‘the cockroach effect’

Money Pit

‘the cockroach effect’

working smarter

Submitted by Gordon Anderson, Hasmate

New Zealand is in the midst of an economic recession, also with high inflation and interest rates. It is a challenging time of for all businesses, and every dollar counts.

There may be a way to examine how your business operates to maximise your bottom line for no extra cost. The normal ways to increase profits can be any of the following:

  1. Restructure the business.
  2. Reduce staff numbers.
  3. Get a business coach.
  4. Hire a new CEO or whiz kid manager to increase profit.
  5. Hire a marketing company start up a marketing campaign.
  6. Increase the marketing team and get more sales.
  7. Develop new products.
  8. Update technology.
  9. Update or buy better machinery.
  10. Increase production.

However, there is another way of thinking by looking for things I will call cockroaches, and the cockroach effect.

Cockroaches are business leakage factors. These are the faults, mistakes, rework, rejects, loss of product, absenteeism, accidents, loss of clients/customers due to poor service, penalties etc.

Every business has these, you may or not know where they are occurring. Often, they are hidden in plain sight, and you can’t or don’t want to see them. However, these factors constantly eat away at your bottom line. The common actions businesses can take are:

  1. Ignore it, it’s cheaper to do nothing.
  2. Brushed it under the carpet as a costly mistake.
  3. Used as an expensive learning experience.
  4. Blame employees or others for the mistakes.
  5. Blame suppliers.
  6. Blame it on the market, or the weather.
  7. Hide it in the accounts.

The important thing here is to record and quantify the exact cost to the business and take action to ensure that it is not repeated.

These issues are called non-conformances, the potential or actual financial leakage in your business.

A non-conformance is the failure to meet an expectation, specified products, a quality or stated outcome or services, an internal business systems or personnel failure.

Non-conformity can occur in both the process and the product and can also be considered as those issues previously mentioned. Consequently, nonconforming procedures such as,

  1. Lack of planning.
  2. Not utilizing the systems correctly.
  3. Not following the standard operating procedures.
  4. Lack of maintenance.
  5. Lack of training of staff often leads to nonconforming products and services.

To illustrate the importance of this concept for your business, think of just one non conformance in the past six months, and estimate the cost. Then consider all the other peripheral activities, contributing or impacted issues that also have a dollar value, and you could easily double your first estimate.

If we image a non-conformance with an estimated value of $10,000, we then must consider how much additional time, production, or cost, would be required to recover this amount.

A rule of thumb for this is to apply the 30 to 1 rule, which is to multiply this figure x 30.   For every $1 lost through a non-conformance, the business must turn over an additional $30 of service, production, sale of products just to recover this $1.

If you find this figure hard to believe, it can be illustrated in other ways. Imagine a corner dairy buys a chocolate bar for $1 and sells it for $2, which is a 100% markup. If one candy bar goes walkabout then they must sell an additional 2 candy bars just to recover the amount they would have made if they had sold the first.  In addition, the dairy must stay open longer and employ additional staffing and overheads to sell the extra 2 candy bars. This equates to both the materials and the production costs that need to be recovered.

The key to improving your bottom line for little or no cost is to identify, quantify, and collect hard date on your business non-conformances. Then take corrective action to reduce or eliminate the “cockroaches” and watch the 30:1 rule work in your favour.

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