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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. 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.