Use Small Numbers

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Use Small Numbers

Is a 1% gain ever good enough? How about 1/10 of 1%?

A few years ago a procurement officer really wanted to make a name for herself, so she wanted to create a project that would produce some eye-popping results (her words). Even as a medium-sized company,cost of goods equated to roughly $700 million.It was suggested to set a goal of improving cost of goods by 1% within the initial project.

“One percent?” she responded. “That is a ridiculously small number. We should reduce purchasing costs by 20 percent!”

It did not matter that the 1% was achievable through some minor process changes and with no major project required. It did not matter that the 1% would create enough savings to fund a much broader effort to create even more savings. This manager felt that it would be an insult to propose to the senior officers a project that only created a 1% gain on a $700 million cost base.

Now, one percent of $700 million is $7 million. That $7 million would be an incremental direct improvement on cash flow. It could be done quickly, without investment. And it could fund the larger project she had in mind so that she would not have to go to senior management and ask for limited cash.

Create cash to create more cash. That is what great managers do.

Build dollars out of pennies. Focus consistently on finding ways to trim a little bit more cost. Don’t focus on labor, but on materials and energy. You can improve labor productivity but fail to monetize it. The same is not true when you reduce waste or reduce energy consumption. Finding a way to reduce cost in a repetitive activity is never sexy—until you add up the savings.

Business operations leak little tiny bits of cash all over the place. Just like an old ship’s hull, little scraps of cash are wasted in the operations. Most people walk over these opportunities in search of the big dollar bills, which are so attractive. It’s so counterintuitive to pass the dollars to pick up the pennies; there’s even a saying about being penny-wise and pound-foolish. But the truth of the matter is, the dollars are very hard to capture, and there is a risk that you will never capture them. Picking up the pennies is easy, and if you do it enough times, automating it into your processes, those pennies multiply into dollars.

The pennies live—and the devil lies—within the details. Looking through your processes for the 1% improvements, and stringing those improvements together, helps create the funding that a manager needs to create more savings. There is beauty in small numbers.

To Your Success…

 

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