Small towns frequently have anemic labor pools challenging human resources with high turnover and incomplete skill set. A small accounting firm nevertheless must offer big-city service to a clientele of very competitive farmers and ranchers.
To build and maintain a competitive edge by reorganizing the firm, freeing CPAs for specialized services and customer relations.
Offload many accounting and bookkeeping services to a work center in Cebu. Setup Voice over IP network for free international teleconferencing. Setup Virtual Private Network (VPN) to enable secure and encrypted access files and information from Cebu.
Deliver a labor cost savings of 66%, reduce the turnaround time of accounting services, and increase billable output. US-based CPAs were able to expand their focus to complex, specialized revenue generating tasks and invest time in improving customer relationships. Outsource workforce skills increased from entry-level bookkeepers to accountants with university degree and an average of 6.2 years of experience. Domestic and outsource employee cost/performance improved dramatically. Back to top.
High cost data center plagued with security and reliability problems coupled with inadequate support staff after hours.
Outsource and optimize data center operations
Relocate and develop a lights out data center to Los Angeles, California and develop a 24x7 network and support engineering team in Cebu, Philippines. Implement a back to back DMZ network configuration to protect mission critical fully redundant web, database, and email server farms.
Saved the organizatio more than $500,000 per year while improving customer service and reducing downtime by 75%. Back to top.
A global Japanese exporter has low employee moral, high turn over, and poor follow up and customer service from Japan-based sales staff.
Reorganize and expand customer service and sales workflow
Build 24x7 customer service and sales work center in Cebu. Develop custom global customer service tracking and response software.
Deliver a labor cost savings of 70% while reducing the overall turnaround time of customer service inquiry. Up-selling developed and improved customer service, led directly to a 10% increase in sales volume, fewer customer complaints, lower operating expenses, and improved responsiveness. Back to top.
An international vehicle export company with high software engineer turnover and prohibitive software development costs seeks to optimize employee satisfaction and cost/performance.
Reorganize Software Development Department
Hire, train, and deploy 40 skilled software engineers based in Cebu, Philippines creating vertically specialized teams to cover Java, C# and C++, SQL Server, and Visual Basic.
The reorganization enables management to realize cost savings of 65% with increased software development productivity and reduced staff turnover. The existing quality control system migrated seamlessly to provide an optimized defect rate. Back to top.
Daufel Enterprises is a small business that produces hand-tied fishing flies. A fishing fly consists of feathers, furs, and synthetics placed on a hook and seamed with thread. The fly tier constructs these flies to represent aquatic organisms upon which fish feed.
Quality and speed are two issues that conflict in the fly-tying industry. The faster a tier can construct a fly, the more profitable. However, if speed is the only focus, quality will suffer. In the book, Patterns, Hatches, Tactics, and Trout (Vivid Publishing, 1995), popular fly fishing writer Charles Meck wrote the following about Daufel Enterprises:
Doug and Dan Daufel have tied flies commercially for the past five years. The young age of these identical twins from Dayton, Ohio, belies their tremendous fly-tying ability. They tie some of the best patterns I have seen in my forty-plus years of fly fishing and tying flies. They have tied flies for more than ten years and now tie commercially some of the finest flies I've ever seen.
In essence, the Daufel brothers must personally tie the flies or quality will suffer. In their business, therefore, the brothers' time is the constraint factor.
Exhibit 1 illustrates the contribution margin (throughput per dozen) for the five most popular flies constructed by the Daufel brothers. In addition, the brothers have quantified the labor constraint for each fly to determine the throughput per labor hour. As indicated by Exhibit 1, all flies have the same sales price and shipping cost, but differ in the material cost per unit and the time required to tie the flies. Exhibit 2 compares the apparent profitability of the various flies based on traditional contribution margin analysis with the profitability of the various flies based on constraint analysis.
EXHIBIT 2 PROFITABILITY RANK
Throughput per Dozen Contribution Margin per Dozen
Pheasant Tail 1 2
Woolly Bugger 2 4
Hare's Ear 3 3
Compara Dun 4 1
Thorax Dun 5 5
To perform the constraint analysis, the brothers had to monitor their own time spent working on each type of fly. They intuitively knew the Thorax Dun required more time than the others to tie. They also knew it had the lower contribution margin, so they were not surprised when the results indicated it had the lowest throughput per labor hour. However, they were surprised by other results of the throughput analysis. The Compara Dun, which has the highest contribution margin, ranked next to last based on throughput per labor hour because it required the second highest amount of the brothers' time. The Woolly Bugger, which had the next to lowest contribution margin, had the second highest throughput per hour. Because of the high quality of their work, the Daufel brothers are able to sell essentially all of their production of any model of fishing fly. Prior to performing the constraint analysis, the brothers had concentrated on Compara Duns and Pheasant Tails. The constraint analysis indicated that the brothers should switch their productive efforts from the Compara Dun to the Woolly Bugger.
To meet the needs of their best customers and continue with their own creativity, the brothers desired to continue producing all of the current models, while increasing their profitability. With this objective in mind, it was suggested that the brothers explore the possibility of increasing the price of the less profitable flies.
Constraint analysis can be used to determine the sales price required so that each model of fly would have the same $29.39 throughput per labor hour. This analysis reveals that the required prices for the Thorax Dun ($20.72 per dozen) and Compara Dun ($16.64 per dozen) were higher than customers would probably be willing to pay. The required prices for the Hare's Ear ($14.11 per dozen) and Woolly Bugger ($12.53 per dozen) would probably not substantially decrease demand. This additional analysis suggests that the Daufel brothers should consider raising the price of the Thorax Dun, Compara Dun, and Hare's Ear to $14.00 per dozen and the price of the Woolly Bugger to $12.50 per dozen. Exhibit 3 shows the throughput per dozen based on the new sales prices.
Daufel Enterprises' constraining factor is, like many small businesses, the time of one or a few key individuals. This is certainly true in most service businesses. Like the Daufel brothers, owners or managers of small businesses normally have an intuitive feel for which products are more profitable. Often a simple constraint analysis will allow them to quantify their intuitive feel and make precise adjustments. CPAs that service small businesses can help their clients become more profitable by assisting them with the analysis.
CPAs can also use constraint analysis to improve their own firm's profitability. The constraining factor for CPA firms is often partner-level time required to review work before it is submitted to the client. Some services that are priced higher often require more partner time to complete the review and ultimately may not be as profitable as lower-priced services. Since accounting firms normally keep track of time spent on individual jobs, the data is readily available for the analysis. Back to top.
(Bushong, J.G. & Talbott, J.C. 1999, An application of the Theory of Constraints. The CPA Journal, 69(4))
