Theory of Constraints POOGI Part 57: We lost money on that job! cont.

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Brad: So, the problem is that by using more time than estimated, there is less time left in the month to produce and ship the margin on subsequent jobs. Sometimes, what margin is shipped in total is less than the fixed costs for the month, and then there is a loss for the month.

Dr. Lisa: Yes, and that is the problem that most owners are trying to avoid. And the way we were all taught to do that is -- cost allocation. However, you can make sure that you make enough margin in total without allocating any costs and it’s actually simpler and more straight forward.

Just plot the Margin dollars you ship everyday (what we in Theory of Constraints Throughput Accounting call Throughput) and compare that to your Operating Expenses. And remember, if you work overtime, you’ve increased your Operating Expenses. Once you understand the relationship between Throughput and Operating Expenses, you have all the information you need to ensure you ship enough work in total to make money.



A company can lose money, but a job rarely does. Jobs aren’t unprofitable, and for that matter, products are rarely unprofitable and customers are rarely unprofitable. Companies lose money because the margin in a month does not cover the fixed costs for a month. Otherwise, the margin on all jobs, products, and customers in excess of that month’s fixed costs all collectively add to the overall profits for that month.


... to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2009, Dr Lisa, Inc. All rights reserved.

Jobs Lose Money? Theory of Constraints Throughput Accounting

http://www.ScienceofBusiness.com Goldratt Theory of Constraints Throughput Accounting is NEW technology relative to Cost Accounting. Discover why you don't really "lose money on a job".

Theory of Constraints POOGI Part 56: We lost money on that job!

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Cost accounting is alive and well in American business (and around the world really), even though it is an invalid, old technology. The continued—and unquestioned—use of cost accounting has led directly to the loss of competitiveness and long-term decline of American manufacturing. Stop using it!

Brad: You give a lot of speeches to business owners. Tell me again, what drives you nuts?

Dr. Lisa: When someone says “We lost money on that job” or “We lost money on that project".

Brad: That’s cost accounting talking. It’s amazing the owner is still in business, saying something like that. If his competition didn’t all think the same way, he would be out of business.

Dr. Lisa: Truly variable costs—materials, outsourcing, freight, sales commissions—are normally just a fraction of the selling price. There are only two ways to lose money on a job: 1) charge less than your truly variable costs; or 2) re-work a job over and over again causing you to incur the truly variable costs multiple times and the total of all the truly variable costs are more than the price you charged.

Brad: The all-industry average for truly variable costs (TVCs) is 40%. And machine shops are usually much less than that, depending on the type of work they do. So why does the business owner think he “lost money on that job”?

Dr. Lisa: It’s the allocation of overhead cost, the number one conceptual mistake of cost accounting. Remember, cost accounting was invented back at the turn of the last century, when labor was paid piece rates and overhead was less than 10% of total costs.

What really happened was that the job took more time than estimated. And since cost accounting allocates “cost” to that time, the job “cost” more than expected, perhaps more than the price. But this is a mirage. The margin received — the sales price minus the truly variable costs — is the same no matter how long the job took to produce.

... to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2009, Dr Lisa, Inc. All rights reserved.

Theory of Constraints POOGI - Part 55: Yes, but… The Value of Concerns and Objections cont.

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Dr. Lisa: Back to the process for handling a “yes, BUT”. We are saying “yes” to the solution, and the “BUT” is a negative we anticipate if we go forward with the solution. So the first step is to identify which part of the solution your concern stems from. State this explicitly. Next, indicate what your concern is, what negative could occur (called Negative Branch Reservation). Now together you can figure out that (1) either that you misunderstood the solution or (2) that you are correct that the negative could happen. If so, how could we modify the solution to eliminate completely or substantially the possibility of the negative?

Brad: That sounds a little theoretical. Do you have an example?

Dr. Lisa: Sure. When we are doing the Velocity Scheduling System with a machine shop, someone in the management team will often have the idea to do preventative maintenance. In this example, this is the “part of the solution the concern stems from”. Someone will respond that there isn’t enough capacity to do preventative maintenance without being late on orders. This is the concern, the negative that could occur.

Brad: What’s the solution to trim the negative branch?

Dr. Lisa: To do both -- to complete ALL the orders on-time AND do the necessary preventative maintenance. The Detailed Planning portion of the Velocity Scheduling System is what we use to see and plan for opportunities for preventative maintenance while maintaining 100% due date performance.

“Dealing with yes, BUT’s” is one of the bonus videos included in the Velocity Scheduling System which is based on Goldratt's Theory of Constraints and Drum Buffer Rope.

Get a daily TOC Tip on Twitter, just follow http://twitter.com/TOCExpert.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2009, Dr Lisa, Inc. All rights reserved.

Theory of Constraints POOGI - Part 54: Yes, but… The Value of Concerns and Objections cont.

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Brad: You’re making the case for people expressing their concerns whenever a solution is presented? That this is a good thing? Doesn’t this slow down the whole process? If I have a good idea—and as a business owner, it goes without saying that all of my ideas are great ideas—why shouldn’t I just have everyone go implement?

Dr. Lisa: We weren’t taught how to deal with the situation where someone presents an idea, and we have a concern to express about the idea. In Theory of Constraints (TOC), we call the process “Negative Branch Reservations”. It is part of theTheory of Constraints Thinking Processes. There is a straightforward logical process for doing so. And yes, it is an important part of processing each and every solution, and getting your people to buy-in once all the reservations have been raised and dealt with.

Oh, by the way, a lot of your ideas aren’t so hot before we had addressed my negative branch reservations. Don’t you remember…?

Brad: Never mind about that. Explain the process, please.

Dr. Lisa: First, let’s agree on the criteria for a good solution. The presenter should feel good about offering an idea or solution to a problem. If someone responds by saying “let me think about it”, he or she should honor that agreement and does think about it. By thinking through the concern, we get the benefit of the idea and block potential negatives, thereby becoming better managers, and getting better results.

Brad: So the old adage, “an ounce of prevention is worth a pound of cure”.

... to be continued in Part 55.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2009, Dr Lisa, Inc. All rights reserved.

Theory of Constraints POOGI - Part 53: Yes, but… The Value of Concerns and Objections

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Brad: Both as a business owner, and back when I worked for large companies, I have found a lot of negative people. Someone has a good idea, and then it seems like everyone has a “yes, but…” It’s irritating.

Dr. Lisa: Particularly if it’s YOUR idea. In Theory of Constraints, we call that a “yes, BUT”; Small yes and a big BUT.

Brad: Why can’t people be more positive and optimistic? It seems like such negativity blocks progress. Perhaps such people are the problem.

Dr. Lisa: Hold on. To voice concerns is part of human nature. When we hear an idea or solution presented, it is natural to think of what negatives might come from it. The presenter is normally very proud of his or her suggestion, and just as often is not fully aware of what negatives might result from implementing it.

Brad: So he or she is expecting praise and to get credit for the idea?

Dr. Lisa: Exactly. Now, depending upon the trust level and power relationships within the group, and whether there have been previous bad experiences from raising concerns, the concern might not be expressed. Instead, you might hear “let me think about it”. However, we don’t think about it. What we think about is our “BUT”, and hope the idea just goes away. So, we don’t benefit from the idea, and we miss the opportunity to improve it by voicing the concern.

... to be continued in Part 54.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2009, Dr Lisa, Inc. All rights reserved.