Why do we keep wasting money in business, but cite ‘growth’ as a distraction?

Capital Confidence

Any organisation that owns capital assets is almost certainly wasting capital value through inefficient behaviour. Challenging statement? Sure is. A spurious conjecture based on emotion. Not at all.

 

For example, mining and energy production companies carry large values of assets on their books. The numbers range anywhere from 40 – 70% of the total asset value of the company. Utilities companies are evenly more heavily weighted up to nearly 95%. If a smaller company is stating total assets of, say $1.5bn, then we’re seeing a major contributor to the company’s performance. Surely this number on the balance sheet is worthy of close consideration and support?

 

In the majority of production companies, the laser focus is on production volume when measuring business performance. It is seen as the key metric to for generation of revenue and hence profitability. It makes sense, to a degree, because these companies are price takers in a fluctuating commodity market. The more you make, the more you sell, the better the profitability, right?

 

To achieve optimum profitability, you need to achieve high efficiency in cost of production. It is the most controllable internal factor to profitability. It’s difficult in some circumstances, but it is not beyond the grasp of a well planned and managed operating system.  With many variables to consider in improving internal efficiency, the high cost ones are the first to be addressed. A very common way most production companies choose to reduce production costs, is to ‘cut costs.’ What this translates to, invariably, means labour and maintenance. Fewer staff and less maintenance activity.

 

And therein lies the greatest contributor of unintended consequences. Cutting maintenance costs is a sure means of driving the increased risk of failure, cost increase and inability to meet contact requirements. On the surface, it may seem like a rational accounting approach to minimising waste. But if maintenance costs are considered excessive, one needs to seek the root cause. The problem is almost always a sign of underlying inefficiencies. If the behaviour is breakdown maintenance being the prime focus, then the operation is playing ‘catch up.’ Preventative maintenance is the position a well managed, optimised operation needs to be working in. This is the stark contrast of lagging and leading behaviour.

 

As global competition is at every business’ doorstep, thanks to instant communication, the drive for efficiency and profitability is essential for all trading businesses. If we’re to be ensuring sustainability for our business, we need to adopt and employ an efficient and effective production focus. Maintenance is an investment in production efficient, not a cost penalty.

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