Theory of Constraints POOGI Part 67 -- Employees Need Time Off? That’s unproductive!

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: Each employee has a life outside his or her job in a business. They have family, financial and other pressures. Time off is sometimes needed.

Brad: Of course, but business owners have to run the business to satisfy their customers, as well as make enough profit to stay in business. Time off can be a real issue. In some businesses, it is the main issue.

Dr. Lisa: In many businesses, employees have holidays and earned vacation. Normally there are paid breaks for non-exempt employees. In addition, depending on the company, they might also have paid sick leave and/or unpaid time off.

Brad: Often times, the more senior the employee, the more earned vacation they have. And senior employees are frequently the most skilled. When they are off, it's tough to maintain productivity. Early in my career, I supervised a small department of highly skilled employees. We were responsible for the production of a large group of paper mills. It didn't take me long to realize that on average, one person would be off on vacation every day. And of course, it didn't work out that way. Half the department would be gone the whole month of December. Most small businesses have this problem, although they cope with it in different ways.

Dr. Lisa: Yes, I've seen all kinds of different ways business owners cope with this, including NOT dealing with it at all. But, to maintain due date performance, there needs to be some predictability and consistency of resource availability. In the Velocity Scheduling System (based on Theory of Constraints drum buffer rope), machine shops are comparing load to capacity for several weeks into the future. Often the company policy requires less notice for vacation than the scheduling horizon, meaning that significant variability is added from even planned time off, not to speak of unplanned time off that happens with no notice. Due date performance is jeopardized.
Dr. Lisa: Then there is the impact on profitability. Paid time off is an operating expense. Throughput (Throughput equals Sales dollars minus Truly Variable Costs in Theory of Constraints Throughput Accounting) dollars must exceed Operating Expense to make a Profit. During some weeks and months of the year, there isn't enough productive time available to produce enough Throughput to make money. This puts the business owner in the position of having to make enough more money in the more productive months to make up for the loss months.
Brad: And, customers don't care about the people scheduling issues the supplier has. They expect what they want when they want it (or at least when it was promised). For sure, the demands placed on a supplier by a customer do not neatly fit into the preferences of when employees would like to work.

... to be continued in Part 67
Hello? Is anyone reading? Please add your comments (just click the comments hyper link at the bottom of the post)

Here's to maximizing YOUR profits!


Dr Lisa

(c)Copyright 2010, Dr Lisa, Inc. All rights reserved.

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.

Cash Velocity Summary

Continuing our cash velocity discussion started on March 16, 2007

Cash Velocity Summary

There are two cash velocity rules:
● Make sure that the amount and rate of cash flowing in is enough to cover all your business and personal needs
● Be paranoid. Unfortunately, stuff happens. And unless you’re willing to risk losing your passion, studying and maximizing your cash velocity is essential
The goal of this chapter was to educate the reader about cash velocity -- how to maximize it and how to avoid cash becoming your constraint. We discussed the two drivers of velocity: throughput and cash-to-cash cycle time. We found that by using Goldratt's TOC techniques, we can increase throughput and reduce cash-to-cash cycle time. We also discovered that the velocity of throughput can be more important than the amount of throughput, especially when we are limited by cash.
If fear of cash problems is not enough for you to monitor, forecast and plan for you cash velocity needs, then consider this: The real value of your business is NOT based on your accountant’s value of your assets; it is based on the cash earning stream that your business assets are likely to produce. The more predictable and reliable this stream of cash is, the more valuable your business is. So if you ever plan to sell your business and retire with the money, then you need to pay attention to your cash velocity. Your banker will also value your business and assess your risk based on your cash flow.[1] Cash is still king. It’s still the life blood. So get in the drivers seat by understanding and increasing your cash velocity.

[1] Many banks use the Uniform Credit Analysis® Cash-Flow Worksheet developed by Wells Fargo and made popular by the Risk Management Association.

That completes the cash velocity discussion we started on March 16 for now. What would you like to hear about?

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Increasing Throughput -- Other Considerations

Continuing our cash velocity discussion started on March 16, 2007

Increasing Throughput -- Other Considerations

In previous sections we have covered raw materials and how to reduce them. We also need to cover WIP (Work In Process) and finished goods inventory. DBR Scheduling* reduces WIP by releasing raw materials at the rate at which the constraint can consume the raw materials. Demand Pull* can also be used to reduce finished goods inventory. If we make to stock, or use a replenishment system to supply our customers, then we can minimize the amount of finished goods we carry while at the same time increasing the probability that we will have on hand what is needed. When DBR Scheduling and Demand Pull are implemented, we see a mean reduction in all inventories of about 50%. All of this, of course, helps us to further reduce cash-to-cash cycle time.

* DBR Scheduling and Demand Pull as defined in Goldratt's Theory of Constraints

... to be continued ...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Increase Throughput -- Increase Sales cont.

Continuing our cash velocity discussion started on March 16, 2007

Increase Sales cont.

Last time we ended our discussion with this question: So how do you increase your throughput without going into cash trouble?

The first step is to examine your product mix. Calculate the T/CU for each product. With this information you can devise a strategy to sell more products with higher T/CU and drop those with a lower T/CU. This will allow you to maximize your throughput without investing additional capital or having to tie up more cash in the form of raw material.

Then once again, we must decrease our cash-to-cash cycle time which we have already covered.

... to be continued ...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Increase Throughput -- Increase Sales

Continuing our cash velocity discussion started on March 16, 2007

Increase Sales

Increasing sales is a sure fire way to increase your throughput and is theoretically limitless. My first question is: Are you selling all that you can now? If you are a “make to stock” company, do you ever have the case where you don’t have the product your customer is looking for in stock? If so, you could benefit from DBR Scheduling and Demand Pull to ensure that you always have what your customers demand.

But, let’s say that you have already implemented DBR Scheduling and Demand Pull, and you currently can provide what they want on time. To increase sales you must learn and met your customer’s business NEEDS. New customers are earned over time by understanding the business needs that they have, then customizing your products, services, or policies to meet those needs. In TOC we call this creating a mafia offer. Market Segmentation will be a likely result of matching your offerings with your customers or potential customer’s perception of value. All that being said, sometimes business owners already know that they could earn more business from existing customers or know where that can find new customers. What stops them is cash. To grow sales takes cash and to grow sales a lot takes a lot of cash. So how do you increase your throughput without going into cash trouble?

... to be continued ...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.