What are your performance indicators telling you to do in 2008?

 

Last month we visited Ajax Cabinet & Millwork Co. and overheard Owner Chuck Wright and his operations manager, Jerry Stovall, discuss the future of the company in light of a slow housing economy. They decided to have a planning retreat where they would conduct a SWOT analysis to determine the Strengths, Weaknesses, Opportunities and Threats to the company, and use this information to plan for 2008 and beyond. While it was necessary to learn from the past, they agreed that looking toward and planning for the future was the primary goal of the retreat.



This month as we join the Ajax retreat, we encounter a very interesting issue.



Retreat to Move Forward



Addressing the group at the beginning of the meeting, Chuck makes some interesting management metaphors regarding his experiences as a private pilot-in-training and how it relates to the future strategies that the team will develop for 2008.



“During our deliberations this weekend, we need to take a serious look at ourselves and see where we are today and what we must do to be successful during 2008 and beyond,” Chuck says. “I was thinking about this the other day, and something from my past struck me as extremely relevant.



“About 30 years ago, I took flying lessons on the way to getting my private pilot’s license. I will never forget some of the basics that my instructor Jake taught me. When I was learning to fly by instruments only, I had a hood over my head so I could not see out of the plane — all I could see was the instrument panel. Jake told me that those instruments were engineered to give me all of the information I needed to safely pilot the plane in bad weather, or whenever I could not see the horizon or any landmarks.



“I had to learn to trust those instruments to tell me: the direction I was flying, my altitude and speed, whether I was climbing or descending and how fast, and whether or not I was in a turn, etc. Jake stressed that I not trust my ‘feelings’ or ‘intuitions’ because they were likely to be wrong and could send me crashing to the ground.”



Chuck explains how this lesson can be used in the present situation, as his team starts looking at Ajax. “We are going to look at ourselves very closely and set some goals and objectives.



“During the process, we must look at our own internal performance indicators and correctly interpret what we see. We must trust them — and not our emotions — and act accordingly,” Chuck says.



Just like one instrument cannot tell the whole story, one indicator of poor performance in your wood products company will not tell the whole story without looking further. What follows is an example of this very concept.

Diminishing Profitability



When the Ajax staff reviewed profits over the past several years, they saw a downward trend. This indicator alerted them to a serious situation that was continuing to deteriorate. Typically, the CEO or CFO would demand the trend be reversed and nothing beyond a short-term effort would result.



Fortunately however, Chuck is determined to make the best of this opportunity. At the meeting he says, “This profitability indicator points to a very troubling pattern of decline. If we were in a plane and saw we were losing altitude, we would look elsewhere on the instrument panel to find out why and make a correction. The question now is, ‘What are the root causes of this trend of diminishing profits?’”



There are many areas that can affect profitability and need analysis, including:



• Labor costs

• Materials costs

• Overhead costs

• Warranty costs

• Productivity

Labor Costs



Jerry next points out that Ajax had been steadily adding employees in the factory shop during the past few years. He pulls out a chart similar to the one at the left to show everyone. “Why have we been adding so many people lately?” asks the human resources manager.



According to Jerry, it was necessary to keep up with orders. “We kept falling behind on delivery schedules and had to add operators in the plant to get the work done and keep the sales department and customers happy,” he says.

“Why couldn’t you keep up with orders?” Chuck asks.



“It takes longer to make those specials we keep getting in,” Jerry says. “They take a lot more work than our cabinets did in the good old days.”

Decline in Productivity



The Ajax team then looked at its productivity over the same period, as measured in units per labor hour, and noticed a negative trend that seemed to correlate with the decline in profitability. For some reason, the company is producing fewer units per labor hour over a long period of time, but using more people. After seeing this, Chuck asks that golden question: “Why?”



In an effort to increase sales, the company has been accepting orders for very large and exotic cabinet designs from new customers. Among other problems, they require different cut stock, machining on manual machines that require long setups and necessitate special material handling. In fact, some units cannot go through the finishing line and have to be sprayed in another area in a make-shift booth. The handling is such that damage occurs and extra labor has to be brought in from another department — disrupting the production flow there.



As a result of this simple discovery, the Ajax team members now turn their focus on the product offerings. They define their core competency and decide to stick to it. They conclude that by doing this, they can go a long way to turn the company around and begin improving productivity and profitability.



Lessons Learned



Although fictionalized, the scenario at Ajax highlights the very real importance of having methods in place to continually gauge the performance of your company. This means you must first set up monitoring and reporting systems to accurately measure the critical factors that determine the success of your company. These should measure things such as on-time deliveries and customer satisfaction, as well as production and cost numbers. The information must be accurate and presented in a way which is meaningful to your company.



If you take this first step and establish indicators such as this, you are on your way. However, if you stop there and let these fill your file cabinets or just sit there and consume space on your hard drive — they are worthless.



You also must use regular purchasing records, production figures, operating statements and other data to manage your business, no matter what size it is. These can come from an ERP system or can be drawn up manually if you have a small shop. No matter what system you use, these indicators will prompt you to dig deeper and then to make the corrections/positive change necessary to improve performance or even avoid disaster. Just like the instrument panel of an airplane, your in-house information is essential to successfully pilot your company.



Chuck and the team at Ajax are reviewing their performance gauges as they attend their retreat. Looking at this, along with the SWOT analysis we discussed last month, will give them the tools to move forward with an effective strategy of continuous improvement for 2008.



What about you and your wood products company? Can you do the same? Even more importantly, will you do the same this year?



Tom Dossenbach is the managing partner of Dossenbach Associates LLC, a Sanford, NC-based international consulting and research firm. Contact him at (919) 775-5017 or e-mail tfd@dossenbach.com. Visit his Web site at www.dossenbach.com. Past Management Matters columns are archived on www.iswonline.com.

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