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Why the 5 Focusing Steps are so Important

Most middle and senior managers do not understand or simply are not interested in how their business system works. They are content to focus on their local department and optimise that – rather than understanding the business as a whole to cause it to maximise results. Even top management (CEOs) often do not understand their business. They condone and even encourage their management teams to optimise their local departments – production, marketing sales, finance etc. Wherever local optimisation is the rule the business concerned will always harm the bottom line significantly. Local optimisation is a massive mistake!

The 5 Focusing Steps are guidelines that properly used will cause a management team to always reflect on their (local) decisions. Is the action or decision taken locally help or damage the business as a whole? As we will see the 5 Focusing Steps are a guide, but they do not replace a deep understanding of the business system.

What follows is a description of the 5 focusing steps, how to apply them, why each step is important and a series of examples of common practice that violate the 5-Steps. This third post is a short discussion of the second of the 5 steps.

The 5 Focusing Steps

Step 2: Decide how to exploit the constraint.

This is easy to say, but it is not so easy to do. How should I use my constraint to maximise profits (assuming maximum profit is the business goal)? Which of my products have the highest margins? Which of my products consume constraint capacity most effectively? What are the implications of my decisions in the market? What are the implications for the future? Clearly this is not an easy decision for any to make. It is in fact the responsibility of top management to decide!
If management does not take the decision or does not take it correctly the business will suffer. The bottom line will reflect this suffering. Unfortunately business results will not point to the culprit for less than optimal (even poor) results. The culprit is almost always the way we manage our system, our constraint, or could it be anything else? If it is something else let me know at rgb@vistem.eu!
The constraint might be our market. The market may not be buying enough of our products to fill our factories resulting in a less than satisfactory bottom line. Our decision may then be to cause our markets to buy more and more from us (and this must not be done with lower prices since our competitors can easily copy these). Some sort of powerful competitive advantage is essential.
It is important to remember that a policy ‘constraint’ should simply be changed. Deciding how to exploit an inappropriate policy does not make any sense. An inappropriate policy was originally put in place for a good reason. That is why it should be changed but not necessarily be eliminated. Chang such policies, KPIs or just the way work gets done.

On Clear days you can see Corporate HQ - 2

Why the 5 Focusing Steps are so Important

Most middle and senior managers do not understand or simply are not interested in how their business system works. They are content to focus on their local department and optimise that – rather than understanding the business as a whole to cause it to maximise results. Even top management (CEOs) often do not understand their business. They condone and even encourage their management teams to optimise their local departments – production, marketing sales, finance etc. Wherever local optimisation is the rule the business concerned will always harm the bottom line significantly. Local optimisation is a massive mistake!

The 5 Focusing Steps are guidelines that properly used will cause a management team to always reflect on their (local) decisions. Is the action or decision taken locally help or damage the business as a whole? As we will see the 5 Focusing Steps are a guide, but they do not replace a deep understanding of the business system.

What follows is a description of the 5 focusing steps, how to apply them, why each step is important and a series of examples of common practice that violate the 5-Steps. The second step is a discussion of the first of the 5 steps.

The 5 Focusing Steps

Step 1: Identify the Constraint

“We are continually working on eliminating constraints”, is a common claim when we ask for that thing that blocks a businesses performance. The statementalone indicates common practice. Every entity or department focuses on what they call constraints. These constraints originate from the behaviours of other departments around that focus on their own constraints. It is an uncoordinated mess. Everyone is trying his or her best. It is the system that forces every manager to optimise his or her local department.

There can be only 1 (or very few) physical constraint(s) in any system of entities; like a chain can have only one weakest link. Since this is true a business system will have only 1 constraint located in just one of the entities. That is what we must find.
There is something else that people call a constraint. These are the rules by which their business is run. These may be formal policies, guidelines, key performance measures or simply ‘the way we run the business around here’. These have been called policy constraints. The 5 steps are not valid for these ‘policy constraints’ they (the inappropriate parts of policies) must be changed to remove or change the damaging part.
The simplest way to understand how to find a constraint is to look at a production environment with many machines more or less in a sequence between raw materials and finished product. One of these machines has, on average, the smallest capacity. Work in process (WIP) tends to pile up in front of this machine. (Many times materials are released as soon as possible so that huge amounts of (WIP) are present throughout the factory masking the true constraint.) So, the most loaded resource is the constraint of the system as a whole. The constraint does not need to be a bottleneck! The constraint can be the market or sales that are not delivering a sufficient number of orders to keep the factory busy.
The next steps are the guidelines how to manage the business constraint. They are guidelines! They are not a management cookbook! Top and middle management need to develop the thinking and tools to be able to apply the 5 steps correctly.

On Clear days you can see Corporate HQ - 1

Why the 5 Focusing Steps are so Important

Most middle and senior managers do not understand or simply are not interested in how their business system works. They are content to focus on their local department and optimise that – rather than understanding the business as a whole to cause it to maximise results. Even top management (CEOs) often do not understand their business. They condone and even encourage their management teams to optimise their local departments – production, marketing sales, finance etc. Wherever local optimisation is the rule the business concerned will always harm the bottom line significantly. Local optimisation is a massive mistake!

The 5 Focusing Steps are guidelines that properly used will cause a management team to always reflect on their (local) decisions. Is the action or decision taken locally help or damage the business as a whole? As we will see the 5 Focusing Steps are a guide, but they do not replace a deep understanding of the business system.

What follows is a description of the 5 focusing steps, how to apply them, why each step is important and a series of examples of common practice that violate the 5-Steps. The first step is a discussion on the prerequisites to apply the 5 steps correctly.

The 5 Focusing Steps - The Pre-Requisites

Prerequisites to the application of the 5-Steps

1. Definition of the System: The system to be optimised could be our production (because we know that production is holding back our ability to succeed. It could be the business as a whole including our markets. Care should be taken that the system selection will not lead to local optimisation.
2. Definition of the Goal of the system. If we do not know the goal of our business we will not know how to optimise it – there will be many things that can be improved so that our business will have no focus.
3. We need to know how our business can tell it is approaching the goal. Top management may be able to look at the bottom line, but middle management is operating locally. They need a way to know that their decisions and actions are causing the business as a whole to approach the goal more and more.

Economic Order Quantity (EOQ)

EOQ is a Cost World metric. The purpose of the method is to find the minimum cost of buying and holding inventory. It does not take into consideration the impact inventory has on Throughput (and sales). Too low (and the wrong) inventory will almost certainly cause a company to lose sales, Throughput and profit.

The reason to minimise inventory should not be to minimise these to costs. It should be to minimise lead-times (for low inventories in a supply chain, lead-times must be low). The shorter lead-times are the smaller the bullwhip effect and the smoother demand will be on production. The smoother demand on production is, the more effective production will be in on time delivery, ensuring product availability, production capability (capacity to produce) and production cost per unit.

In the TOC World we focus on maximising Throughput which, done correctly, leads to the lowest overall cost. We focus on placing inventory in the right place in order to ensure due date and availability near 100%. We focus on minimal lead-times to minimise the bullwhip effect and thus also inventory. Because of this focus it can easily happen that TOC Throughput tactics take an organisation away from the EOQ minimum – often towards the left with more frequent re-ordering.

So, is EOQ a valuable concept? Or, is it dangerous?