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.

Excess Capacity for a Viable Vision

Question: How much excess capacity do you need to have to make a Viable Vision viable?

Answer: It depends. Squeezing more capacity out of your existing operation without investment is relatively easy (you read about it in The Goal, Its Not Luck, and Critical Chain). The hard part is selling it. You need an unrefusable market (a “mafia offer”) offer in order to sell all your capacity (you read about this in Its Not Luck). The Viable Vision is the specific strategy and tactics necessary for you to uncover your capacity and the market offer that will bring your company to have a profit level equal to your current sales level.

What percent of sales are your truly variable costs (TVCs)? Remember that we define TVCs as those costs that change when an additional product or service is sold. TVCs include raw material, sales commission, freight, subcontractors, and the like.

The higher your TVC or lower your throughput (T = sales – TVCs), the more excess capacity (or price premium) you will need to make it possible to turn your current sales level into your profit level in 4 years.

Here’s an example: If you currently have $10 million in sales and TVCs at 30% you will need $23 million in sales. This assumes that you could add these sales with your current labor and/or operation expense (OE). And, in many cases this is quite possible.

If you will need to add labor or other OE, then for each million in those costs that you add you will need to sell another $1.43 M (amount OE added divided by throughput). This is typically not a big deal (we have a client right now with about 65% TVCs), it is just something we have to take into consideration.

So, the more you can sell with your existing resources and investments, the quicker you can turn your current sales level into your profit level. And, your specific mafia offer will also play a big role in the amount of excess capacity you will need. If you can get a price premium, then you will need less capacity and less sales.
The smallest company on a Viable Vision right now started at $1.2 M in sales and the largest started at $4 B (billion!).

But this is way more information than you need because we will collect the data for your company, develop your Viable Vision, and spend 2 hours with you discussing your company and your Viable Vision for FREE, no strings. The only catch is that the CEO, President, or business owner must have attended one of my Maximizing Profitability events to be eligible for the free offer.

And if you decide that you would like guidance from us in achieving your Viable Vision, then 100% to 90% of our fees are based on YOUR results. If you don't get the results, you don't pay! And yes there is a 100% results based option!

Here's to maximizing YOUR profits!
"Dr Lisa" Lang

99/1 Rule vs 80/20 Rule

Question: You mention in your speech that TOC (Goldratt's Theory of Constraints) is about the 99/1 Rule, not the 80/20 Rule. Can you explain that?

Answer: Let’s start by talking about the 80/20 Rule. The 80/20 Rule, also called the Pareto Principle was made universal by Juran and refers to the “vital few and trivial many”. According to Juran:

“It is a shorthand name for the phenomenon that in any population which contributes to a common effect, a relative few of the contributors account for the bulk of the effect.”

This principal is universal. It applies to your customer base – 20% of your customers account for 80% of your revenue. Your customers are independent or unrelated contributors to your revenue.

When we are talking about maximizing profitability, and the contributors of profitability (various elements in your system) are related, then the 80/20 Rule still applies, but it is too broad. Because the contributors of profitability are related, the largest contributor will have a much greater impact than all the remaining contributors. This is due to the statistical fact that dependent contributors add up as the sum of their squares. By squaring each contributor, the largest one ends up being closer to 99% of the sum of the squares. This largest contributor is your constraint – it’s the thing that limits your profitability most.

Most companies have one or few constraints. The number depends on the number of independent processes. If all your processes are in some way dependent on each other, then you will have one and only one constraint. If you have 2 completely independent processes for 2 different products or services, then you will have 2 constraints in your system. Since your system is limited by the amount of work that the constraint can process, your constraint is the BIGGEST contributor to your profitability. Hence, focusing on your constraint(s) is where you will have the greatest leverage on your profitability – the 99/1 Rule.

In summary, when you are trying to identify where to focus your efforts (quality or otherwise) and the contributors are related or dependent, then determine your constraint (your 99/1) first. Then, use the 80/20 Rule to determine the main contributors of an effect or problem within the constraint or constraint process.

Here's to maximizing YOUR profits!
"Dr Lisa" Lang

Maximizing Profitability Workshop May 11, 2007 in Denver

If you have never attended one of my Maximizing Profitability events, here's your chance. The next one is May 11, 2007 at the Wellshire Inn in Denver.

Event Description

In this highly interactive presentation, “Dr Lisa” Lang engages the group in discussion and hands-on participation to discover how to LEVERAGE their existing resources using Goldratt's Theory of Constraints to maximize profitability. An approach to developing a “Mafia Offer” and to achieving rapid sustainable growth (a Viable Vision) is discussed, along with:

· How to make management decisions that are aligned with profitability goals
· How to increase profitability by increasing capacity with no corresponding increase in expenses or capital investment
· How to create a “Mafia Offer” that allows this newly created capacity to be sold

Dr Lisa provides a unique, counter-intuitive perspective based on scientific methods, causing participants to challenge their current assumptions and think bigger. Participants will learn to make decisions and strategic plans that are aligned with maximizing profitability.

The value to participants will include:
· Improved understanding of how to leverage their constraint and existing resources to drive profitability
· 4 metrics and 3 decision rules to make day-to-day and mix decisions that maximize profitability
· How to have the biggest and quickest impact with their Lean and Six Sigma efforts
· The guidelines and examples for creating a “Mafia Offer” – an offer that is so good your customers can’t refuse it and your competition can’t or won’t offer the same.

If you are frustrated with your profit level and are tired of playing Whac-A-Mole, then this event is for you! Click here for the fax registration form. It's only $29 and includes lunch.

Here's to maximizing YOUR profits!
"Dr Lisa" Lang

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.

Increase Throughput to Increase Cash Velocity

Continuing our cash velocity discussion started on March 16, 2007

Increasing Throughput

Throughput (as defined in Goldratt's Theory of Constraints Throughput Accounting) is sales revenue minus truly variable costs. Therefore we can increase your throughput by either 1) increasing sales, 2) increasing our selling prices, or 3) decreasing our truly variable costs.

Let’s start with the last one, first. To decrease our truly variable costs we can:

• Negotiate a lower price with raw material suppliers
  
• Negotiate a lower price with outside services, freight suppliers, or with any other truly variable cost vendors that we have
  
• Decrease the sales commission we pay to our sales people

There is a limit to how much we can reduce our costs. If our costs go to zero, then we are no longer in business. Therefore, we want these costs to be in line, but this is not where we want our focus.

... to be continued ...

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

Factoring Receivables Reduces Cash to Cash Cycle Time

Continuing our cash velocity discussion started on March 16, 2007
Yesterday we discussed how offering a discount can reduce cash to cash cycle time and today we will discuss an alternative.

Another approach, which leads to similar results is receivables factoring. Factoring receivables, however, takes about a month to set up in order to provide all the necessary information. They charge based on how long it takes your customers to pay. This is typically in the range of 1 to 5% which is a much better deal than the 20% discount. However they typically pay you 80% of the invoice within 2 days but hold 20% of the funds back until your customer has paid. We usually start with the discount offer then switch to factoring once we can get it set up.

In addition to the above ideas, with DBR Scheduling we can also give preference to customers who pay quickly. Customers who pay quickly are certainly better, as demonstrated above, to our cash-to-cash cycle time.

The shorter lead-times that result from implementing DBR can also allow us to offer shorter lead-times for higher prices depending on our industry. This would be determined during your mafia offer development[1].

... to be continued ...

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

[1] We typically do a Mafia Offer Boot Camp over 3 days. For more information see http://www.mafiaoffers.com/

When Offering a Discount Makes Sense

Continuing our cash velocity discussion started on March 16, 2007

Last time (on Friday) we talked about offering a discount to our customers if they paid on delivery.

What kind of discount could you offer to get cash back into your system faster so that you could make more money? Before you answer that question, also consider that 1) you need to be able to sell the additional products so that you can benefit from the faster cycle. If you offer a discount, get the cash back quickly, but don’t have another order, then this strategy is not a good idea for you. 2) If you have other sources for cash, like a line of credit, you may be better off to use that than to use deep discounting. You’ll want to compare the Return on Investment of each. 3) However, if your cash is close to becoming a constraint, and you have no borrowing options, this idea could keep you in business.

A 20% discount for 42 days is an interest rate of 174%. But the cost of money is less important than the availability. Obviously you would not do this if cheaper money was available.

When we have used this type of offer to recover from a cash constraint, we let customers know that it was an offer we were testing to determine customer interest and that it may not be a long-term offering. This will give you the option of discontinuing the offer once you have another source of cash to grow your business.

.... to be continued ...

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

Increasing Cash Velocity Can Increase Throughput

Continuing our cash velocity discussion started on March 16, 2007

Now let’s look at the impact on what we discussed yesterday had on our throughput.

Let’s say we immediately visit a customer whose complete order was shipped and had just been received by that customer. We make, and they accept, our 20% Discount Mafia Offer and we collect $320 in cash. We pay the sales commission of $40 so we have $280 left. With the $280 we can buy 2 sets of raw materials ($100 each) to produce 2 more products and still have $80 in cash.

We then sell those 2 products with our discount offer collecting $640 ($320 x 2). We pay sales commission of $80 but had $80 in cash from the first offer, so we now have $640 in cash. We buy 6 sets of raw materials and have $40 in cash left. We sell all 6 products with our discount offer collecting $320 x 6 = $1,920. We pay $240 in sales commission leaving $1,920 - $240 + $40 = $1,720 in cash. Let’s go one more time, a 4th cycle. We take the $1,720 in cash and buy 17 sets of raw materials, leaving $20. If we sell all 17 products with our discount offer we collect $320 x 17 = $5,440. We pay sales commission of $680 leaving $4,760, plus the $20 left from the previous cycle, we now have $4,780 in cash.

So, in 53 days you can sell 1 product and generate $260 or you can make a “discount” offer which enables you to sell 17+6+2+1 = 26 products and generate $2,520 in throughput in 52 days.

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

Cash Constrained Company Example

Continuing our cash velocity discussion started on March 16, 2007

Reducing Float for the Cash Constrained Company

Now let’s consider a case where there is a cash constraint.

When cash is your constraint, going out of business is usually not far behind. Most small businesses go out of business because they have run into cash trouble. A cash constraint situation can occur to profitable businesses simply because they must pay vendors before they receive their payments – their cash-to-cash cycle times are too long.

Let’s continue with the company who has a cash-to-cash cycle time of 55 days. Because their cycle time is a positive number it means that they must pay their vendors for raw materials before they get paid by their customers. But now, our company has a cash constraint and they can not buy any raw materials. What can be done?

We need to collect enough cash to buy raw materials so we can work our way out of this jam. Consider the impact if we offer a 20% discount on any order paid in full on receipt of goods (a temporary Mafia Offer) . The product sells for $400 but our truly variable costs for this product are only $140. That includes the 10% sales commission. For customers that take the discount, the cash cycle time would be 13 days with throughput of $180 ($400 less $140), almost a velocity of 14! Any customers that pay full price and take the 42 days to pay, their cash to cash cycle time remains at 55 days with throughput of $260 (4.73 velocity). Therefore, we have almost a 4:1 cash cycle if customers take the discount. What a difference!

... to be continued ....

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

Factoring Receivables

Should I factor (sell) my receivables? I could use the cash, but the cost seems too high.

This question is hard to answer without more information, so let’s look at an example:

Let’s say it costs you $40 to make a product you typically sell for $100. If you could get $100 dollars in 60 days from your customer or $80 dollars in 10 days from selling the invoice, which would you prefer?

To compare the 2 options, let’s calculate the amount of Throughput that each option would generate in 60 days. Remember, Throughput* = Sales Price – Truly Variable Costs.

Option 1: We wait to collect the accounts receivable in 60 days. Therefore in 60 days we generate $100-$40 = $60 in Throughput.

Option 2: We sell the invoice and receive $80 in 10 days. Therefore we reduced our cash to cash cycle time and have generated $80-$40= $40 in 10 days. But we still have 50 days to go, so we invest our $40 in more raw materials and sell another product. For that product we also sell the invoice and generate another $40 in Throughput. We now have 40 days to go, so we repeat the process 4 more times. In 60 days we generate $240 in Throughput.

So the answer is “it depends”. If you have a use for the money that will generate additional Throughput, then you’re on your way to maximizing your cash flow and your profitability! If you have plenty of cash or access to low interest cash, then it doesn’t really make sense. Calculate the annual interest rate and you will see what I mean.

Another way to accomplish the same thing is to create a Mafia Offer where you offer deep discounts if your customers pay very quickly. However, if you decide later that you don’t want to offer this option anymore, then you have to explain that to your customers.

*Throughput is defined in Throughput Accounting as originally developed by Eliyahu M Goldratt, developer of Theory of Constraints.

Welcome

Welcome to Dr Lisa's Max Profit Zone! We will discuss subjects related to maximizing profitability including Cash Flow, Cash Velocity, Mafia Offers (a Decisive Competitive Advantage), Drum Buffer Rope, Critical Chain, Demand Pull (or Goldratt's Distribuiton Solution), Throughput Accounting, and Goldratt's Theory of Constraints. If you have a question would like to see answered on this blog, please send it to DrLisa@ScienceofBusiness.com