Four tips to optimize profits

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Business tips
Wednesday, July 24, 2013

07.25.13 Blog AndrewBielatBY ANDREW BIELAT | BUSINESS TIPS CONTRIBUTOR

A few years ago, Rocky Mountain Steel Mills (RMSM) faced a dilemma: Despite the booming natural gas industry and mounting demand for seamless steel pipe, RMSM’s management team was uncertain about the profitability of restarting production. They enlisted my help to develop a market/production strategy for re-entering the seamless pipe market with minimal risk and optimal profitability.

RMSM, a subsidiary of Oregon Steel Mills at the time, found that its traditional analytical resources couldn’t determine the impact of such a decision on corporate profits. Each complex trade-off created a new dilemma to analyze, further complicating attempts to identify the most profitable path forward.

Using software developed specifically for situations like this, I developed a model to account for market pricing conditions, start-up assumptions, operational considerations, distribution expenses and key factors, such as staff training and capital investment. The software enabled RMSM to conduct “what’s-best” analyses and understand the profit implications of each decision in near real time.

With a comprehensive understanding of its options, RMSM elected to wait until market conditions changed in its favor. When the time was right, they went for it – successfully.  The analytical process helped prevent a potential $34 million loss that would have been incurred had they decided to produce seamless pipe when it originally appeared to be profitable.

In my career as a business adviser, I have helped dozens of other firms with strategic planning issues. In my experience, four characteristics typify the successful quest for profitability:  

Get an early start

Business leaders often tell me that they want to make more profit, and that they will do whatever it takes, within professional standards, to make it happen. Yet in the next breath I hear, “But, I’m not sure we’re ready for the technology.”  What they usually mean is: “I don’t believe I have all the data I need to form opinions and to decide how my team should proceed.”

My experience? Waiting will only make it more difficult. Now is the time to act.

Measure the right things with the right tools

Even if all critical business functions are part of an organization’s data capture system, its leaders will still need more. Why? Most organizations use simple, standardized approaches like spreadsheet analysis, average costing or standard costing – primarily fiscal tools. These work at an accounting level, conform to generally accepted accounting principles (GAAP), meet all reporting requirements and are important for reporting a company’s profitability, but there is much more to profit-related decision making.

I own a company that writes software for businesses to “quantify” not only the monetary but also the material, human and market resources affecting their performance.

The technology most leaders need is larger than the numbers they can churn out. They need a profit optimization system – one designed to help achieve the best possible results given their current circumstances. The best of these systems include market conditions and physical-, regulatory- and policy-driven internal constraints.

Be inclusive, not exclusive

Most enterprises still use standardized approaches to decision-making because most accounting personnel, all the way to the CFO, accept the practice as sufficient. Meanwhile, strategic and tactical decisions based upon partially analyzed, incomplete information can constrain profits. A “holistic,” strategic approach always involves key people from several disciplines within an organization.

Listen to yourself when discussing new opportunities. Listen to your team. Have you sent them messages to “protect” your position, or are you encouraging everyone to keep moving confidently, creatively and progressively toward the prize? When was the last time you changed a policy or revised a long-standing practice in a way that increased your profit opportunities? When was the last time you publicly recognized an associate who identified a solution for a flawed process that was costing the company profits?

Lead with your best offense

Who hasn’t watched a football team with a late-game lead go into “prevent defense”? Many now refer to this approach as the “prevent-a-win defense” because the team with the lead often cedes ground while its opponents become more creative and “offensive,” and are now giving it everything they’ve got. It’s common to hear fans for the offensive-minded team cry out in frustration, “Where was that during the rest of the game!?”

Consider this analogy when looking for growth and profitability.

Being an offense-based leader who seeks out and develops a like-minded team will make a big difference. Every time you catch yourself going into defensive mode, be sure it is for the right reasons. And, once the crisis is resolved, challenge yourself to break out as quickly as you can.

Profit optimization software is a separate and different class of business tools that involves both the art and the science of leadership. Leaders who commit to this new approach will immediately be a step ahead of their peers.

Andrew Bielat is the owner of Profit Hawk, an Oregon-based profit optimization software company and Pilot Advisors, a business process consultancy. He recently co-authored a book, "The BestPossible Enterprise: A Comprehensive Guide to Optimal Profits."

 

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