House of Operational Excellence Part 13: Profitable Growth Opportunities

Understanding the leverage points in the organization and pursuing market opportunities that will increase sales and increase profitability at an increasing rate.
An important element of the Operational Excellence management system is to identify profitable growth opportunities.
Quote: “Between calculated risk and reckless decision-making lies the dividing line between profit and loss” ― Charles Duhigg

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Transcript:
In the last session, we talked about the necessary and sufficient elements of the management system that support operational excellence. We talked about effective decision-making. This session we're going to talk about profitable growth opportunities. How do we identify profitable growth opportunities and where are the best options for us to go focus our marketing efforts to get more sales?

What we want to do is we want understand the system in terms of where we have available capacity, where is our constraint, and if we want to utilize our capacity the most effective, what products would we go after that would flow through our internal capacity constraint that gives us the most throughput per unit of time.

To understand this a little bit further, we can look at what's the impact of new opportunities on the company. If we understand our current structure, if our sales represent 100%, that's what our current sales are.

Now, what's the material content? What we want to do is we identify opportunities that have low material content. If we had a choice between products that have high material content and products that have low material content, we want to go after products that have low material content, because there's more leverage there.

Then if we look at the throughput, that's just our sales minus our totally variable costs, then our net profit might be currently 5% so we back into our operating expense at 65%.

If we just keep the same mix of products and we find opportunities that are 30% material of products we're going to sell, if say let's increase our sales by 20%, what impact does that have? If we keep the same material percentage at 30%, 30% of 20% is another 6%, our throughput goes up to 84%. Our operating expense doesn't change because we're going to leverage our resources to better utilize them to increase the sales of the company. Our net profit almost goes up four X. You can see if you can reduce that percentage of material, just say, let's go after products that only have 10% material, then we reduce that material percentage and profits go up even further.

It's very important to understand the cost structure of the organization, understand where capacity constraints are, understand what products provide what value to the company, so what's our value added percentage and the marketing strategy needs to be developed from those three elements, not just going out and finding any opportunities that we can. It's finding the right opportunities that are going to grow the company and grow profits at the same time.