Org charts and goals can be extremely hazardous to profit margins. You may wonder how this can possibly be, especially after all the recent focus on cost cuts. The reason? Not all revenue dollars are created equal and not all cost cuts increase profits. With everyone responsible for something other than profits, profits suffer:
- The sales force is responsible for booking orders; big orders and lots of orders are what counts. They may not have any idea which customers and products are most profitable.
- The production people are responsible for shipping quality products on time. The more products that go out the door on time, the bigger their bonuses and raises. It doesn’t matter how many of those products have low or no margin.
- The purchasing and inventory folk want the best deal on every purchase while keeping inventory low. Their raises depend on it. Important, high revenue projects and customers might influence their decisions, but beyond that, all lead times and savings are created equal. How much time do they devote to low margin products, making the margins even worse? Are their deals hurting the lead times of high margin products that need to be flying out the door?
- The product development crew ought to be focused on cost effective products, but are they? Are engineers from different groups working together to minimize development, installation, and maintenance costs? Or are they creating super cool products to wow the customer, beat the competition, and attract big bucks?
So now we come down to the CEO and the rest of the executive team. Surely they are responsible for profitability!
The executives better know exactly what is and isn’t profitable and why, so that low margin products and customers do not persist without a really good reason. And they better make the tough decisions needed to keep profits strong.
Nonetheless, how much control do the executives have if everyone else can achieve their goals and earn a bonus or raise regardless of margins? In most companies, all the groups mentioned above can personally thrive while profits go down the tubes.
Everyone plays a role in company profits. Everyone needs to be responsible for a piece of it. And at the top, the data must be there, the analysis must happen, the tough decisions must be made, and the goals and responsibilities needed to support growing margins must be driven into every corner of the organization.