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Benchmarking
Fallacies
FTP Consulting Services, Inc.
I recently read an article in support of
EIPP (Electronic Invoice Presentment and Payment). The claim was made that
a payment costing $10 to process manually could be handled for only $1
with an electronic solution. Assuming the backend costs for posting are
the same, does this statement cause you to question the source of the
numbers?
We who live in the
remittance processing world see retail payment processing costs at a
maximum of $.15 per item – but typically much less. Wholesale payment
unit costs can go as high as $4.00 per transaction but are more often in
the range of $.25 to $.60 per item. So where did the author of the EIPP
article get his numbers?
We are constantly
presented with numbers and facts, both in business and our personal lives,
and asked to accept the information at face value. The little known secret
is that if we were provided more detail as to the source of those
statistics, the justification for a theory or assumption would often
disappear. Sadly, many groups will manipulate numbers to support an
opinion or their own personal interests. A great deal of comparative
benchmark data is presented out of context. Without knowing the source and
environment of the original data being compared, benchmark conclusions are
simply misleading.
The challenge, then,
is to question the facts and figures presented. We must ask ourselves if
they make sense. Do my knowledge and experience tell me the same thing? If
not, start digging.
Comparing
Dissimilar Organizations
A typical example of
erroneous benchmarking data can be found in a recent industry survey of
retail processors in which information was gathered from a small sample
size that varied greatly in its source data. The data came from different
industry segments with varying volumes and applications of technology. The
blended results (benchmarks) looked impressive but, in fact, were
meaningless in application.
Does it really make
sense to compare the productivity of a public utility with 80% matched pay
to that of an operation processing revolving credit payments where less
than half match to a full or minimum payment amount? What about unit cost
reporting that combines inner city operations that staff hundreds of
personnel with rural and urban operations whose employees number less than
two dozen? You must consider what the two operations do or don’t have in
common.
Likewise, when looking
at unit cost for each organization, examine how many components relate to
the processing environment controlled by the management team and how many
elements such as rent, salaries and transportation costs are dictated by
the corporate office.
While we are all
interested in knowing how we compare to others, it is a waste of time and
energy to compare on anything but an “apples to apples” basis. The
validity of comparisons is questionable if there are significant
disparities in the size of an organization, type of processing system,
workflow, staffing levels, and variations in the application.
Sample Sources Matter
At first glance, one
would think that a benchmark comparison of two credit card companies would
provide beneficial information – until the layers of the onion are
peeled away. For benchmarking to be truly valuable, the comparison needs
to be of more than two retail processors. One credit card company, for
example, may possess an upscale portfolio and receive a high percentage of
payments in full, whereas the other might cater to sub-prime or less than
credit worthy cardholders. The percentage of non-matching payments would
therefore vary greatly between the two organizations.
A study should also
take into account how the two organizations identify and count errors. One
may count only those errors reported back to the department through
customer service or the depository bank. The other operation counts both
internally discovered errors plus those reported back through customer
service and the depository bank. Which one has a more accurate picture of
its true error rate? You need to know.
Who’s Conducting the Study?
An academic background
is admirable and beneficial in determining statistical validity but may be
less than helpful in understanding the cause and effect of errors and
productivity measurements. The credentials of an individual or
organization conducting a benchmark study are often the cause of skewed
benchmarking data. A dose of live experience will add far greater insight
into determining comparability and validity of data than hours of
classroom and library time. Both are important and add value to the
benchmark. It’s practical experience, however, that produces realistic
expectations and easier implementation.
Dangerous Implications
Accepting raw facts
and figures at face value can prove to be worthless at best and
detrimental at worst. The truth of the matter is that most industry
benchmarks are about as useful as convertible in Wisconsin. You will get
some use of the data but the majority of the time it will sit in the
garage.
Attempting to
establish industry benchmarks using only a limited number of samples with
variances in organization size, volumes processed, applications, workflows
and systems employed is ludicrous and misleading. The most dangerous
aspect of unreliable data is that management staff without an in-depth
understanding will embrace it as gospel. That not only makes the life of
the department manager miserable, but false assumptions will drive errors
in strategic and tactical management decisions.
Discerning the Truth
For benchmarking to be
truly valid and worthwhile you need to have specific objectives and
expectations in mind. Secondly, you must determine the degree of
applicability the benchmark has to your business. If your goal is to
ascertain trends, then an industry benchmark comparison of one time period
to another might prove beneficial. But if the objective is to determine a
valid unit cost or production rate per employee, then the comparison
should be of operations that are as similar to one another as possible.
When reviewing
benchmark data, the reader must understand what numbers are being
compared. What similarities and differences exist between the
participants? What is the background and experience of the person or
organization that performed the study? And how current is the information
that was used in generating the benchmarks? It’s critical to review the
standards and methods used in collecting and reporting data. Use the acid
test. Does it look, taste,
feel and sound reasonable?
If you doubt any of
the data presented or are unable to answer the previous questions, you
would benefit from some healthy skepticism. It may very well protect you
from unrealistic points of comparison and objectives. After careful
scrutiny and determining that a benchmark study meets required criteria,
you can then embrace it as a valuable tool for comparison and goal
setting. Applying a little discernment in benchmark evaluation will go a
long way.
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Details,
Details. . .Why They Matter
FTP Consulting Services, Inc.
We live in a new age. Technology has
streamlined processes, placing operations light years ahead of their
labor-intensive predecessors where manual methods were the only option.
Since the initial productivity leap over these last few decades, however,
efficiency gains have leveled off. Yet an increasingly competitive
marketplace continually calls for more. More profits, higher yields.
Outsourcers are knocking at the door, promising to deliver desired
results. For the in-house operation, this means relinquished control and
loss of jobs.
To
circumvent this seemingly inevitable demise of in-house processing, we
must fully understand why companies are not producing at required levels.
A bird’s eye view of different operations – regardless of the industry
segment or size in terms of processing volume – will reveal very little
difference in terms of technology used or the type of people running
operations.
So
what is it that sets best-in-class operations apart? Attention to detail.
As simplistic as it may sound, executing that goal takes time and effort.
Perhaps that is why many operations are letting this important ingredient
to success slip by them.
Small Improvements Add Up to Big
Savings
An
examination of just what details are being missed will shed some light on
why they are so important. To demonstrate the value of details, let’s
look at two similar operations that produce very different results.
We’ll assume that each shop has two transports with the same throughput
rates – 300 documents per minute – and one jam occurring per machine
every 30 minutes. In Shop A, transport operators average three minutes per
jam repair, while Shop B is able to get the transports up and running
again in only two minutes.
That
one-minute difference adds up. Shop A will lose 96 minutes over an 8-hour
day, which translates into 28,800
documents that are not processed. Shop B, on the other hand, loses only 64
minutes or processing capability of 19,200 documents. Repeated one-minute
delays quickly swell to a 9,600-documents
(or 4,800-transactions)
difference per day between each shop. With numbers like that, it’s no
wonder that many departments are experiencing holdover on a daily basis.
The good news is it can be eliminated with simple attention to detail.
As
you can see, opportunities for improvement are measured in fractions. For
the most part, technology has already provided all the major gains. There
are no real home runs out there when it comes to improving the overall
process. The way companies will score is with an accumulation of singles.
That means a combination of small improvements and changes throughout an
operation. It might be gaining a minute on jam repair on a transport.
Perhaps it’s reducing idle time while employees are waiting on work or
reloading a hopper in mail extraction and transport operations. An effort
to minimize the number of keystrokes required to perform a data entry
operation will likewise bring about measurable results. It’s all in the
details.
A New Style of Management
The
best-in-class operations are the ones that are paying attention to every
step in their process, rather than just fixing one problem. This is a much
more economical approach than that of some outfits that merely throw money
at problems by buying more technology. A new piece of machinery may not be
the answer. It could be as simple as supervising employees to focus on the
task at hand and work more efficiently.
The
job of a manager becomes critical in overseeing these kinds of details.
But first, the mindset must change. Questions must be asked and action
taken. What is being measured in a shop? Perhaps it’s only the
high-level detail and not specifics, such as individual time spent on a
transport. While it can seem overwhelming to manage the minutia of jam
repair time on a transport, the information is usually available on a
vendor’s system. Taking the time and exerting the effort to manage these
details does pay off.
Managers
must also understand scheduling and take the time to do it right. When
does your mail show up and when do employees arrive? If most of your mail
comes in between midnight and 8:00 a.m., the company operations are, in
reality, starting during that third shift. But how many workers are on the
clock during that time? Probably not enough. Another inefficient scenario
might involve too many people starting work at noon, while the bulk of the
mail arrives at 1:00 p.m. In that case, you end up paying for idle time.
Staggering
start times of different employees or job functions is critical. If
everyone starts work at the same time, that means a person who scans the
mail has to wait – with nothing to do – until the mail is opened.
Clearly, this is not the best use of your resources. Scheduling can get
even more complicated for operations where the volume comes in by
different patterns according to hour of the day, day of the week or week
of the month. It’s not consistent every shift or every day. The easy,
but inefficient, thing to do would be to schedule the same number of
people per shift each day. A more innovative manager, however, will take
the time to forecast what the volume is by day and then by hour, adjusting
the number of employees on each shift to correspond accordingly.
Another
role of management is to set standards when it comes to employee
productivity. If some operators are producing at twice the speed of
others, it’s probably not profitable to keep the slow people on the
payroll. That’s when it becomes important to establish and enforce
minimum performance levels. When an employee knows what is expected of him
or her and has incentive to reach those goals, productivity rises.
Staving off the
Competition
Both
managers and employees have all the incentive in the world to keep
productivity up. The trend today is to outsource operations because, quite
frankly, third party vendors tend to do a better job. When processing
items is a company’s core competency, more attention is paid to detail.
It then becomes a profit center, rather than a cost center. An insurance,
utility or mortgage company, on the other hand, may see processing
payments as a necessary evil.
The
problem with that point of view is those managing in-house operations may
not be motivated to be creative in their thinking or look for ways to
operate cheaper, faster, better. They may even be lulled into a false
sense of security. The unfortunate but likely consequence of such inaction
is that people lose their jobs to the more aggressive outsourcers. If you
want to protect your interests, you must make the most of your in-house
operation, doing all you can to improve your current process. Even if the
decision is made to outsource your process, you could bring something to
the table by being best in class. That distinction could be the reason an
outsourcer decides to acquire the facilities and all the people who work
within, as opposed to just acquiring volume.
Details,
details... They are not to be ignored or dismissed as a nuisance. Indeed,
attention to detail can elevate your operation to one that makes a
difference, bringing necessary and welcome profitability to your
organization.
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Back
To Basics - The Fundamentals of Operation Management
FTP Consulting
Services, Inc.
The daily roller coaster ride of
the Dow and NASDAQ has certainly made us catch our breath as we
contemplate the future. One thing is clear. It is not the roaring ‘90s
anymore. What does the current economic slowdown mean for business? A
growing number of corporate layoffs indicate a trend to reduce expenses.
How does this affect your business operations when purse strings are
tightened and you find yourself being stretched to do more with less?
Many
are at a loss. For some the first instinct is to purchase new technology
in hopes of increasing productivity and efficiency. While you might see
some changes, this approach stops short in that it merely automates the
old process. It’s a band-aid when what you need is surgery. But not to
worry … it’s really only a minor procedure, and recovery is relatively
quick and painless. When all is said and done, you’ll find that there
doesn’t have to be a trade-off between quality and productivity or
timeliness.
Understanding
the Past
It’s all about getting back to the basics. Over the last 20 years, we’ve
moved away from some important fundamentals of operation management. There
are two main reasons for this shift. The first step away from the basics
was taken in the 1980s when a sluggish economy resulted in a purge of
middle management. The loss of these individuals meant lost mentors who
were critical in passing down a skill set to the next generation of
managers.
But
when that next generation came along, it didn’t seem to matter. The
1990s marked an unprecedented economic boom on Wall Street. Profits
soared. People had money to spend like never before on technology,
acquisitions, marketing, product line expansion, training and facilities.
It simply wasn’t necessary to be as efficient in the operations area as
it had been in the past.
That
is not to say that quality management and productivity issues were
ignored. In some companies, valuable reengineering and TQM (Total Quality
Management) programs were put in place and successfully executed. However,
today’s wavering economy paints a different picture. Companies don’t
have the time or money to wait the years it takes for these programs to be
rolled throughout the entire corporate level. People need immediate
results.
The
Basic Tools
Getting back down to the basics provides results in as little as 90 days.
So what are the basics? Just what did we lose in terms of practical tools
when that mentoring element dissolved in the ‘80s? The skills needed to
make the most of your resources involve tracking arrival patterns;
forecasting volumes; staffing to schedule; and measuring and analyzing
productivity, quality, timeliness and unit cost. When you know your
productivity rates, timeliness requirements, what your volumes are and
when they’re coming in, you can then staff and schedule accordingly.
Knowledge gained from these relatively simple steps will enable you to get
creative with variable staffing and drive down costs.
The
best common denominator to measure yourself against past performance and
your peers is unit cost. Tracking your unit cost establishes a baseline.
When it comes time to cut your budget, you’ll know how much you need to
lower that unit cost. This is often accomplished through staff reduction.
But how does this affect the timeliness of your production? To avoid a
negative impact, you might staff with part-timers on peak days and use
only full-time employees on low volume days. You can effectively forecast
and make effective staffing decisions when you track volume and arrival
patterns.
Perhaps
you’re already tracking productivity or volumes. But what are you doing
with the information you’re tracking? Are you gathering the data and
evaluating it so as to streamline your work process? Are you collecting
too much information? If your measurement reporting system consists of a
thick book of data, it’s too much; you can’t get through it. That’s
when you narrow down the field and ask yourself, “What are the ten most
important things needed to measure quality, productivity, and timeliness
and provide the necessary data to improve my operation?”
Creative
Solutions
What you’ll find is the same basic measurement tools apply, regardless
of your industry. Take application processing, for example. When interest
rates go down, mortgage applications go up. Volume patterns change.
Collections are likewise affected when the economy takes a
downturn, as collection activity is likely to rise. That means more people
are necessary to staff the phones – especially in the evening hours when
there is a greater likelihood of contacting individuals at home.
If
your processing operation runs one shift, five days a week, chances are
Mondays are a peak day. Perhaps extending to a seven-day operation,
working twenty-four hours a day will smooth out that peak. This will give
you timeliness where needed and drive down the unit cost as you eliminate
overtime.
Maybe
your volumes are so high that you’re running out of physical space or
processing capacity. Again, adding evening or weekend shifts can spread
the volume out. But solving efficiency problems doesn’t always mean
adding shifts. Split shifts could be the answer. Or maybe you’re already
running two shifts, seven days a week – but the work still isn’t
getting out on time or quality is low. An examination of peaks and valleys
in terms of volume may require some creative staffing to address these
issues. Such was the scenario of one of our customers. We arrived at a
solution by breaking employees into teams and scheduling them to work four
ten-hour days. On low volume days, only one team worked, whereas on high
volume days, two teams were called in. The people loved it because they
only had to work four days a week, and the operation solved its timeliness
and expense problems.
As
you can see, these are simple solutions. It’s all about looking at your
options and being creative. However, many managers are just too busy
fighting fires and doing everything they can to push the work out. They
don’t have the time to sit back and consider all the alternatives to
achieve their goals. It’s a matter of not seeing the forest for the
trees. That’s when it’s nice to get the perspective of someone with an
aerial view.
If
you already schedule, measure productivity and set timeliness and quality
standards, good for you. But given the current state of the economy, the
screws are being tightened. You’re going to have to sharpen your pencils
and those of your management team and get better at it. It’s not
difficult. People have just gotten away from the basics. They’ve either
focused on the wrong things or aren’t focusing at all. Our hope is that
this newsletter will help you examine alternatives to running your
operation processing system differently and zero in on the fundamentals.
After all, it’s fundamental to your success.
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You
Don't Know What You Don't Know
FTP Consulting Services, Inc.
When
a bushman that has traveled his entire life by foot is introduced to
a bicycle, his world is immediately transformed. As far as he is
concerned, those two wheels provide the best mode of transportation
known to man. While peddling through the village is a clear
improvement over walking, no one has bothered to tell our bushman
about planes, trains and automobiles. He simply doesn’t know what
he is missing.
While people can remain blissfully ignorant about many things, your
business operations process is not an area about which you can
afford to remain uninformed. When hiring a consultant or purchasing
a product, lack of knowledge can cost you. Wise investment of your
capital starts with education.
Shop Wisely
If you plan to hire a consultant or buy a piece of
equipment, you must shop the market. Otherwise, you’re like the
bushman who has no point of comparison simply because he hasn’t
been exposed to alternatives. Many businesses are under the false
impression that their operation is “best of class” because they
took the advice of a consultant or salesman at face value without
investigating other solutions.
Many feel that they have performed sufficient investigation by
examining the process of another business. Yet far too often, they
are comparing apples to oranges. If, for instance, a utility likens
its own operation to that of a bankcard company, the analysis is
flawed from the start. Utilities have a near monopoly with 80% or
more of their customers paying their bills in full. Bankcard
companies, on the other hand, operate in a highly competitive
market. What’s more, only a third of bankcard customers pay off
their balances. Therefore, comparing productivity rates per staff
member or error rates per 10,000 or 100,000 transactions will yield
inaccurate results, causing false assumptions to be made.
Stretched Too Thin
In today’s fast paced business environment where streamlining
is commonplace, it is understandable that a manager or supervisor
would look for the easy path when making purchasing decisions.
Management staffs are stretched thin, putting managers in the
undesirable position of making business decisions in areas that lie
beyond their scope of expertise.
For example, individuals in management positions are often asked to
purchase new equipment even though they have never done it before.
Due to time constraints and lack of knowledge, the Request for
Proposal process is often set aside. If a vendor or consultant
offers a solution that looks good, it’s easier to take the first
thing that comes along and get on with the everyday demands of
business.
However, there are many who call themselves consultants but
are simply between jobs. They lack the experience necessary to give
you the knowledge to make an informed decision. Likewise, many sales
people move from job to job and will sell you just about anything.
They may, in fact, be selling you a bill of goods. Buyer beware.
The Power of Knowledge
More than likely, the purchase of a new system will be an
improvement over the old. But is it the best solution for your
company’s particular needs? Informed shoppers – people who hire
experienced consultants – find that whatever money is spent in
researching the market comes back to them two-fold. With knowledge
comes power. They understand what kind of demands can be made on a
vendor and expectations are clear. Protection clauses can be written
into contracts. In the end, the company benefits by obtaining
state-of-the-art technology designed to support business operations
well into the future. Individuals involved in the purchasing process
glean valuable knowledge and experience that boosts their careers.
It’s a win-win situation.
The ones who don’t win are companies who make poor decisions and
fail to protect their interests simply because they don’t know
what they don’t know. They may put in old technology that will
become obsolete in just a short time. That was the case with many
who purchased new equipment in the late 1990s that was not Y2K
compliant. Needless to say, the life span of these products was
extremely short, as the new millennium quickly approached. Others
bought products that wouldn’t run on NT and consequently were
forced to buy new systems.
These individuals didn’t know what questions to ask because they
weren’t aware of all the facts. They didn’t know what they
didn’t know. The good news is that costly oversights like these
can be avoided with a little time and effort directed toward
understanding the marketplace.
Call in the Experts
No matter what the size of your undertaking, it is wise to seek
some degree of outside advice. You can control how much money you
want to spend by engaging someone for one day or for the duration of
your project. It could be that once you’ve met with an experienced
consultant, you’ll discover that you know less than you thought
you did. That’s when the FUD factor sets in – Fear, Uncertainty
and Doubt. These debilitating words are quickly erased from your
mind, however, once you bring in the experts.
As a case in point, it might very well behoove you to hire someone
who writes Requests for Proposals several times a month, as opposed
to relying on a manager within your company who may only develop an
RFP once or twice in an entire career. Experienced consultants stay
current with developments in technology and the way in which people
do business. If you are not aware of these changes, you may not know
what is realistic to expect and demand of a vendor.
You wouldn’t buy a car or retain a mortgage company without
first investigating and pricing your options. Yet some people spend
more time shopping for a VCR than they do a million-dollar business
solution. There is a world of opportunity out there. But if you
haven’t been exposed to it, you won’t know how to take advantage
of all the tools available or how to gauge your company’s success
and productivity. You won’t know what you don’t know.
You therefore need to have as many points of reference and
comparison as possible. And rely on people with the experience
and long-term market presence to share their knowledge with you. Get
all the facts. Make an informed decision. In so doing, you will reap
benefits for yourself, your company and the industry as a whole.
Most importantly, you will no longer operate without knowing what
you don’t know.
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Who
Said Nothing in this World is Free? The Discovery of Free Data
FTP Consulting Services, Inc.
What
would you do if you suddenly learned you were sitting on a gold
mine? Well, start digging. Odds are, you are rich in resources you
probably didn’t even know you had. We call it “free data” –
a gold mine of information.
An abundance of data is captured in an automated format through the
overall workflow process each and every day. However, only a portion
of these facts and figures are used for the immediate task at hand.
The rest is typically discarded. This extra information – or free
data – is actually quite valuable and could be put to use in other
capacities that would streamline your operations and save a great
deal of money.
You are already collecting information for specific purposes. Now
you must look deeper and ask yourself how you can mine that data and
use it elsewhere. We’ve noticed that there is free data
circulating in virtually every industry. You just need an eye to
find it.
Information Mining
When is the last time
you were at the airport, number 194 of the 200 people in line at
your gate – while one lone counter clerk worked to check everyone
in during the ten minutes remaining before your flight?
Had that airline made use of its free data, you could have
been relaxing in the lounge with plenty of time to spare. The
airline’s computer is full of information – including how many
tickets were sold. Knowing what time most travelers would arrive for
their flight, management could have easily planned to have more
workers behind the counter. Free data.
How about the cash register at the fast food restaurant that logs in
sales information? If
this data is saved and analyzed, the manager may notice a pattern.
Maybe every Tuesday at 3:30 p.m., the store experiences a rush.
Perhaps that’s the time kids get out of school and come in for
their daily dose of French fries. (You see, the register will also
have recorded information as to what customers are buying.)
Now the restaurant can forecast and schedule additional
employees for that afternoon shift. And they will be sure to have
plenty of ketchup on hand to go with those fries. Free data.
A producer of snack foods in Dallas is a prime example of a company
that took advantage of free data and made it work to their
advantage. In the 1980s, this company’s trucks would retrieve
unsold items from stores and give storeowners credit for the
merchandise. The information collected on receivables was stored on
a computer. One day, someone in the snack food company’s marketing
department took note that data was being gathered on which items
were and were not selling. In the meantime, raw materials – corn
and potatoes – were sitting on the railroad track, waiting to be
processed. A quick analysis of this data told snack food company
personnel whether or not potato chips were selling in West Texas and
if corn chips were stronger in the southern part of the state. The
Dallas plant then knew what to make and where to ship it. Free data.
Taking off the Blinders
What kind of free data
is floating around in your operation?
You, like those in many companies, may be pressed from an
operations standpoint to reduce costs and improve profit margins.
People are investing hundreds of thousands (if not millions) of
dollars in automation … but using it with blinders on. Technology
is being left on the table.
Take the example of
incoming mail. Perhaps you spent a quarter of a million dollars on a
machine that sorts your mail to individual PO boxes. Great. But did
you know that other valuable information is being captured
simultaneously? You can
also determine your volume and the pattern of mail by day of week or
by hour. All that data is contained within your machine. Now you can
take this knowledge and start forecasting. If you know that every
Monday at 8:00 a.m., you get 30% of your volume, you can build a
staffing schedule. Free data puts you in control of your workflow
environment instead of reacting to it.
Too many companies are wasting time, energy and money on manual
processes, when needed information has already been electronically
captured. A mailroom clerk, for example, will sit and manually log
the trays of mail, when the machine has already counted every
envelope. Or what about the employee who re-keys information into a
computer for billing purposes? The data was already in electronic
format. It just came off the computer. But it is being entered
again. Billing may not have been the end goal when this particular
automation system was purchased, so no one thinks to mine that
information. But it’s there.
Understandably, managers are focused on accomplishing their
particular job – getting from Point A to Point B in the shortest
amount of time with the least amount of problems. However, there may
be a number of side paths that can lead to answers for another
operation or help in a particular area of the processing stream.
A Different Perspective
Free data is often discovered when somebody simply looks at a
process from a different perspective. They see that while
information is being gathered for one purpose, it can be effectively
used for another. The zoo generates a lot of manure. But some
individuals have turned it into a business enterprise for
fertilizer. Again, free data.
When a car leaves the plant in Detroit, General Motors knows exactly
how much labor is in it. But in our business – in the back room
– when someone is asked about the cost per item, all you get is a
blank stare. The information is there. It’s free. It needn’t be
a mystery any longer.
Our challenge to you, the end user … to you, the vendor … to the
industry as a whole … is to explore the ways in which you can make
more use of the data that already is out there … right at your
fingertips. Don’t let this valuable resource slip through your
hands. Grasp hold of it.
Look to see if you have information available that can be used in a
different way than originally intended. The more you train yourself
to view your operation with new eyes, the more instinctive it will
become. And you will be the richer for it.
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Incentives that Work for You
FTP Consulting Services, Inc.
Incentives.
You can’t compete unless you’ve got them. But once you’ve
established incentive programs to recruit needed employees, how do
you go about improving productivity? Are your incentives yielding a
return on your investment? Or have you created a money pit?
If structured correctly, incentives can have a strong impact on your
bottom line. Sadly, most incentive programs are not achieving
desired results of increased productivity and cost savings. If you
find yourself at your wit’s end, trying to find an incentive
program that works, you are not alone. What is it, then, that so
many people doing wrong?
One thing is certain. Simply throwing money at the problem won’t
solve it. The tendency is to try to motivate employees through
raffles or contests with the promise of “warm and fuzzy” prizes
at the end. However, for an incentive program to be truly effective,
it has to be carefully crafted. Operations managers must take the
time to analyze their work environments and quantify desired
results.
Working from the Inside Out
It starts with examining the expense of operations. If your core
objective is to cut costs, do you know what you’re spending? What
is your unit cost of production? What would you like it to be? How
do you get there? Better yet, how does employee performance need to
improve in order to impact productivity and quality … and
ultimately save you money?
These are questions that must be answered before instigating an
incentive program. First, let’s look at unit cost. What is it? In
its simplest form, unit cost is the number derived by dividing the
dollars spent on manpower by the number of transactions in a given
time period. Increased productivity should naturally lower your unit
cost. We suggest tracking this number on a monthly or quarterly
basis to determine if the unit cost is rising or falling.
FTP offers training classes to help companies throughout the country
understand their unit cost and the components that can improve
productivity. That lays the groundwork on which to construct an
incentive program. Truth be told, if the correct foundation isn’t
laid, you may as well be building on sand.
FTP Analysis Leads to Unprecedented Savings
One client of FTP recently called on us to restructure its shaky
incentive program. The results have put smiles on the faces of the
operations manager and employees alike. The specifics involve a
telephone call center that takes customer service calls for a credit
card operation. The organization had tried a variety of short-term
motivational strategies over the years in an effort to boost
productivity. The feel-good gifts did little, however, to increase
numbers and accomplish company goals.
FTP took a long, hard look at the company’s unit cost and what it
would take to save significant dollars. We came to the conclusion
that if each person in the call center could improve productivity by
an average of only one call per hour, the company would save
$260,000 over the course of a year. The results would be measured on
a monthly basis and a percentage of the savings distributed among
the workers, based on their individual performance.
Suddenly, the call center incentive program was no longer vague.
People could understand why the company set a specific objective and
what they needed to do to make it happen. Employees could gain
points by meeting such performance standards as attendance and
availability to take calls. These tangible, attainable goals have
changed the perspective of employees, teaching them to work smarter
– not harder.
The results? Each
worker added not only 1, but an average of 2.3 calls per hour. That
translates to almost $550,000 annual savings for the company. And it
means an extra $150 to $200 in the pockets of employees each month.
That’s motivation.
Relating Incentive Programs to Employees
The lesson for the telephone call center was that a critical element
had been missing from past incentive programs. Employees must have a
clear understanding of how to tie their individual performance to
the company objective. This is what most operations managers fail to
recognize. Attaching the organizational or departmental goal to
dollars is what makes sense to employees.
Another common mistake is what we call the “cookie-cutter
approach” to incentives. Perhaps you’ve seen an incentive
program succeed in someone else’s organization. Yet when you tried
to implement the very same plan within your own work group, you came
up empty. The reason is no great mystery. Corporate cultures are
different. Even different operations within the same organization
can have personalities of their own. Maybe the tasks in one area are
repetitive in nature, compared to the broader scope of work required
of another department. Operations managers need to ascertain the
personality of a group and tailor the program accordingly.
To do this, you must go to the source. Talk to your employees. Most
managers don’t take time to understand employees or what motivates
them. Ask how they feel about incentive programs that have been used
in the past. You may be surprised to learn that their responses are
negative. Workers often look at incentives as gimmicks lasting three
to six months – or until management decides to try something
different. And with each new program, employees see the same people
being rewarded time after time.
Fair Allocation of Rewards
Typically, the superstars will continue to perform well and be
recognized. This is why contests or raffles are self-defeating. So
how do you motivate the lower performers to improve? That’s where
allocation comes into play. Once you determine how much of the money
saved can be allocated, develop a system whereby individual
employees can earn qualification or a percentage of those funds. And
set up the allocation in a way that seems fair to everyone. Some
sort of equal distribution among team members is one way to solve
the problem.
Experience That Pays Dividends
If your incentive programs need an overhaul, it is critical that you
analyze your business operation and make needed changes. There are
many questions to ask. FTP has worked with operations managers for
more than twelve years, providing answers about unit cost management
and how to build successful incentive programs.
FTP has been down the road you are traveling. We invite you to take
advantage of our experience to identify performance improvement
opportunities within your organization and surpass even your own
productivity goals.
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How Much is Really in the
Bank? Revenue vs. Profitability
FTP Consulting Services, Inc.
Wall Street
judges you on it. Shareholders demand it. Management scrambles to
make it happen. Revenue growth is the mantra of modern day business.
Quarter by quarter, the pressure is on for sales numbers to
increase. But the question at hand should be: “Is your bank
account increasing?” Are you profitable? You may be surprised to
learn that increased revenue doesn’t necessarily translate to
profitability. In fact, there is a very distinct difference between
the two.
Do the Math
As is true with most businesses, the common thought within the
wholesale lockbox industry is that profitability is tied to volume.
Au contraire! Let’s get out the calculators and do some business
math. For the sake of this exercise, we’ll assume a wholesale
lockbox operation has two customers for whom internal processing
costs are $0.20 per item each. Box rental is $125 per month.
Customer A has a volume of 500 items per month and will pay $0.30
per item. Customer B, on the other hand, has a volume of only 10
items per month and will pay $0.25 per month.
Which customer account is more profitable to the processor? At first
glance, it may seem like a no-brainer. Go after the big volume
customer that is paying more per item. It’s the smaller customer,
however, that will bring greater per item profit. Here’s how it
breaks down. When processing Customer A’s 500 items, the lockbox
makes $0.10 per item ($0.30 - $0.20) for a $50 profit. Add to that
the box rental of $125 and the total profit is $175, or $0.35 per
item.
The processing profit for Customer B is significantly lower – 10
items x $0.05 ($0.25 - $0.20) = $0.50. But when you factor in the
$125 box rental charge, profit rises to $125.50, or $12.55 per item.
The fixed costs are what make a difference in this equation. The
bottom line is that Customer A has greater revenue, but Customer B
has greater profitability. Revenue numbers may look good on paper,
but profitability is what you have in the bank.
To take this simplified illustration one step further, we’ll
consider the labor costs involved based on the assumption that the
time required to process an item for Customer A is the same as it is
for Customer B. If the lockbox operation had 49 more accounts like
Customer B – each with 10 items per month – the amount of labor
and accompanying expense required to process these 50 accounts (500
items) would be the same as that required to process for Customer A.
Yet Customer B and the 49 other small customers would bring in a
profit of $12.55 per item for a total of $6,275. Compare that to the
$175 profit made from processing Customer A’s 500 items. It takes
the same amount of work to process the 50 small accounts as it does
the one large one. But you get a bigger return on your effort with
the smaller customers. There’s simply no comparison.
This same logic applies to retail lockbox applications, with
some of the differences being that the exception percentage and mix
of work come into play. The fact remains that a while a large volume
account may generate more revenue for an organization; it may not be
the most profitable.
The Wrong Motivators
Still, it’s big numbers that get the attention of management.
Wall Street rewards revenue growth. However, a company could
potentially have no increase in sales from one quarter to the next
but see profitability climb. The irony is that unless revenue rises,
stock prices fall. The truth of the matter is:
profitability is the real indicator of a company’s health.
An investor gets a dividend when profits are up – not just sales.
Nevertheless, many processors or banks continue to turn down small
accounts because they don’t understand the concept of
profitability. Given the choice between a single account that will
bring 500 items and 50 accounts that generate 10 items each, a
lockbox manager will invariably choose the one large customer.
It’s easier to manage. And it’s easier for a salesman to sell
one high-volume account than it is to sell 50 small ones. When the
numbers are calculated, though, it becomes clear that these are not
sound business decisions.
Anything for a Sale
Because incentives are based on revenue, sales people will go to
any lengths to win a big-name, big-volume account. But that
doesn’t necessarily mean big profits. Take any major industry,
like telephone and cable or credit card, for example, and think of
it as a pyramid. A limited number of companies usually occupy the
top tier. With a number of processors vying for the payment
processing business of those few accounts, the lowest possible cost
is negotiated. The “lucky” winners of these accounts may not be
so lucky after all.
Not only has the price been driven down, but processors have more
than likely spent quite a bit of money to compete for these deals.
Consequently, the profit margin has been cut so thin that if a
machine so much as hiccups during the day, the processor loses
profitability.
The smart thing to do is to go after the hundred or so telephone
companies at the bottom of the pyramid. They’re willing to pay
double or even triple the bid-down price that processors must settle
on with the large vendors. You may have less volume than you would
with the big guys, but the potential is there to make a larger
overall profit.
A similar mistake is often made in the vendor community. Companies
are so intent on making a sale that they will bid a job for less
than the cost of doing business. For instance, an organization might
bundle hardware and software together and discount it to make a
sale. While that vendor may record $1 million in sales, if it costs
$1.5 million to put the system together, the lifespan of the company
will be cut short.
In another scenario, a company might spend more on development than
it makes selling a product. Or perhaps a manufacturer is trying to
sell equipment at a price that matches the competition. But the
competition is a reseller without the internal costs of
manufacturing. The higher the internal costs, the lower the profit
margin. As companies have come to recognize this reality, there has
actually been a trend to move away from hardware manufacturing into
software – all to decrease overhead expenses and increase
profitability.
A Time to Refocus
Understanding your business and working smarter are key factors
to achieving success. It is therefore critical that profitability
considerations play a major role in business decisions. That means
shifting strategies and expanding the myopic view of revenue alone
to include a focus on profits. Revenue on its own does not represent
the vibrancy of an organization. Many of the dot-coms serve as prime
examples of companies that had millions of dollars on paper, but
incurred greater expenses than revenue earned. Lack of profit sent
them to the annals of failed business ventures.
It’s time to look at and go after business differently. Then
you’ll make a new kind of history for the record books. One that
will be emulated by others for years to come.
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