Since profit represents the difference between your total sales (money coming in) and all your expenses (money going out), the only way to increase profits is to increase the difference between these two numbers.
The first option is to increase sales — no easy task in today's economy. And if your company is at capacity, increasing sales might not provide enough additional income to cover increased costs.
The second option for improving the bottom line lies in lowering costs. One way to lower costs without affecting quality or morale is through efficiency, and this option often rewards your business more in the long run than increasing profits alone. However, because businesses are by nature complex, and expenses are often hidden, streamlining a company takes time and creativity.
The first step in problem solving requires a clear understanding of what went wrong. Sometimes this is the hardest step, and like anything new, knowing where to look can be difficult at first. To find inefficiencies in your operation, I suggest using the following three business analysis tools. They demonstrate approaches to consider in your quest to cut costs through efficiency.
Process flow
Examining your process flow can help identify many inefficiencies and errors. For example, what procedures does your operation follow when equipment is not returned on schedule?
At one company, equipment shortages were common until managers added the step of monitoring returns and immediately checking future orders for potential conflicts that might result from unreturned equipment. If you find that time is wasted compensating for inaccurate or unscheduled inventory control, or by making additional deliveries to job sites because the correct equipment did not arrive the first time, then chances are your process flow is missing some steps.
No matter what method you use to track inventory — software, Gant charts, calendars, or 3×5 index cards — headaches can be avoided simply by keeping accurate records. The previous example illustrated a case of an incomplete assembly line. The company's assembly line was lacking an entire step in which those supervising returns reported missing items back to inventory control.
In his book, Service Breakthroughs, author James L. Heskett suggests that “most service failures are not failures — they have been designed into the system.” In this example, the added procedure of checking future orders for new shortages due to incomplete returns ends up being cheaper for the business when handled in a timely manner.
Basically, there are two types of operational structures. First is the traditional assembly line, invented by auto pioneer Henry Ford. In this structure, a product moves from station to station, and each person along the line performs a task. The second structure is the more modern approach of a job shop, in which groups of employees form teams to work on projects. Most production companies in the rental and staging industry require an assembly line capable of producing custom jobs.
Figures 1, 2, and 3 are examples of process flow charts. Complete, detailed charts often have thousands of steps. Notice that as a major component of the process, the customer is at the beginning of the assembly line. When looking at your operation, it's essential to ensure that handoffs from station to station on your assembly line occur smoothly.
“When work is handed off from person to person and unit to unit, delays and errors are inevitable,” notes an article on process flow in the May/June 1990 Harvard Business Review. By looking at each step of your operation, you can identify system weaknesses, and fill in those gaps by modifying policies.
Data analysis
Another rental and staging manager I know recently noticed he was spending a large amount of time looking for and hiring freelancers. Surprisingly, it took him an average of 10 phone calls to fill each slot. Because he believed this ratio to be inefficient and unacceptable, this manager and his company studied employee utilization. His company was hiring three to four freelancers a day on its “sellout” days — Tuesdays and Thursdays — during the busy season.
After his analysis was complete, armed with freelancer and work order data, this manager hired three freelancers in advance for each Tuesday and Thursday for the upcoming three-month busy season. As predicted, he needed at least three freelancers every day but one, which worked out to a utilization rate of 96%. That's efficiency.
“Data is the most valuable raw material that many service firms possess,” notes James L. Heskett in Service Breakthroughs, and this example illustrates that. Only through data analysis could one calculate the correct number of seasonal “full-time” freelancers. In addition, by using rental data from your past orders, you can keep groups of equipment together as packages or systems, thus decreasing equipment prep time.
While racking and re-racking of equipment will always be needed, minimizing prep time means more time to focus on quality. In fact, maximizing the return on your investment in rental equipment is almost impossible without access to this kind of rental data. On the other hand, it's also too costly to track every little item — patch cables, for example. But overall, accurate and fast access to the return on investment data for your equipment makes future purchasing, leasing, and cross-renting decisions easier.
Target market
Understanding what you do and for whom also helps to identify inefficiencies. Customer needs become your product, and by forming similar clients together into groups, the different needs of each group become obvious.
Not all rental markets are identical. Some offer a higher profit margin, which is usually accompanied by custom events, challenging technical and logistical demands, and long labor hours. Other markets are seasonal, leaving a company with uneven cash flow. Rock concerts require fast setups and strikes. In the theater market, there is usually an independent system designer as well as an ongoing need for open-ended orders.
An open-ended rental is necessary when any event or show has a flexible return date. Usually, a play will run until ticket sales drop off. Therefore, the theater market requires open-ended orders and week-to-week billing. Since most rental software packages require a return date to process each order, as well as multiple invoices for a single work order, maximizing your inventory can be difficult.
How can opened-ended orders be easily identified? What date should be entered in the return field, even though you hope the show will run forever? One solution would be to use Dec. 25 as the return date for all open-ended orders. After all, no one is going to return gear on Christmas Day. Remember to look at all Dec. 25 orders in October or November to prepare for the upcoming year.
Since each market has its own unique needs, the markets your company serves will determine how to best deliver your service, and how best to set up your entire organization, from software to policies and procedures. If you are lucky enough to be a regional production company with little competition, then chances are you are serving multiple markets within a geographic region. You probably serve local businesses and politicians, the high school musical, concerts at the local theater and nightclubs, and occasionally houses of worship.
Flexibility is required to successfully serve a diverse client base. Using this list of markets, your operation can be more easily modified or retooled to adapt to the demands of serving multiple markets while offering the best product.
Conclusion: TQM
One of the most popular modern methods of lowering overhead without affecting quality is through the theory of total quality management, or TQM. TQM is the belief that quality is required in every aspect of the organization, and that this investment in quality will produce a healthy return on investment.
Starting a TQM program is easy. Begin by refusing to allow any problem to go unexamined. Invite employees to participate by asking for suggestions. Let them know you are not looking to place blame, but simply to reduce errors.
For example, every sound engineer has pressed fast-forward instead of play at least once, but under TQM, the simple solution to that problem — putting a piece of brightly colored tape on the play button — is what's important. This approach will naturally spread throughout your company. Most employees take pride in their work, and naturally want to improve themselves, especially if a little thinking can lead to less physical work.
To be successful, TQM requires an open system of communication between all members and levels of the organ-ization. As management proves its commitment to quality by taking time to help everyone “work smarter,” employees will soon begin to invent cost-cutting and efficiency solutions on their own.
While it is natural for people to resist change, TQM is less frightening because it begins by inviting employees to first look at the things they don't like. By inviting all employees to participate in the evolution of your company, morale will increase. Once a commitment to quality has been established, making decisions becomes easier. Commitment to a job well done helps direct employees at all levels when confronted with problems. The result of using TQM is an organization with empowered employees working together as a team.
However, be aware that many problems will not be immediately solved. As the Harvard Business Review says in its article, “Errors are inevitable, but dissatisfied customers are not. Every customer's problem is an opportunity for the company to prove its commitment to service.”
In review, attack problems by first identifying what I call the “PITAs” (the “pains in the ass”), then determine how the PITA becomes formed. And remember that implementing the correct changes may require test runs and revisions of new policies. Before long, TQM will lead to a system of continuous improvement in your organization. Your company will attract the best customers, employees, vendors, and a positive reputation that will lead to increased sales.
Starting in the staging industry in 1984 as a stagehand for an opera company, Bill Magod has a diverse background. With both an MBA and CDL, Magod has experience touring as a monitor mixer for major artists, an in-house sound engineer for three venues, symphony and corporate A/V experience, as well as warehouse, sales, and management experience. He currently works as an event producer, sound designer/crew-chief, home theater designer, and business/management consultant for a variety of events, customers, and production companies. Email him at [email protected]