Last week I reviewed the importance of componentizing the business and how separating each segment or component of the organization is required to gaining an understanding of the path towards getting to an end product or service. If you dont understand the individual components, you wont have the ability or understanding of what to measure and where to improve efficiencies and effectiveness. In the end however, it will ultimately always boil down to costs. One of, if not the, most important reason for determining each component is to determining the costs associated with each component. Without these costs, it is very difficult to determine actual base costs and requirements so you can determine desired profit margins. This week, we take it to the next step.
During the process of determining the different components, items such as what reporting measures are needed, how will data be collected, and how are components linked together should come up. Lets talk about linkage first. Understanding the linkage between components is important because of pricing and work flow. If one product or service requires another component or sub-service to be completed or processed, in order to deliver a quality standard product, the price must reflect the additional component or service accordingly. The interrelationships between components affect both the final output and scheduled delivery. Spending time to work though each components requirements for completion facilitates building the final puzzle to what your organization actually looks like from a broader perspective. As pricing develops within quotes, different components will become primary while others are considered secondary. Primary components typically contain the bulk of the work, time, or materials required for the final product or service to be completed and are typically the item listed within the quote. It is a false assumption to assume those primary components will dictate the bulk of the price during quoting. It is not unusual to have one secondary component become the cost driver for the final price. This is especially true when dealing with special materials required in producing your product or service. Determining linkages between each component solely form that components perspective will generate the final puzzle of how the internal workings of your business product or service is actually linked to achieve a successful final outcome. This process can also potentially surface new components that you hadnt considered important or simply neglected to acknowledge previously. Remember the business plan we discussed in the beginning? It all has linkage with each other in the data collection process.
Tracking data is one of the most underutilized aspects of managing a business. The main misconception is it takes too much time and requires too much money to do it right. This is false on both accounts and the reality is, these results from tracking, are required for process improvement as well as profit margin adjustments and gains. The most basic data gathering can be performed with a simple data base functionality software such as an Excel file. It doesnt have to be elaborate nor a need to be or have an Excel expert on staff to manage it. Just consider for a moment how the financial aspects of a business are tracked. Everyone knows these are important to accurately track due to the required taxes and potential audit risk of our wonderful governments. I guess you could say; if it is something that has an affect from outside of the business such as regulatory or other constraint, mandated by an entity other than the business owner themself, it is important to accurately track. To that I would then ask, why not make the internal components equally important and track them as well? You cannot fully appreciate or understand each components impact to the final product or service unless you can accurately track it against other internal factors within the organization. You cannot accurately measure a component if you are not diligently tracking it either. The investment of appropriate software and/or talent to assist in managing it will pay for itself with efficiency, reduction opportunity, waste control, etc. The key to this is finding the right software that will serve your type of business well and using it consistently. And yes, it will change over time so having something that can grow as the business grows and as technology improves, is extremely important. With that being said and as I stated earlier, the least you should be using is some form of database functionality similar to or comparable to the Excel software. It doesnt have to be pretty or complicated at first, but must be functional and set up to properly track the desired components within the organization. The nice thing about Excel is typically, if you decide later to step up to more elaborate software, Excel formats can be transitioned easing the pain of starting over
It is great if you are doing what I have talked about this week. If not, I cant more strongly urge you to consider it and invest some time toward my suggestions and ideas. Ive heard it before: I am just working to make money. I dont need all that fancy stuff to run my business. In the end, what I find and prove out is how much potential cost, effectiveness, and efficiency is lost with not knowing the fancy stuff. The unrealized potential cannot be tapped until the actual data is collected. The actual data cannot be collected until the components and aspects of the internal business structure are fully understood. Again, the investment in both time and thought to determine these will pay for them in very short order resulting in increased profit, reduced costs, or both. Next week, I will talk process flows and work flow through the organization.