A Process Of On-Going Improvement (POOGI) - Part 33

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.}

If we can compute the impact of any action using T, I, and OE, which are global measures (and part of Throughput Accounting), then we can compute the bottom line financial impact quite easily:
· Throughput minus Operating Expense equals Net Profit (T-OE=NP).
· Throughput divided by Operating Expense is Productivity (T/OE=Productivity).
· Net Profit divided by Inventory is Return on Investment (NP/I=ROI).

We recommend measuring frequently enough to continuously improve. To improve, the causes of the effects must be managed:
· Sales Dollar Days and Inventory Dollar Days should be measured daily.
· Sales, Throughput, Operating Expense, Productivity, and Return on Investment each should be measured daily, weekly, and cumulatively month-to-date and year-to-date. It’s also helpful to track each with a 13 week and/or 12 month trailing average graphically.

For additional reading on measurements, reread “The Goal” and “The Haystack Syndrome” by Dr. Goldratt. And feel free to contact us if you have questions about measurements in your organization.

We’ll discuss why incentive systems don’t work as well as measurements in an upcoming post.

...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 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.

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 1

{This series was co-written with Brad Stillahn.}

Do you remember Herbie from the book “The Goal”? He was the slowest Boy Scout on the hike. The hike was taking much longer than expected, and the only way the troop could finish the hike sooner was to find a way to make Herbie go faster. The troop put Herbie at the front of the line, distributed the contents of his backpack and finished the hike at a much faster rate.

Of course, the hike was an analogy for improving a business, and made the point that is always someone or some thing is restricting the business from achieving more of its goal. For a business, that goal is usually “to make more money now and in the future”. If your business is not making an infinite amount of net profit, someone or some thing is holding you back. Do you know what it is?

The Goal was written 25 years ago, yet it is still a best seller worldwide. It is estimated that 20% of business people have read it, more than any other business book. For every copy bought, an estimated 4 people have read it due to it being recommended and passed on. Over 5% of businesses worldwide have implemented some of the common sense methods described in The Goal with significant results*:

70 percent reduction in lead time
65 percent decrease in cycle time
44 percent improvement in due-date performance
49 percent deduction in inventory
63 percent increase in revenue

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

*Source: The World of Theory of Constraints, Vickie Mabin and Richard Balderstone, Lucie Press, 1999

The Goal is leading the votes for Best Business Books of All Times. It has 5x more votes than the next closest book. Go to http://800ceoread.com/bookvote/ to cast your vote!