Where to Focus your Scarce Resources - 3

It needs to be said again! All of these possibilities are just that. Before you decide to focus on any one of them you must first determine what your limiting factor or constraint is and what you want to get from your limiting factor - decide how you want to exploit it. What you read here are possibilities (in the absence of a real organisation) - so analyse and choose well. Addressing many of these possibilities id NOT the way to go. Try that and it will be a long time before you get bottom line results - unless you are very lucky! When we discuss engineering and project management a key action (if projects/engineering are your constraint) will be to stop multi-tasking.

What follows are the rest of the sales/marketing improvement opportunities I have decided to discuss.

Is Sales and Marketing or the Market your Limiting Factor? - 2

• So far we have discussed ways to increase sales through new business gains. You have however; existing customers that should, because of your excellent products and performance, continue to buy from you. The rest of your business can impact this existing repeat business considerably. Poor due date performance, long lead-times and other factors will eventually cause customers to look elsewhere. Poor operations performance wastes the sales organisation’s time as the must console disappointed customers. The more severe an operations problem is, the more sales time is wasted and the more customers are lost.
  
  How good is your operation’s performance? How often must sales get involved to fight to maintain good relations with customers in order to not lose future sales? What % of a sales person’s annual hours is spent protecting existing business due to some inadequacy or mistake made in operations?
  
  
  
  
  
  
  
  If it is relatively easy to maintain market share despite relatively poor perceived performance by operations; then we can conclude that your competitors have equally poor operations. This indicates you have the potential for a competitive advantage vs. your competition – something that can help the sales organisation massively. If your industries poor performance damages clients – by forcing them to hold high inventories, by making their lead-times long and unreliable etc., then the potential from an operations competitive advantage is even greater.
  
  Does your sales organisation understand the consequences of your industry’s poor performance? Can the value the damage caused to clients? Can your organisation (sales and operations together) take advantage of this opportunity?
   
  
  
  
  
  
   
• A decisive competitive advantage would help increase sales dramatically. Most managers would likely claim that such a decisive competitive edge is not easy to imagine, let alone realise. However if any of the situations described below were realised, would they lead to such an advantage?
  
  
  • The organisation is able to develop and launch significantly more new products than currently – at a rate faster and with shorter lead-times than any relevant competitor can.
  • Delivery performance is nearly perfect – products and projects are almost always (nearly 100% of the time) delivered on time or early (if that makes sense).
  • Lead-times are considerably shorter (by 25 – 50%) vs. all valid competitors. This advantage includes the due date reliability mentioned under point b.
  • In make to stock environments availability of all stocked products is nearly perfectly reliable – when a client wants to buy the desired product is immediately available.
  • The company can produce significantly more (20 – 50%) without adding resources.
  • The company can deliver the above performance with much less inventory in the supply chain (raw materials, work in process, finished product).
  
  When you consider the above 6 items that, if achieved, probably will lead to a decisive competitive advantage (at least a competitive advantage) then you must ask yourself how can this be done? If it can be done, why has it not been done? Organisations have achieved the kind of improvements described, so there is evidence that at least some companies have made the improvements outlined and have gained the hoped for competitive advantage. Whatever your experience, it is possible. 2 of the key changes a company must make are: a) prevent the organisation from optimising every department or function. In other words the company must opt for global optimisation vs. optimising everywhere; and b) the amount of work in process must be limited so that everything flows – projects, production, the sales funnel etc.
  
  Can your managers envisage that some or all of the above would give your company a decisive competitive advantage. If you cannot, would you like to speak with someone that can show you the way to such a solution?
  
  
  
  
  
  
  
  
  Should you pursue these opportunities be careful that you do not try to implement all the ideas at once. I you do work in process will be too high and ‘nothing’ will get done. Results will take so long to achieve you and your employees will lose interest – its just another one of those improvement initiatives that does not work. So, select the order in which you want to implement and then implement and complete the highest priority initiative first before starting the next one. Make sure your people are not impeding flow by multi-tasking. Make sure work in process is at a level that supports a fast flow of work towards completion. Get results quickly!
  
   My Dog!

Where to Focus your Scarce Resources - 2

Important: What follows are a number of possibilities to work on. Several of them may be attractive directions to take. However do not try to do several at the same time - it will take much longer to get results since your scarce resources would be forced to multitask and thus lose effectiveness.

Is Sales and Marketing or the Market your Limiting Factor? (1)

Could sales and marketing (or the market is not buying enough to fill your operation’s capacity) be blocking more profit and higher profitability? If management and especially operations are pressuring the sales and marketing organisation for more sales and work then it is likely that a lack of demand is hurting profits and profitability. The sales and marketing organisation is your constraint or limiting factor.

Assume your products are about equal to those of all of your competitors. If this is the case (in many markets this is the case) you need to decide how best to exploit your sales forces capacity. Things to think about include:

• A sales person’s responsibility is to sell as much of the available time as possible. Ideally he is in front of his client 100% of the time. Recent studies show that the actual number is around 30% of a sales person’s time is at the customer. How can you change the organisation and sales process so that 30% becomes 40%, then 50% then even more? An increase from 30 to 40% is a 33% increase and implies a 33% increase in opportunities and sales (assuming your sales people do not stay unnecessarily long at clients – simply boring them).
  
  What is just a 10% increase in sales worth? Based on the table below such a suggested effort is very worthwhile.

 

 

 

 

 

 

 

             How much of their time do your sales people actually spend selling at their clients?

 

 

 

 

• Your sales people are well trained in the art of selling – that beginning a sales appointment by talking about the product is not the way they start. Your sales people start sales appointments by seeking to understand the client’s problems and their consequences (the damage or cost of the problems). Your sales people understand the features and benefits (in relation to their clients) very well and are in a position to help the client (whatever his function) to think about his issues in new ways. The relationship your sales people have with their clients is one of causing the client to reframe how he thinks about his business; is one in which the salesman speaks in relation to the clients business. Your sales person brings value to the client – through his knowledge, expertise and business insights he has.
  
  How do your clients perceive your sales people? Are they seen as simple order takers and information conduits or real partners with the customers’ managers?

 

 

 

 

• Not only do you want many client appointments; you want to focus on those potential clients with the greatest opportunity – in terms of sales and the chance of making the sale. Sales and marketing need to focus efforts on opportunities with which the chances for success are the greatest. A current hit rate of 10% means a sales person must work on 10 opportunities to make one sale. Through proper focus our “hit-rate” should increase significantly – with a constant number of customer appointments and a 50% increase in your hit rate sales will increase accordingly.
  
  How good is your hit rate today? If we don’t already measure it, how should we measure hit-rate?

 

 

 

• Your sales funnel is the sales process that transforms potential clients into new (and hopefully lasting) business. There can be quite a number of steps in the funnel before a client actually buys. Along the way your sales organisation will potential clients that have decided, for one reason or another, that your competition is the better option. Where you lose the majority of potential clients should be your focal point in this process – why do we lose potential business at this point (and consequently waste our expensive and scarce sales resources time)?
   
  The process of the sales funnel usually involves more than just the sales organisation. Potential clients evaluate your performance in terms of responsiveness, reliability, speed, quality and, of course, price. If the rest of your organisation is slow to respond (qualification orders are often small and costly) then your hit rate and business growth will suffer. All of your company and not just sales are equally responsible for ensuring growth.
  
  Do you know where in your sales funnel new business is lost? Do you no why this business is lost? What are you doing about it? How well are you managing your sales funnel?

 

 

 

 

More to come!!!!

Where to Focus your Scarce Resources - 1

In the “Your Businesses Potential” article you were asked to evaluate your business against 5 criteria (Global vs. Local Optimisation; Aligned Key Performance indicators; Your Limiting Factor(s) (Constraints); Reliability and Effectiveness. Local optimisation (every department and function optimises its area of responsibility) is wasteful of scarce resources because most of the optimisation efforts bring nothing to the bottom line – since your limiting factor determines what your bottom line can be. Focus your scarce resources on your limiting factor to always realise the greatest positive bottom line impact!

So, where is your limiting factor or business constraint located? What part of your business is blocking your ability to increase profits and profitability?

Your Goal and Necessary Conditions

To determine where to focus scarce resources necessitates an understanding of your goal and necessary conditions. For our purposes we will assume your goal is something like: “We want to make money now and more in the future”. The necessary conditions we assume are: 1. We want to satisfy clients now and in the future; and 2. We want provide our employees with a satisfying and secure employment. Whether or not you agree with the goal and the necessary conditions matters not. Key is the goal.

Your limiting factor is that part of your business system that is blocking you from making more money (and that you believe will continue to block you in the future). Now is a good time to think about what might be blocking your bottom line performance. From the following list pick that part of your business you believe is blocking performance. Since your business is a system of interdependent entities (the functions and departments) only one of them can be the blocker!

• Sales & Marketing; the Market
• Production•Distribution
• Engineering, Research and Development, New Product Development
• Sourcing/Purchasing; Suppliers
• Human Resources; Employees
• Finance
• Legal
• Management; Senior Management
• Policies, Performance Indicators, Behaviours, Company Culture

What does your intuition tell you? Try to verbalise why you believe your pick is the blocker or limiting factor. Explain to yourself through cause and effect analysis why your choice must be correct. This blocker is the place for your scarce resources to focus and improve performance – is it not?

Your intuition might be faulty. Would that be dangerous for your business? It would not, since your efforts to improve the non-limiting factor would overload the real constraint even more than it already is. If this does happen, then switch your focus to your real constraining factor.

Might this kind of focus result in much greater bottom line improvement vs. spreading improvement resources across all departments?

What follows may help you to qualify your intuition will deciding on the location of your limiting factor.

Your Businesses Potential

Check yourself against these 5 criteria. If you are not well in the green on them you probably have significant potential for bottom line improvement.

Global vs. Local Optimisation

Experience has shown us that most businesses behave in a way that indicates they believe that optimizing all the components of a business will optimise the whole. In most businesses departments and functions are given goals to optimise their performance which, if managers want to progress, will pursued to the maximum of these manager’s ability. Unfortunately we know that this practice leads to conflicts between and among departments and functions. These conflicts are not open war; they simply result in most if not all functions and departments not meeting their targets and the business as a whole is certainly not optimised.So, where does your business stand on the scale between local optimisation (all departments seek to optimise their performance) and global optimisation (all departments seek to optimise the businesses performance? Rate yourself on a scale of 1 (local optimisation) to 10 (global optimisation).

Aligned Key Performance Indicators

Frequently we see Key Performance Indicators (KPIs) that give the organisation mixed signals. For instance: Production should on the one hand achieve the lowest cost position and on the other hand they should support sales by excellent due date performance and short lead-times. Since these are often incompatible production will favour whichever KPI is the bosses favourite. A similar situation for production is the need for lowest cost and the lowest possible inventory levels. Sales of course wants perfect due date performance and short lead times which conflicts with production’s need for lowest cost.Are your Key Performance Indicators aligned across all departments and functions? Or do your KPIs cause conflicting situations between and among departments and functions. Where do you stand on the scale? Please rate yourself.

Your Limiting Factor(s) (Constraints)

Experience has shown us that most businesses have not recognised their limiting factor or constraint. When we speak with a business we often hear about many constraints and constraints that move about from one resource to another.Systems thinking and the Theory of Constraints tell us that any system of interdependent entities (like a business) can only really have one constraint. In any case only a very few constraints are possible (just like a chain can have only 1 weakest link).Since most businesses have not identified their weakest link (the limiting factor or constraint) it is unlikely they will have decided how to get the most (for the bottom line) from this constraint. These businesses will almost certainly have not aligned the rest of their company to the way they want to exploit (get the most from) their weakest link. Such businesses are missing opportunities for profit! Your business may be different. Please rate your business on the scale according to how well the entire organisation is aligned to get the most from your limiting factor or constraint (which might be operations, sales, R&D…). Properly deciding how to you want to get the most from your limiting factor and aligning your organisation to that decision can be very beneficial to your bottom line.

Reliability

Many businesses are not as reliable as they could be – delivery performance (products or projects) is not near perfect or product availability in warehouses or shops leaves customers dissatisfied. Our experience indicates that businesses within an industry generally perform at more or less the same level of reliability. If the industry as a whole is relatively poor every company has a significant opportunity to gain market share.Please rate yourself on the scale. It runs from 50% due date reliability (On Time In Full) to 100%. The further away from 100% you are, the greater your potential.

Effectiveness

Effectiveness is defined as doing what is supposed to be done and NOT doing what should not be done. Work In Process (WIP) and inventory levels are an indication for Effectiveness. Too much WIP (and thus long lead-times) indicates that work-orders are released into production too soon or projects are released to the organisation too soon. The result is a chaotic environment with unclear priorities and long lead-times. Inventories in the supply chain are indications of the same problem and the practice of producing in large batches (usually due to pressures to reduce cost). Big production batches are likely to block capacity for items that are needed now while a significant part of these batches will not be required for many weeks and months.Please rate yourself on this last scale. This rating is a bit more difficult because some inventory to buffer for uncertainty and unreliability is essential. Zero-inventory is not a good idea – it will lead to poor customer service. Moving inventory to suppliers or customers is simply a question of ownership – it does not change the effectiveness question.

Summary

If you have rated yourself in the deep green for all of these, then you are very likely to be in a powerful position in your chosen markets. Your performance towards clients is excellent, your cost structure is in great shape and because of your reliability you are unlikely to be under much cost pressure. Your profitability will be more than acceptable.If you have rated yourself in the deep green and the results I expect (the above paragraph) are not evident there is a good chance you are fooling yourself with your rating. I would look at each scale again and think deeply about the reality within your company.If you have rated yourself somewhere in the yellow or even red, then your business has considerable scope for bottom line improvement – even if your business is doing well today.
If you would like to evaluate the size of your potential we have a one page Excel spread sheet with which you can evaluate the bottom line implications for your business. If you would like a copy send an email to csstw@bluewin.ch with your name, email and phone number and business address.

Preventive Maintenance

Look in the Internet and you will find plenty of material on the subject of preventive maintenance including cost justification. Interestingly I have not found any mention of preventive maintenance’s impact on sales revenue, Throughput, and the consequences for profit and profitability. I did not do an exhaustive search. The first page of Google results all focused on the probable positive effects on cost. Clearly focus is on the local maintenance cost benefits.

Cost Benefits

The documents I have perused have focused on the following items comparing preventive maintenance with ‘waiting until something breaks’.

1. Actual cost of preventive maintenance
2. Effects of preventive maintenance on expected useful life
3. Cost of repair/corrective maintenance
4. Frequency of required repairs when equipment is not maintained
5. Cost of replacing equipment
6. Effect of preventive maintenance on energy consumption
7. Expected useful life of equipment

The various analyses have shown that in most cases benefits are considerable although there is a few that one would find questionable. In other words in most cases the benefits are so dramatic that there is no question of the value of preventive maintenance. In the remaining cases costs with or without preventive maintenance are near enough equal – a decision either way would not be wrong. 

Throughput Benefits

I have not seen evaluations of preventive maintenance’s impact on sales, Throughput and the consequences for profits and profitability. Reliability of supply is a key issue of most companies. Unreliability of supply forces companies to hold stock as an insurance against supply interruptions. If this protection is insufficient (there is always pressure to reduce stock), then these companies may suffer further damage:

1. More price pressure due to poor reliability.
2. Lost business due to the inability to supply. This could be lost sales during the downtime of equipment or, if the problem persists or happens too often, then customers may be lost.T
3. o regain or replace lost customers results, generally, in lower prices in order to buy business back.
4. To regain or replace lost customers costs considerable effort from the sales organisation – effort that would be better focused on gaining new customers (from those competitors that suffer from poor reliability).

What might be the financial impact on your business?

Impact Model of NOT Practicing Preventive Maintenance.

Assumptions:

1. Materials cost is 40% of sales.
2. Base profit margin is 10%

Evaluation:

1. 1-5% Negative Price Impact
2. -10% Negative Sales Volume Effect
3. The 2 effects may happen concurrently but are evaluated separately.

The impact of price pressure (that we cannot resist against) on profits is enormous – in our model 1o times the relative impact on price. Clearly giving in on price can be very costly for our business. However, if we do not give in on price at least some customers my move to competitors – especially if these have a better reputation than we do. Our sales people have a tremendous conflict – resist price reductions vs. risk losing a customer’s business. Lost business also has an impact on the bottom line (see below). The pressure to resist on price is severely compromised by the threat of losing a client!

Maybe the best strategy is to ensure near 100% reliability! 

Management needs to decide whether it wants to save the expense of preventive maintenance or not. Management should, however, look at the impact of their decision based on the impact on cost and sales revenue and the consequences of the impacts. The decision whether or not to implement preventive maintenance is not just a local decision of the production or maintenance manager – it is a business decision that should be evaluated for its global impact.

 

Hold Down Two Jobs with Ease!

I am not really suggesting you actually do this, but evidence shows that in today’s business environment it is entirely possible to hold down 2 (maybe more) jobs at the same time. This may not be true in all situations, but I claim it is (very) often possible. A better way might be to use your capability to get more done and get ahead in your current job.

Low management expectations and bad practice make it possible. Management expectations are based on their reality; based on what they experience and not on what could be. Organizations’ have simply never delivered to their potential.

Managers are at Fault

Every manager’s personal objective is to demonstrate his high workload, many important tasks and projects he plans to deliver for the company. Managers want to show their value to the company. Such managers overload their organisation with jobs or projects that ‘must’ be worked on and should be achieved. Both managers and their employees are so loaded with work they hardly ever have a spare minute. Not only are they 100% occupied, but at the same time the multi-tasking that goes on is the premium capacity killer for both individuals and organisations. We all know it and yet we continue to insist on (over) full loads - a long list of tasks and projects (all with priority 1!).

Employees are at Fault too

Most employees feel pressure to be constantly busy. If they are not they worry about longevity in their job or the diminishing likelihood of promotion. No work and our job may be cut and cost reduced or we are not visible to those that may help us get a promotion. Not wrong if many, as most people believe, “a resource standing idle is a major waste”. Employees therefore go out of their way to find more work to make sure they are always busy (many stay late in the hope management sees). They effectively aggravate managers’ behaviour. Multitasking in organisations increases even more.

The Damage of Multitasking

Our brains are wired to focus on one thing at a time. Hopping around among or between projects (or tasks) cost every project buckets of time. Every idle project must wait for the person to return to it. Everything takes much longer. Benefits are delayed. A person loses time whenever they return to a task or project. They must recall all that was done before – at the very least read their job notes; that hopefully are complete. (Just think about reading a book. You put your book down to sleep or do something else. When you come back to the book, how quickly are you back in the flow of the story?) Hopping between tasks not only costs time; it also has a detrimental effect on quality and as a consequence more time, repairing poor quality, is lost that should have been available for something else.

How can you hold down 2 Jobs?

Follow some simple rules:

1. Avoid multi-tasking like the plague – avoid it as much as you can. With more than one task or project, make sure you always complete a job before starting a new one.
2. Minimise the number of things you are working on to 3 or so. Prioritize your jobs clearly.
3. Deliver your tasks quickly … by staying focused on just a few tasks and completing them one after another.
4. Make sure your boss knows you have completed a task or project. Don’t let him give you more than the small number you can handle effectively.
5. If you follow these simple rules your boss will see a greater flow of projects coming from you than from anyone else.
6. You need much less (multi-tasking) effort to create this flow and will therefore have the capacity for your second job!
7. Your colleagues will wonder how the hell you do this.
8. If you manage a group … the same rules apply.

Strategic Inventory Placement(Pharmaceutical, Agrichemicals…)

In many B-to-B industries suppliers produce the same basic product for several to many customers. The product may be the same, but often the packaging and (or) the labelling will be different. Labelling and packaging is often different from customer to customer, but also within a single customer packaging and labelling might well be different from country to country. Agrichemicals and generic pharmaceuticals are examples.
This variation in packaging causes inventory and availability problems that endanger suppliers’ business since clients can get the same or very similar product from another supplier. Switching does not solve the problem for a client it simply transfers it to another company. Performance is unlikely to improve in any sustainable way.
Suppliers need a solution that makes it possible to guarantee availability, with, at the same time, reducing the amount of stock in the supply chain. A robust effective solution would most probably also take some of the pressure off price.

Are Suppliers & Customers Partners, Competitors or Enemies?

Businesses in a supply chain are really only paid when the final customer, the consumer, has paid for the product – everything else is an advance payment. Every company along the supply chain is competing for that consumer’s dollar. In the B-to-B part of the supply chain a supplier and his customer negotiate price that will, to a large extent, determine profits and return on investment of the B-to-B pair. It is clearly a conflict situation since both the purchasing agent and the salesman concerned are charged with maximizing profit for their company … at least usually. Companies within a supply chain are certainly competitors.
Supply chain collaboration is a buzzword that sounds and real collaboration could be great. Whatever level of cooperation or collaboration is actually achieved, the fact remains that two parties within a chain compete. A level of mistrust is likely to remain.
In many supply chains customers throw orders to their suppliers over a wall– many times as a surprise (in terms of volume or timing). Orders can arrive at really inconvenient times. The supplier may suggest a way to solve the problem – for instance by sharing demand information. A supplier might offer a significant discount for much earlier commitments from clients. Can these proposals work?
Sharing demand information is often problematic because it seems to give away proprietary information that may get into competitors’ hands. On top of that, even if demand forecasts are shared, we all know that these tend to be quite inaccurate. Actual orders are often significantly different. Demand forecasts are inadequate and usually not so useful for suppliers.
A firm order placed well in advance sounds very attractive for a supplier (and for the client if he gets a nice discount). However reality will almost certainly catch up with the client. Close to delivery time he needs a different mix of products. He will request last minute changes to his orders. The supplier loses the discount and gains no stability benefit for his production unit.
Our problem is to find the robust, simple solution to get the best information about near term demand to the supplier’s production unit and to his suppliers. The criteria for such a solution must be something like:

1. Visible, transparent information about current demand for all stocked items (those not made to order).
2. Visibility must be such that all nodes in the supply chain have absolute clarity about the priorities to ensure correct replenishment of stocks in the supply chain.
3. The system must have a simple and dynamic way to adjust target stock levels to current demand as it changes over time.
4. A supply chain must carry stock at the most appropriate strategic locations with the following two targets: a. Minimize stock levels within the supply chain. b. Guarantee near 100% product availability.
5. A monitoring system to provide early warning of an arising capacity problem.
6. The key performance indicators that show the supplier and his customers what their respective performance levels are.

Make for Availability is a process and system that meets the above criteria. If a part of the business is Make to Order, then the two processes can be easily integrated into one mixed mode solution.
In addition to the basic criteria above, the process needs to be able to cope with:

1. Seasonality (Agrichemicals have very seasonal demand).
2. Promotions – especially in retail situations.
3. Sudden peaks in demand – for instance when the supplier gains a new large customer.
4. Sudden loss of a significant account.
5. The need to forecast longer-term demand remains – in order to support decisions about capacity changes.

In today’s business environment the technical challenges to support such a process can easily be overcome.

Selling the Concept

That companies compete for the profit of a supply chain makes the sale (of such a concept) a difficult one. In addition most purchasing personnel and their counterparts from the supplier’s sales organisation do not normally negotiate about inventory, information and availability. They are used to discuss price, product quality, product features and benefits. These people will need to master the core of Make for Availability and the corresponding business offer being made.
Before purchasers and salesmen can even talk about the solution the process must be absolutely clear for a sales or purchasing person to make a coherent offer. The solution may well be a paradigm shift for clients (or suppliers). The process may well indicate that a better location for stocks exists and should be used. There are considerable implications in the way the process must function; who will do what; where will inventories be stored etc. Not too difficult a process to understand, but a purchasing organisation must be in a position to sell the benefits in such a way that will almost certainly gain the clients’ cooperation.

Where should Inventory be located?
Do we need so much?

Roni's Thinking Games

TOC (Theory of Constraints for Education) has developed this short (less than 90 secs) video to help teach kids cause and effect thinking. This is what they have said:

"Hi Everyone, this clip is the first chapter out of 14, where we aim to improve our children's cause effect thinking. The approach is based on the Thinking Tools of TOC by Dr. Goldratt. HOPE YOUR KIDS ENJOY IT!!!

http://www.youtube.com/watch?v=w8ZVNuDp5H0

Learning cause and effect thinking may be helpful for all of us, from business to politics!

http://www.youtube.com/watch?v=w8ZVNuDp5H0

Should I Invest In “CCPM”?

CPPM is an example to explain how you can, should you wish to do so, look at any decision to change (or not). CCPM (Critical Chain Project Management) is a project management methodology that claims to bring very significant benefits to those that choose to use it. The benefits claimed are so high that they must look like marketing hype to those just discovering it. The paragraphs below look at the decision for or against CCPM from 4 perspectives:
1. The potential positives of an investment in CCPM (“The Pot of Gold”).
2. The potential negatives of the investment (“The Crutches”).
3. The positives of NOT investing (“The Mermaid” you want to keep”).
4. The negatives of NOT investing (“The Crocodile” that is already snapping at your heels).
To learn more about the 4 aspects of a decision and resistance to change please click here.

The Pot of Gold

Critical Chain Project Management promises some significant benefits to you, your business and the community.

1. Projects, especially in multi-project environments, take much less time (25 -50% shorter) to complete.
2. Projects can meet their due dates much more often (>90% on time). Those that are late are much less late than current experience.
3. The project organisation can complete many more projects (without adding resources) than is currently possible (25 to 50% and sometimes even more).
4. People’s motivation and harmony in the workplace increases dramatically. This is the benefit that Japanese organisations apparently value the most - they certainly value this a lot.
5. Your business can (should management wish) take advantage of speed, reliability and capacity to transform these benefits into a winning strategy and greater sales. Throughput can grow much faster than operating expenses.
6. …

The “Pot of Gold” does not explain how and why CCPM works. To learn more please attend a CCPM workshop (More Projects in Less Time OR The 2-Day Critical Chain Workshop)

The Crutches

To adopt the CCPM methodology requires paradigm shifts. Each of these paradigm shifts is based on common sense, but they are diametrically opposed to common practice. This will of course cause people in project environments (team-members and management) to worry about the consequences and dangers of the change.
While the methodology deals with the potential negatives and practitioners have learned the ways to deal with others, you must evaluate the risk for yourself. A significant thing to think about is that the work to be done remains the same. CCPM does not change the work, only the way it is organised, sequenced and synchronised. Situations and risks that may worry you include

1. Projects are supposed to take less time, workload does not change and I know from experience there is never enough time. Our (my) performance levels will be at risk.
2. Tasks are cut by 50% - what will that do to my performance?
3. If we can do more with the same resources, then management might decide to do the same with fewer resources. My job is at risk!
4. To invest in Critical Chain will mean a lot time and money to make the change. We need to invest in software, consultants and a lot of time to learn.
5. Project team members may not behave, as they should.
6. …

If you want to learn more about Critical Chain and the risks involved please follow this link or attend one of our workshops.

Your Mermaid

The current environment is fine. We (I) know what we are doing and are comfortable in our current process. Our clients and we are comfortable with the current process (they and we do not know anything else). Expectations are being met. If this is so and the results you achieve are good enough, then you have less reason to change. You need to evaluate whether or not the Pot of Gold is as big as promised, whether the risks of change (Crutches) are too big and the risks of not changing (the Crocodile) are small enough and whether your current environment (your Mermaid) is nice enough. You know your Mermaid the best! You know how well your current situation meets the requirements of your business. If there is no need, then do not invest!

But maybe you should watch what your competitors (crocodiles) are doing.

The Crocodile

The way your projects are managed today might already cause you and your business to suffer from crocodiles:

1. Customers threaten to go to competitors because your lead-times are too long or too unreliable.
2. Investment projects may be unattractive because project costs are too high and lead-times too long. Potentially attractive projects are not pursued.
3. New product developments take too long and consume too much of your capacity. Competitors are gaining on you.
4. If the Critical Chain promises are valid, then you will have a new crocodile from those competitors that have adopted it.
5. Margins are under huge pressure from clients.
6. …

You need to understand your crocodiles currently threatening you and your business. As crocodiles grow and become more aggressive something will have to be done.

What is the Right Solution for YOU?

CCPM might be the solution, although Agile, Scrum, Reliable Scrum, Kanban and Spider project management are all methods you probably should evaluate. They all are ways to address the problems of current common practice and the problems most businesses have with late, over budget and missing content in their projects. To learn more see Speed4Projects.
Join us in workshops to look at ways to combine ideas from all of these so that you can guarantee reliability and speed. Click on the Workshop to follow the link.

1. More Projects in Less Time; Simplified Resource Management;
2. The basics of Critical Chain;
3. 2-Day Critical Chain Workshop (A); The Path to Success for Project Organisations (B)
4. Practical Project Control
5. Evaluate your Risks and Benefits with Critical Chain
6. Critical Chain as a Business Strategy
7. Software to Support Critical Chain
8. Comparison of Project Management Methodologies

The workshops are in German. If you prefer these workshops can be presented as private events in both German and English.

Echoes of Theory of Constraints (TOC)

Rajeev Athavale has published a collection of articles (including some of mine) in an eBook. There are 40 articles in volume 1 and looking at the authors they are a group of TOC experts with many years of experience. Should be a worthwhile book to get.

The proceeds go to the Goldratt Foundation to support its activities in extending TOC knowledge.

I want to thank Rajeev (and his helpers!)for the huge amount of effort he put in to create this first volume. I hope he will have the energy to keep up the good work and that TOC practitioners around the World support his efforts.

Echoes of TOC

Nassim Nicholas Taleb on Accepting Uncertainty, Embracing Volatility - Knowledge@Wharton

Nassim Nicholas Taleb on Accepting Uncertainty, Embracing Volatility - Knowledge@Wharton

No New Hires; No Replacements

From time to time corporate management will put such a restriction on a division that is performing poorly. This policy is actually not that unusual in industry. But, does it make sense? Could it be this policy that makes it impossible for the business to survive? The feeling in the targeted business might be that the policy is just the first step before it will be shutdown. If this is the feeling, won’t it cause employees to jump ship in search of greener pastures? Is there a better way?

 

The Goal

A company’s goal is to make money. A corporation that supports a business with insufficient profitability will feel that such a business is draining a lot of energy from management to try and deal with the problem. If the lack of profitability persists there will eventually come an ultimatum – something like, “Please don’t ask for more resources until you have shown proven positive bottom line results.” Fair enough? I think it is fair, although I also believe there is a better way to motivate the business and properly support it when it does hit the resource wall. (When it hits that wall the business cannot produce any more sales and the only remaining hope will be to reduce cost wherever excess exists – a very demoralizing tactic.) The Goal will seem to recede into the distance, impossible to meet it. At this point employees are quite likely to jump ship – especially those with that alternative.

The Approach for Success

The business in trouble needs a way to focus so that it gets the absolute maximum Throughput possible. (Throughput is meant as the money they generate through sales). To do this they have no choice but to find and then exploit their limiting factor to its absolute maximum. This means the limiting factor should work 24/7 and it should produce only the most lucrative products. The rest of the organisation makes sure that not a single minute of the limiting factor (the constraint) is wasted by a work stoppage or through the production of a low value product. What the paragraph above describes the first three steps of the 5 focusing steps for continual improvement.

1. Find the constraint (the limiting factor). The limiting factor is key … if its limiting results, then we must use it well.
   
   Many times a company will believe there are many constraints throughout their production process. This is in reality not possible. The impression of many constraints or constraints that move from one place to another are the result of the way the production process is managed. The policies that control how production is managed are very often the source of ‘many constraints’.
   
   To find the real constraint, operate with smaller batches and look for the operation before which work piles up and must wait. The real constraint is usually immediately after the pile of waiting work. 
2. Now that we know where and what our constraint or limiting factor is, we need to decide how to get the most from the limiting factor. Only if we can get this maximum can we expect our business to maximize its results.
   
   What this means is not only to maximize the output of the limiting factor, but the constraint must also be used effectively – it should produce those items that produce the greatest Throughput (sales less materials cost) with the least amount of constraint effort. That maximizes the result.
   
   There may be products that do not require the constraint resource – they give the highest amount of Throughput of all since they require zero from the limiting factor (as long as Throughput is positive. Decide to maximize sales of these products. 
3. We have decided how we want to exploit (get the maximum from) the limiting factor. How should the rest of the organisation behave?
   
   All of the rest of the organisation, including senior management, should subordinate to the limiting factor – even if this means their efficiency will suffer. If any other resource seeks to optimize his or her efficiency and in doing so hurts the limiting factor then the business as a whole suffers – the bottom line and all employees!
   
   Subordinate starts with management. Management sets targets and Key Performance Indicators for the business and functions within the business. This usually a good thing, but must be done with the decision how to exploit the constraint in mind. Resources (being good people) will seek to reach their targets. If targets and KPIs are set incorrectly they will inadvertently harm business Throughput.
   
   In the discussion of the exploit decision we recommended the production and sale of items that do not require the constraint. This tactic must be monitored carefully since too much of it can cause the constraint to be starved of work … a feeding resource is working on a product that does not pass through the limiting factor. 

These first 3 focusing steps are an excellent framework but they must not be used blindly. The business must continue to think and reflect about the consequences of its actions … focused especially the consequences for the limiting factor.

The advantage of these three steps is the focus on the limiting factor. The 3 steps give a logical framework to the corporate policy “No new hires, no replacements”. They help the business successfully achieve the desired outcome of more profit from existing resources. In fact followed correctly they will by themselves prevent new hires or replacements or investment in equipment until no more Throughput can be wrung from the limiting factor. (These 3 focusing steps should be used in every business in order to prevent unnecessary investment in additional resources until these are truly necessary. The focusing steps should be in continual use.

Many times the decision to exploit and the actions taken to subordinate cause the constraint to move – the business has a new limiting factor. The business must identify the new constraint; decide how to exploit it and how the rest of the organisation should subordinate to it. Care must be taken to do this correctly … the initially identified constraint may not have so much spare capacity.

 

The Value of One Hour

Previously we recommended focus on the limiting factor in order to maximize Throughput. How much is an hour at the limiting factor worth?

Assuming a month has 30 days of 24 hours (our operation runs around the clock) then there is an absolute maximum of 720 hours. Clearly some of these hours are not productive as resources (machines) must be maintained or if they are people there are very few than work 100% of the time during an 8-hour shift. For the purposes of this experiment lets assume 100 hours are currently not productive for one reason or another … so net we are using our resource for 620 hours every 30-day month.

The resource of interest is our limiting factor … it currently is the limiting factor in our production that results in 10 million€ turnover. If materials are 38% of sales, then Throughput is 6.2 million€ and 1 hour of constraint time produces 10000€ Throughput. Every additional hour we are able to utilize our limiting factor produces 10000€ to the bottom line … additional profit! If the business is able to utilize the limiting factor for an additional 50 hours, that means an extra .5 million€ to the bottom line. That is an extra 5% of return on sales.

Utilizing a non-constraint an extra hour has a negative effect on the business unless the constraint can use the extra material. Otherwise utilizing a non-constraint for more than capability of the constraint simply increases work in process and increases lead times (Little’s Law).

It does make sense to utilize a non-constraint for extra hours; if the time is used to produce products that do not have to go through the limiting factor. Such hours are also very valuable since every € of Throughput goes straight to the bottom line.

 

The Limiting Factor can do no More; What Then?

The fourth focusing step is, “Elevate the Constraint” – expand the constraint’s capacity in some way … through overtime, outsourcing, adding resources etc. The step is the correct action if the limiting factor (constraint) truly has been exploited to the maximum and no more subordination steps are possible. Management’s job is to understand where the organisation stands – they should allow an expansion only at the correct time.

The value of elevating the constraint or limiting factor is enormous (as long as the market will actually buy the additional products).

If the constraining resource is 10 people responsible for 10 million€ sales then adding just 1 person should allow the business to grow from 10 to 11 million€ sales. This 1 extra person would generate 1 million€ in sales, and 600’000€ in additional Throughput and profit (of course I assume the rest of the operation can handle the extra 10% load).

An extra employee in any other area adds only cost. The added person cannot add to the bottom line because the limiting factor is running at its capacity. Such an added person adds no value.

The rule, no new hires and no replacements gets seriously in the way at this point – especially if even outsourcing, over-time and the like are not possible. The business is blocked from progress until the capacity of the limiting factor can be increased. Management needs to seriously consider this fact as well as the time it might take to train an additional constraint resource.

A corporation may not want to hire additional people into a poorly performing division. But if this division is now blocked by the limiting factor and the type of resource necessary at the constraint can easily be placed elsewhere; then the question is why not expand the capacity of the limiting factor? It would seem to make eminent sense.

There may be pressure to reduce costs in areas other than the limiting factor. This might be OK as long as the capacity of all other resources remains sufficiently larger than that of the constraint – there needs to be sufficient protective capacity. Also, consider that employees in operations generally represent just a small percentage of the total fixed costs … less than 10% and often much less. Cost in modern businesses lies in overheads. If overhead costs are reduced care must be taken to not take away essential support for proper exploitation of the limiting factor.

 

When to Allow Expansion

The Focusing Steps define when expansion should be allowed … whenever the exploit and subordinate steps are successfully and completely implemented. The limiting factor is at its limit and only an expansion of its capacity will lead to more Throughput (sales less materials cost).

However, people have two ways of thinking … fast and slow (see Daniel Kahneman's book "Thinking Fast and Slow"). We use our intuition and experience to come to conclusions quickly and possibly make a serious mistake. There could still be capability left in the organisation if only we would take the time (slow thinking) to go over all possible options to exploit the limiting factor better and/or subordinate to it better!

A recent experience demonstrated to me again; the truth of fast and slow thinking! The organisation believed it had reached the limit of what could be done with and for the constraint. However senior management stood by their no hire and no replacements policy. What happened next was amazing – the organisation found more ways to subordinate even more effectively to the limiting factor and some more capacity was found.

 

Protective Capacity

If a business in trouble follows the actions outlined above it will very soon be operating near the limit of its capacity – assuming the market buys its products. It is common knowledge that as an operation approaches capacity its flexibility and delivery reliability decline while lead-times extend. These three parameters are, however, extremely important in many competitive environments – flexibility, reliability and short lead-times help ensure the business wins orders. As these qualities deteriorate demand will decrease. A certain amount of protective capacity is essential to maintain these important parameters so that sales can continue to increase.

When the corporation considers their strategy and tactics for a particular (poorly performing) business they should include protective capacity in their considerations. Management can ignore protective capacity; the market will not ignore it. The market will soon realize flexibility, reliability and speed are deteriorating and will react accordingly. Demand will drop, price pressure will increase and all the good work to exploit the limiting factor can be undone. Why go to all the effort if a lack of protective capacity will undo the work?

Within the business all non-constraint resources have and must continue to have sufficient protective capacity to make sure the constraint can always be exploited to its maximum. There is a strong likelihood that the business will experience pressure to reduce costs wherever excess resources exist. Excess resources can be reduced, but the sufficient protective capacity must alwazs be available.

 

Summary

The 5 Focusing Steps process is an ideal replacement for the commonly applied rule “No New Hires and No Replacements”. Applied correctly it does the same thing as the rule I wish corporations would change. The difference is in the process when no further improvement from the limiting factor is possible. At that point the corporation should allow expansion at the constraint because of the high leverage found at this point. If the limiting factor cannot be expanded, then the business concerned may as well be shut down. No further significant improvement in the bottom line can be expected.

Management should, before they embark on an exercise to try and improve a business in trouble, decide at what point they will allow expansion (at the limiting factor) and this should be communicated to the organisation concerned. The proper exploitation of the constraint becomes the businesses first target. Management needs to be knowledgeable enough to recognise when the organisation has not yet squeezed the maximum from the limiting factor and when they must allow expansion – in the right place.

Following the 5 steps as described should, in the majority of cases result in 20-50% greater internal capability, that if it can be sold should bring most businesses in trouble to profitability! (20% greater internal capability represents 2million€ added sales and 1.2million€ to the bottom line (Throughput is assumed to be 60% of sales) (IF, and only IF you can sell the extra capability)!

If you are wondering, the 5th step is, "If during any previous step the constraint or limiting factor is broken during any of the previous steps, go back to step 1. BUT, DO NOT let your own inertia (fast thinking!) become the system's constraint!

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