Value Add: Operational Efficiency
(As originally published in Canadian Capital newsletter,
7 May 2012)
By Barry Levine, associate partner, Advisory, EY
When business owners think about shopping their companies they often think of getting debt off the books, seldom do their transition agendas include operational improvements. Yet fine-tuning performance can reduce in efficiencies and increase profit margins, making your business more attractive to potential buyers. By becoming more operationally efficient, business owners can ensure they get a higher price when they sell.
Operational improvement focusing on people, processes and technology can optimize a business’s agility internally and externally, ultimately driving top- and bottom-line growth. When you’re deeply involved in your business’s operations, it’s often difficult to see the inefficiencies, let alone develop ways to eliminate the waste.
When job descriptions aren’t clearly defined, particularly within mid-sized entrepreneurial companies, there tends to be a lot of overlap in responsibilities, and owners often have their fingers in too many proverbial pies.. Having key professionals in certain functional areas such as sales, manufacturing and logistics, can lead to improved business management. The crux for the right professional management team is ensuring that their goals are aligned with the business vision, so they know exactly what is expected of them.
The challenge for owners is to let these leaders execute on their goals without a lot of interference. Managers in turn have to ensure their direct reports have defined goals and are adequately trained for the job.
Small to mid-sized companies often involve processes that have been cobbled together over time. As companies grow organically, they require more structure and discipline to meet the demands of their clients. Without efficient and well-defined processes such as streamlined manufacturing, or integrated accounting, growing companies face the risk of increased blunders, which can hamper growth. But when processes are efficient, they are powerful vehicles that support growth.
Critical to the improvement of processes is the need to eliminate waste. This means eliminating extra steps such as duplicate data entry or cumbersome administrative or approval processes. For example, if a customer requests a product for delivery by a certain date, an employee should be able to see the stock availability. If the stock is on back order, then the customer is notified, ensuring the company’s capability-to-promise is met.
Business owners usually translate the need for updating systems and moving towards a more integrated solution as a costly expense; but it is necessary to increase company value.
A suitable system is dependent on a company’s needs, but every company should have IT systems in place that are integrated across the organization. For example, a well integrated system ensures that when an order is placed, the system can determine raw material availability, schedule production, adjust inventories, and enter the correct accounting transactions – all with minimal user intervention. The technology and systems behind this are simply the tools to collect the data, simplify the execution and allow for more nimble customer service.
Barry Levine is an associate partner in EY’s Advisory practice.