Managing Business Mix
February 12, 2011
How to Manage Business Mix
In operations, every business deals with challenges surrounding the mix of their business. Whether it be manufacturing or delivering variable products, selling to variable customers, or completing variable processes, the variability causes many businesses planning and executing efforts to come to a crippling halt. In the worst cases, the variability is chalked up as unmanageable – leading to phrases such as “it’s the nature of the business.” In reality this is a manager out of touch with the requirements of his/her position, and needs to be shown that not only is it the nature of the business, but that it is their responsibility to achieve the performance expectations no matter the mix. As harsh as that may sound, there are simple steps that can lead to increasingly successful ability to plan, manage, and perform with even the most volatile business mix.
As hinted at above, the worst business mix failure to be made is to leave it unaddressed. There are always reasons why it will be difficult to accurately quantify the business mix. There are always reasons why the struggles of business mix will be reduced in the future. And there are always reasons the business mix itself will be variable. However, there has yet to be a good reason why a small incremental improvement now is not worth the effort.
Even in cases where management is so burdened with trying to keep up with the volatile business, it is easy to prove the long term value in attempting to get ahead of the curve by setting aside time to outline the variability in business mix itself. In these cases, the first step is to create broad general differentiators. For example in manufacturing a variety of widgets, create broad buckets such as ‘easy,’ ‘medium,’ and ‘difficult.’ With these buckets review customer demand for a recent period or better yet, next week’s manufacturing schedule. For each variety of widget, classify them into one of the buckets. If Widget A takes 5 hours to manufacture, Widget B takes 3 hours, and Widget C and Widget D take 1 hour – those could align with your buckets.
Repeating this exercise for each case will eventually lead to more specific buckets until the stratification is sophisticated enough to use for planning and executing purposes.
Once the mix has been well separated into the necessary buckets, the rubber meets the road at applying standards to the various buckets. A recent example was when working with a restaurant group that measured their labor effectiveness in terms of customers served per waiter hour paid. When the restaurant did not meet their efficiency expectations, their default excuse was “the customer mix was skewed!” What they meant to say was they had an inordinate proportion of guests that required lengthy waiter attention.
When probed deeper, the ‘number of servings’ was identified as the driver of the amount of waiter attention any given customer needed. For example, a breakfast customer typically had 2 servings, a drink, then a plate of breakfast. Lunch customers typically had 3 servings, a drink, a salad, and a plate of lunch. Customers at dinner tended to have more variability yet and so were divided in half, ‘full dinner’ customers had 5 servings (e.g. appetizers, dessert, etc.) or more while ‘quick dinner’ customers had less than 5 servings. This information created the buckets, that then were assigned standards. A breakfast customer was assigned 1 credit, lunch got 1.5 credits, quick dinner earned 2 credits, and finally full dinner customers earned the restaurant 3 credits. Now instead of calculating labor efficiency based on a raw number of customers divided by the raw number of waiter hours paid, the calculation is number of credits earned divided by raw number of waiter hours paid. With credits earned taken into account, the discussion of variance to efficiency expectations gets more directly to the management’s ability to understand the mix that they must serve, and the timing of when more or less waiter hours were needed.
Standards Drive Improvements
Once standards are in place it is only a matter of time before those held accountable to performance expectations begin to understand the relativity of the standards. For example, does a lunch customer really only require 1.5 times the amount of waiter time that a breakfast customer does or is it more like 1.8? When these arguments begin to arise, know first that you are on the right track towards managing closely the mix of your business and second that the standards can be adjusted at any time. However with any adjustment to the standards, also consider adjusting the performance expectations. If a waiter is taking 1.8 times longer to serve a lunch customer than breakfast, do the standards need adjusting or does the lunch service process need adjustment?
Affect the Mix
As performance expectations and business mix standards evolve, benefits will first come from identifying variances in performance. Next tangible performance improvements will come out of process changes associated with accountability for achieving performance expectations. Soon behind will be a forecast of the projected mix, and a schedule of how to accomplish that projected mix within the performance expectations. But finally, and often most impactful is when the business gains such understanding of their business mix that they take an active role in shaping the mix to optimize their performance beyond the performance expectations. For example, the restaurant management may offer customer incentives to purchase full dinner servings during evening periods of low customer volumes(e.g. ‘happy hours’ or weeknights), and offer customer incentives to purchase quick dinner servings or even lunch servings during evening periods of high customer volumes (e.g. Friday and Saturday night).
Do Not Fall Victim to Your Business Mix
As unquantifiable as your business mix may seem, there are always broad general categories that the work can be categorized into, and the greatest barrier is just starting the ball rolling. Once categories or mix factors are identified standards can be set and measured. As the measurements begin to show performance variances ask both questions – are the standards appropriate? and is the performance appropriate? Finally, take full ownership by creating strategies that not only account for business mix, but proactively affect it.