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.

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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.