Organizational Development, How are Unseen Costs Affecting Your Profits?

One of the first questions I ask a business owner is, “Why did you go into business?” The response I get usually starts with a long thoughtful silence followed by something like: “Well, I thought I could make more money working for myself”; or “I thought running a franchise would be easier.” I respond with, “Have you found that to be true? Are you making more money working for yourself?” “Is it easier running a franchise?” The next response I get most is something like, “Uhhhhhh?”

Does this sound familiar? Many business owners start a business because of these very reasons. After a year or so into the business, the honeymoon is over – it isn’t “fun” anymore. The business grows and all of a sudden it is running you instead of you running the business. At this point you are not only producing products/services but you have to watch profits, train others (if you want to grow), manage employees, and yet make money.

If it isn’t “fun” anymore, how can this change? How can you become more profitable and make your business what you always knew it could be?

Let’s think about these two equations for a moment:

The results are telling us that reducing costs will increase profits. This sounds logical but how can costs be further cut? You’re getting the best price your suppliers offer; you cannot release any staff; you need every resource you currently have. What more can be done – - plenty.

In every business there are “unseen” costs (wastes) – costs that you see everyday but, overlook. They become common. They “fade into the background.” One of the largest “unseen” costs (waste) is the lack of – or inefficient systems.

Systems are simply routines. Everyone has different routines. Whether it is the route we take to work or the manner in which we pay our bills – everyone has routines/systems. We get comfortable with these systems and they become somewhat automatic – we don’t think about them anymore. Something to try: –

Put a box in the middle of a path that you use all the time and leave it there, not moving it; within 30 days you will be stepping over the box without thinking about it – you no longer see the box. Move the box out of the path, and the next time you come through the path you will still attempt to step over the box that is no longer there.

That’s how simple it is to acquire “unseen” costs within your business. You simply stop “seeing” it. How can you start “seeing” the “unseen” costs? The answer: slow down and observe. Look at each routine/system to identify “unseen” costs within that system. In order for a business to become more profitable you must be willing and able to first “see” the “unseen” costs.

Once you’ve started identifying the “unseen” costs, what’s next? What can you do to reduce these costs? Here is one tool that I use that can be implemented fairly easily that can show immediate results. It is called the 5S System which stands for: Sort, Set In Order, Shine, Standardize, Sustain.

Let’s look at an example: let’s say you identify wasting too much time finding job files in your office as your first “unseen” costs. The first thing you would do is – Sort – the job files – decide what is needed and what is not needed to get the job done. Next – Set in order – decide how you want them filed. Shine – inspect, clean and straighten each file. Standardize each file – document what goes in the file and why so that everyone knows exactly how the system works. Last – Sustain – the system will be sustained by changing habits and educating your staff on how the system works. By implementing these five simple steps you will to stop the frustration and wasted time/money associated with searching for job files and job information.

The 5S system can be done on a large or small scale. Each time you put a 5S system into place, you will see your business improve. Remember, the very first step is to “see” the “unseen” costs.

Some common “unseen” costs are:

• Training: is it outdated, inadequate, or unproductive?
• Personnel: are your employees working to their full potential?
• Communication: is it clear between customers, sales reps, and production?
• Hiring process: is it effective?
• Marketing: what is your real ROI for your marketing dollars?
• Sales: do you have effective representation, are your reps educated properly about your company as well as the products/services you offer?
• Equipment/Technology: is it up-to-date?

This is a short list of “unseen” costs. This could be a good starting place to see where your profits could become visible. In our next issue we will take a look at the Seven Deadly Wastes in a business.