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We first encountered the book, How to Measure Anything* years ago and it is our go-to when someone asks “how do I even start to measure __?” It is one of the best tools we’ve found to help someone develop the ‘measurement mindset’ (I don’t think we can copyright that, but we say it a lot when talking to our clients about quantifying in business).
In our Is your customer making your money? post, we talked about different ways to analyze aspects of customer profitability (returns, samples, pricing, etc.) and this is what it’s all about for business owners. The question becomes how granular do you want to get in your measurements? Where do diminishing returns start when quantifying different aspects of your business?
You likely know about the “big” performance measures (customer acquisition cost, customer lifetime value, engagement, etc.), but how do you measure a transaction cost for materials (requisition to invoice, also called “quote to cash”)?
In this example, we know about the time involved for each of the players (requisitioner, buyer, receiver, accounting), but what about the cost to transmit the order? Or the cost of the check and stamp to mail the payment (another reason why using a check service might be beneficial, but ACH is the way to go if you’re comfortable with it) to the vendor? What about the cost of rework when a shipment is wrong or a payment gets lost?
There are a lot of variables, and you can’t remember everything in every situation, which is why we emphasize the mindset. Thinking through a process will allow you to visualize every part of it, from scanning a packing slip to walking the check to the mail sorter, and everything in between.
Here’s an example from one of our clients who runs a mobile document service. They came to us because of margin issues (making money, but not enough to offset the amount of work being put into it). We looked at their pricing model (which seemed okay — not robust, but workable) but it was based on a 30% markup over average cost per transaction. So we dug into the cost modeling. It turns out that they had accounted for time, travel, and materials, but didn’t factor in more subtle items like their printers (they had the paper and toner, but not the devices themselves or an approximation for the energy usage). So at the end of the year, printers were among the items dragging their net margin by nearly 10%. On top of that, they had more machine than they really needed, so we worked with them to “right size” their equipment for now plus continued growth.
This example might seem simplistic, but you’d be surprised at what gets missed when looking at things. If you’re having inventory issues, when are they occurring? (We had a client who was having a lot of missing inventory and, after looking into why, we discovered that ‘stockouts’ were happening very late in the day — typically within 60-90 minutes of the picking team going home for the day.) From there, it’s looking at the impact and exploring possible solutions.
Once you’ve taken a look, we can help. Or if you’re still not sure where to start, let us know.