A Process Of On-Going Improvement (POOGI) - Part 30

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints.

Measurements (Not Incentives)

“Tell me how you measure me, and I will tell you how I will behave. If you measure me in an illogical way…do not complain about illogical behavior”.

This quote by Dr. Eli Goldratt, the father of the Theory of Constraints (TOC), speaks directly to the cause and effect power of measurements, and to the general misuse of measurements.

We business managers often struggle to determine what to measure and control, and how to motivate employees. Some of us measure many, many things, while others of us don’t measure much at all.

Think about these questions:
· What problems are we trying to solve by using measurements?
· What and how are we measuring now?
· What problems do we cause by the way we measure now?
· Is there a better way? That is, what should we be measuring and how?

First, let’s set a context for our discussion of measurements by agreeing on the overall objectives of our organization:

1. Make more money now as well as in the future,
2. Provide a secure and satisfying environment for employees now as well as in the future, and
3. Provide satisfaction to the market now as well as in the future.

The challenge is to accomplish all three objectives simultaneously.

One approach to doing so is called “balanced scorecard”. This proposed solution falls into the trap of trying to measure many, many things. It violates the second objective above in that when we measure many things, there will be some things that will look good and others that look bad. Depending upon the management style of the people involved, management can always find something to find fault with employees.

With TOC, we’re interested in ongoing improvement. We aren’t interested in measuring what is going well as much as we are interested in measuring what can be improved.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Next Maximizing Profitability Events:

• January 20, 2009 from 1 pm to 5 pm
• February 3, 2009 from 1 pm to 5 pm

We now have 2 viewing options:

1. On-site in Denver
2. Live streaming video -- watch from you desk

Are you a Vistage/TEC member who would like your team to hear my Maximizing Profitability speech? You and/or you empolyees can attend in Denver at no charge or the LIVE STREAMING VIDEO is only $147 per company. More information at http://theoryofconstraints.eventbrite.com/

First GROUP Boot Camp of the year: February 4, 5, 6, 2009 in Denver. More information at www.MafiaOffers.com. Limited to the first 5 companies!

PRIVATE and On-line Mafia Offer Boot Camps are also available. On-line boot camps are done at YOUR time schedule and PRIVATEs are scheduled at a mutally agreed time.

Interview Tom Foster (Management Skills Blog) – Part 6 of 6

Q6 Dr Lisa: Are there some basic questions our clients can use to assess the “time span of discretion” for an individual?

Tom: In his Time Span Handbook, Elliott Jaques outlines ten questions for a diagnostic interview. While most diagnostics, related to employment, center around psychological or "behavioral" metrics, the Time Span interview measures the Time Span of the individual.

These questions ask the subject to describe the manner and frequency they are given task assignments, the manner and frequency their work is reviewed, and whether they work on multiple assignments at the same time.

While most psychometric assessments require psychological interpretation, the responses to the Time Span diagnostic can be easily understood by any competent manager.

That completes our interview of Tom Foster. If you have questions or comments, please enter them below by clicking on the Comments hot link.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

My reknown and praised Goldratt Theory of Constraints overview, Maximizing Profitability, is now available through live streaming video. Watch from your desk!

Are you a Vistage/TEC member who would like your team to hear my speech? Here it is: NEXT Maximizing Profitability Event (no charge): January 20, 2009 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.scienceofbusiness.com/events/viable-vision-maximizing-profitability-events.aspx. You can register by fax or on-line.

Interview Tom Foster (Management Skills Blog) – Part 5 of 6

Q5 Dr Lisa: Could you explain about the “felt fair pay” curve for the time span of discretion that is universal across cultures, currencies and continents?

Tom: Felt-Fair-Pay is probably the most controversial, yet scientifically documented finding in the research of Elliott Jaques. Here's the way it works.

Ask someone what they feel is Fair Pay for the work they perform. This question is a little tricky, because, as you might imagine, there are many influences on this response. First, you have to discuss the work. Next, you have to get the person away from their co-workers, away from their spouse and then ask, "What do you feel is Fair Pay for the work you perform?"

When Jaques plotted the points based on Time Span and Fair Pay, they produced a curve that was reproduced in study after study over a period of 12 years in multiple countries under different currencies. Uncanny.

The implication for this finding? If I can determine the Time Span of the role, I can calculate the Felt-Fair-Pay.

..to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Are you a Vistage/TEC member who would like your team to hear my speech? Here it is: NEXT Maximizing Profitability Event (no charge): December 1, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.viable-vision.com/. You can register by fax or on-line.

Interview Tom Foster (Management Skills Blog) – Part 4 of 6

Q4 Dr Lisa: We find that incentives or bonus programs only useful in a small number of cases. Are management incentives or bonus compensations schemes ever appropriate in your opinion?

Tom: I hear managers, especially in the sales arena decry that their best salespeople are only motivated by money and the best system is straight commission.

Okay. Let's say, I buy that. Let's say there are people who are only motivated, or mostly motivated by money. And what's more, let's say I need that kind of person on my sales force. I want someone who is willing to work three extra hours every day, make that extra sales call, do that last pitch.

Have you ever met a salesperson like that? I have. And what impact do they have on the rest of the organization? My experience is that they are prima donnas and wreak havoc on the rest of my people and my company culture.

BUT I NEED THEM.

Okay, I need them. But they are not an employee. They are not a team player. They are self-employed. Willing to put their compensation at risk, eat what they kill. So pay them like they are self-employed, on a 1099. And keep them the hell away from the rest of my people..

..to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Are you a Vistage/TEC member who would like your team to hear my speech? Here it is: NEXT Maximizing Profitability Event (no charge): December 1, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.viable-vision.com/.
You can register by fax or on-line.

Next Mafia Offer Boot Camp -- is December 2, 3, 4 2008 in Denver.

Interview Tom Foster (Management Skills Blog) – Part 3 of 6

Q3 Dr Lisa: As you know we recommend against most incentive or bonus programs. How does the prevailing belief by Western management that incentives are effective relate to the “best efforts” contract?

Tom: Yes, incentives are effective. They are most effective at creating mistrust in the organization. They violate the implicit contract between the employer and employee. Incentives lay the groundwork for counterproductive relationships and sow the seeds for deceit. Incentives pit manager against employee in a game of underperformance, where the carrot rules.

Even worse, managers use incentives to abdicate their responsibility to hold people accountable for performance. Managers throw up their hands and say, "the only way I can hold my people accountable is to withhold part of their pay until they meet the performance standard." If that is the only strategy a manager has to hold people accountable, then I think I need a different manager.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Are you a Vistage/TEC member who would like your team to hear my speech? Here it is: NEXT Maximizing Profitability Event (no charge): December 1, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.viable-vision.com/. You can register by fax or on-line.

Next Mafia Offer Boot Camp -- is December 2, 3, 4 2008 in Denver.

Interview Tom Foster (Management Skills Blog) – Part 2 of 6

Dr Lisa: Tom in your speech you mention the “best efforts” contract that exists between an employer and employee. Could you elaborate on what that is?

Tom:
There is a widely held notion that to get the best efforts from a person, management must engage in a game of trickery, using manipulation, incentives and bonuses to extract the last ounce of willingness from their employees. The notion concludes that employees are basically lazy and to get their best efforts, management must withhold some benefit or some money until that best effort is observed.

Under that notion, the contract reads like this: For your salary or standard compensation, I expect you to show up and trust that you will deliver less than your best effort. At the end, after you have delivered less than your best effort, if I can get you to deliver a little more than less your best effort, I am willing to pay you more.

How silly is that?

It does nothing more than breed mistrust and sets up an incentive system that employees will manipulate. It is a destructive game that tears at the fabric of most intentional cultures.

Now, try this contract: For your salary, or standard compensation, I expect you to show up and trust that you will do your best.

That's it, no games, no manipulation.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Are you a Vistage/TEC member who would like your team to hear my speech? Here it is: NEXT Maximizing Profitability Event (no charge): December 1, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.viable-vision.com/. You can register by fax or on-line.

Next Mafia Offer Boot Camp -- November 10, 11, 12 2008 in Denver.

Interview Tom Foster (Management Skills Blog) – Part 1 of 6

We'll take a break from our POOGI series for this interesting 6 part interview of Tom Foster.
----------------------------------------------------------

I had a chance to interview Tom Foster. Tom is a consultant and TEC Chair in Florida. Brad heard Tom speak, checked out his blog and then I ended up speaking to his group. During our trip to Florida we had dinner with Tom and discussed a number of interesting topics. Here are some questions we asked Tom and his answers.

Dr Lisa: Tom, as you know, we do results based consulting. We only get paid if our clients increase their profits. So it is very important for our clients and for us to have the right people on the bus. Many times we come into a company to find that the right people are no where near the bus.

You have found that “time span of discretion” is a better indicator than the various personality tests of how successful a person will be in a job. Please explain more about that.

Tom: Each of us has an innate ability to deal with various levels of complexity in our world. This is a finding by Elliott Jaques in his research on how organizations get work done. This innate ability to deal with complexity is measured in terms of "Time Span." While many companies employ various instruments (psychometric testing) to determine what Elliott describes as "temperament," the correlation of any given temperament to success in the position is hardly more than random.

The real key to determine whether a person has the capability to be successful, in a given role, lies in matching the Time Span of the role with the Time Span of the person.

To do this requires some understanding of Time Span and how to measure it. For now, I will leave you with the definition:

Time Span is the length of time that a person can work into the future, without direction, using their own discretionary judgment.

A Process Of On-Going Improvement (POOGI) - Part 29

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints.

How will we know if we have a good solution before we try to implement it?

As business leaders, we’re smart people and fancy ourselves as problem-solvers. So, not only do we skip the step of developing a deep understanding of the problem, we jump to our favorite direction of the solution. Usually, we propose the solution and are surprised by the resistance we encounter. If we have enough power and stamina, we impose the solution. If we require the consensus of other people, we often get stuck arguing about the pros and cons of alternative solutions. Other people are very good at seeing what is wrong with our idea!

A useful way out is to identify the few criteria that would be associated with any good solution to the problem. And then list as many alternative solutions that meet the criteria in whole or part as possible.

For each alternative, also predict the negative effects and the implementation obstacles. These are what are normally referred to as the “problems” with a proposed solution. In the example above, the recently imposed no-overtime policy was an attempt to control costs in the face of declining productivity. Could you have predicted the negative reaction to such a policy? When the incentive system was initially implemented, do you think management expected it to de-motivate the workforce at the end of every quarter in which it was not earned? Probably not, but it was a predictable negative effect that should have been thought through before the incentive plan was implemented.

In this example, criteria for a good solution might include:

• Immediately improve the morale of the plant
• Immediately support increased productivity
• Be sustainable.

As for alternative solutions with our example company, one is to do nothing differently. This, in fact, is what is normally done. Remember Einstein’s definition of insanity: “doing the same thing over and over but expecting different results”. Inertia is powerful. Better to live with the devil we know…

Another direction is to address directly the conflict between the current company policies and the employees’ security and satisfaction. Notice that this does not require an employee survey. We all have enough intuition about causes of security and satisfaction. The difficulty is in removing bad policies and replacing them with better policies.

So what happened? The owner took charge, realizing that the company was lax in keeping current with employee reviews. While to every employee his or her review was very important, the company had not prioritized doing them, especially since that would require delivering bad news and having to talk about pay rates. The management had also allowed a few bad attitudes to affect everyone. The bad attitudes were addressed; there was a company meeting acknowledging the importance of employee security and satisfaction, and brief reviews were held emphasizing the importance of skills, cross-training, and attitude. The company committed to paying its most skilled people better than they could make anywhere, but needed their help with increased productivity. The feedback was positive and that “something really changed” this time.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

NEW -- Seattle Group Mafia Offer Boot Camp. October 20 (all day), October 21 (pm), October 22 (pm), and October 23 (pm). If you're interested please contact me by email.

Are you a Vistage/TEC member who would like your team to hear my speech? Here it is: NEXT Maximizing Profitability Event (no charge): September 23, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.viable-vision.com/. You can register by fax or on-line.

A Process Of On-Going Improvement (POOGI) - Part 28

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints.

What is the problem? Is it:

• Declining sales?
• Unrealistic expectations for increased productivity?
• No profit incentive payout?
• Low morale?
• The new no-overtime policy?
• Ineffective supervision?

TOC has cause and effect logic tools to determine which problems are causes and which are effects. To have the greatest impact on the business system, we don’t want to treat symptoms; we want to address what we call the “core problem” that is the cause of all of the symptoms.

The company’s objectives to “make more money now as well as in the future” and “provide a secure and satisfying environment for employees now as well as in the future” are currently jeopardized. The specific objective being addressed is improved productivity as measured by sales compared to total plant payroll.

The core problem is that company policies are in apparent conflict with the goal of secure and satisfied employees. Employee resistance instead of buy-in to the objective of improved productivity is a result.

What are the possible alternative solutions to such a problem? What are the criteria for a good solution? That is, how will we know if we have a good solution before we try to implement it?

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

NEXT Group Mafia Offer Boot Camp: September 24, 25, 26 2008 in Denver. More information at http://www.mafiaoffers.com/. There are also PRIVATE and On-line Mafia Offer Boot Camps. The July boot camp SOLD OUT and there is no group boot camp in August. Don't miss September!

Are you a Vistage/TEC member who would like your team to hear my speech? Here it is: NEXT Maximizing Profitability Event (no charge): September 23, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.viable-vision.com/. You can register by fax or on-line.

A Process Of On-Going Improvement (POOGI) - Part 27

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints.

The detailed buy-in process is:
1. Agree on the problem(s)
2. Agree on the direction of the solution
3. Agree that the solution solves the problem and brings the benefits
4. Agree on predicted negative side effects and prevent them
5. Agree on implementation obstacles and objectives to overcome them
6. Agree to implement the solution.

The step most often missed in the buy-in process is step one, agreeing on the problem.

Let’s use an example from a machine shop. See if you can apply the process. First, the background story:

This machine shop has sales of about $300,000 per month. Sales and the backlog have been declining slightly over the past three months, although a new large order of about $1 million is expected at any time.

This new order is on top of normal orders, so it represents growth. Morale of the workforce has been low recently, following the end of a quarter when no profit incentive was paid out and a new no-overtime policy was announced. Pay rates for the most skilled workers have been frozen for some time.

Supervisors in the plant are trying to implement a change in the work process to cope with the increased sales without adding additional people and have been getting resistance. In fact, productivity has decreased.

What is the problem?

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

NEXT Group Mafia Offer Boot Camp: September 24, 25, 26 2008 in Denver. More information at http://www.mafiaoffers.com/. There are also PRIVATE and On-line Mafia Offer Boot Camps. The July boot camp SOLD OUT and there is no group boot camp in August. Don't miss September!

Are you a Vistage/TEC member who would like your team to hear my speech? Here it is: NEXT Maximizing Profitability Event (no charge): September 23, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.viable-vision.com/. You can register by fax or on-line.

A Process Of On-Going Improvement (POOGI) - Part 26

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints.

Whether you’re selling stuff or just trying to get the collaboration of other people, you need buy-in. Do you follow a buy-in process?

As W. Edward Deming, father of the Quality Management revolution said, “If you can't describe what you are doing as a process, you don't know what you're doing.”

So let’s describe the buy-in process that was developed by Dr. Eli Goldratt, father of the Theory of Constraints (TOC). Big picture, the steps are:

• What to Change?
• To What to Change?
• How to Cause the Change? more information on the TOC Thinking Processes

You use a buy-in process to accomplish business objectives. For a profit-seeking company, the overall company objectives can be generalized as:

• “Make more money, now as well as in the future”, and
• “Provide a secure and satisfying environment for employees now as well as in the future”, and
• “Provide satisfaction to the market now as well as in the future”.

Usually though, buy-in is sought related to a more specific objective and you should verbalize what that is. This more specific objective should make sense in relation to the overall business objectives of the company.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.


NEXT Group Mafia Offer Boot Camp: September 24, 25, 26 2008 in Denver. More information at http://www.mafiaoffers.com/. There are also PRIVATE and On-line Mafia Offer Boot Camps. The July boot camp SOLD OUT and there is no group boot camp in August. Don't miss September!

Are you a Vistage/TEC member who would like your team to hear my speech? Here it is: NEXT Maximizing Profitability Event (no charge): September 23, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.viable-vision.com/. You can register by fax or on-line.

A Process Of On-Going Improvement (POOGI) - Part 25

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints.

There is probably at least one step in your sales funnel that is more expensive or uses more highly trained personnel. If so, that step can be managed just like a production constraint. It should not be wasted. In fact, it can become the control point for managing your sales funnel. Work should be released into the sales funnel at the rate the control point can produce. Essentially applying Drum Buffer Rope (DBR) to Sales.

If you are interested in more information about sales funnel management the TOC way, and the significant increase in sales and profits it can bring, we recommend you read “The Cash Machine” by Klapholz and Klarman. It is an easy to read novel that provides a story for the development and improvement of sales funnel management.

Also, read “Reengineering the Sales Process” by Roff-Marsh. This book explains how to apply the Drum-Buffer-Rope production scheduling methodology to managing the sales process and sales people. Both books can be found on our website with links to the lowest cost purchase option.

Please contact either Dr. Lisa or Brad if you're interested in having the co-authors present and discuss TOC and a process of ongoing improvement to increase sales and profitability with your company or one of the groups you belong to.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

The steps to implement Drum Buffer Rope (DBR) are not that hard to understand or explain. The difficulity lies in applying it to YOUR specific situation. If you don't know how to do that or do it incorreclty, it could lead to the conclusion that -- TOC doesn't work.

We are going to take 5 companies through the process of implementing DBR remotely. We will explain each step and discuss any questions or concerns specific to your situation. This will be a 12 week program with one session per week. Each session is 90 minutes in length. All 5 companies will be on the same call to take advantage of learning from the other companies. During this 12 week program you will learn: to read the rest, click here

NEXT Group Mafia Offer Boot Camp: September 24, 25, 26 2008 in Denver. More information at http://www.mafiaoffers.com/. There are also PRIVATE and On-line Mafia Offer Boot Camps. The July boot camp SOLD OUT and there is no group boot camp in August. Don't miss September!

Are you a Vistage/TEC member who would like your team to hear my speech? Here it is: NEXT Maximizing Profitability Event (no charge): September 23, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.viable-vision.com/. You can register by fax or on-line.

A Process Of On-Going Improvement (POOGI) - Part 24

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints.

To describe sales as a process, we must define the steps of the process. Of course, these may vary somewhat between industries and companies, and may be described in more or less detail. One such list of steps for a sales process is:




Often not considered are the capacity of the sales process and the flow of work through the sales process. In the example above, the capacity of the organization is greater than where work is (snapshot 1) except in one place: engineering at 20. Is it the case that in your company you may have one or bottlenecks that slows your responsiveness when trying to win new customers? As in the example above, will such a bottleneck serve to further reduce the rate at which you win new business?

In snapshot 2, we’ve assumed we’ve doubled the capacity of engineering. Now the rate of sales through the sales funnel is limited by the capacity of Production prototype at 35.

No, sales funnel management is not rocket science. But few organizations—including machine shops—are managing their sales process.

To manage your sales funnel, you must (1) define the steps in your sales process, (2) determine the capacity of your organization to perform each step in a time period, and (3) measure how many prospects are in each step a particular point in time.


...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

The steps to implement Drum Buffer Rope (DBR) are not that hard to understand or explain. The difficulity lies in applying it to YOUR specific situation. If you don't know how to do that or do it incorreclty, it could lead to the conclusion that -- TOC doesn't work.

We are going to take 5 companies through the process of implementing DBR remotely. We will explain each step and discuss any questions or concerns specific to your situation. This will be a 12 week program with one session per week. Each session is 90 minutes in length. All 5 companies will be on the same call to take advantage of learning from the other companies. During this 12 week program you will learn:
to read the rest, click here

NEXT Group Mafia Offer Boot Camp: September 24, 25, 26 2008 in Denver. More information at http://www.mafiaoffers.com/. There are also PRIVATE and On-line Mafia Offer Boot Camps. The July boot camp SOLD OUT and there is no group boot camp in August. Don't miss September!

Are you a Vistage/TEC member who would like your team to hear my speech? Here it is: NEXT Maximizing Profitability Event (no charge): September 23, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.viable-vision.com/. You can register by fax or on-line.

A Process Of On-Going Improvement (POOGI) - Part 23

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints.

Last time, we discussed how having a "Mafia Offer", an offer so good that (1) your customers can’t refuse it and (2) your competition can’t or won’t match it -- had the potential to dramatically increase sales.

A Mafia Offer is another “technology” that is part of the Theory of Constraints (TOC), a holistic business process improvement body of knowledge developed by Dr. Goldratt, author of The Goal.

TOC is especially effective in machine shops. In fact, it is usually possible to develop an excellent Mafia Offer for a machine shop, especially if your competitors have long lead-times and poor due-date performance.

Here’s a test: do you and your competitors’ quote lead-times that you know have a low probability of being met just to get the order? If so, you have an excellent Mafia Offer. Would you like to find out what it is?

The process of implementing the internal changes a Mafia Offer requires is not trivial, but doing so improves sales closing rates from less than 5% to as high as 80%. Typically, additional sales people aren’t required, but sales funnel management is.

Why? Because having a Mafia Offer doesn’t address the following issues with your sales process:

• Prospects aren’t aware of you
• You aren’t aware of enough prospects
• You have difficulty getting in to see your prospect
• You have a long sales cycle
• You have difficulty quoting as many jobs as you would like
• Quote turnaround is too long
• There are peaks and valleys of booking sales.

Sales funnel management begins with realizing that sales is a process. As Dr. Deming said, “If you can’t describe what you are doing as a process, you don’t know what you’re doing”. Many companies abdicate selling activities to individual sales people, and then have understandable difficulty managing and measuring sales performance and effectiveness.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

NEXT Group Mafia Offer Boot Camp: September 24, 25, 26 2008 in Denver. More information at http://www.mafiaoffers.com/. There are also PRIVATE and On-line Mafia Offer Boot Camps. The July boot camp SOLD OUT and there is no group boot camp in August. Don't miss September!

Are you a Vistage/TEC member who would like your team to hear my speech? Here it is: NEXT Maximizing Profitability Event (no charge): September 23, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.viable-vision.com/. You can register by fax or on-line.

A Process Of On-Going Improvement (POOGI) - Part 22

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints.

You will possess a sustainable competitive advantage when you have value-creating products, processes, and services for your customers that cannot be duplicated or imitated by your competitors.

Having a competitive advantage, even a sustainable one, does not necessarily mean that you or your customers and prospects are aware of it. So, there is a need to create an Offer or positioning in the market that clearly states your competitive advantage. We call this an un-refusable market offer or a “Mafia Offer” (this term was originally coined by Dr. Goldratt). A Mafia Offer is an offer so good that (1) your customers can’t refuse it and (2) your competition can’t or won’t match it.

A Mafia Offer is NOT a list of strengths, a cliché, subjective, or offered by competition. In addition, it is sold differently. When you have a Mafia Offer, you are making a business proposal. A business proposal promises substantial improvements for your prospect, and it is appropriate to present at the highest levels of your prospects organization. A Mafia Offer addresses a significant need of your prospect in a way that your competition can’t or won’t.

Developing a Mafia Offer is not trivial, but having one improves closing rates from less than 5% to as much as 80%. Typically, additional sales people aren’t required, but sales funnel management is.

If you are interested in more information about developing a Mafia Offer, and the significant increase in sales and profits it can bring, we recommend you read “It’s Not Luck” by Dr. Goldratt. This book is the sequel to The Goal. It also is an easy to read novel that provides a story for the development of three Mafia Offers. Also, check out our website http://www.mafiaoffers.com/ to hear an example, find out how you can develop a Mafia Offer for your company, and learn about our Mafia Offer Boot Camp.

Next time, we will address managing the sales funnel once you have that compelling Offer.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

NEXT Group Mafia Offer Boot Camp: September 24, 25, 26 2008 in Denver. More information at http://www.mafiaoffers.com/. There are also PRIVATE and On-line Mafia Offer Boot Camps. The July boot camp SOLD OUT and there is no group boot camp in August. Don't miss September!

NEXT Maximizing Profitability Event (no charge): September 23, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at http://www.viable-vision.com/

FREE Marketing & Sales Constraint Assessment Webinar July 28 from 2 to 3 pm Denver time. To register, just drop me an email with which date works best for you. We have expanded our seat limitation to 50 for each Webinar. Seats are filled on a first come first served basis and both sessions are already more than half filled.

A Process Of On-Going Improvement (POOGI) - Part 21

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints.

When asked about what is unique and different about their company, most people reply with some of the following typical answers:

• We provide great customer service
• Our quality is outstanding
• We innovate and/or help our customers to innovate
• We have great employees
• We deliver results
• We have a very knowledgeable staff
• We are responsive to our customer’s needs
• We have a great reputation
• Our customers trust us

Don’t your competitors say the same thing? All good companies have these qualities or they wouldn’t be in business for long. We call this the “blah, blah, blah” answer because that’s what is sounds like to your customers and prospects.

Your Mafia Offer is a sustainable competitive advantage that differentiates you from your competitors. It separates you from everyone else. It is usually the reason you are in business. It answers the question “Why should I buy from you?” or “How are you better that my current supplier?”

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

NEXT Group Mafia Offer Boot Camp: September 24, 25, 26 2008 in Denver. More information at www.MafiaOffers.com. There are also PRIVATE and On-line Mafia Offer Boot Camps. The July boot camp SOLD OUT and there is no group boot camp in August. Don't miss September!

NEXT Maximizing Profitability Event (no charge): September 23, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at www.Viable-Vision.com

FREE Marketing & Sales Constraint Assessment Webinar July 21 from 2 to 3 pm Denver time or July 28 from 2 to 3 pm Denver time. To register, just drop me an email with which date works best for you. We have expanded our seat limitation to 50 for each Webinar. Seats are filled on a first come first served basis and both sessions are already more than half filled.

A Process Of On-Going Improvement (POOGI) - Part 20

We are continuing our series based on The Goal by Eliyahu M Goldratt.

What are the problems associated with marketing and sales? A few of the typical problems include:

• To prospects, what you say sounds the same as your competitors
• You have nothing unique or compelling to offer that is different
• Prospects aren’t aware of you
• You aren’t aware of enough prospects
• You have a collection of sales individuals, not a sales team
• You have difficulty getting in to see your prospect
• You have a long sales cycle
• You have a low closing rate
• You have difficulty quoting as many jobs as you would like
• Quote turnaround is too long
• There are peaks and valleys of booking sales

Yikes! That is a lot of problems! Where do we start to improve marketing and sales?

We recommend you start with your market offer or as we like to call it, your Mafia Offer. Without differentiating yourself from your competitors, it is difficult to determine what else is wrong with your marketing and sales process, and how to improve.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Dr Goldratt offers his new book Inherent Simplicity at no charge, click here to get the details: http://www.scienceofbusiness.com/dr-lisa/eliyahu-goldratt/goldratts-new-book.aspx

2008 Odyssey Program. Click here to learn about the low cost life changing event for young adults. You WANT to send your kids to this! http://www.scienceofbusiness.com/events/2008-odyssey.aspx

NEXT Group Mafia Offer Boot Camp: July 30, 31, Aug 1 2008 in Denver. More information at www.MafiaOffers.com. There are also PRIVATE and On-line Mafia Offer Boot Camps.

NEXT Maximizing Profitability Event (no charge): July 29, 2008 in Denver from 1:00 to 5:00 pm at the Science of Business Training Center. More information at www.Viable-Vision.com

Also check out our FREE Theory of Constraints videos. New videos added weekly! http://www.scienceofbusiness.com/free-stuff/free-videos-audios.aspx

A Process Of On-Going Improvement (POOGI) - Part 19

We are continuing our series based on The Goal by Eliyahu M Goldratt.

Up to this point, we have discussed how Drum-Buffer-Rope scheduling has the potential to double your capacity with little or no investment or expense. And Throughput Accounting has provided you visibility on the rate at which you make money.

Both of these “technologies” are part of the Theory of Constraints (TOC), a holistic business process improvement body of knowledge developed by Dr. Goldratt, author of The Goal. TOC is especially effective in job shops. In fact, The Goal was about a turnaround of a job shop.

However, if you can’t sell more with your newly available capacity, there won’t be a bottom-line effect. And we find cutting the people—to save a little cost—who collaborated to increase the productivity of your organization unconscionable. It is management’s responsibility to have the marketing and sales processes in place to increase sales, utilize the capacity, and dramatically improve the bottom-line.

Unfortunately, the marketing and sales processes of most organizations are already getting the results they are designed to get. To get more, something has to change.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Next GROUP Mafia Offer Boot Camp is July 30, 31, Aug 1 2008!

Also check out our FREE Theory of Constraints videos. New videos added weekly! http://www.scienceofbusiness.com/free-stuff/free-videos-audios.aspx

About the co-authors:

“Dr. Lisa” Lang is President of the Science of Business. Her TOC speech “Maximizing Profitability” is popular with Vistage/TEC groups and as a keynote speech. Recently Dr. Goldratt’s Global Marketing Director, she offers the “Mafia Offer Boot Camp” for companies wanting to develop and implement their own Mafia Offer. She can be reached at DrLisa@ScienceofBusiness.com or 303-909-3343.

Brad Stillahn is a business owner that has successfully implemented TOC methods in his own business and is now helping other business owners do the same. His consulting company, TOC Professionals, is a new NTMA member. TOC Professionals works with companies implementing all aspects of TOC. His business and personal partner is Dr. Lisa Lang. Brad can be reached at Brad@ScienceofBusiness.com or 303-886-9939.

A Process Of On-Going Improvement (POOGI) - Part 18

We are continuing our series based on The Goal by Eliyahu M Goldratt.

You can also perform a sensitivity analysis to determine the breakeven level of T/CU. In this example, it would be the Operating Expense level of $615,000 divided by 2,912 which is $211.20.

Pricing with Throughput Accounting is much easier and potentially much more dangerous. It is easier because there is no such thing as “product cost” to calculate. Instead, each product is evaluated for its Throughput per Constraint Unit. And overall, for the business, the average T/CU must be enough to achieve the Net Profit goal. It’s dangerous because any amount of Throughput does contribute to the bottom-line, but there must be the discipline to maintain the T/CU average needed to achieve the Net Profit goal. Pricing to achieve incremental business is not for novices.

For example, say you are quoting a new job. You estimate it will take 50 hours of milling. The Truly Variable Costs are estimated to be $5,000. Here is your estimate:

Hours of milling 50
T/CU desired $258
Throughput desired $12,900
Truly Variable Costs $5,000
Total Estimate $17,900

We understand that this method is much different and you may have many questions. If so, and/or you would like help calculating T/CU for your business, please feel free to contact us.

If you’d like to learn more about Throughput Accounting, we recommend the following materials (which were also used in developing the discussion above):

• “The Haystack Syndrome” by Dr. Goldratt,
• “Throughput Accounting” by Corbett.
• "Maximizing Profitability" by Dr Lisa (hit the ground running w/ 3 hr audio and workbook)

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Next GROUP Mafia Offer Boot Camp is July 30, 31, Aug 1 2008!Also check out our FREE Theory of Constraints videos. New videos added very week! http://www.scienceofbusiness.com/free-stuff/free-videos-audios.aspx

A Process Of On-Going Improvement (POOGI) - Part 17

We are continuing our series based on The Goal by Eliyahu M Goldratt.

Let’s apply this to your business. In order to do so, you’ll need to make some calculations. First, write down your annual sales. Second, subtract the Truly Variable Costs (these include raw materials, outsourcing, freight in and out, and sales commissions). The difference between the two is your dollar Throughput.

From throughput subtract all of your fixed costs which we call Operating Expense. The difference is your Net Profit.

For example:

Sales $1,400,000
Truly Variable Costs -$650,000
Throughput =$750,000
Operating Expense -$615,000
Net Profit =$135,000

Let’s further assume that you have lathes and mills in your machine shop. You have identified that milling is your constraint resource. You have only two milling machines operating one shift. You have calculated the available capacity as:

Number of mills 2
Hours per year 2,080
Percent available 70%
Available hours 2,912

The 2,912 hours is how many “Constraint Units” you have available.

The Throughput of $750,000 divided by 2,912 hours is $257.55. That is your “Throughput per Constraint Unit” (T/CU).

What is the meaning of this number? The Throughput per Constraint Unit is the amount of margin needed per operating hour of your limiting resource to cover Operating Expense and achieve your Net Profit. It is the rate at which you make money.
...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.
Next GROUP Mafia Offer Boot Camp is June 25, 26, 27 2008!
Also check out our FREE Theory of Constraints videos. New videos added very week! http://www.scienceofbusiness.com/free-stuff/free-videos-audios.aspx

A Process Of On-Going Improvement (POOGI) - Part 16

We are continuing our series based on The Goal by Eliyahu M Goldratt.

Dr. Goldratt says it this way: “If a process of ongoing improvement is what we are after, which of the three avenues of Throughput, Inventory, or Operating Expense is more promising? If we just think for a minute the answer becomes crystal clear. Both Inventory and Operating Expense we strive to decrease. Thus, both of them offer limited opportunity for ongoing improvement. Both of them offer only limited opportunity for ongoing improvement. They are both limited by zero. This is not the case with the third measurement, Throughput. We strive to increase Throughput. Throughput does not have any intrinsic limitation; Throughput must be the cornerstone of any Process Of On-Going Improvement (POOGI). It must be first on the scale of importance.”

Therefore, to make decisions according to Theory of Constraints (TOC) and Throughput Accounting, we need to quantify a decision’s impact on these three measurements and then we will be able to determine the change in net profit and return on investment.

The role of the company’s constraint is fundamental for quantifying the decision’s impact on the three measurements. Thus, to identify which products contribute the most to the company’s net profit, TOC also advocates the use of the measurement of “Throughput per time of the constraint (T/CU)”. This method is much simpler than the product costing and it allows for fast decisions that are directly linked to the bottom line.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Next GROUP Mafia Offer Boot Camp is June 25, 26, 27 2008!

A Process Of On-Going Improvement (POOGI) - Part 15

We are continuing our series based on The Goal by Eliyahu M Goldratt.

We have discussed some of the problems with Cost Accounting, yet only touched on the alternative, “Throughput Accounting”. We promised to explore Throughput Accounting in more depth, and explain how implementing its concepts will help you understand the rate at which your company makes money. We also promised to discuss how Throughput Accounting can influence pricing decisions.

We are discussing Throughput Accounting from the perspective of the Theory of Constraints (TOC), a body of knowledge developed by Dr. Eliyahu M Goldratt and others over the last thirty years to support a process of ongoing improvement.

The fundamental concept in TOC is that every real system, such as your for-profit business, must have at least one constraint. If it were not true, your business would produce an infinite amount of net profit. Because a constraint limits your business system from getting more net profit, then if you want more net profit you must manage constraints. These constraints will determine the net profit of your business whether they are acknowledged and managed or not.

TOC and Throughput Accounting introduce three measurements for increasing net profit:
1. increase Throughput (Sales minus truly variable costs such as raw materials),
2. decrease Investment, particularly in inventories,
3. decrease Operating Expenses (that is, fixed costs).

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 14

We are continuing our series based on The Goal by Eliyahu M Goldratt.

Throughput is the rate at which the system generates money. It is similar to Gross Margin or Contribution Margin, but it is also different in that TOC (Theory of Constraints) does not consider direct labor as a variable cost, but rather as Operating Expense.

The role of the company’s constraint is fundamental for quantifying the decision’s impact on the three measurements. Thus, to identify which products contribute the most to the company’s net profit, TOC advocates the use of the measurement of “Throughput per time of the constraint”. This method is much simpler than costing methods. It allows for fast decisions that are directly linked to the bottom line.

Next month we will explore Throughput Accounting in more depth, and explain how implementing its concepts will help you understand the rate at which your company makes money. We will also discuss how Throughput Accounting affects pricing decisions.

If you’d like to be better prepared for the discussion, we recommend one or more of the following books:

• The Haystack Syndrome by Dr. Goldratt,
• The Theory of Constraints and Its Implications for Management Accounting by Noreen, Smith, and Mackay, and
• Throughput Accounting by Corbett.

You can also search this blog for Throughput Accounting.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 13

We are continuing our series based on The Goal by Eliyahu M Goldratt.

The core idea in the Theory of Constraints (TOC) is that every real system, such as a for-profit business, must have at least one constraint. If it were not true, then the system would produce an infinite amount of net profit. Because a constraint is a factor that limits the system from getting more net profit, then a business manager who wants more net profit must manage constraints. The constraints will determine the output of the system whether they are acknowledged and managed or not.

Dr. Goldratt says it this way: “Before we can deal with the improvement of any section of a system, we must first define the system’s global goal; and the measurements that will enable us to judge the impact of any subsystem and any local decision on this global goal”.

It is impossible to disentangle using TOC in operations (DBR) from TOC accounting (known as “Throughput Accounting”). Any attempt to run TOC in operations while using traditional management accounting measures and controls is doomed to failure. TOC is a radically different way to control operations and does not work with conventional cost accounting systems.

As an alternative, TOC and Throughput Accounting introduce three measurements for increasing net profit:
1. increase Throughput (Sales minus truly variable costs such as raw materials),
2. decrease Operating Expenses (that is, fixed costs), or
3. decrease Investment, particularly in inventories.

To make decisions according to TOC, we need to quantify the decision’s impact on these three measurements and then we will be able to determine the change in net profit and return on investment.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 12

What is the effect on the monthly Profit and Loss statement from this?

Because cost accounting (and GAAP) requires that inventory absorb allocated costs, the effect is that all of the cost allocations from prior months that are attached to the inventory will be recognized in the month of the inventory reduction, causing a significant “loss” from this change in inventory.

If your management is aware of this, it may block the implementation of DBR in order to avoid the perceived negative impact. If no one blocks the implementation of DBR, the result will be recognized when the P&L is compiled. At that time, management will be “surprised”. So will be the bank and any other outside entity that has interest in your company’s financials.

Efficiency measurements typically evaluate the effectiveness of labor and equipment utilization. The goal is to strive for as high of efficiency as possible for all resources. However, DBR strives to have high utilization on only one resource: the system’s constraint. As a result, all other labor and equipment resources will have lower efficiencies. Again, if management perceives this as a negative outcome, it may block the implementation. Or, if DBR is implemented, when the efficiency reports are generated, management will be “surprised” by the lower efficiencies on most resources. So will anyone else that has interest in your company’s efficiencies.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.
_____________________________________________
About the authors:Brad Stillahn is a business owner that has successfully implemented Eliyahu M Goldratt's Theory of Constraints (TOC) methods in his own business and is now helping other business owners do the same. His consulting company, TOC Professionals engages in long-term relationships with companies implementing TOC. His business and personal partner is Dr. Lisa Lang. Brad can be reached at Brad@ScienceofBusiness.com or 303-886-9939.

“Dr. Lisa” Lang is President of the Science of Business. Her speech “Maximizing Profitability” is popular with Vistage groups and as a keynote speech. Recently Dr. Goldratt’s Global Marketing Director, she offers the “Mafia Offer Boot Camp” for companies wanting to develop and implement a Mafia Offer. She can be reached at DrLisa@ScienceofBusiness.com or 303-909-3343.

A Process Of On-Going Improvement (POOGI) - Part 11

Conventional cost accounting assumes that incremental and isolated cost improvements are productive and in support of an organization’s goals, and that global improvement equals the sum of local improvements.

Since a conventional cost accounting system relies on transaction data—each transaction is a separate event—it is incapable of a holistic or systems thinking perspective except when closing the books. In addition, conventional cost accounting is not capable of giving good information because it assumes that all the company’s resources are equally important.

So, how would cost accounting block you from implementing the Drum-Buffer-Rope scheduling methodology? In at least two ways:

• because of the way inventory is valued, and
• because of the impact on efficiency measurements.

Remember from the discussion of Drum-Buffer-Rope last month that we expected a reduction in Work-in-Process inventory to about half of its initial level. What is the effect on the monthly Profit and Loss statement from this?

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

_____________________________________________
About the authors:
Brad Stillahn is a business owner that has successfully implemented Goldratt's Theory of Constraints (TOC) methods in his own business and is now helping other business owners do the same. His consulting company, TOC Professionals engages in long-term relationships with companies implementing TOC. His business and personal partner is Dr. Lisa Lang. Brad can be reached at Brad@ScienceofBusiness.com or 303-886-9939.

“Dr. Lisa” Lang is President of the Science of Business. Her speech “Maximizing Profitability” is popular with Vistage groups and as a keynote speech. Recently Dr. Goldratt’s Global Marketing Director, she offers the “Mafia Offer Boot Camp” for companies wanting to develop and implement a Mafia Offer. She can be reached at DrLisa@ScienceofBusiness.com or 303-909-3343.

A Process Of On-Going Improvement (POOGI) - Part 10

“Cost Accounting: Public Enemy #1 of Productivity”

Way back in 1983, prior to writing his popular business novel “The Goal”, Dr. Eliyahu M Goldratt gave a speech by this controversial and confrontational title at a conference of Management Accountants. However, it was well received because the problems with cost accounting are well known to knowledgeable management accounting professionals. For them, agreeing that there are problems with cost accounting was not the issue. The question was “what is the alternative?”

That is where we left our discussion last month. We had provided an overview of Drum-Buffer-Rope (DBR) scheduling. We warned that cost accounting assumptions may block you from implementing this powerful scheduling methodology and promised to discuss both the issues with cost accounting and introduce the solution: Throughput Accounting.

Management Accounting’s objective is to make the connection between managers’ local actions and the company’s profitability so managers can know if their actions are leading the company toward its goal.

The problem with cost accounting is the focus on cost.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

___________________________________________________________
About the authors:

Brad Stillahn is a business owner that has successfully implemented TOC methods in his own business and is now helping other business owners do the same. His consulting company, TOC Professionals engages in long-term relationships with companies implementing TOC. His business and personal partner is Dr. Lisa Lang. Brad can be reached at Brad@ScienceofBusiness.com or 303-886-9939.

“Dr. Lisa” Lang is President of the Science of Business. Her speech “Maximizing Profitability” is popular with Vistage groups and as a keynote speech. Recently Dr. Goldratt’s Global Marketing Director, she offers the “Mafia Offer Boot Camp” for companies wanting to develop and implement a Mafia Offer. She can be reached at DrLisa@ScienceofBusiness.com or 303-909-3343.

Leverage - Theory of Constraints

Tom Foster of ManagementBlog.org interviewed me about Goldratt's Theory of Constraints. Here is the fifth installment:

--- Start interview
TF: If we do a good job of placing our constraint in our highest cost, most scarce resource, what is the next most difficult thing to do?

Dr. Lisa: Leverage it. Leverage is a great word but we are not taught how to do this or what we are taught is simply wrong.

The book The Goal by Eliyahu M Goldratt describes leverage as exploiting the constraint and subordinating everything else based on the point where you have placed the constraint.

Exploit means not wasting any of what you have. Subordinating is often the harder one because it requires the non-constraint silos to fall in line by supporting the exploitation of the constraint. This is difficult because each silo is usually measured and rewarded on its individual results.
---End interview

That completes Tom's interview of me.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Hard to Get - Theory of Constraints

Tom Foster of ManagementBlog.org interviewed me about Goldratt's Theory of Constraints. Here is the fourth installment:

--- Start interview
TF: If the idea is to strategically select your bottleneck (constraint), what are the characteristics you look for in a strategic constraint?

Dr. Lisa: A strategic constraint should be relatively hard to get more of, compared to a non-constraint. Hard to get more of, means that it’s expensive, hard to find, hard to train or something like that.

Non-constraints, on the other hand, are generally less expensive and easier to get. And a starting rule of thumb is to have 25% excess capacity at your non-constraints.

So we are leveraging our very expensive hard to get resource (constraint) and we have excess capacity at our easier to acquire (non-constraint) resources.
---End interview

...to be continued.
Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Don't Chase It - Theory of Constraints

Tom Foster of ManagementBlog.org interviewed me about Goldratt's Theory of Constraints. Here is the third installment:

--- Start interview
TF: You talk about bottlenecks in systems. Conventional wisdom says bottlenecks are bad and that it is management’s job to get rid of them.

Dr. Lisa: Bottlenecks are what determine how much money you can make. I don’t think of them as bad. They just are. And by definition you will always have one. The question is, where is it? But, unless you have unlimited profits, you have a bottleneck, somewhere.

If you think bottlenecks or constraints are bad (like we were taught), then you will strive to get rid of them. But, as soon as you get rid of one bottleneck, another pops up, somewhere else. Essentially, we are taught to chase them around. Find them and get rid of them. It’s like being trapped in that arcade game – Whack-A-Mole.

If, by definition, you always have a weakest link or bottleneck, instead of chasing it around, my recommendation is to strategically place it. You decide where you want this control point to be. By doing that, you can get very good leveraging it and knowing how to control and grow your business with this control point.

So bottlenecks are not bad. Management’s job is to control them so that we can meet our commitments and grow. And more importantly to LEVERAGE them so that profits can be maximized.
---End interview

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Maximize the System - Theory of Constraints

Tom Foster of ManagementBlog.org interviewed me. Here is the second installment:

--- Start interview
TF: Intuitively, we try to maximize efficiency (profitability) of the entire company by working in each functional area to maximize its efficiency. We are thinking if every area is absolutely efficient, then by default, the entire company will be profitable. You disagree.

Dr. Lisa: Take an extreme case where a company may break itself into separate P&Ls. The logic is that if we maximize each P&L then we will maximize the P&L of the company as a whole. (And of course it’s much easier to hold each manager accountable only for their own P&L.)

I have a client, a not for profit, who collects donations that they sell in 14 retail stores. Each store has its own P&L and each store manager is measured and rewarded accordingly. The average selling price of an item is $2.25.

Imagine you are one of the underperforming stores in this company. To improve your profit, you need to sell a lot of volume at $2.25.

There are, however, some donated items that fetch $100 or more and sell very quickly. All the store managers love these items. Yet, there is one item that sells for $100 in 13 of the 14 stores, yet, sells for $200 in one of the stores, because of its location. It’s a cowboy item and this store is located near cowboys.

If I hold this item up in front of the group of 14 store managers, which store manager wants it for THEIR store? Of course, they all want the item, but, who should get the item to sell? The cowboy store can sell it for double.

So, if one of the other stores (not the cowboy store) gets a walk-in donation of one of these cowboy items, what should that store manager do?

Most store managers would keep quiet and sell the item quickly for $100 to improve their own P&L. This maximizes their own silo, but steals valuable profit from the company as a whole. This story illustrates how maximizing each silo does not necessarily benefit the system as a whole.
When management teams attack a problem, most often they try to fix a small segment of the company without even seeing the larger system problem.
---End interview

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Theory of Constraints - Systems Problems

Tom Foster of ManagementBlog.org interviewed me. Here is the first installment:

--- Start interview
A couple of weeks ago, I got to spend some time with Dr. Lisa Lang about one of my favorite subjects, Theory of Constraints. Like many of my favorite subjects, Theory of Constraints is a mindset that leads you to take action (make the right move) that is counterintuitive. In other words, left to your own devices, you would intuitively do exactly the wrong thing.

Theory of Constraints helps us to do the opposite. Theory of Constraints has been around for quite a while, but was most coherently explained by Eli Goldratt in a series of books starting with The Goal. Lisa Lang (Dr. Lisa) spent three years as the Marketing Director for Goldratt Consulting. During the past two decades she has used Theory of Constraints (TOC) to help companies solve their most serious problems. This week, I will share with you some of our conversations.

TF: When a management team realizes it has a system problem, what mistakes does it make trying to attack the situation?

Dr. Lisa: Most often, the team doesn't realize it’s a system problem. Because we are taught to manage in silos, or departments, or teams, most often, we attack the problem inside the silo, and don’t impact the system much, if at all.

By silos, I mean, we tackle sales problems separate from operations problems separate from admin problems. This happens, in part, because we have been trained to work inside our own area, indeed, not to meddle in other areas.

If you look at your organizational chart, you know the silos that exist in your company. Silos, in and of themselves are not bad. It’s that we measure each silo thinking that if we maximize each silo then we will maximize the system or the company as a whole and that’s just not what happens.
---End interview

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

Free Goldratt Theory of Constraints Videos and Audios

I just completed a redesign of part of my website and added several free videos and audios. To view this new page, go to FREE Stuff and then down to FREE Videos & Audios. You will need to register to view/listen to them, but registration is free and we will protect your email.

You will find videos on the following topics:

• Critical Chain Project Management
• Viable Vision
• Mafia Offers and Mafia Offer Boot Camps
• Success Stories
• Overview of Goldratt's Theory of Constraints
• more to come!

You will also find a list of written articles, success stories, blog posts, etc under the FREE TOC & VV Articles (Theory of Constraints & Viable Vision). I'm in the process of resigning this page so that the articles can be better searched and allow you to see how many times each has been downloaded, as well as, you can enter and read reviews left by readers.

And, if you click on the FREE Stuff tab directly you will find other items that might be of interest, like:

• Theory of Constraints games
• Theory of Constraints software (Thinking Process Software)

Here to maximzing YOUR profits!

Dr Lisa Lang

P.S. We will be continuing with the "Process of On-Going Improvement" series shortly.

A Process Of On-Going Improvement (POOGI) - Part 9

Normally, Lean and Six Sigma tools provide additional benefits very quickly. For example, it is common that the constraint resource could benefit from set-up reduction. Focusing Lean tools—which cost little to implement—results in additional capacity where it is needed and that has an immediate bottom-line result.

Due-date performance improves because of the reduction in lead-time, the increased capacity, the predictability of the time to process an order has improved, and jobs are prioritized according to due date.

The “Drum” is the schedule for the constraint resource. It sets the pace for the entire operation. In Goldratt's Theory of Constraints, we assume there is one system constraint that is limiting the throughput of the entire business. The drum is the only resource that needs to be scheduled. All other operations have relative excess capacity, meaning that orders can flow through the plant until reaching the constraint resource, and after it.

The “Buffer” is what protects the constraint from going idle from lack of material to process. The buffer needs to be large enough to prevent starvation on the constraint resource. It is really a time buffer, not physical materials, but we’ll explain that at another time.

The “Rope” is the mechanism for release of new material into the operations.

There are conventional cost accounting assumptions that may block you from implementing Drum-Buffer-Rope. Next time, we’ll address those issues, and describe how TOC’s Throughput Accounting concepts will free you to take the needed actions.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang(
c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

______________________________________________________________________ About About the co-authors:

Brad Stillahn is a business owner that has successfully implemented TOC methods in his own business and is now helping other business owners do the same. His consulting company, TOC Professionals engages in long-term relationships with companies implementing TOC. His business and personal partner is Dr. Lisa Lang. Brad can be reached at Brad@ScienceofBusiness.com or 303-886-9939.

“Dr. Lisa” Lang is President of the Science of Business. Her speech “Maximizing Profitability” is popular with Vistage groups and as a keynote speech. Recently Dr. Goldratt’s Global Marketing Director, she offers the “Mafia Offer Boot Camp” for companies wanting to develop and implement a Mafia Offer. She can be reached at DrLisa@ScienceofBusiness.com or 303-909-3343.

A Process Of On-Going Improvement (POOGI) - Part 8

Once the lower level of WIP is achieved (using Theory of Constraints) which takes about two weeks, as a job is processed through milling, this triggers the release of another job to the floor to begin processing.

What is the effect?

Do you realize that the amount of work-in-process on the shop floor is directly related to production lead-time? In this example, within just a couple of weeks, lead-time dropped in half, from 4 to 2 weeks. WIP inventory dropped in half as well.

Of course, in this simple example and in the real world, dropping WIP levels will cause some work centers to go idle from time-to-time. Before, with higher WIP levels, we were just masking the reality that different work centers had different capacities. With lower WIP levels, that reality is now exposed and there is an opportunity for further process improvement.

We still haven’t addressed how Goldratt's Drum-Buffer-Rope yields additional available capacity. It does so by revealing hidden capacity on the constraint. The time a job spends waiting is reduced. With focus on the constraint resource, actions are taken that cause better utilization. When everyone knows that the constraint is what limits the net profit of the company as a whole, focus is provided that is unavailable when the shop floor is flooded with work and everything is a priority.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 7

Let’s take a simple environment as an example. Say that there are seven operations in this environment:

1. customer service receives and enters the order,
2. engineering programs the part, and when released the order processes through
3. lathes,
4. mills,
5. outside heat treat,
6. inspection, and
7. packaging/shipping.

Let’s assume the starting condition is a quoted lead-time of 4 weeks with due-date performance of 80%. Work-in-process (WIP) inventory is $100,000.

After an initial Goldratt Theory of Constraints analysis, we determine that milling is the constraint resource. In order to protect the mills from running out of work, we decide we always want a buffer of ready-to-process material in front of milling. And we want to release new work to the floor only at the rate milling is processing.

Since there is more WIP on the floor than desired, our first action is to not allow any new work to be released to the floor! We have a rule of thumb to reduce WIP to about half the level of WIP we started with. The focus is not starting new jobs, but finishing the jobs that have been started.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 6

Of course, doubling available capacity must mean that we aren’t managing our current capacity as well as we would like, despite our best efforts to do so. Is this a reasonable possibility? Let’s check some “facts”:

Does your mix vary widely from week-to-week, as is typical of most job shops?
Do most jobs spend more time waiting than being worked on?
Is the touch-time for a job less than 10% of the quoted lead-time?
Are your lead-times relatively long, for example, are they measured in weeks instead of days?
Is your due-date performance less than 99%, as measured by your original promise date?

If you answered “yes” to some of the above questions, then there is a good possibility you can reveal substantial capacity with Goldratt's Theory of Constraints Drum-Buffer-Rope (DBR) scheduling.

But first let’s see if your like most traditionally managed job shops. If you are, you have excess work-in-process. In an effort to keep resources—machines and people—busy, jobs are released to the floor as soon as possible. Queues of work are in front of many machines. Once a worker has finished the job they were working on, the next job is available to get started on. This is done in the name of high efficiencies.

What are the problems associated with this traditional approach?
First, having too many orders on the shop floor masks priorities, promotes local optima behavior and therefore prolongs lead-time and significantly disrupts due-date performance. Second, hectic priorities (hot, red-hot, and do-it-NOW) cause chaos on the floor; not having a priority system can cause some orders to still be late. Finally, in many plants, there are bottlenecks that prevent attainment of 99% due-date performance.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 5

Up to this point, we provided an overview of Goldratt's TOC (Theory of Constraints), the business improvement process methodology described in the popular business novel “The Goal”. Perhaps you’ve had the opportunity to take our recommendation from last month and read or re-read it.

“The Goal” refers to the goal of most for-profit organizations, which is to make more money now and in the future. If an organization is not making an infinite net profit, and of course no organization does, then something is limiting the system. TOC calls this the “system constraint”. If the constraint is external, the company does not have enough sales to fully utilize its available resources. If the constraint is internal, the company cannot sell all that is demanded from the company. Let’s consider the case when the constraint is internal.

We claimed that if a company implemented the scheduling methodology described in The Goal, that it just might be possible to double available capacity with little or no investment or added expense. The scheduling methodology is known as “Drum-Buffer-Rope” and we will discuss it in more detail this month.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 4

Most companies don’t have processes in place to sell twice what they are selling now, so it is necessary to develop a compelling, un-refusable “Mafia Offer”. A Mafia Offer is an offer so good that your customer can’t refuse it and your competition can’t or won’t offer the same. Developing and implementing a Mafia Offer is not trivial, but having one improves typical closing rates from less than 5% to as much as 80%, so additional sales people aren’t required, but sales funnel management is. (See also http://www.mafiaofferbootcamp.com/)

Let’s check the numbers using an example of a company with $5 million in sales, net profit of $250,000, and raw material costs, outside services and sales commission of 30% (what we call Truly Variable Costs in Goldratt's Theory of Constraints Throughput Accounting). One year after implementing DBR, and developing and implementing a Mafia Offer, the company has twice the capacity to sell, and is selling it at a rate of $8 million per year with no additional fixed costs. The additional raw material, outside services, and sales commisions are $900,000 on the additional $3 million in sales. The difference of $2.1 million drops through to the bottom-line which is now $2,350,000. So, net profit went from 5% to 29%! Incredible! Unbelievable?

What if your results were only half as good? Are you doing anything else with so much potential for sustained increased profit with so little risk?

TOC is a collection of “silver bullets”, and when implemented well in conjunction with Lean and Six Sigma, the result is an ongoing exponential increase in net profit. We believe that it possible for most companies to achieve a Viable Vision. One definition of Viable Vision is to turn your sales level into your net profit level in about four years, and sustain the exponential net profit increases beyond that.

If you haven’t read The Goal, we recommend you read it. If you have read The Goal, we recommend you read it again.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.