How to reduce your Break-Even Point?

Reduce your Break-Even Point - Qimpro

Quality Improvement

In 1987, when I first attempted introducing Quality Improvement to corporates in India, I was a miserable failure. Each Quality Manager I approached was a devotee of ISO 9001. In other words, Quality Control.

Two years elapsed with no corporate willing to bite Quality Improvement. At my annual review with Dr J M Juran, he expressed concern about my approach. He underlined:

  • Managing for Quality uses the same three processes as Managing for Finance – Planning, Control, Improvement
  • Quality Improvement is a top-down initiative
  • In order to implement Quality Improvement, speak the language of top management – MONEY.

EUREKA!

Tata Steel

Soon thereafter, I was fortunate to get an appointment with the Chairman of Tata Steel, Mr Russi Mody. Tata Steel was the darling of the share market.

I was young, with a track record of zero assignments over the past two years. Hesitatingly, I asked a few questions:

SL: What is your failure rate at the plant?

RM: 3 percent.

SL: So what is the cost of failures?

RM: Zero. My seconds (rejects) also have a pent up demand.

I dared the next :

SL: Sir, 3 percent failure rate creates 10 percent wasteful costs. We call it Cost Of Poor Quality (COPQ).

RM: Unbelievable. But, will you make this statement to my top management?

And so, over a two day executive briefing, Dr J J Irani, Managing Director, and Mr Ishaat Hussain, Finance Director, amongst others, declared that the COPQ at Tata Steel was 30 percent of sales!

Tata Steel was the first organization in India to adopt the Juran on Quality Improvement methodology.

The by-product of Quality Improvement was COPQ reduction. This also implied that several wasteful fixed costs that were budgeted for, declined. The top management of Tata Steel continuously challenged the quality standards.

The result: A lower break-even point!

Made in India

Many more corporates joined the Quality Improvement movement. The industries included: steel, textiles, tractors, diesel engines, air conditioners, amongst others.

The bottom-lines of their Profit & Loss Statements swelled.

By 1994, the brand Made in India had arrived.

RANDOM THOUGHTS

  1. Make Or Buy is a critical strategic tool
  2. Make, when you have superior Process Capability compared to other sources
  3. Buy, when the supplier has superior Process Capability than you have.



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7 thoughts on “How to reduce your Break-Even Point?”

  • Such a simple concept yet so difficult to embrace! Is that because it is easy to reduce costs by firing people? Nothing to it – get managers to create their lists and decide on the quantum to be fired. Unless, people are considered as “assets that appreciate in value” ( (your idea from your last blog) in the books of accounts, this behaviour won’t change. It is high time the CA Institute led this change!

    I am surprised that Industry still fails to understand what the fact that by reducing or eliminating earnings of an individual, they are reducing their market’s purchasing capacity. The results are there to see – reduction in demand, uncertain demand pattern. The way out of this downturn is to invest in people – people buy products and services, robots don’t! People create change and improvement, robots don’t! People innovate, robots don’t!

  • Verg true. MY understanding over these years and J have learnt from you is
    Thd Leadership function is Uto meet customer’s expectations at all times every time ( reliability ) of quality processes and improvement by people engagement , . by reducing COPQ which jn effect reducing break even and improves profitability.
    This is the real leadeeship function KARMA

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