In the 1980s, Bob Crandall, head of American Airlines, calculated that removing just one olive from each salad served onboard would save the company $40,000 a year. Other airlines were quick to adopt similar initiatives, and so we said goodbye to beverage garnishes (saving United $50,000 a year), salad strawberries (saving Delta $210,000 a year), and little bags of pretzels (saving Continental $2.5 million a year).
However, businesses’ growing need to become more efficient does not always have to come at the expense of service. Nor does it have to lead to job cuts, or even necessarily come solely from increased sales or changes in pricing. Instead, an in-depth examination of company processes that identifies vulnerabilities, reveals economic damage, and takes action to rectify the situation can fill a company’s coffers with considerable sums of money.
Economic damage affects every organization in Israel and around the world, from small service companies, through financial firms, to the largest corporations. Wherever you make money, you also lose money, and often it is the larger, more complex organizations, with dedicated financial control systems, that experience the greater, more painful losses. This loss may not even be in the form of money – the theft of information, raw materials, intellectual property, and trade secrets can be equally damaging, or even more so.
Sometimes this loss stems from genuine criminal activity, such as theft, embezzlement, or bribery. Sometimes it is a result of flawed activities or a lack of process oversight, leading to wasted resources or depreciation. And sometimes it’s just a matter of mental fixation. However, the common denominator in most cases is companies’ desire to sweep it under the rug (although often it is too late for that), for fear of damaging their reputation.
For example, one company was surprised to discover damages that were a direct result of long-established work processes that included incorrect calculations regarding the cost of goods and various inefficient procedures. It turned out that these work processes, which had been used unquestioningly by managers and employees for years, had resulted in severe losses, while another company site, using similar (but correct) processes, had not only avoided losses but actually saved money. In this case, the “iron law” of following time-honored processes and methods became the company’s Achilles heel, as some people took advantage of it to line their own pockets.
In other cases, it is a matter of real negligence, such as poor inventory management that leads to the need to “balance inventory” for each period – resulting in significant financial shortfalls appearing in quarterly reports, without the ability to identify the root causes. Similarly, imposing heavy workloads on employees with the goal of saving money generally leads to stress, cutting corners, inefficiency, and frustration – and it’s a short path from there to embezzlement and lawbreaking. In the same company, we can examine supplier processes and find that the company has been invoiced for work that has not been performed. As mentioned above, even if the company has complex management systems relating to invoices and signatures, they cannot confirm that the work has actually been carried out, so the company ends up paying suppliers for nothing.
At another company, there was no qualified person on staff who could perform maintenance work, so all maintenance was carried out by non-professionals. This unsurprisingly resulted in repeated equipment shutdowns, work stoppages, and severe losses. Here, another significant element entered the picture: ego. Because the CEO was the one who insisted on cost-cutting and not properly dealing with the issue, it was extremely difficult for him to reverse his decision and hire a qualified maintenance worker, even though the worker’s salary was only a quarter of the costs incurred by the faulty equipment.
The ego is an important factor in the loss reduction field. Understandably, the owner of a company, who has built it up brick by brick with his own two hands, wholeheartedly believes that he knows best… until one day an outsider, looking at the company with fresh eyes, points out the painful reality. Furthermore, executives do not always realize that financial losses are just the beginning. This is the information age, where social media is a fertile ground for business shaming, and flawed processes can also expose a company to lawsuits or regulatory enforcement. Plus, they damage the company’s DNA – the lifeblood of the owner or CEO – and the investment needed to repair this damage can far outweigh the costs of prevention.
Shimon Kahana – May 2018
