Posted by: knightbird | February 6, 2015

Building your Business

We can be our own worst enemies when it comes to building our businesses in Alaska. Think about your major competitors and how your delivery of goods and services compares to them. How do you respond to the competition? Do you reduce your prices and take a smaller profit? More advertising? Incentives? Do you hire more customer service agents? Do you hire a hotshot CEO to rescue your business? Do you expand your range of goods and services? Do you cut your budget and lay off employees, resulting in putting more work on to your remaining employees. The responses listed are all standard responses to businesses experiencing difficulties.

What Boeing did in the 1990’s changed this conversation to a different conversation. This article reports some of their improvements after introducing a Lean Manufacturing system. Check this out.

-Removed 1.5 million hours from the manufacturing time required to deliver 100 military aircraft. Taking 15,000 hours of labor and related expenses from each plane is a lot of money. At $50 worth of labor cost per hour, that’s $750,000 less to manufacture. And that’s only for assembling the airplane.

-Lean principles reduced the size of a manufacturing facility from 4 million square feet to 1.5 million square feet. That’s a reduction of 67.5% in space. The space requirement cost reduction passes substantial savings on to the product being manufactured. If the cost of space is just $1 per square foot monthly, the savings annually add up to $30,000,000. And this doesn’t include all of the building support costs such as heat, lights, janitorial, insurance and maintenance/repair.

-Reduced manufacturing and building costs should reduce lots of administrative costs. With 1.5 million less hours of pay to be calculated, the accounting costs go down. With only 1.5 million square feet, there are fewer administrative requirements.

Using Lean principles, Boeing reduced its cost of business considerably. It became more competitive using fewer resources. That’s lean thinking.

If you can reduce your cost structure, using every possible tool available, you become more competitive. If you don’t, your competitors have a chance to exploit a competitive advantage over your business.

How do they benefit? Here is how I explain it to my sons. If your business has $10 million in revenue, and $1 million in profit (10%), it costs you $9 million to earn that profit. If you can reduce your costs by 10%, you will have an additional $900,00 in revenue (9%). Decisions become easier then. You can invest the additional income by reducing debt, adding more capacity or reducing costs for increasing revenue. Any action will increase your earnings, so they are all good choices assuming everything else remains static. But in a dynamic business environment, you may have to meet competitive pressures. At least you have an ability to do that with increased income. If you had to reduce the price you charge by 5%, instead of a reduction of net income to $500,000, it reduces to $1,400,000. You still have considerable options left.

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