On Clear days you can see Corporate HQ 12

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. Doe 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 my fifth example of the impact of the exploit and subordinate steps on the bottom line. In this example I have chosen a situation in which top management has sent a directive to all factories to increase yields (reduce scrap rates). The factory managers’ bonus would depend on achieving the 3% improvement target. Just a small policy change would be worth a huge amount.
BTW. If you have any similar examples please share them with me. I will publish them (if there are not too many!) Send your stories to CSSTW@Bluewin.ch - I will credit you with the story.

5th Example of the 5 Focusing Steps in Action

Yield Increase or Scrap Reduction Targets

Every once in a while senior management comes up with a great idea. In this case the COO came up with the directive that all factories must increase yields by 3% (or reduce scrap rates by that amount). The directive was sent to all factories around the World. On the face of it a good idea.

Production management at one of the factories were convinced that their machines, very large machines, would not allow them to achieve their 3% improvement target. They made 3 standard colours in high quantities and a number of the colours of the rainbow in small quantities. The 3 major colours were no problem, yields were already excellent there - actually the problem was that no significant improvement was possible. These small quantities of colours suffer from poor yields (high scrap rates) because change-overs for small quantities on large machines consume a lot of material to be sure the colour from the previous lot has been fully flushed from the system.  The required quantities of pigmented products is not very high so that changeover material losses were a high percentage of production batches. The situation could also not be improved with their existing equipment - cleaning by dilution takes a lot of material.

The factory solved their problem by outsourcing pigmented production to suppliers that have smaller machines. They met their yield targets but as a consequence had quite long periods of no production on their big machines when they would normally be producing colours and, of course, they had to pay considerable fees for the outsourced production.

After a year the business manager was transferred elsewhere. The new manager saw the damage caused by the outsourcing. What he saw was an annual net penalty if 1.5 million$ (the cost of outsourcing far outweighed the value of any yield gains).

Here we have another example of a damaging corporate policy that should have never been implemented in the factory concerned … and possibly also elsewhere. Improved yields are a good target to set but should be done with full knowledge of any consequences. In fact senior managers (COOs) should allow (in fact expect) their managers to raise such potential negative outcomes of an action. If they did allow/expect such reactions, then many businesses might be better off.

On Clear days you can see Corporate HQ 11

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. Doe 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 my third example of the impact of the exploit and subordinate steps on the bottom line. In this example I have chosen a situation in which management has split a very big business into many profit centres. Profit centres sell both to the outside World and to their internal customers along the value chain.
BTW. If you have any similar examples please share them with me. I will publish them (if there are not too many!) Send your stories to CSSTW@Bluewin.ch - I will credit you with the story.

4th Example of the 5 Focusing Steps in Action

Multiple profit centres within one product group (transfer pricing)

Many corporations divide their business into profit centres. The idea is not a bad one since smaller entities are easier to manage. Unfortunately these profit centres are usually  interdependent – they depend on each other. The targets profit centre managers are given can compound the problem and the damage to the corporation as a whole as managers will optimise locally - without regard for the system as a whole.
The graphic (a picture of interdependent multiple profit centres) below depicts a major business with 6 profit centres. All of the profit centres sell to customers in their particular  arkets. The 4 supplier profit centres sell both to external clients and transfer product to their internal client for further transformation. Since each of these entities is a profit centre they all have a profit and loss report and they have profit and return on investment targets. By these targets the corporation causes them to optimise locally by the way the profit centres must report and by the individual and local targets the corporation sets for them.
Internal transfer prices are usually set through negotiation, bearing in mind market prices. Common practice is to give internal customers some sort of benefit (discount) in order to fill capacities as much as possible (in order to prevent downstream businesses from buying from the outside). The consequence is that selling internally hurts the supplying entity. There will be a tendency to reserve more for clients and starve internal customers. The effect is aggravated by supplying profit centres having higher returns on investment than those at the end of the value chain - because why supply a lousy business - its got to be bad for our company as a whole.

In our theoretical example profit centre 1 is the constraint – it has insufficient capacity to supply all the demand placed on them. The profitability of the various profit centres is such that profit centre 6 has the lowest margins and ROI. In fact they operate at breakeven. However, the price of their product is 6 times that of profit centre 1 (on a per Kg (or other unit) basis).
Profit centre 1 sells as much as they can to clients to maximise their profit. 40% of their sales volume goes to the market causing profit centre 6 to be starved (profit centre 6 has plenty of spare capacity to produce more, and market demand also exists). Is profit centre 1’s tactic the correct tactic? After all, does it make sense to sell more in an operation (profit centre 6) that barely breaks even? (NB. Operating expenses in the system as a whole are constant since profit centre 1 produces the same quantity no matter what (they are sold out) and profit centre 6 has spare capacity.)
The answer is yes, it absolutely makes sense to NOT starve profit centre 6! The more sold through this profit centre the greater the profit for the sum of the 6 profit centres. The situation described is not unusual since the practice of having profit centres is quite common although the shape (interdependencies) are likely to be different . The correct tactic seems so obvious that one has to wonder the situation of starving profit centre 6 is allowed to exist! It exists because most corporations manage their businesses as profit centres and cause local optimisation. Whenever businesses are interdependent as in my example the corporation risks the mistake described. (Since operating expenses are constant and more revenue is realised with products from profit centre 6 it is obvious that maximising centre 6 sales will improve over all financial performance.
In the example the constraint (profit centre 1) is inappropriately managed because the constraint is not used to maximise profits and profitability for the corporation. If managers were taught the 5 focusing steps and if the managers of the 6 profit centres are collectively responsible for the bottom line, then they would probably discover the right tactic to maximise profits now and in the future - at the very least the chance for better decisions will be greater!

On Clear days you can see Corporate HQ - 10

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. Doe 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 my third example of the impact of the exploit and subordinate steps on the bottom line. In this example I have chosen a situation in which there is a constraint only during a part of the year - that could be overcome through inventory management. Just a small policy change would be worth a huge amount.
BTW. If you have any similar examples please share them with me. I will publish them (if there are not too many!) Send your stories to CSSTW@Bluewin.ch - I will credit you with the story.

3rd Example of the 5 Focusing Steps in Action

Year-end Low Inventory Targets

Such targets are policies instituted to demonstrate a well-managed business with low inventories to Wall Street and investment analysts. Factory and business managers are given no choice but to meet these year-end targets no matter the problems it gave the business.

One business always met its targets with the full knowledge that as soon a January starts they would not be able to fulfil market demand. Because they could not deliver everything early in the year they were later forced to lower prices in order to win back the lost business. Year-end inventory targets were extremely damaging to their bottom line. A 1% price reduction cuts a 10% margin by 10% to 9%. Can you imagine that 1% is enough price incentive to win back customers?

Another business, also with a stringent year-end inventory target, sold synthetic yarns to a special industry that created fabrics for the consumer market. The nature of this business was such that during the first quarter of every 2 years out of 3, demand would exceed supply by a considerable amount. Since year-end inventory targets were holy, factory management did not dare to produce for the first quarter. Instead the produced enough for the first quarter but sold the extra amount (above inventory targets) to dealers at very low prices – at least this way their customers would be satisfied – they get the quantities they need from their factory  and not from competitors. 

Calculate for yourself what the cost would be to hold the extra inventory for on average 5 months 2 years out of 3 and say 8 months in years without peak demand. The cost of holding the extra materials is minimal compared to the extra income (Throughput). The extra income is sales less materials cost.

Factory management was most irritated by this because the dealers owned Aston Martins and Ferraris while they (factory management) could only afford Fords!

Clearly, when you read these 2 examples the conclusion has to be that the policy concerned is not a good one. Low inventories are certainly a good idea, but only once you can continue to meet demand despite low stock levels. Corporate management is the problem. What they want is fine, but it should not be requested equally from all factories. A further problem is it is very difficult to get sufficient time with top managers (either because these are too busy or middle managers fear for their careers) to show that the local optimisation of inventory leads (in such cases) to bottom line damage. Such situations often live on for many years damaging the company year after year.

On Clear Days you can see Corporate HQ - 9

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. Doe 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 my second example of the impact of the exploit and subordinate steps on the bottom line. In this example I have chosen another situation in which a there is apparently a clear physical constraint in the factory concerned. However through just a few simple changes to the way the factory works in relation to the constraints (policy changes) they also were able to move from an overloaded situation to being able to meet all demand with the expected lead time.

BTW. If you have any similar examples please share them with me. I will publish them (if there are not too many!

2nd Example of the 5 Focusing Steps in Action

Exploiting the constraint in a coatings (for automotive) factory

Before I arrived at the factory I knew that factory management was lobbying for more vessels to hold paint. They claimed their constraint was the number of storage vessels; they had already submitted a project to install 2 additional vessels.

This time I ran a simple simulation to show the impact of properly exploiting the constraint. Participants were supervisors from the factory and plant management. The simulation went well, the people got the idea and began discussing the constraint. I did not believe the constraint was the vessels since I also knew that quality control had limited capacity due to illness and an accident that reduced capacity by a large amount. Because evaluating colour takes several years to learn adding people to quality control was not going to work.

I led the team to the idea that quality control is the constraint of the system. Initially they were doubtful but when they began to think about the quality control job and the amount of time actually spent evaluating colours it became clear that quality control, even with 2 of their 4 people out of action, had enough capacity to do the job of colour quality control correctly. The decision made was that the colour experts would do only colour evaluations. To collect samples they would no longer walk back and forth between the lab and the factory; they would no longer add the corrections to the mix vessels and they would not wait until mixing was complete. Other employees were found to make the corrections (weighing pigments and adding these to the mixing vessels), people were found to collect samples and the quality control experts found ways to reduce the number of corrections needed. All these actions were "subordinate to the constraint” actions – subordinate to decision that the two colour experts in QA would focus only on colour evaluations.

Once all the actions the team decided were implemented the factory enjoyed a 40% increase in capacity – and no longer needed to buy any added vessels.

On Clear Days you can see Corporate HQ - 8

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. Doe 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 first example of the impact of the exploit and subordinate steps on the bottom line. In this the first example I have chosen a situation in which a there is a clear physical constraint in the factory concerned. However through just a few simple changes to the way the factory works in relation to the constraints (policy changes) they were able to move from an overloaded situation to being able to meet all demand with the expected lead time.
Examples of the 5 Focusing Steps in Action

Exploiting the constraint in automotive component production

The factory produces a major component for both cars and trucks. Production involves a series of steps followed by an automated assembly and lastly some manual final assembly. The company invited me to a meeting with the plant manager to discuss how TOC (and the 5 Steps) could solve his problem of insufficient capacity.

The plant manager's problem was demand far exceeded the factories capability to supply (by about 25%). Instead of a discussion with the him, he confronted me with 16 sceptical engineers who had been working on the problem already for a very long time.

I explained the 5 steps and their importance. This led to a discussion about the location of their constraint. With 16 engineers in the room consensus was difficult. After a while it became clear that they believed either a metal turning step or the final manual assembly step were the possible constraints. I explained that it is unusual to find the constraint at the end of a production line simply because month end pressures to meet sales targets ensure plenty of capacity there. They finally agreed that the best candidate was the turning machine in a line (they had 10 lines).

From there it was easy. I asked them how many hours per day the constraint machines would be producing. They claimed constantly except for set-ups. I asked to see these machines. We went to 5 lines and found that in 3 of them (60%) the turning machine was idle. They were idle for set-ups (but no set up person was present) and one was idle for a break. Clearly they were losing capacity at the constraint and therefore for the factory.

Back in the conference room the engineers came up with many ideas to make sure the constraint never stops (apart from actual work doing set-ups). They also came up with ways to accelerate set-ups significantly. Most of the changes could be made immediately (some did require the OK from their union). The result was they easily discovered the 25% of capacity needed to meet demand!

To exploit the constraint they had to find ways to shorten set-ups; they had to find ways to cover for breaks, meals and shift changes and they eventually found ways to move material between production lines since the constraint was not equally loaded across all 10 lines.

 

On Clear Days you can see Corporate HQ - 7

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. Doe 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 discussion of the impact of the exploit and subordinate steps on the bottom line. If an organisation follows the 5 steps correctly they can easily find 20 - 40% greater Throughput. The impact of the exploit decision and subordination is shown using several cases (materials cost at 35%, 50% and 65% of sales and 10, 20 and 30% positive impact on sales.

Why are the 5 Steps so Important for a Business

The decision to exploit and subordinate to the constraint

Consider a business with an internal constraint. The constraint limits how much can be produced and sold. This business now applies the 5 focusing steps. As a result, without adding any fixed costs, the business finds it can sell 10, 20 and 30% more (gains that can often be easily achieved). The tables below show the impact in 3 different situations – one with 35% material cost; one with 50% material costs and one with 65%. In all 3 cases the businesses earn 5% on sales (profit is 5% of sales).

With low materials cost (35%) the leverage is huge. 

Despite less leverage with higher materials costs the impact is still impressive.

With very high materials (totally variable costs) the leverage declines further but a good impact remains.

From the 3 tables it is clear that following the 5 Steps can have a very significant positive impact on the bottom line. Someone wishing to use the 5 Steps faces the problem that current experience tells managers that such impact is just not possible. They cannot believe that such huge jumps in profitability are possible after their many years of improvement initiatives. The claim insults their capability and their view of themselves as successful managers. The examples below, taken from real life situations, will hopefully demonstrate the possibilities and the pitfalls of not following the 5 steps. (Nevertheless there will always be resistance; much of which in the form of ‘we are different’.)

Elevating or expanding the constraint

After following the 5 Steps in a disciplined way the organisation will know exactly where to expand. The expansion will immediately lead to more sales and Throughput. If in the above first example I have 3 resources machines in my constraint area then a new resource can potentially add 25% to sales and Throughput for a small amount of added costs. It is of course essential to know the cost of such an expansion since you may have to expand the near constraints too or the sales organisation may be unable to increase sales.

The decision how to exploit the constraint and proper subordination has the biggest impact on the bottom line. It’s free! Following the 5 steps correctly and continually is the most rewarding action an organisation can take. It focuses scarce improvement resources at the point of greatest rewards – great for the company and very motivating for the improvement team.

On Clear days you can see Corporate HQ - 6

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. Doe 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 sixth post is a short discussion of the fifth (the step with an important warning that is often not heeded) of the 5 steps. This last step is actually simple the first step in the next cycle of improvement.

The 5 Focusing Steps

Step 5: If the constraint has been broken (has moved) go back to step 1. WARNING: Do not let you inertia become the systems constraint!

Clearly the 5 steps are a never-ending improvement cycle since there is no way to ever eliminate constraints. At best they will move to a new location.

The warning is extremely important! We humans develop a new paradigm very quickly as our business simulations show. We can explain the 5 steps in depth and emphasize the 5th step, run the simulation with manager participants and within 30 minutes they will forget the 5th step's warning. While this step makes eminent sense to them it seems managers cannot follow it correctly – it takes time practice and probably at least 2 people that constantly remind each other – of not just of step 5 but all of them.

Sometimes a business will tell me their constraint wanders (or dances) throughout the factory or business. This is simply a phenomenon of too big batches. The operation swallows too much at a time so that the constraint seems to move through the factory. To see the effect in animal life watch an Anaconda snake swallow a pig. The pig is swallowed whole and travels slowly through the snakes digestive system. The huge batch makes the snake lethargic and largely inactive … similar to a constipated factory. 

Factories with wandering constraints have too much WIP and very likely no constraint at all once they choke the release or freeze half their projects (see Production the TOC Way or Critical Chain - both by Eli Goldratt)

On Clear days you can see Corporate HQ - 5

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. Doe 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 fifth post is a short discussion of the fourth (probably the step that is taken much too soon much too often) of the 5 steps.

The 5 Focusing Steps

Step 4: Elevate (Expand) the Constraint

Many times an organisation will expand resources of a perceived constraint, without deciding how to exploit the constraint or how to cause the rest of the organisation to subordinate to the decision. This is almost always a mistake. It is a mistake because a good decision how to exploit together with proper subordination yields so much capability (capacity) that the expansion is often shown to have been unnecessary. The first 3 focusing steps minimise investment and by delaying it to the proper time when investment is truly necessary.

Also many times the first 3 steps alone will cause the constraint to move (see step 5). A too early expansion of something would therefore be a waste of money. While the 5 steps are not a Lean process they do prevent financial waste whenever they are properly applied.

So, if the constraint has been properly and fully exploited and subordinated to; and it is still the constraint, then it is time to expand it … but only after full exploitation! Usually this will cause the constraint to move to a new place (unless strategically, the company decides to expand in such a way as to maintain the location of the constraint).

Elevate or expansion does not only mean investment in added resources. It means any expenditures made to increase capacity such as overtime, hiring temporary staff, outsourcing and anything else you may think of.

On Clear days you can see Corporate HQ - 4

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 fourth post is a short discussion of the third (probably the most difficult to implement) of the 5 steps.

The 5 Focusing Steps

Step 3; Subordinate Everything Else to the Decision how to Exploit

This is the difficult step. Imagine that sales are asked to sell lower margin products (in preference to higher margin ones). The fact is that our lower margin products consume our constraint (equipment) resource more effectively; that we get many more low margin products per unit of time from our constraint is a good reason to favour these. Sales, if they are measured by price or margins may well resist such subordination.
Similarly production generally loves big batches or efficiency at every resource. At first glance the right way to go, but big batches extend lead-times of those products waiting their turn. Long lead times (due to big batches, compromise quality - quality control sees problems much later. This quality issue tends to cost in other ways too - materials cost increases and capacity is reduced. The focus on efficiency everywhere wastes scarce improvement resources that should focus efforts on the limiting factor – our constraint.
These examples show how difficult it is to get the correct behaviour. Departments and their managers are measured and rewarded by the results of just their department and not by the effect these managers have on the business as a whole. True, some corporations have a bonus system that rewards middle managers by the overall results. This is a first step, but an ineffective one.
Bosses are used to measuring their employees by the results they achieve locally mainly because they do not have the tools to measure impacts their people have on the business as a whole.
Every business has a lot of work to do to give their managers and employees the information necessary to properly subordinate to the constraint. The data is there in ERP systems; it just needs to be transformed into information!
Part of my garden!