The Cost of Outdated Processes
An outdated or inefficient process can have a greater impact on an organization than management realizes.
Previous articles in this series looked at the challenge of identifying inefficient processes. This article will discuss the impact on organizations if they don’t make the effort to root inefficiencies out and correct them.
One of the most noticeable effects of an inefficient process is an increase in costs, driven by factors like longer processing times, elevated labour costs, lower direct labour utilization and overtime, increased inventories with lower turns, increased material consumption, material loss, high rework levels, multiple and unnecessary touch points and similar factors.
Without identifying and addressing the outdated processes that lead to these inefficiencies, an organization may be leaving hundreds of thousands of dollars on the table.
Lower Service Levels
Another result of a sub-optimal process is reduced service levels. Whether the process services an external customer or an internal downstream department, longer processing times will inevitably trickle down and affect overall company performance. In addition to driving higher costs, increased service levels seriously impact the competitive position of the company.
Some external service levels can be effectively benchmarked against industry standards and trigger inquiries into efficiency when the company fails to operate at a certain level. With internal processes however, it is often impossible to gain insight about the internal metrics of competitor companies in order to be able to compare apples to apples.
Inefficient or outdated processes simply cannot produce the same amount of customer value per unit of time as their streamlined and efficient counterparts. In addition to reducing the profitability of what is being produced, outdated processes may lead to reputational risk and result in missed sales because they hamper an organization’s ability to meet demand.
Result: A Lower Competitive Position and A Higher Risk
The competitive position of any business is determined by the amount of value it can generate and its ability to capture that value. The figure above shows the effects of the outdated processes discussed above. The inefficiencies exert dual pressure: Downward on the value of the product or service, and upward on cost of providing it. The overall effect is a reduction in profitability.
A major risk associate with running an organization that has low competitiveness and profitability is the financial difficulties they will face when market conditions worsen. As a direct consequence of being in a weaker competitive position with lower profits, an organization may find itself underwater in situations where its competitors manage to weather the storm.
Delaying evaluating existing processes with a systematic approach may prove detrimental to long-term success.
Click here to learn more about how Trindent Consulting can help you evaluate and correct your outdated and inefficient processes.