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.