waste reduction for improved profitability - part 1

waste reduction for improved profitability - part 1

Waste reduction is one of my favorite topics because it is the easiest way to improve profitability!

There are just so many types of waste and so many different ways of identifying waste to improve efficiency that I think this will need to be a multi-part post.

Waste is everywhere. To some degree, all businesses waste: time, money, materials... One of your jobs as the business owner is to identify the big sources of waste and eliminate or at least minimize them. Furthermore, you can’t just do it once. You need to do it again and again because waste sneaks up on you and eats away at your profits when you are least expecting it. For example, systems are not implemented correctly, new employees are not trained completely on ways to minimize waste, new products or procedures introduce unanticipated waste, and there’s just general entropy. In short, waste identification and elimination is a constant, never-ending battle.

I now make it a habit to do a waste reduction drive about once a year.

Let’s dig down into this a little deeper to understand why this is and what can be done about it. In short, it boils down to employees having a different perspective from you. This is not to say that they are malicious or stupid; they just have a different set of motivations and incentives from you, thus they see things differently (or don’t see things).

I am very fortunate to have an AMAZING staff.   These guys really care about what they do, they care about the business, and they want Koffee? to be successful.  These guys are also looking for ways to do things better or to fix problems that come up.  Like it or not, problems crop up in the shop all the time.  Equipment breaks, things stop working the way they were supposed to, signs fall down, etc, etc.  When you have an awesome staff, they notice these things, and they try to fix the problem... sometimes without telling you about it.  Frankly - this is what you want.  You want thinking, proactive employees that are figuring out clever ways to make things better.

Unfortunately, when figuring out solutions, they don’t always take the cost of the solutions into consideration, and you end up with some fairly expensive solutions.

For example: five years ago, there was a fruit fly problem that seemed to crop up around the espresso dump bin. One employee discovered that if he tied off the espresso grind bag and dropped it in the compost bin (outside) half-way through his shift AND at the end of the shift, he would trap a bunch of fruit flies in the espresso grinds, thus keeping the fly problem to a minimum. This solution became embedded in the tradition of doing business, so everyone got into the habit of tying off the espresso grind bag halfway through their shift and tossing it. Thus, our usage of garbage bags increased from two to four per day. While it may have helped the fruit fly problem, it cost money on the compostable garbage bag used (they cost about 70 cents apiece!) and took time to do it (taking the barista away from the service area, thus slowing down the line). There are two shifts per day, and we are open 340 days per year.  So while this partially solved the problem, cost basis just increased $0.70 x 2 x 340 = $476.00 per year. They did not do this out of malicious intent, they just did it because cost didn't factor into the equation in the same way it would with me.

These kinds of things happen ALL THE TIME. It is like an insidious rot that creeps up on you, making your shop less and less productive, more expensive and slower. It is further reinforced when new employees come into the business and start adopting the same behaviors... even when the original problem no longer exists!! In the case of fruit flies, we figured out the source of them and eliminated it... but by now the bag change-out had become part of the procedures and continued to be the regular practice. The employee who had started the practice and those he told about it were all gone, and all the new employees had never known about that problem. They only knew that one changed out the espresso grind bag twice during the course of the shift. This practice continued on for another year before I finally identified it as a source of waste and stopped it.

Your shop is not a static thing; it is a living, breathing entity independent of you.  There is a constant, never-ending stream of issues, minute changes and adjustments that happen all the time... with and without you.  If you let these expensive practices build up, over time your shop will become progressively less and less profitable.

This is what I do to fix these problems.

You never know where you will find these kinds of wasteful practices,  so you just have to observe. Just sit in the main seating area of your shop and observe. Try not to be too obvious about it;  it unnerves your employees. You might want to warn them you are doing this beforehand. Just tell them to do everything they normally do. Explain that you want to see how things run and how people do things, and explain that your goal is to make things more efficient rather than get anyone in trouble. It is amazing what you will learn about your business by sitting for an hour and watching how everything is done. How do employees greet customers? How long are customers waiting? What is being thrown away? How long does it take to make stuff? Etc, etc.  You will soon start seeing wasteful behavior; take note of it, and keep watching.

Here are some areas of waste I uncovered while doing this simple observation exercise. This will at least give you some idea of things to look out for, as well as some specific areas of potential waste.

- Garbage Bags: I noticed that the garbage bags we were using were VERY heavy grade, thick contractor bags - bags designed for oil drums (much bigger than our garbage bins). I also noticed that my employees were double-bagging the garbage when it was full. From there, I pulled out a months' worth of invoices from our supplier of garbage bags and discovered that we were going through FOUR cases (of 100 bags) of these heavy duty bags. Each of these cases cost me $35. Thus, I was spending about $560/month or $6700/year on GARBAGE BAGS!! I had my supplier change the type of bag we would use to a lower grade (only $22/case of 100), and then I wrote a memo to my employees asking them NOT to double bag the garbage. Immediately, the business's consumption of bags dropped to two cases per week. This reduced our garbage bag expenses from $6700/year to ($22/case x 2/week x 52 weeks ~ $2300)... I just saved myself $4400 dollars per year!! That is $4400 additional CASH in my pocket at the end of every year.

So, for a couple hours work, I just saved myself $4400. I just made about $1500/hour to fix that problem!! Now that was a VERY valuable use of my time.

The backstory on the garbage bags relates to the previous manager. About a year earlier, we were having some problems with garbage bags ripping on their way out to the dumpster because my employees were DRAGGING them across the floor. If the bag caught on something, it tore open leaving a nasty path of coffee grinds and garbage, which the employee would sometimes just leave without cleaning up. Instead of asking employees to carry the bags (not drag them), he decided it would be easier to just get thicker bags and tell everyone to double bag them. This would eliminate the garbage-trail problem.

This is a perfect illustration of my point. The manager had no incentive to minimize cost, so he solved the problem in a way that (from his perspective) just cost a little extra money ($10?). Let me be clear about one thing here: this is not a *bad* decision from the manager’s perspective. He solved the problem. It is simply a reflection of different motivational factors and how a manager’s perspective on a situation will never be perfectly aligned with yours. THUS, YOU must be the one to do this waste assessment.

- Cream Cheese cups: At the time of this writing, we use the little 1.5 oz. cream cheese cups with our bagels. When a person orders a bagel with cream cheese, they get a toasted bagel with one of these cups. Each of these cups cost me 21 cents. If the bagel is toasted with one of these cream cheeses, the net profit (also taking overhead into account) on the $2.45 bagel and cream cheese is about 40 cents. So, when my coffeehouse sells a customer a bagel (ceteris parabis), I get 40 cents in my pocket.

A year ago, while watching the counter staff, I discovered that my staff had started *defaulting* to providing TWO cream cheese cups with every bagel instead of just one. Without my knowing it, my employees had reduced the profitability of bagel with cream cheese by HALF. To add injury to insult, I looked through the garbage and found about one in three cream cheese cups were thrown away *untouched*.

Let’s run the numbers on this. My coffeehouse sells about 50 bagels with cream cheese per day. This meant that in one month, we are selling about 1500 bagels with cream cheese. If each one of those is costing me an extra 20 cents, that translates to $300 per month or $3600 in loss PER YEAR!!! WOW!! To solve this problem, I made a rule that the default was one cream cheese cup. If a person wanted a second cream cheese cup, they had to ask for it and they'd get it (only about one in five people ask for an extra cream cheese cup). You could charge people for the extra cup, but I don’t think it is worth the aggravation - it pisses people off. Better to just give it to them if they ask for it.

Now, WHY did my staff start doing this? Simple - it was easier. If they provided two cream cheeses for each bagel, they would never have to make a second trip to the refrigerator where we kept the cups. They figured the cost was so minimal that it would not make a difference, and it saved them time and inconvenience (and made the whole process faster - speeding up the line) They were not acting in a stupid or malicious manner, rather they were making a rational decision from their perspective that did not include the cost implications.

- The DRINK MIXER!!

This is another favorite of mine.  A couple summers ago, we sold a HUGE number of Italian Sodas. It seemed every other person was getting one. For those of the uninitiated, an Italian Soda is soda water mixed with one of the specialized Italian syrups you see adorning many a coffeehouse. You can make any number of refreshing bubbly concoctions for a very reasonable price. So, as I watched, a new employee grabbed two of the large cold cups (cost - 16 cents apiece), poured the soda water, ice and syrup into one glass and then proceeded to pour the mixture from one glass to another in a nicely artful manner in front of the customer. Looked like a bartending competition gone wild... I smiled - nothing wrong with a little showmanship, keeps the customer happy. Then my smile slowly wilted as the happy-go-lucky barista handed the fizzing drink to the grinning customer and TOSSED THE OTHER CUP IN THE GARBAGE.

I got up and walked over to the garbage. Sure enough - there were *hundreds* of the 16 cent cups in the garbage. I growled. I walked out to the dumpster and opened it up. I poked a couple bags and opened up a bag that had been behind the counter.... yep... full of 16 cent cold cups.

Again, a classic example of how a decision by an employee had serious cost implications. Why did they do it? Simple - it was fast and easy... and nicely showy... better tips! They also figured the cost of a cup was so small so as not to make a difference. 16 cents. When I asked why people didn’t at least reuse a cup, they stated that it took too much time to rinse it out -- especially when there was a huge line of people waiting for drinks.

So, a summary: take time out of your schedule a couple times a year and just observe your operations. See how people are doing things, how customers order, what procedures are followed, etc. Take a couple days for it, and you will gain HUGE dividends from it. You can add thousands of dollars in net profits to your bottom line through just a couple days work.