SMB Trends – Bimbos, Twinkies, & Rising Labor Costs

Food manufacturer Hostess ($3 billion sales; 18,500 employees) recently announced plans to liquidate its assets after years of struggling with rising labor costs in an increasingly competitive market space.   Mexican food giant Grupo Bimbo ($11 billion sales; 127,000 employees) is hungry for some of the most valuable Hostess assets including Twinkie.

How did an iconic U.S. brand become prey to a flagship Mexican brand?  Perhaps the answer lies with the labor pool.   Although Grupo Bimbo is not entirely a Mexican company—having some bakeries in the United States and other countries, the overall labor cost structure of the two companies is different.  Unlike Grupo Bimbo, the Hostess compensation structure includes funding expensive pensions, generous medical benefits, and operationally inefficient work rules.  The lesson here is that rising labor costs in a global market are sure to make companies less competitive.

How do the struggles of a large company like Hostess apply to small-to-medium-sized businesses (SMBs)?   Like large companies, labor costs in SMBs are projected to rise for at least two reasons related to the Affordable [Health] Care Act.  First, the cost of employer paid health insurance is projected to rise substantially to pay for a nationwide increased population of insured (some 30 million newly insured).  Second, many employers will be required to cover more employees than they had covered before or face a free rider surcharge of up to $3,000 per employee.

Let’s assume we are owners of a $10 million revenue company with a 10 percent net profit margin.  We have just learned our health care costs are increasing by $50 thousand per annum thereby decreasing our net profit from $1 million to $950 thousand.  Our response will be based on at least four options:

Accept Less Profit – we could choose to accept less profit.  Investments are all about risk and return.  It will be difficult for many business owners to accept less reward for the same amount of toil and sacrifice.  They will seek ways to preserve their profit.  Inflationary cost pressures will not be the only pressure on business owners.  The threat of rising personal income taxes will discourage business owners from accepting less profit inherent with an increased cost structure.

Increase Sales – to overcome a $50 thousand increase in labor costs, the company would need to increase its sales by 5 percent or $500 thousand.  Many SMBs experienced sales downturns several years ago with slight upticks in sales since, but no real recovery.  Revenue growth in many SMBs is currently stagnant.  We expect industry supply chains to raise prices, but those price increases will be passed down the supply chain and have a negligible effect on company cost structures.  Business owners who expect sales increases to pay for rising employee costs are utilizing a risky strategy.

Decrease Employee Wages & Benefits—like Hostess, there will be pressures to lower employee wages and benefits, but these efforts will have mixed results.  The best employees will go elsewhere for better compensation; the worst employees will stay.  After several years of a recessionary environment with frozen pay in the private sector and an increased consumer price index, we think lowering employee compensation will be a difficult, last option.

Leverage Outsourcing Solutions—companies will scour their financial statements for cost savings opportunities.  Eventually, the focus will turn to headcount justification.  Each position will be evaluated for its ability to add value to the business according to three criteria: [1] Are important relationships being nurtured?  [2] Is company-specific intellectual property and / or know-how being developed and preserved?  [3] Are problem-solving skills required to resolve ever-arising, unique problems?  Positions that do not meet these three criteria and instead include highly proceduralized work that includes work papers that can be readily digitized will become candidates for either outsourcing or automation.  These labor categories include human resources, information technology, finance and accounting, legal services, purchasing, and reception.  SMBs that implement these types of outsourcing options may very well realize savings that overcome the costs associated with rising labor costs.

In summary, business owners must proactively respond to the increasing labor cost environment.  As they consider the practicalities associated with increasing sales and decreasing costs, many can and should consider the wide range of outsourcing solutions available on the market.

How Important is it to Measure Physician Practice Performance?

Efficient processes require less time, effort and resources to produce better outcomes.  Recognizing that staff in medical practices are already running very slim, and the labor of additional projects may be difficult to take on, it is important that practices create lean physician practices by examining processes, eliminating waste, using the most highly trained staff members to perform tasks only they can perform, and identifying revenue opportunities to yield gains in productivity, patient satisfaction, and quality of care.  Most problems within a practice can be traced back to a process problem as opposed to a people problem.

There are several opportunities to improve financial performance through practice transformation.  Some may include practice profitability (revenue and cost), practice referrals, practice “right sizing”, IT strategy, improved payer positioning, service portfolio by market, fee schedule/price negotiations, and best practice sharing.

Revenue is optimized by increasing and balancing both capacity and demand.  Provider productivity is the lever on capacity.  Revenue events and capture are the levers on demand.    Three major strategies for driving enhanced revenue performance are improve productivity of billable resources, increase billable events and capture rate, and add new billable services. There are a variety of levers in the practice that are used to execute these strategies.   These include ancillary services, billing and collections, coding standards, income distribution, physician extenders, population management, process optimization, and resource utilization.

There are three primary strategies to address the two major components of practice cost.  Practice cost management strategies include expense management of general operating cost, process optimization and resource utilization of support staff cost.

Physician practices face significant challenges with execution:  Prioritizing physician strategic goals, objectives and allocation of funds can create conflict during the implementation process.  Needs of the primary care physicians and specialists may vary.  Objectives such as growing margins, expanding the funding base for future needs, changes to governance and structure, market share growth, increased patient referrals, utilization, expanded clinical services, information technology infrastructure, and improved community access emphasize the need for physicians to enhance high quality and efficient patient care.

Successful physician practices understand and measure their practice performance and are mindful that there are four perspectives on Value in a Practice that should be considered.  They include: 

  1. Patient View:  Convenient access, Caring Environment, Efficiency, and Health status
  2. Physician View:  Quality of care, Practice income, and Personal time
  3. Health Plan View:  Quality of care, Access, Cost of care – both short-term impact and long-term trend
  4. Health System View:  Quality of care, Referrals to system, Practice profitability, and Competitive position with payers

 How does your practice measure in these perspectives on Value?

Meaningful Business Metrics

WHY MEASURE

Meaningful business measurements are essential and critical management tools for success. If you don’t know where you are, or where you have been, how can you know where you are going?  You can’t manage what you can’t measure. A very applicable quote by Albert Einstein, “Not everything that can be counted counts, and not everything that counts can be counted.This thought needs to be fully understood when talking about measurements.

APPROACH TO MEASUREMENTS

If there is a thoughtful approach to measures, many times a “Balanced Scorecard” approach is taken aspiring to attain meaningful measures for the business. What occurs more often is that most of the scorecards end up being financial measures with a few measures on people development (training) and some aimed at business development (new customers or new markets). When examined for effectiveness, we find most results being measured are lagging indicators. This approach is similar to driving down the highway at 70 mph but only looking in the rear view mirror and not ahead to see where the business is going. What is missing is a meaningful set of Driver measures which can predict if the business is on track. What are Driver measures? These are usually Business Process measures such as Order Fulfillment Cycle Time, Product/Service Development Cycle Time, New Product time-to-market and key measures of Quality – First Pass Yield which quantifies doing things right the first time.

Too often we find the prevailing conditions and state-of-measurements within companies are:

  • Business managers are frustrated by measures that are hard to interpret and use,
  • There is an unreasonable amount of effort expended in data collection,
  • There are long delays before measurement metrics are available,
  • Too often there is little correlation between business strategies, goals and performance measures,
  • High cost of measurements create strong dissatisfaction,
  • There is a heavy emphasis on financial measures unrelated to operational realities, and
  • In many cases there are too many measures and too little time.

These points are verified by testimonies from executives who require accurate and undistorted views of their business to make critical decisions. Some of their statements are:

  • “We use 2% of what we measure; the rest is CYA.”
  • “We measure the wrong things to four decimal places of accuracy.”
  • “We are masters of the micro.  We measure paper clip acquisition times.”
  • “We measure far too much and get far too little for what we measure because we never articulated what we need to get better at and our measures aren’t tied together to support higher level decision making.”

WHAT ARE MEANINGFUL MEASURES

The pertinent question that should be asked is, “What metrics are relevant and meaningful to business success?” There are four axioms of meaningful performance measurements:

  • The goal of measurement is not to measure, but to improve business performance
  • You must know what you want to measure and why before you worry about how
  • Strategic clarity must precede measurement
  • Processes are the key inflection point of an organization

All business executives and managers, at every level, have a critical need for accurate, timely and meaningful performance data to navigate through the highly demanding environment to successfully compete, grow and sustain profitability. Foremost, whatever strategic goals and purposes exist for the business, the product(s) and/or service(s) delivered must align economically with the resource capabilities and facilities to deliver them. The delivery resources must also produce them with an acceptable quality, at an affordable price and with timely availability to meet customer needs.

CATEGORIES OF BUSINESS METRICS

Fundamental business metrics generally fall within three overall major categories: Financial, Operational and Quality.  Within each of these major categories we find three essential attributes of cost, quality and time associated with each task. And traditionally, we find most business measurements are designed to measure functional results which lack one or more of these attributes with a focus on history. The major disadvantage with managing operational performance with historical data is that results have already been experienced. This is similar, as previously stated, to trying to drive a car looking into the rear view mirror.

When we analyze functional results, we find they are generally aligned with the structure of most financial budgets. Their shortfall is that they do not provide a true operational performance picture of business processes. Functional results give poor visibility, if any, to current or future delivery capabilities. True operational performance results can only be attained by focusing on business processes and their associated attributes. Ideally, the best visibility is attained from real-time data; however few companies have this capability. Even fewer companies are equipped to provide predictive forward projections based on current business conditions.

CONNECTING MEASUREMENTS TO SUCCESS

This white paper illustrates the importance of understanding the hierarchical relationships and linkage of meaningful process measurements to business success. Every action in a business is achieved through the execution of a process. Business processes can be simple or complex, inexpensive or costly, slow or fast, inefficient or efficient, poorly designed or well designed and can achieve results in one location or in multiple locations. Every process has common elements (as shown figure 1) with three basic meaningful process measurement attributes, cost, time & quality which are drivers of performance.  The metrics shown of productivity (cost), time (cycle time – CT) & quality (first pass yield – FPY) attributes are the drivers, which if measured and managed will provide the control and visibility of true operational performance. Often within the diagram block “Process” are embedded replica process sub-task blocks with identical attributes which are individually monitored, depending on the criticality, or they are grouped as progressive steps in the overall process.

Figure 1


Every action in a company, whether it is white collar or blue collar related, fits within a business process. There are many key performance indicators (KPI’s) which are important quantitative measurements to know about the product or service related status, such as meeting the schedule, performance to budget, raw material inventory, WIP and FG inventory, customer needs met, pipeline, etc. However, these are not indicative of the measure of operational efficiency of process tasks.By closely examining the three major categories of business process metrics, financial, operational & quality, we find that the foundation and driver of financial and quality results squarely rests on acceptable operational performance of business processes. When business processes are designed, measured and managed appropriately, the financial and quality metrics will follow with positive results. There are other factors which can impact business financials and quality, i.e., outside uncontrollable costs and material quality, etc. However, in every case the controllable actions within a business entity will be driven directly by the effectiveness and efficiency of business processes. Using driver measurements immediately identify problem areas at the time when they are occurring and can be fixed. No more waiting until historical data is analyzed and effort is expended trying to discover what happened.

Each task:

  • Has a Process Flow that can be Developed
  • Has History that can be Analyzed
  • Has a First Pass Yield
  • Has a Theoretical Cycle Time
  • Has a Performance Baseline and a Realizable Performance Level
  • Has Activities that are Non-Deterministic (unpredictable)
  • Can be Measured by Cost, First Pass Yield (FPY), and Cycle Time (CT)

MANAGING WITH MEANINGFUL METRICS

Holistically, when we analyze business entities, we find four core sets of processes, as shown in figure 2.

Figure 2

A simplified example of a set of Strategic Thrust associated processes is shown in Figure 3. This set of processes is shown to illustrate that the flow of more intangible white collar work tasks are as identifiable and measurable as those involving substantial hands-on work activities. The major task blocks, from the creation of a Vision to completion of the Strategic Plan, all have multiple sub-tasks which can be measured, by time to complete, invested costs and a required level of quality which produce a corroborated and acceptable forward direction for the business. The aggregate of these process measurements summarize the financial costs, the responsiveness and the approved quality of the Business Plan.When core business processes are interconnected, analyzed, measured and managed, the full process performance capabilities can be determined and monitored. This also provides clear visibility to all the sub-sets and any constraints and barriers which restrain attaining full performance. This approach provides executives and managers with timely and accurate information from which they can manage effectively for desired results.

Figure 3


Business entities with meaningful business measurements have demonstrated the value of these essential and critical management tools for achieving and sustaining business success. These tools which contain true performance results and actual business process capabilities provide not only clarity in decision making, but timely management intervention when needed. The measurements of cycle time (CT), quality (FPY) and costs ($) are proven key attributes which provide the mechanisms to steer, correlate and directly link operational performance to business financial results. With these measurements, effective business controls can be implemented and monitored with an added measure of performance and delivery predictability which in most cases is available without the investment of costly real-time IT systems. These measurements provide business executives and managers the capability to determine if they are maximizing current business performance against their full realizable potential. Unobstructed visibility also exists to drive continuous operational improvements. Ultimately, the ability to successfully compete, grow and sustain profitability is critically dependent upon accurate and timely meaningful measurements in order to maximize asset utilization and provide all stakeholders the returns they expect.

CONCLUSION

To further investigate how to determine your full operating potential, apply these meaningful business measurements to improve your business performance and manage for success, call Greater Yield at 972-308-8533 or email at mwilson@greateryield.com.