Waste not want not

2008-02-12 00:00

If one were setting out to put in place a research programme to analyse waste, in all its guises, then there is no doubt you could have a field day by starting with the government.

I am positive the star prize would be awarded to road sections of the local municipalities. I thought the midlands’ roads were pretty bad when it came to potholes, but having just come back from Johannesburg, we aren’t in the same league.

Great sections of roads look like bunkers on a golf course. What you think is a drunk driver in front of you, turns out to be some individual doing his utmost to get from A to B without disappearing down some enormous chasm. The problem we are facing is obviously a great deal more than just waste. It has to be another example of theft within government institutions.

Recently, I have been strongly making the point in this column that there is ample opportunity to kick-start income growth to be shared between employees and shareholders alike, by liberating all guises of waste from within business.

The size of businesses’ total waste bill, I suggest, is enormous. The ironic thing is our existing budgeting methods tend to lock these costs, that add no value, into the variable and fixed costs, with all the negative operating consequences, not the least of these being the impact of this on the business’s operating break-even level.

One way of getting a handle on the size of the waste issue is to evaluate how much turnover is required to produce the necessary profit. You can determine this from a relatively simple calculation or formula. Using monthly or annual figures, simply add together the total fixed costs (plus any interest payable) and the required profit and divide this sum by the operating gross margin percentage.

The result will be the amount of turnover necessary to produce the required profit from the existing fixed cost base at the current gross margin percentage. I suggest to you that, across South Africa, this resultant turnover number can be as much as 20% too high — or higher than the normal level achieved.

The Rainbow System, which I have referred to regularly in my column, sets out to liberate this variable and fixed cost waste in the business to the benefit of employees. Equally importantly, the system motivates every worker in the business to do all in his/her power to grow the turnover of the business.

The method that motivates the employees to do these things is a simple one: at the beginning of the financial year, the shareholders agree to an amount of profit that is required from the business, expressed as a percentage return on turnover.

At the end of the trading period, this shareholders’ profit requirement is firstly removed, followed by all costs (including labour costs). Anything that is left is distributed among all the employees.

The important thing about this system is that, as soon as it is in place, every employee is coming to work with an entirely different attitude. The employees want, both individually and collectively, to grow turnover and its value, while doing all in their power to reduce the costs associated with the manufacture and supply of that turnover.

Not only do the employees earn considerably more from this (and certainly more than from the annual increase system), but also, the shareholders receive more return as the value of their percentage increases.

These considerations represent tremendous short-term advantage to every employee. However, the system also presents a basis for long-term, sustainable, business improvement.

A rainbow business is one in which collective labour is trying to produce the highest level of output with the lowest level of costs.

That adds up to the elimination of all waste from the business, massive improvement to labour productivity and employee income growth without inflation.

frankgreenfield@iafrica.com

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