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Part One of Creating Well-Defined Processes Series

What if your sales increased from $100,000 to $110 Derek Wolfe Jersey ,000 per day and your profit increased from $10,000 to $11,000 ? did you improve by 10%? The answer might shock you...

Because the answer is no. No improvement occurred. In fact, your process deteriorated. Sure, revenue increased, but is this really an improvement? Let's take a look at the problem by looking at revenue and expenses.

Extra Expenses Prevent Process Improvement

Let's examine the before and the after scenario. Say Chris Harris Jr Jersey , in the before picture, you have sales of $100,000, fixed costs of $20,000 and variable costs of $70,000. Total expenses amount to $90 Emmanuel Sanders Jersey ,000, giving you a gross profit of $10,000. In the after picture, sales increase to $110,000, while variable costs rise to $77 Case Keenum Jersey ,000 in addition to $2,000 in Extra Expenses ? which give you total expenses of $99,000 and a gross profit of $11,000. In the after picture, remember though, fixed costs are fixed Demaryius Thomas Jersey , and do not change with additional revenue. So you should get more than 10% (11.8% to be exact) profit from 10% growth.

But in order to maintain a 10% profit we have to spend $2,000 in Extra Expenses. These Extra Expenses represent your process inefficiencies. These expenses could be sales discounts, travel, overtime, or something else. The names don't really matter. What does matter is that we are not improving.

Process Evolution Enables Improvement

Improvement results from process evolution, not from an increase in scale. What's the difference? Scale increases when we hire another person Von Miller Jersey , increase expenses, or purchase more assets in order to acquire or service more business. Process evolution occurs when we change the process and as a result can release hidden capacity and service more business without adding any costs - and this is a form of efficiency. You can measure efficiency with the formula:

Efficiency = Output Costs

But process evolution is about more than just changing costs. It is about changing time, increasing process velocity, and getting more output from the costs you already have. Cutting costs, by itself, does not evolve a process. In fact Royce Freeman Jersey , reducing costs, without properly understanding how those costs relate to the process, can actually decrease process evolution (devolution). Let's review an example?

A Cost Reduction and Procedures Training Case Study

A company decreases costs by switching suppliers and using cheaper materials for their manufacturing process. Now the purchasing department is happy they are saving money. The bottom line is starting to look better as profits initially increase. And so this improved the process, right? Well...

But then complaints start rolling in from the field. Products are breaking down faster. Technical support costs rise, and customers start reducing their orders. Not only do profits evaporate, but customer goodwill does too. To offset this Phillip Lindsay Jersey , your first reaction might be to switch back to the old supplier. This is much eas. Cheap Jerseys Cheap Jerseys Cheap Nike NFL Jerseys Cheap NFL Jerseys China Cheap Authentic NFL Jerseys Wholesale NFL Jerseys Free Shipping Cheap NFL Jerseys