Making more money in the service business

If you’re a regular reader of my writings, you will know that I do not endorse many products. And, even if a product delivers many outstanding benefits, I will give you the straight scoop about delivering on R.O.I. (return on investment).


Well, I just finished reviewing an outstanding product for the SMB (small-to-mid-sized business) service industry. If your company sells, installs and/or services high-value technical or industrial products – or even if you service products sold and installed by others (such as swimming pools and hot-tub systems) – SM-Plus(tm) from Single Source Systems could help you start making more money.

A study done by Aberdeen Group indicates that service companies that adopted end-to-end solutions that aided managing their business as a “system,” rather than in silos, saw an average of 14.2% increase in revenues over a two-year period. Since, for many service companies, their service revenues carry very little in Truly Variable Costs (TVCs), that means that almost all the dollar increase in revenues drops directly to the company’s bottom-line.
 
So, how does an service management end-to-end solution create this increase in revenue – and profit?
Here are a few of the key factors:

• Elimination of inter-departmental silos increases visibility of “bottlenecks” and helps executives and managers take effective action to increase Throughput.
• Integration with mobile computing devices reduces time lost for data-entry or trips back to the job site or warehouse. This means more available service hours are actually used performing billable services.
• End-to-end solutions are able to handle complex contract-based billing calculations, thus virtually eliminating “islands of information,” manual calculations and redundant data entry. This, in turn, means the enterprise can grow revenues without adding to operating expenses.

So, how would you determine if Single Source Systems’ SM-Plus would be a good investment for your service-centric enterprise?

The formula return on investment remains the same:
You and your team need to calculate how much your Throughput (T) (i.e., Revenue less TVC) might increase (see average of 14.2% over two years above, but calculate your own numbers) and any net effect on Operating Expenses (OE). Then, figure out what your investment would be to get started with a product like SM-Plus. Put those numbers into the formula for ROI (see illustration), and you can calculate your ROI simply and easily.

Give it some thought.

Drop me and email at rcushing(at)GeeWhiz2ROI(dot)com if you have further questions.

©2010 Richard D. Cushing

Technorati Tags: service management,SM-Plus,Single Source Systems,ROI,return on investment,Throughput,bottleneck,TVC,Truly Variable Costs,mobile computing,operating expenses,SMB,SME,Aberdeen Group

The New ERP – Part 24

It is all academic

We have covered several aspects in the matter of developing a "requirements list" so far. (See prior posts.) Of course, whether you are developing your requirements list in-house or your firm is retaining as traditional Everything Replacement Project consultant to do it for you, it is entirely academic and suffers from the same bad assumptions and lack of focus.

As I am writing this, I have before me a real-life "Request for Information" (RFI) stemming from a real-life traditional Everything Replacement Project. This particular document presents 286 "requirements." Sadly, it is quite likely that the folks behind this RFI – because they are employing traditional ERP concepts and methods – have absolutely no idea which of these "requirements" reflects the small handful of things that will actually permit their organization to improve by increasing Throughput (T), reducing demand for new Investment (I), or cutting or holding the line on Operating Expenses (OE) as their firm grows. In fact, they probably "hope" – but cannot state with any certainty – that any of these requirements will actually aid the firm in growing beyond its natural trajectory as of today.

The danger of lack of focus

It is precisely this lack of focus as reflected in a 286-item "Requirements List" that drives firms to undertake an Everything Replacement Project rather than identifying and changing that very small number of things that will actually deliver results by permitting the firm to elevate or even break a constraint and, thus, to increase Throughput – or to make significant improvements in I or OE, for that matter.

The firm that unwisely elects to spend half-a-million dollars on an Everything Replacement Project when a more focused investment of some (likely, significantly) smaller amount would deliver effective and valuable improvement has wasted capital that it will never be able to reclaim.

The Everything Replacement Project approach is supported by the false underlying assumption that, if we just throw enough money and technology at our organization, our organization will somehow improve. As evidence, I quote a gentleman who once said to me the following regarding a time-consuming and costly implementation of SAP that he had ongoing in his organization: "We've spent so much money already, it's got to work." (Emphasis is his.)

This unfortunate lack of focus in a traditional Everything Replacement Project, is to be contrasted with the New ERP – Extended Readiness for Profit approach that we are introducing here. The New ERP encourages you and your management team to focus on "what needs to change" (by looking at the roots of your Current Reality Tree [CRT]) – that relatively small handful of things that will actually lead to measurable improvement. Then, and only then, should you take your precious cash and other resources to apply them in a focused way, knowing in advance the measurable outcomes you expect from each critical investment.

What does all this have to do with "software selection"?

While traditional Everything Replacement Project methods will have you and your organization searching for software (and, potentially, other technologies) to replace – well – "everything" based on the all too traditional "Requirements List," the focusing steps of the Extended Readiness for Profit method will direct your team to consider only those particular technologies that will actually lead to real and rapid improvement (read: return on investment). Rather than a shotgun approach – throwing time, energy, money and technology – at everything – the New ERP gives your management team the option to become sharpshooters for improvement and new profits.

The New ERP approach will

• Conserve cash
  
• Provide more targeted uses for capital
  
• Avoid the waste of spending on IT projects that result in little or no real value-add to the "system" – the organization, as a whole
  

Going back to the example company (see early prior posts in this series), since the management team understands precisely "what needs to change" in order to improve the "system" – the organization – as a whole (namely, integrated bar code printing, integrated and automated ASN generation and transmission, and reducing or eliminating paper-based pick-pack-ship operations), they do not need to look at replacing everything. Rather, this wise team is prepared to turn to vendors and do "software selection" based on a very small domain of critical functions.

Rather than spending several hundreds of thousands of dollars on an Everything Replacement Project, our example team can set – as we previously described – a reasonable budget for the accomplishment of just the critical changes they have identified and for which they have already created measurable objectives.
[To be continued]

(c)2008, 2009 Richard D. Cushing

The New ERP – Part 10

Setting priorities in The New ERP

So, how does the Thinking Processes and the Current Reality Tree (CRT) we've just built tie in with ERP decision-making?

Well, let us imagine a firm (taken from an actual case) that has completed their first CRT and they have at the root of their tree the following entities:

• Non-integrated software applications are used to generate bar codes for various purposes
  
• An ASN (advanced shipping notice) cannot be automatically processed by existing systems
  
• Production schedules are created and maintained in Microsoft Excel rather than in an integrated data environment
  
• Manual flags must be set in our contact management system if a sales order goes on hold for any reason
  
• Order processing documents are presently reproduced in multiple copies for distribution on paper to various parties and departments
  
• Data in existing software applications (e.g., Purchase Order expected receipt dates) are unreliable
  

By following this firm's relatively complex CRT to the top of the tree, the management team is able to see that their current reality is driving Operating Expenses (OE) that are too high – growing at a faster rate than Revenues or Throughput (T). They are also experiencing higher than desired Inventory levels, and since carrying costs for Inventory contribute to Operating Expenses, excess inventory is a double-whammy – putting upward pressure on Operating Expenses, as well. Of course, higher Operating Expenses lead to a lower NPBT (net profit before taxes). The management team also recognizes that much of the fire-fighting they have been doing over the last years – caused by their treating UDEs as "problems" and a failure to manage their organization as a "system" – has limited the time, money and energy available to spend on new business development. Therefore, they see that they have actually missed out on potential growth opportunities – thus reducing Throughput.

Our company's management team now turns to reviewing the several "roots" and they determine the following:

• Roots 1, 2 and 5 predominantly affect the warehouse and shipping department. In this particular case, many of the functions between warehouse operations and shipping overlap, so these will be considered together.
  
  
• Root number 6 is also a warehouse issue, but it affects receiving and there are separate people who handle that function. Therefore, this root will be evaluated separately.
  
  
• Root number 3 primarily affects the Production Management Team – a group of people that work together to try to keep the work flowing through the factory as smoothly as possible. However, it also has some implications for sales ("If I take a big order, what date can I promise to my customer for shipment?") and for customer service, too ("What's the status on the production of the products for order number N that's supposed to ship tomorrow?").
  
  
• Root number 4 affects accounts receivable personnel, who must notify the appropriate customer service people whenever an order goes on hold. There are also other functional areas that must be aware of potentially delayed orders and must guard against accidentally releasing an order that should not be shipped. It gets complex quickly.
  

Finding your "bottleneck"

In The Goal, Eliyahu Goldratt points out that any "system" or organization is like a "chain." It is not a collection of loosely related functional groups – shipping, receiving, production, accounting, and so forth. Rather, like a chain, if you want to strengthen the "system," it is imperative that the weakest link be identified and efforts made to strengthen that link. If the weakest link is not strengthened, then the chain itself will not have been strengthened (improved) at all. Your effort may have added weight to the chain, but will have done nothing by way of improvement.

For simplicity's sake, let us say that the management team in our example organization has determined that the sales department is doing great. Sales and customer service are presently able to continue to sell more products, so the firm's bottleneck does not appear to be in sales or customer service. Let us also say that, despite the firm's rather primitive reliance upon weekly production meetings and spreadsheets, production has not yet become a bottleneck for producing goods to meet known demand.

On the other hand, warehousing and shipping operations are having an increasingly difficult time keeping up with picking, packing and shipping all the orders. There are several factors at work, it seems. One is that the sheer volume of orders of every kind is increasing. More importantly, the company has just opened an e-store on their Web site and has started selling some products direct to the consumer.

While this move has proven to be a good one and is quite profitable for the organization, it has dramatically changed picking-pack-ship operations. Since the firm used to sell mostly to dealers and distributors, they generally picked and packed large quantities into a smaller number of shipments. All of their processes were configured to handle this kind of order processing.

Now, however, with the e-store in operation, shipping finds that, in addition to picking and shipping the large orders with large quantities in each order, they must also pick, pack and ship hundreds of small orders every day. Some of these orders are just a single item in a box. They must do this every day; and this change has had a dramatic impact on them since all the shipping, manifesting and labeling is presently a very time-consuming, paper-based process. Clearly, the pick-pack-ship operation is this firm's bottleneck to reaching more of its goal.

If you and your management team have been following along and you have completed your own Current Reality Tree, you will need to take similar steps to those described above. You will need to look at the roots of your CRT and consider which parts of your organization need to be changed (i.e., what needs to change) and, more specifically, try to identify your "bottleneck" operations – those operations in particular that represent the weakest link in your system's chain of actions that result in producing Throughput.

Note: If you determine that your "bottleneck" is – as is it is sometimes stated – "in the market," then what you are saying is that you have more capacity internally (within your system) do supply and deliver products or services than the market is willing to buy from you at this time. It is important to note that while the terminology is often applied to say, "The constraint or bottleneck is in the market," this is really a misleading misstatement.

If your team comes to the conclusion that your bottleneck is "in the market," then the real internal bottleneck is still internal and will likely be found in functions like

• Research and development – timely production of innovative products or services that provide a sustainable market advantage
  
  
• Marketing – development of new modes of communicating value to prospects and customers around your product or service offerings
  
  
• Sales – creation and execution of a sales process and innovative new "un-refusable offers" that deliver more sales while sustaining Throughput
  
  
• Elsewhere – quality, lead-time, packaging, and other factors can lead to customers or prospects not being interested in buying your products or services
  

[To be continued]