being the cost of food not consumed by the customer that spoiled per week; and we have our business metric: wasted money on inventory.

3. Analyse

We define a metric by analysing the data, from which it can be determined that 75% of the wasted rands is coming from two sources: beef and high-end fish products. We further determine that of that 75%, the fish products accounted for 80% of the problem. We verify that the source of information is repeatable for the past eight weeks, and the receipts confirm that is, in fact, the case. During the analysis phase, additional defects may be uncovered, such as order delivery times being longer than they should or a short supply of crab legs, thus accounting for the shortage of crab legs during the all-you-can-eat specials.

4. Improve

We have determined that for three foods – beef, high-end fish and crab legs – the amount ordered doesn’t match the consumption rate. Therefore, an 80% reduction in the ordering of the slow-consumption foods – the beef and the fish – will yield a savings of R9 000 per month. Increasing the amount of crab legs ordered lowers opportunity costs by having a supply of crab legs that meets demand during all-you-can-eat specials.

5. Control

To prevent recurrence of defects, we track our shortages and overages and place “threshold spending amounts” – maximum amounts spent based on inventory – on each major food category. A graph of the previous day’s orders and shortages or overages is created daily, with results reviewed weekly. Based on end consumption rates, an action plan is put into place, including such components as a more accurate buying guide and menu adjustments. The “test” of the action plan are the customers voting with their wallets.

Key to consistent growth and success for any business is the ability to monitor changes, spot problems and opportunities first, then act accordingly. It’s tempting to react impulsively or emotionally when faced with a business decision. However, maintaining long-term, reliable growth requires well-developed methods of tracking business goals related to factual income, expenses, growth and quality. Just as entrepreneurs don’t stop tending to their businesses once they are established, neither does Six Sigma stop with the completion of a project. It is vital that small business owners maintain momentum by picking new projects, creating new deployment teams, committing additional and new resources, and continually improving businesses.

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Increase Profitability

5 Winning Ways To Strengthen Your Bottom Line This Year

Let’s get down to the nuts and bolts of your profitability.

Revel Africa

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The beginning of the year is upon us, and the question everyone is asking is, “How are we going to make this year more profitable than 2018?” Break away sessions to strategies are always good, however, the most effective organisations know that the best ideas didn’t come from high-level planning, rather, they come from the field.

1. Your winning market

The saying goes, ‘The riches are in the niches.’ This year, stop spreading your sales focus thinly across several markets. Review your data on the which niche or subgroup of buyers make up your best customers. Then laser focus your best sales efforts and talent on these prospects this year. If you don’t have data on your buyers, then make a commitment to invest in your CRM software this year, so that next year your focus can be accurate.

Related: How Excellent Customer Service Affects Your Business’ Bottom Line

2. Your winning product or service

Don’t let chance dictate which sale you focus on, rather identify which of your products or services has the highest margins. Your data will tell you which products or services you should focus your sales efforts on this year, and which you should phase out, or simply terminate immediately.

3. Win more customers

You have a big budget for your lead generation, but invest more this year on optimising your lead conversion rate. No matter what industry you are in, or if you convert leads digitally or face to face, your ability to turn leads into sales is a potent leverage point to increase profits. For example, if you increase your conversion from 20% to 25%, that 5% increase in conversion will lead to a 20% or more increase in profitability (assuming your costs stay steady.)

Consider a sales coach to refresh your sales team’s conversion strategy, or review your digital data, landing pages, and automation strategy with a reputable digital marketing agency.

4. Whittle down waste

One immediate way to see your bottom line improve this year is to keep a tight rein on your sales team giving out discounts and freebies, and on your production team’s unregulated wastage. You’ll be surprised when you add it all up how much profit you’ve lost this way. Set boundaries over what is and isn’t okay for your sales team to do during the sales cycle.

Rather create bonuses or value adds that they can add in that have high perceived value but low cost of goods sold. For example, you might offer two free training classes to a new customer when they buy a year’s subscription to your software service.

A training class has a high value, but likely costs very little to add more seats to the room. As far as your production team goes, if you haven’t already, you should invest in business software that tracks productivity in your team, as well as in your machinery and equipment, to improve efficiency and reduce wastage. This alone is worth the investment costs of the software.

Related: Strong Company Culture Fattens The Bottom Line

5. Say ‘No’ to scope creep

Scope creep is when your customer alters the scope of your product or service after the initial agreement of work has been signed off, but with no alteration to the initial quote.  It is excessively common and can be very detrimental to a bottom line in service businesses.

This year, be clear about what is and isn’t on offer in the quote, and if there are any adjustments down the road, inform the client upfront of these additional costs. Wait for approval before starting the work. Be clear about prices for common extras that clients may want and let them know you’d be happy to provide these additional items for them at these pre-agreed prices. This could also be an opportunity for gentle upselling.

With this in mind, may 2019 see your bottom line grow from strength to strength.

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Are Your Scalable?

Here’s how you can assess if you’ll make it, or if you need to first make some fundamental adjustments before pursuing your growth goals.

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Pete is a classic entrepreneur. He spent 
15 years building his manufacturing firm to 
a R30 million outfit, before his big opportunity came to take on contracts worth R120 million, allowing him to scale to 
R150 million within five years. This was everything he’d worked towards. This was his retirement plan.

Five years later, instead of running a R150 million business, Pete is burnt out and broke. His company is closed and he’s lost everything. The crisis has even torn his family apart. How did this happen?

A common fate

Unfortunately, it’s a far more common story than most of us would like to admit. 70% of the top 1% of businesses (by growth potential) land up failing to scale. Sometimes, like Pete, they lose everything and close the doors. Other times, they land up bigger, but managing a chaotic hell of their own creation: A daily sprint to survive, a never-ending treadmill of frantic hustling to keep things together, with the horizon never coming closer.

The most common reasons? Either scaling something that fundamentally is not scalable, or scaling poorly; not making the right changes at the right time.

In this article, I’ll be focusing on the first reason: Attempting to scale a business that is fundamentally not scalable — because not every business can be scaled. If your ambitions are focused on high-level growth, step one is to determine if you have the 
right business model to do so. Because if 
you don’t, that’s the first change you need 
to make.

Scalability

Some companies scale easier than others. And some don’t scale at all. Let me illustrate with two extreme examples:

Very scalable: Dropbox makes an extra $10 for every user they add, while adding $1 of cost, and zero operational capacity. That is very scalable.

Not easily scalable: A start-up ad agency is soon faced with a growth ceiling created by the limits of the founder’s time and energy. This normally occurs somewhere between ten and 20 people. An ad agency is not a scalable business model because growth requires top, senior creative talent. Such individuals are rare, have attractive options, and usually prefer to either work for big multinationals, or run their own businesses. It’s therefore tough for smaller agencies to attract and retain talent without offering large chunks of equity, which can be a zero-sum game. It sometimes even works out net-negative. Unless you find a way of breaking that constraint, this is not a scalable business model.

Related: If You Want Scale, Fail Fast And Learn Quickly

So, what makes me scalable?

Building a scalable business is a bit like picking a spouse. There are a number of criteria to consider, the absence of any one of which is a deal killer, even if all other criteria are amply present. A suitor may exceed your fantasies in every regard (looks, smarts, fun, caring, etc), but if they are also prone to parallel relationships, that’s enough to pull the plug and look elsewhere.

Just as in relationships, a number of things must come together to make your business scalable. Here are the ten most fundamental drivers of scalability grouped into three core areas: Scalable market, scalable business and scalable team.

Scalable market

  1. Size (Total Addressable Market, or TAM): The market must be big enough to achieve your ambitions. As a rule of thumb for ambitious entrepreneurs, TAM must be at least 4X your business size goal. If you want 
to build a R500 million business, you need a R2 billion market.
  2. Economics: It’s expensive to scale. You need to invest in great management and top talent, plus spend on infrastructure ahead of actually seeing growth. To make that sensible, it must be very profitable serving your market.
  3. Growth: The market must be growing, and preferably faster than the rate of new competition. 

Scalable business

  1. Number one: Highly scalable businesses almost inevitably are number one, or will become number one in their market or niche. If you can’t lead the market, you must be able to lead a sizable niche.
  2. X-Factor: Every market has a bleak outlook: More competition, lower prices, lower margins. Unless you have some fundamental reason to continue to lead the market despite competitive intensity, such as proprietary tech. It must be good enough that you can be and stay number one in your market.
  3. Scalable channels to market: Some customers are just impossible to reach profitably. A scalable business has access to channels to effectively target, market to and sell to customers profitably.
  4. Scalable operating model: Scalable businesses have unconstrained access to all critical materials and talent, without breaking the economic model.
  5. Scalable economics: You can calculate the scalability of your economics with a simple formula: [Gross Profit per R10 million new revenue] / [new cost required to manage each R10 million new revenue (managers, systems, facilities, etc)]. Highly scalable businesses have a 2X or higher ratio. 1 to 1,2 is borderline and scaling will be like walking on glass. Most businesses have a ratio <1, which means they will lose money by scaling.

Scalable team

  1. Scalable founders: Statistically, most founders are not scalable. They lack the experience, skills and personality profile to make the required shifts as the business scales, and to develop the organisation through its various lifecycle stages. Scalable entrepreneurs are able to:
  • Build a great culture for >100 people
  • Attract and build an A-Team of truly impressive senior leaders, and delegate large parts of the business to them
  • Be ‘builders’ and ‘managers’ — that is, graduate from ‘entrepreneur’
  • Submit their interests to the best interests of the organisation, even when it’s painful — we see this when founders step down in favour of CEOs with corporate experience
  • Lead the transition of the business to a professionally managed company, introducing systems, processes and policies in a way that does not break the company’s culture.
  1. Leadership team: Particularly in the most painful scale up stage — going from ten to 100 staff — the key driver of scaling well is the quality of the top team. That’s why quality of early hires is a great predictor of scalability. Leaders who can adapt and be effective in a business of ten, then 20, then 50, then 100 staff are truly remarkable, and therefore exceptional. Not many manage this transition. These leaders can be effective in three completely different ‘modes of organisation’: The hustle (at ten people); The build (from ten to 100 people); The operate and grow modes. By implication, they are — or can grow into — executives. They can hustle. But they can also shift from a tactical focus (immediate fires and opportunities, action focus), to a strategic focus (future focus and system focus). They are able to run operations while transcending operations, bridging the long-term strategy, the short-term strategy, operations, culture, team, and finances, and they can do that in a company of ten people, or 100 people. Of course, you can bring in new leaders and you can replace leaders that are not scalable, but this dramatically slows the scale-up journey and can even derail it.

The result of having founders and leaders who are capable of scaling with the organisation will be the automatic development of the other key ingredients for a scalable team: Great talent, a highly engaged team, a great culture, and an effective organisation.

Related: What It Will Really Take For South Africa’s Businesses To Scale And Create Jobs

The key to growth

If you’re following the path to scale, or investing in a scale-up, it’s important to be aware of the causality amongst the above ten factors. Typically, the main factor that drives the speed at which a business can scale is how quickly founders can delegate major areas of responsibility, so that the business can continue to make rapid progress at scale.

This in turn is driven by the ‘next level’ (non-founding) leaders, as well as the leadership abilities of the founders. The problem is that early-stage companies struggle to attract top talent, unless they find people who want to be a part of the equity-incentivised leadership team pursuing an exciting opportunity. This type of career opportunity can usually attract top talent, despite the various reasons these individuals gravitate towards well-paid corporate roles and their own ventures.

But that sort of opportunity does not typically happen by accident: It’s the function of the founders getting points 1 to 9 right. In a nutshell, the first thing you need is an amazing team of founders who work smart to nail points 1 to 9, find and pursue an amazing opportunity, and then harness that to attract amazing talent in order to delegate effectively, so that you can scale beyond the limits of the founders’ time and energy.

scalability-self-assessment-tool

Click here to take your free self-assessment. 

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Increase Profitability

Leon Meyer GM At Westin Cape Town Shares 4 Experience-Driven Tips On How To Keep Your Team Productive

Productivity is a fundamental requirement for an organisation – it’s the seed that builds a business and contributes to higher profit margins.

Leon Meyer

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Productivity is a fundamental requirement for an organisation – it’s the seed that builds a business and contributes to higher profit margins. But what’s the best way to ensure employees remain productive, and happy in their day job?

The answer is simple and highly effective and I choose to sum it up with three short phrases – respect, trust and teamwork.

In partnership with my management team, which consists of about eight staffers across various disciplines, we strive to tick these boxes.

Related: 5 Surprising Elements That Boost Your Productivity (One of Them Is Colour)

In total we’re ultimately responsible for managing roughly 500 employees.

Five hundred employees across several departments is a mighty job. But with teamwork, good listening skills and the right attitude from the top to filter down, any business can run like a well-oiled machine.

I’d like share with you the essentials for building and maintaining a productive workforce, and these apply to all industries, not just the hospitality sector:

1. What’s your definition of a productive team and how do you achieve that?

We need to keep in mind that productivity is a result, one that CEOs and managing directors strive for with their teams. But what happens beforehand in order to achieve that result determines whether it will be achieved at all, and is equally important. I suggest the following to ensure a productive team:

Define roles and responsibilitiesDirection is incredibly important; everyone needs to know exactly where they’re going and how they need to get there, so KPIs are essential.

Often when roles and responsibilities are unclear, things go pear-shaped. I am an advocate for setting clear KPIs, it’s a good way to steer us in the right direction, and in turn helps to grow the business and the individual in his/her role.

Be flexible: Rigid environments are the worst kind, allow your employees some flexibility and the opportunity to be themselves in the workplace. We spend so much of our time at work, we need to be ourselves there.

Celebrate the team: When there are achievements, celebrate them, single out individuals who are excelling and living the company values. This builds morale and is indicative of appreciation, which is fundamental when running and building a business.

2. What has and continues to be your philosophy since managing a large team?

Know your strengths and weaknesses, as well as your team’s and leverage off that. Be prepared to learn from others, no one can operate in isolation, regardless of the level on which you operate. Accept criticism and don’t bulldoze someone’s ideas, that’s how you build trust.

3. What in your view are the top characteristics the team look for in a leader?

  • Be consistent – inconsistency screams bad leader
  • Provide guidance – this is key, don’t turn a blind eye, give input and council
  • Listen – always listen intently
  • Be impartial – always be fair
  • Give credit – it builds morale and shows you recognise good work
  • Be patient – Rome wasn’t built in a day, and remember not everyone thinks the same as you do

4. What’s your view on an open door policy and how does it assist with managing a team and ensuring everyone remains productive?

I believe in an open door policy. It’s essential to build and develop trust. I’m the first to admit that it takes a while to build that trust, but once the team (on all levels in all departments) know your door is always open, and that they can trust you implicitly, half the battle has been won.

I host a GM’s roundtable every two months, just to establish how everyone is feeling and where everyone is at. It gives staff the opportunity to bring their challenges to the table, and I deal with them the best I can.

It’s 100 percent confidential and line managers are not allowed to attend. During this meeting we try reach common ground, and I commit to addressing and ultimately solving the problem(s).

Related: 10 Ways To Make Your Employees 10x More Productive

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