Waste in your business processes is one of the greatest drags on the profitability of your company. Your goal should be to constantly review your processes to eliminate waste and the excess expenses that go along with waste. The first type of waste is overproduction. Overproduction involves doing more of something than is required. In the product world, overproduction generally takes the form of producing too much inventory which creates inventory carrying costs and reduces cash flow. In the service world, over production generally takes the form of performing more services than our required by the client which ties up otherwise productive resources.
The following are specific types of overproduction in the manufacturing and distribution realm.
1. Producing product without a guarantee of sale. This results in product inventory that creates costs associated with carrying the inventory and drains on cash flow.
2. Purchasing too much raw material. This also results in materials inventory carrying costs and drains on cash flow.
3. Producing too many reports in conjunction with the manufacturing process. This results in a diversion of otherwise productive resources to non-productive and inefficient report generating.
4. Delivering too much product to customers. This results in additional costs for returns including freight costs and intake costs.
5. Overstaffing the manufacturing or distribution system. This results in more cost of goods sold due to the salaries and overhead of excess staff.
The following are specific types of overproduction in the service realm.
1. Frequently being forced to create proposals for new potential clients. This results in the diversion of otherwise revenue producing resources to the proposal process. This problem is magnified if the firm has a low win rate on new proposals.
2. Having too many accounts to service. This results in difficulty focusing on the top 20% of your clients that provide 80% of your revenue and it reduces revenue maximization efforts.
3. Working excessive overtime. This results in a less efficient workforce and exposes the service provider to a greater risk of errors.
4. Over-servicing smaller clients. This results in the dedication of too many resources to unprofitable engagements.
5. Paying creditors to quickly. This results in a poor match between incoming cash and outgoing cash which impairs cash flow.
Overproducing your product or service will create increased cost of goods sold or increased cost of services provided. So, you should constantly review your processes to eliminate overproduction. If you need assistance identifying and eliminating overproduction from your business systems, please call Brian Kerrigan at 860-524-4443 or email to bkerrigan@wadvising.com.