Article Profit Maps Model 10 Pages 4471 Words

Profit Maps Model (An Effective, Simple and Easy to Implement Tool for Profit Improvement and Cost Reduction Using the Profit and Loss Statement) Introduction Improving profits is one of the main objectives of any business, yet most managers do not truly understand how to move beyond the basics of cost-reduction and profit improvement. In fact it is now the new buzz-word in management circles due to the current economic climate. If profit improvement is one of the essential elements of our business strategies and challenges why don’t we develop the ability to focus continuously on profit improvement the same way we focus on marketing, operations and Human Resources? Why don’t cost reduction and the resources and leadership necessary for its success receive management's constant attention? The Profit Maps demonstrates how large corporations, a small business or a single department can improve its profits and reduce costs using the proven approach that is based on team innovation and management. Organizations need to view profit building as a process similar to the processes that drive Marketing, Human Resources and Finance. It is an excellent area where the finance professional can play a leadership role and prove that the Finance function can truly add demonstrable value, the effects of which will be seen in the next profit and loss statement. Typically the company's response to the need to reduce cost is to reduce the workforce. People are laid off in large numbers and dollars are saved-or so it seems. In most situations this is a mistake or merely a short-term solution. The best approach is to give employees a chance to participate in developing cost reduction strategies so that profit improvement is perpetual. In this scenario people are not laid off in large numbers, but instead, better utilized within the organization where they will generate a multitude of creative ideas and effective solutions for profit improvement. Rationale for a New Model As a senior manager and finance professional I have never found a method that deals simply and directly with the concept of profit improvement and cost reduction. There are many books written which do not have a direct impact on how to increase profits. Each time I searched for such a concept or framework in a book or article I was forced to settle for publications on business theories, financial management, operations management or costing. I never found a concept that specifically told me how to take a business, organization, department or team through an easy to use process to achieve cost-reduction or profit improvement using the line items in the profit and loss statement. Who Should Know and Use the Method? Because profit improvement and cost reduction should be every manager’s responsibility I believe this method should to be an effective vehicle for profit improvement and cost reduction within their areas of responsibilities. Anyone concerned with improving profits will find it useful. If every manager and supervisor follows the technique as discussed here, eventually the whole company will be contributing to the process of profit building. Every manager should make it part of their training program. All employees should become aware of the opportunities for cost-reduction that surround them and should actively participate in perpetual profit improvement ideally spear-headed by a Profit Impact Team. The Profit Improvement Paradox In most business conversations only moments pass before some reference is made to improving profits. This is predictable because the main focus of business is to make profits. What is not so predictable is most managers’ limited ability to formulate effective plans for profit improvement. This is what I call as the profit improvement paradox. What are the Reasons for the Profit Improvement Paradox to Exist? ,[object Object]

Lack of Management Training - As businesses continue to prepare their managers to meet the challenges posed by today’s business environment, they must also earmark adequate dollars for training managers to become more aware of profit improvement scenarios.

Management Turnover - Management turnover is a problem that most businesses must deal with on a regular basis. Its impact on your business is twofold: you lose the experience, knowledge, and training invested in the manager who leaves, and each replacement takes you back to zero in terms of cost-reduction and any associated activities that have taken place. This process should become a core competency of the business. Therefore, profit improvement training should be a part of every new manages development program.

Lack of a Constant Process for Profit Improvement -This is the main reason why the profitability paradox exists. Too many businesses simply do not have a consistent, systematic process for reducing costs and improving profits on a continuous basis. That is why it is difficult for managers, business owners and even senior executives to identify quickly any action steps taken toward cost-reduction. They tend to be more comfortable with problem solving when the questions require more broad based solutions that may or may not tie into profit improvement. Conversely when asked more specifically what line items on the profit and loss statement within your areas of responsibility cover and what steps are you taking to reduce these costs, manages become more halting in their answers. Many books that have been written about cost management which focus on activity based practices. Most widely known is activity based costing. There are also books on activity based budgeting and activity based management. These excellent concepts and frameworks offer a great deal of information about cost measurement. Once you have read them however you may find yourself by asking but how do we reduce cost after having measured them carefully? And where can I find a list of cost reduction ideas organized by line items? The answers to these questions are the basis of the Profit Maps Model. Without it continuous improvement in profitability are unlikely. The Profit Maps Model The Profit Maps Model is a five step process for cost-reduction and profit improvement. In this process an established team, trained in innovation management and questions brainstorming, develops the necessary action steps for a performance improvement plan. Review and follow-up then direct the process back to the team for a new cycle of creativity. The Profit Maps Model acts as an engine for continuous improvement, produces immediate results, and becomes a core competency for the business. The Profit Maps Model consists of the following five steps ,[object Object]

Preparing your team and your business

Brainstorming all the questions

Taking action and documenting the results

Reviewing and following upEach step in the process plays a vital role. Systematically applied, they generate a synergistic approach the delivers constant, continuous focus and improvement. A brief description of each of the five steps follows. Step1 -Choosing and Managing the Profit Impact Team The use of teams specifically to improve profit and loss is uncommon, despite management's widespread acquaintance with teams and what they can accomplish. The Profit Maps approach shows managers how to select the right team members, organize meetings and set concrete goals for optimum results in profit and loss management. When applied in proper sequence with the other steps in the Profit Maps Model, the Profit Impact Team becomes the engine that drives profit building forward and perpetuates it. The Profit Impact Team is a team of people who constitute a cross section of disciplines and are ‘prepared’ for innovation. They will generate an endless list of questions and the answers will fuel the perpetual, cyclical motion of the profit improvement machine in their organization. The Profit Impact Team has the following characteristics, No Fewer Than Five, No More Than Eight -The Profit Impact Team works best when it adheres to the ‘no fewer than five, no more than eight’ guideline because the issues associated with cost-reduction require a sense of urgency, consensus and action steps. A team larger than eight people slows down this process. Teams less than five takes a narrow view and not all departments may be represented. ‘Out of the Box’ Thinkers -The ‘out of the box’ thinkers are valuable players on your team and their creativity is contagious. At first they may startle traditionalists. In many organizations it is wise to keep the traditionalist view-point in mind when deciding on how best to introduce the new idea. Pondering the ‘out of box’ thinkers insights will truly open the eyes of the more conservative thinkers and challenge them to come up with some creative answers of their own. The involvement of ‘out of the box’ thinkers is so critical to the process that a consultant should be used if you find that the organization does not include team members with this ability. Cross-Discipline, Complementary, Cross-Sectional Skills -When it comes to reducing costs on each line of the profit and loss statement the team always outperforms an individual. The Profit Impact Team requires the right chemistry and the proper mix of all functions within the organization, because cost-reduction requires multiple skills and experiences and because functional experts have the depth of knowledge needed to dig beneath the surface and ferret out opportunities for cost reduction. Most organizations miss opportunities to reduce cost by not including key members from all disciplines within the organization or business. Commitment to Reducing Cost -We know that nothing builds commitment more successfully than the people responsible for implementing the process being the ones who created it. People want to be successful. They want to see their ideas and action plans work. The Profit Impact Team must become so good at reducing costs and improving profits. This must become the sole purpose and the passion of the team. Commitment is the critical aspect of the Profit Impact Team. Stress this point by creating incentive programs for the Profit Impact Team. Some examples are, create an incentive pool using a percentage of the money saved by the Profit Impact Team, set a target amount to be saved. Money saved in excess of the target amount are split between the organization and the Profit Impact Team members(say 20% to the team members),award extra vacation days to the Profit Impact Team members upon their achievement and recognize the team's achievements by publications and newsletters or memoranda from senior management. Performance Goals-What makes the Profit Impact Team so effective is that the process of setting performance goals is inherent in the concept. Because the goal of the team is to reduce costs from each line of the profit and loss statement, success can easily be measured by examining the next profit and loss statement. Once team members identify the line-item dollars marked for reduction and put their plan into action, they can use each profit and loss statement as a monthly report card for tracking their progress. Using the profit and loss as a report card for the team has several other advantages such as Profit and loss reports are produced on a regular basis, Profit and loss statements are familiar tools for reviewing results, using the profit and loss statement saves time because it eliminates the need to create a new tracking and measurement tools, the profit and loss statement has broad readership at all levels of the organization, the profit and loss statement is a natural tool for measuring the Profit Maps Model because the main approach of the Profit Maps Model is to read between the lines of the profit and loss statement and identify opportunities for cost reduction. Profit Impact Team Members Hold Themselves Accountable The Profit Impact Team holds a monthly review which should be timed to follow the distribution of the profit and loss statement. During this process, individuals responsible for the particular line items report on the action steps, the results, and any need for corrective action steps or new strategies. Each team member must report on his or results. Then all team members are encouraged to express their views and offer suggestions. Team consulting is a good approach for generating new ideas or helping a team member who is falling behind on stated goals. After each presentation, have all team members give feedback to the presenter in terms of how rapidly or slowly results are being obtained. It is my experience that teams who work together, over a period of time, become more comfortable with open and honest feedback. Giving peers a chance to offer suggestions and comments is powerful team building and will help raise team performance and coherence to a new level. Step 2 - Preparing your Team and Your Business In step 2 of the Profit Maps Model each team member must be ‘prepared’ to understand the techniques of innovation management. Here the fundamental steps are to prepare the team members to recognize the enablers of innovations as well as how to deal with the setbacks that occur as the innovation process unfolds. A training program should be used to help prepare the team for these enablers of innovation. Preparing the team by innovation training is the key to implementing the ideas the team comes up with in the brainstorming process. During the training, the team will learn to recognize and measure the business’s ability to change, to lay the groundwork for future innovations, to measure the ideas success, and to make needed adjustments. This process also teaches the team how to turn to the workforce for answers to tough questions- and tap into input that can make the difference between success and failure. Do not skip this training. Step 3- How to Use the 'Questions Brainstorming' Method in Your Organization Organizations and management processes often shy away from asking questions because they are perceived as antagonistic, confrontational challenges to authority. However, questions can be an important part of finding creative solutions and should be encouraged at all times and within all levels of an organization. ‘Questions Brainstorming’ is a new approach that stimulates creativity and fuels continual improvement. The traditional practice of brainstorming for answers generates fewer ideas and consequently, fewer solutions. Brainstorming questions, on the other hand, allows teams to be more creative when exploring a topic. How It Works-The Group keeps asking questions until they have exhausted the topic. Only when all of the questions have been asked is it time to start looking for answers. The questions are prioritized and each is assigned to an individual to seek answers. The process of thinking about questions provides the framework for the answers, and these in turn help construct the action items.” Questions Brainstorming Vs. Traditional Brainstorming ,[object Object]

Questions Brainstorming. This flip chart looks very different. It might include questions such as: How is revenue generated? What new revenue generation activities have been tried? Why do we need this cost? What are some alternatives to what we’ve been doing? Can we outsource this activity? How do we know whether our price is competitive? Step 4 Taking Action and Documenting Results Taking action and documenting the results is the step of the Profit Maps Model that moves you forward toward successful implementation of your ideas. Asking questions generates an endless list of ideas for further exploration. Our next step, taking action and documenting, shows how to use those ideas as a framework for building concrete programs for cost-reduction and profit improvement. Taking action and documenting is the performance improvement planning activity and administrative step of the Profit Maps Model. This step is essential because it helps us build and complete action steps, track results, and move towards performance, while at the same time serving as valuable program documentation. Taking action and documenting can be broken down into the following components ,[object Object]

Article Profit Maps Model 10 Pages 4471 Words

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Article Profit Maps Model 10 Pages 4471 Words