How to Increase Profit By Reducing Complexity

As a hands-on consultant in analytics, the most popular comment I receive from companies is, “we have so much data but we don’t know what we should be analyzing.” This article provides business leaders with several ideas on where to apply data analytics in order to impact the bottom line, improve profits or reduce workforce issues. The key thing to remember is that the value of analytics is not in the data. It’s in how you apply that data to make better decisions and solve business challenges.

Idea #1: Use analytics to reduce your physical inventory

If you provide physical products to your customers, you undoubtedly stock inventory. From a financial point of view, inventory ties up cash and prevents you from using it for other company initiatives. If you can reduce your inventory, you can free up cash and that represents real cash flow. A lack of cash flow is the number one reason that small businesses fail, even if sales are rapidly growing.

By studying customer ordering patterns over time, data analytics can be used to help you determine how much inventory you should stock of each product. The data can show you how many of each product customers order each month and how stable that order level is over time. Analytics can determine which products are “high runners,” which products have stable order patterns and which ones are highly volatile in terms of order quantities. As a real example, in one manufacturing company, we determined that roughly one third of the products they offered were only ordered once a year, yet they were carrying inventory for all products. 

Analytics in this case allows you to balance your desire to minimize inventory without too much risk of running out of stock to fill customer orders.

Idea #2: Use analytics to get rid of dead product offerings

As a company grows, often its list of product offerings grows too. Product teams are very good at spending their time on the creation of “the next great thing,” but rarely is anyone dedicating sufficient time to analyzing the entire portfolio. Products have a life cycle and that life cycle needs to be managed.

Product analytics is an area of data analysis which helps companies focus their efforts on the products that generate the majority of their profit. A simple analysis of each product’s overall contribution to total profit will do the trick. This contribution is a combination of the profit margin for each product and the volume of product that is ordered. Analytics can show you which products are growing your bottom line, which are tapering off and which ones are costing you more to manage than the profit they generate.

Idea #3: Use analytics to set your customer service levels

The focus of most companies is to grow the number of customers. However, over time the value of each customer changes and your most important customers five years ago may not be the most important today. This is where data analytics can step in and help you make tough decisions regarding the level of dedicated support each customer is assigned.

In the previous tip, we analyzed our products in terms of which ones contributed the most to our profit. We can do the exact same analysis on our customers. In most cases, the majority of your profit comes from a few, valuable customers. As we look at a list of customers in descending order of profit, we will start to reach those customers that are contributing very little to the bottom line.

But they are still providing us with profit, right? Not necessarily. We need to consider how much time and effort we are spending supporting and managing those customer accounts. Are they providing enough profit that they are worth the cost of continued support? Could those support hours be used to perform more valuable activities?

Idea #4: Use analytics to improve quality and customer service

Whether you are an organization that provides products, services or a combination of the two, quality and customer service are what will distinguish your company from your competition. These two topics go hand in hand and can make or break your reputation quickly.

When it comes to product quality, no customer wants to make a purchase and find out that the product was defective or didn’t live up to its estimated lifetime. When it comes to services, no-one wants to purchase your service and be disappointed by what they received. Products and services can disappoint your customers in many ways and often the method of reporting that disappointment is an email or phone call to the seller. While the quantity of phone calls is sometimes tracked, rarely is the reason for the phone call documented. This is where analytics can provide value.

If you track your customer complaints, you can begin to categorize the types of complaints to see which ones occur most frequently. For each type of complaint, you can assess the level of impact that complaint has to your bottom line. By putting these two pieces of data together, you can determine which complaint types you should address first in order to raise your customer service reputation as quickly as possible.

Idea #5: Evaluate Product Demand Patterns

For each part number or product, study the volatility of demand over time. Do you have fast moving, stable ordering patterns? Fast moving but volatile? Slow moving on expensive parts? Slow moving patterns on inventory that expires?

The more you know about the patterns of inventory usage, the better you can manage it. Reduce out-of-stock situations or the risk of becoming stuck with dead inventory. Inventory = cash tied up that can’t be used for something else.

Idea #6: Assess supplier compliance Levels

Supplier data and contract agreements can be used to assess supplier performance across supplier types, supplier geography, etc. You can subsequently benchmark new, potential suppliers according to this data set. This allows for better decision making when selected new or additional suppliers.

Idea #7: Determine the critical factors affecting safety

Safety fines become more expensive every year and can be worth millions for some companies. A reduction in safety incidents is beneficial for your workforce, cost savings and your company reputation. Gather data from employee records, time sheets, locations, ambient conditions, etc. to see which factors are correlated with safety. A few business questions to ask are: Are long-time employees more likely to have a safety incident? Newer employees with less training? A certain work shift? Under certain weather conditions? Determining which factors are the most important will guide you in making the best decision to reduce safety incidents in your company.

Idea #8: Assess variability of supplier deliveries

Move beyond tracking the on-time delivery percentage of your suppliers to a time-trended study of delivery times and the variation in delivery times…especially for operationally critical supplies. This will determine if supplier deliveries are meeting contracted shipping commitments. Have suppliers been delivering product to you later and later? Consider penalty clauses in your supplier agreements to ensure that you remain a priority customer to your supplier.

Human resources (HR) is viewed as a cost center, providing services to employees throughout the company. In recent years, analytics is being used to focus the efforts of HR resources and to hold HR accountable for producing bottom-line results from its assigned budget. The following analytics project ideas are primarily performed in the HR department.

Idea #9: Use analytics to focus your efforts when addressing workforce turnover

What are the “characteristics” of people leaving your company? Where is turnover highest? Lowest? Are the high areas of turnover in job roles are strategic, specialized or hard-to-fill? Are you losing top or bottom performers? Knowing where turnover will impact the operation of the company the most allows HR to focus on those areas instead of typing up valuable resources trying to solve all turnover.

Idea #10: Predict who is likely to retire

This is different from the example above because the actions you take are different based on the results. You won’t be aiming to retain these employees but rather to ensure knowledge transfer occurs in specialized and critical areas.Armed with a retirement prediction, you can better prepare action plans like a “knowledge sandwich” approach to transfer expertise before boomers retire. What’s a “knowledge sandwich” approach? Some creative companies are intentionally forming teams with three generations in them to ensure that experiential knowledge (how the world REALLY works) is being transferred to the younger generations and to ensure that knowledge about new technology is flowing from younger generations to the more experienced.

Idea #11: Evaluate unplanned absences and what they’re worth to the bottom line

Knowing the cost of unplanned absence types allows you to prioritize the actions you take to reduce them. Unplanned absences can be expensive. A follow-up study to assess the root causes is important. For example, in one company, hourly workers would quit their jobs at the end of May and rejoin the company at the end of August. Was the cost of daycare during the summer months more expensive than these hourly employees compensation during these months? Would on-site daycare reduce this type of employee behaviour?

Idea #12: Determine the characteristics of high performing employees

Assess the differences between your “A Players” and “C Players” within job roles to get an idea on what might be make some people more successful that others. The difference can be used to set development plans for the “C Players.” Note: It is not recommended that you use these results for recruitment. Since statistical testing is based on probabilities, using this for “recruiting by characteristics” can land you in the courts. Only use these results for developing current employees. Consult your legal team before acting on the results of this type of study.

Idea #13: Determine your best performing recruitment channels

Which channels are producing your top performers? Which channels are producing top performers at the most economical cost? Is there an opportunity to reduce the number of channels you are funding and to focus your recruitment budget on the most effective avenues?

Idea #14: Determine whether promotions are biased across gender and ethnicity using statistical tests

Gender and ethnicity biases can land you in court and result in expensive settlements. Running this assessment once per year and sharing the results with employees and the public make for great relationship building between HR and the business…. and it can keep you out of the courts.

In Summary

Data analytics is an immensely valuable tool to assist companies in making better decisions in virtually any area of the organization. Whether it’s managing inventory, product lines, customer accounts or workforce challenges, the application of data analytics to drive business decisions has become a must-have skill. Without this skill, companies will find themselves on the road to obsolescence.

Remember that the key to success in analytics is to focus on and prioritize business questions of value to your company. A random approach to analytics will waste a valuable time and money.