Issue 239 - Improving your Business with IROI

Frequently I talk about investing in your business to gain a competitive weapon, it's exciting and the real life examples tend to be dramatic with profit skyrocketing or costs plummeting. However the number of businesses that invest in competitive weapons are relatively small (if everyone was doing it then they wouldn't be gaining an advantage). I recently spoke with a $15 million dollar meat processor who made a move to a SaaS (Software as a Service as talked about in Issue 233) , product to improve (Improvement vs Strategic) his business and he provided me with some great insight that I'd like to share with you.

Remember, according to Olin...

"An improvement strategy utilizes business systems to improve the business. Implementation is justified mostly through reductions in inventory, increased customer satisfaction, warehouse efficiency, etc., although labor savings may be a secondary justification. "

To give you an idea of scale the processor in question processes over 120,000 pounds of meat per week. He recently re-evaluated and changed his order entry, picking, shipping, and invoicing system. The old system was a collection of manual steps and un-connected software systems. His employees would receive an order in one system, transcribe the order to a system to generate pick tickets and cutting instructions, record the shipping information (catch weights and quantities) manually, then enter those weights and quantities into an accounting package for invoicing.

That's four opportunities to make a transcription error on every order, and none of the steps were checking each other. Before each order shipped his supervisors were spending time comparing the invoices to the original order manually, then scrambling to see where an error might have taken place.

Did the product make it on the truck and just get recorded wrong?
Was the product mis-picked and is it sitting in the staging area?
Did the product even get processed or does the supervisor need to order a rushed cutting?

Now according to Olin we could apply any of the three levels of strategic spending to this:
($s are based on Olin's chart of what a $15 mil manufacturer should spend annually)

Survival strategy ($162K yearly): Cut the supervisor position and enforce a double check at each step of the process. There would be some immediate labor savings and the system might work for a while, but as those errors started to slip past savings would erode.
Improvement Strategy ($270K yearly): Focus on improving efficiency. Utilize a business system to improve the business process. Minimal labor savings but increased business quality and performance.
Competitive Weapon ($315K yearly): Invest in a system like we talked about last week. An enterprise class automated bar-code scanning traceability package. Add something to the company that is required to compete in the market.

The owner of the business felt that a competitive weapon wasn't necessary at this time, but realized that a short term survival strategy wasn't appropriate either. Instead he opted to focus on an improvement strategy. He consolidated his four isolated systems for order entry, picking/processing, shipping and invoicing into one unified system. His comment to me about his new solution.

"Improvements started immediately. Picking orders were done more efficiently day one, or production teams now see orders the moment their received rather than when someone has a chance to transcribe them, and invoicing became simpler. Every order has become more efficient and efficiency in business is priceless."

When I asked him about the labor savings he expected to see, he gave the response that identifies the investment he made as an improvement strategy, not a survival strategy.

"I don't expect to see a reduction in labor, I expect to see an increase in quality and volume. The supervisors that were running around all day chasing errors can now focus themselves on quality control and customer service."

So how much of his yearly $270,000 IT budget did he spend on improving his business? A bit less than $2,500 per year, or 0.0016% of his revenue. Now by dollar value alone this should qualify as well below a survival strategy investment, but look at what he's done rather than what he's spent. Improved efficiency, improved quality and improved customer service by utilizing a business system - The very definition of an improvement strategy. If you would like to see the low-cost food business management system he used to accomplish this click here.

So the days of IROI, Instant Return on Investment are here.

What are you doing to improve your business?

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