Q & A

Common questions from Business Owners/Managers Who are striving to make their business More Profitable

Answers inspired by Dr. Eli Goldratt.

Client: So, you have pointed out that the #1 limiting factor to our growth is that we focus on cost. How much do you think our “cost focus” is actually costing us?

Coach:

This focus on cost and localized efficiencies leads to a couple of major problems:

1. It diffuses management attention across everything in the business. As a result (of this lack of focus actually) management becomes stressed and overwhelmed in hourly micro-mgmt, and multitasking significantly increases. This causes productivity to significantly diminish.
2. With management focusing on everything, the system constraint is not being properly addressed which causes the bottleneck to underperform. This reduces how much throughput the business “system” produces. In most cases, we initially find the bottleneck is performing at under 50% of its actual capacity.   Once management understand this and why it is happening, we can help them adjust their focus to Throughput and increase their flow rate by up to 100%. (This literally means they can double their Throughput with the same resources and about the same operating expenses).  In many small companies, even a 50% increase in Throughput results in more than 5x increase in their Net Profit.

Client: How can we double our Throughput without increasing Operating Expense?

Coach:

The key to substantially increasing Throughput is subordinating your entire business system to objective of maximizing Throughput through your bottleneck (or drum resource). This includes changing any policies that are slowing down your bottleneck and then offloading work from the bottleneck to non-bottleneck resources who have excess capacity and availability. Applying the TOC process of ongoing improvement (POOGI) and focusing on increasing your Throughput per bottleneck hour will lead to a significant boost in profitability.

Once you are able to maximize flow through your bottleneck and significantly increase your system’s Throughput, you will notice that the majority of the increase in that Throughput drops straight to the bottom line.

Client: How can we substantially increase profitability without increasing our price to the market?

Coach:

Common management thinking is that, in order to increase profitability, we must increase margins (percentages). However, there is an alternate solution that if usually more effective. If we do projects that have the same margins (or even slightly lower) and we are able to decrease lead time by 33%, what impact can that have on our bottom line? For example, if we typically frame a house in 6 weeks and then we implement new methods that enable us to frame that same house in 4 weeks, we will see a big boost in our profitability?  We now have 33% more capacity to generate more income.   With operating expenses relatively fixed, most of the increased income will go straight to the bottom line.  And notice this can be achieved without increasing our price, and even lowering our price.  A side benefit of this is that you have now built a competitive edge in the market because you offer better, more reliable lead times.

Due to price wars in highly competitive markets, raising the price is rarely the best way to increase profitability because you typically starve your system of work. We find that focusing on speed and reducing lead times always does more for the bottom line that increasing prices.   We reduce lead times by focusing on increasing flow through the bottleneck (or drum resource) and going through the TOC process of ongoing improvement (POOGI).

Client: What is the true impact of reducing lead times on our bottom line (NP)?

Coach:

  Reducing lead times produces simultaneous benefits to the bottom line:

1. Getting projects done in less time improves customer satisfaction and your capability to provide additional value to the marketplace increases (with your increased capacity).
2. Getting projects done in less time allows your business to take on more projects. For example, if you decrease lead time by 33%, this frees you up to take on 50% more projects (that’s 50% more throughput at nearly the same operating expense!).
3. Reducing lead time gives you flexibility to add solutions to your current services that add value to your customers, further separating your company from your competition.

Client: How can we achieve aggressive growth while maintaining stability at the same time?

Coach:

This conflict of growth vs. stability is a major dilemma in most businesses. In order to ensure long-term stability, we must focus on securing long-term growth; otherwise, we are left vulnerable to market shifts and competition. But, we must also focus on maintaining profitability and stability with our current operation (because growth in an unstable environment intensifies the chaos/conflicts and undermines profitability).

Dr. Goldratt gave us the solution to this conflict: We must implement a management process that focuses attention on the right thing (constraint management). This conflict of growth vs. stability diffuses management attention as it oscillates between focus on growth with focus on stability and efficiency.  This oscillation of management attention significantly limits both growth and stability. If management became focused on the one thing that simultaneously addresses growth and stability, this conflict dissipates.  Stable business growth is achieved by continuously increasing throughput per bottleneck hour one using the Five Focusing Steps (POOGI).

Client: As a small business owner, I wear so many hats. I’m the accountant, marketer, salesman, business manager, and I even work in the field from time to time. Is there a simple key to prioritization to get more out of my time?

Coach:

The key to prioritization is to focus on making money by increasing throughput per bottleneck hour and subordinating the system to the bottleneck.  TOC methods implement buffers in front of the bottleneck that provides management the information to make the right decisions at the right time.  In most cases, business owners significantly limit the output of their system by (1)  dispersing their focus and lack of attention on the one main thing that needs their attention and (2) by focusing on making everything else “efficient” and “cost-effective”. A common example is a business owner spending hours to save a few hundred dollars when they could be generating a few thousand dollars in throughput.

The simple key is

:

focus on the right thing and stop focusing on the wrong things. The right thing is making money through maximizing the utilization of your bottleneck resource to significantly increase flow through your system. The wrong things are localized optima and cutting costs.

Client: I never know how well our company is doing until we run our quarterly reports… I constantly feel like I’m operating my business through “the rear-view mirror”.  What is an effective way for me to accurately know how much money my business made last week month?

Coach:

Most small businesses have limited access to accurate financial reports.  If they have a good accountant, they can access accurate financials on a quarterly basis (with 30 – 60 day delay in the reporting).  Usually,  the owners/managers operate on their gut instinct (intuition) to actually know how much money they are making (or losing).  Neither of these methods are accurate or timely and leave managers uncertain of where their business is going.

Implementing an accurate financial scoreboard is actually not as difficult as you might think. You can easily tell how much you invoiced for last week/month. The real question is, how do you know how much “Market Value” you actually created? The only way to know how much value your company is generating, is to have a system measurement that measures throughput. Once you have established this throughput measurement, the next step is to create a Throughput Scoreboard where you monitor throughput generated each week/month and expenses incurred. Expenses can be calibrated quarterly from your actual expenses and throughput can be determined weekly from calculating what percentage is remaining on all current projects. This T-Scoreboard can be used to make real-time decisions in your business (enabling you to operate your business looking forward through your front windshield).

Client: Does Theory of Constraints (TOC) work as well in a Project environment (like ours) as it does in a Production environment?

Coach:

The simple answer is: Yes. In both environments, the process of increasing flow through the system is to identify the key resource that has the most control on the flow through the system (bottleneck or drum resource) and going through the five focusing steps (POOGI) to maximize flow through the bottleneck. The object in both environments is to eliminate waste in the bottleneck, decrease lead time, reduce inventory, buffer throughput at strategic locations, and significantly increase income.

Dr. Eliyahu Goldratt (1947 – 2011) is the genius behind these simple, powerful management techniques. Below is a list of his books that more thoroughly demonstrate how to significantly improve profitability.

• The Goal – Published 1984 – Dr. Goldratt’s first published book which demonstrates TOC applied in a production environment.
• Critical Chain – Published 1997 – Demonstrates TOC applied in a project management environment.

• It’s Not Luck – Published 1994 – Demonstrates TOC applied to marketing and sales.

• The Race  -  Publsihed 1986   -Teaches the TOC Measurements

(Picture of Dr. Eli Goldratt – Taken from the cover of his last book The Choice)