A Process Of On-Going Improvement (POOGI) - Part 38

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.}

Recent economic events have changed the relationship many companies have with their markets.

Not recognizing this change is dangerous. You may need the change the way you are managing, and quickly.

Goldratt's Theory of Constraints (TOC) asks four fundamental questions related to the process of ongoing improvement:
1. Why Change?
2. What to Change?
3. What to Change to?
4. How to Cause the Change?

Let’s approach this at global level: your total company in relationship to its markets. Let’s ask some basic questions to determine quickly what global problem your company needs to address. This self-diagnosis will help you understand “What to Change?”

Are you internally constrained? Yes or no?

You company is internally constrained when it cannot meet market demands placed on it. Symptoms of being internally constrained include:
1. Less than 100% due date performance, and/or
2. Lead times in excess of your competitors, the industry standard, or what the customer should reasonably expect (evidenced by your large backlog).

Sometimes, you are not internally constrained even when these symptoms exist because you know the company is not as productive as it could or should be. A quick check is to ask whether the company could now sell an additional 20 to 30% more, and meet the commitment within normal delivery lead time. If you cannot, your company is internally constrained.

Very recently, many companies were internally constrained.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

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

A Process Of On-Going Improvement (POOGI) - Part 37

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.}

The PQ quiz below is deterministic, with one correct answer. You have only ten minutes to take the quiz once you have familiarized yourself with the data provided. This quiz has been given to CEO’s worldwide for over 20 years. Over that time span, less than one percent of CEO’s get the correct answer. Will you?

The Simple Company makes just 2 products: Pens and Quills. The goal of the company is to maximize profitability. The company has 4 resources that are not interchangeable: Abby, Bobby, Christi and David. The work week is 40 hours (meaning each resource is available for 2,400 minutes per week).

Unlike reality, the environment of the Simple Company has perfect information. Everything is fixed, and every piece of data is precisely known. There is no scrap, no set-up, no worker breaks or absenteeism, no downtime; this is just an idyllic company. We have removed all the uncertainties. Our marketing department is the best, and we know the exact weekly demand for each Pen and Quill.

Operating expenses are $6,000 per week. These are all the fixed costs which include labor, benefits, utilities, interest, SG&A expenses, etc. Labor is paid at the rate of $10 per hour for all resources but remember that labor is included in the $6,000 of operating expense. The raw material (RM) costs and processing times are shown in the diagram of the production process of the Simple Company below.

What is the maximum net profit (or minimum net loss) the Simple Company can earn in 1 week with the current demand?

Please email your answer at any time. You will receive back an email with the correct answer, as well as the methodology for arriving at the correct answer for more complicated real-life scenarios.

...to be continued.Here's to maximizing YOUR profits!

Dr Lisa Lang

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

The pens and quills problem was adapted from the Haystack Syndrome.

A Process Of On-Going Improvement (POOGI) - Part 36

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.}

The good news is that improved R-I-T “Ready-to-be-Implemented Technological Advance” processes are available.

The bad news is that the Western World is implementing these processes slowly, and much slower than some other parts of the world.

Here is a warning from Dr. Goldratt, developer of the Theory of Constraints, in an introduction to his book “The Race” in 1986:

“The Race is about our standard of living and how we can increase it. Today, we are facing a real threat in the Western World that the opposite will happen. The threat is not just to us. If our living standard declines, everyone else on this globe is adversely affected. Both the source and the solution to the problem lie in the same place—manufacturing. Manufacturing has been the major wealth generator of our industrialized world. This ability to generate wealth has mad our standard of living the envy of the rest of the world. If we continue to lose our manufacturing base, and we are losing it rapidly, we and everyone else will certainly live less well.”

Of course, Dr. Goldratt’s warning was also prophetic. The rest of the world has outpaced the Western World since 1986. It is winning the race.

For years, Dr. Goldratt refused to have his books translated into Japanese. He thought and felt that Japan was so far advanced that if it applied the improved processes of the Theory of Constraints, that the trade imbalance would further increase, threatening to destabilize the world economy. Six years ago, when the U.S. and European economies had closed the gap, and Japan had stagnated, he relented. In the first month of its release, “The Goal” sold a half-million copies. Since then, its sales are equal to the sales in the rest of the world.

Japan is adopting TOC at a much faster rate than the Western World. For example, last year Japan announced the requirement that all companies supplying infrastructure projects must use Critical Chain project management, the TOC methodology for managing projects (and delivering them in half the time).

The TOC body of knowledge continues to grow. TOC is very compatible with Lean and Six Sigma. Combined, they lead to even better results than implementing any one. The technology is there, and it is growing at a faster rate than companies are implementing it.

If your company is not implementing TOC, Lean, and Six Sigma—Ready to Implement Technology—then your company is not achieving results that are possible. These results can be achieved in a remarkably short time. These results include 100% due date performance, decreased inventory (freeing up cash), and increased sales.

You have a Technology Gap. What are you going to do about it?

...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 35

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.}

“A Technology Gap”

At the recent NTMA conference, Professor Paul Zane Pilzer spoke of the importance of technology in wealth creation, and of a “Technology Gap”. Let’s review a few of his concepts, and then relate it to a process of ongoing improvement.

Here are Pilzer’s Principles of Economic Alchemy:

1. Technology is the major determinant of wealth because it determines the nature and supply of physical resources.
2. The advance of technology is determined mainly by our ability to process information.
3. The backlog of unimplemented technological advances (the “technology gap”) is the true predictor of economic growth for both the individual and society.

Pilzer described his Six Laws of Economic Alchemy:

1. By enabling us to make productive use of particular raw materials, technology determines what constitutes a physical resource.
2. Technology determines our supply of existing physical resources by determining both the efficiency with which we use resources and our ability to find, obtain, distribute, and store them.
3. The rate at which a society’s technology advances is determined by the relative level of its ability to process information.
4. By providing us with new products and processes that change the way in which we live, technology determines what constitutes a need, and hence the nature of consumer demand.
5. Technology determines the level of consumer demand by determining the price at which goods can be sold.
6. The immediate economic potential for an individual, an industry, or a society can be explained by examining the technology gap—the best practices possible with current knowledge versus the practices in actual use.

Related to #6, Pilzer defines a “Ready-to-be-Implemented Technological Advance” (R-I-T) as a fully developed better product or method that is ready to be put to use.

We normally think of technology as something physical, like a machine. But Pilzer’s view of technology is liberating. His fourth law includes “processes that change the way we live”.

There is good news and bad news.

...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 34

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.}

“Incentives Work, Don’t They?”

Dr. Lisa: “Brad, ever since I’ve known you, you have been interested in the effectiveness of incentives. Tell me why.”

Brad: “It started when I bought my label printing business back in 1991. I wanted to gain the collaboration of my employees. Like many businesses, we had productivity, delivery, and quality issues. Like many owners, I wasn’t at all sure how to manage well enough to get the results I wanted. So, I thought incentives might help motivate employees to do what I didn’t know how to ask them to do. I thought incentives would motivate them to work it through on their own. At the least, I wanted to have employees who wanted what was best for the company. On the other hand, I was very afraid of having unhappy employees.”

Dr. Lisa: “Did it work?”

Brad: “Not so much. Our PDQ (Productivity, Delivery, and Quality incentive) did clarify the company operating goals for our employees. Our incentive plan initially was measured and paid monthly, but that seemed to be too long to affect behavior. When we went to weekly measurement and payouts, we had good weeks that resulted in incentive payments, followed by bad weeks without incentives. Rather than being perceived as a benefit, it seemed that incentives were considered an entitlement. When they weren’t paid, it seemed that some of the employees blamed me.”

Dr. Lisa: “What did you do about that?”

Brad: “The best approach I found was a cumulative year-to-date expectation level compared to year-to-date performance weekly. Any incentive was paid weekly, which was meaningful to employees who told me just to pay them as much as possible every week. I never found that incentives really incented a difference in performance. How we managed the business set up the performance of the company, good or bad. Good employees were good employees whether they were paid an incentive or not.”

Dr. Lisa: “Aubrey Daniels claimed, in his book Bringing Out the Best in People, that most incentive systems are considered by employees as Negative, and based on Future results that are inherently Uncertain. Rather, effective incentives must be Positive, Immediate, and Certain. And they rarely are. At the big companies I’ve work for, the annual bonus seemed very detached from my work.”

Brad: “When I asked him back in 1998, Dr. Eli Goldratt, father of the Theory of Constraints, suggested an annual incentive paid equally to all employees. The pot would be the annual increase in total net profit. Each year the baseline would reset. The reward could be substantial for everyone and anyone that collaborated to achieve the improvement. He referred to a chair manufacturer in Texas as a big success story.”

Dr. Lisa: “Yes, BUT. That doesn’t meet the test for being Immediate and Certain.”

Dr. Lisa: “Eli’s suggested approach has been further developed into what is referred to as the ‘POOGI Bonus’ in a TOC book called Management Dynamics by John Caspari. POOGI stands for Process of Ongoing Improvement. Basically a pot is built up over time and dispensed over time. So that makes it a little more immediate, and if a positive pot is built up, more certain.”

Brad: “When I joined a Vistage (TEC International back then) CEO group in 2003, I immediately put the question of incentives to the other business owners in my group. None had found a really effective plan. I was particularly troubled then because I had just read a book Punished By Rewards that claimed incentives were in fact detrimental. That challenged me because it called into question the very concept of incentives. The author, Alfie Kohn, claimed that the evidence confirmed that people’s interest in what they are doing declines when they are rewarded for doing it. He said Gold Stars, Incentive Plans, A’s, and even praise are ‘Bribes’.”

Dr. Lisa: “How about Open Book Management? That’s been popular.”

Brad: “Yeah, I tried that for a few years, too. My experience is that owners are owners and employees are employees, and education added to incentives still leaves a gap. I call Open Book Management a solution looking for a problem. I was the only one left to dig deep whenever I had a problem meeting payroll. By the way, do you know how difficult it is to transition away from incentive plans? It’s almost as bad as stopping a culture addicted to overtime.”

Dr. Lisa: “So, what do you think, are incentives effective or ineffective?”

Brad: “Ineffective, because finally I found someone that had thought the problem through. Elliott Jacques spent his life researching organizations. He found that the key to determining a person’s performance potential actually is his or her ‘time span of discretion’. That is, how far ahead does someone think? 80% of the population is under a month, and half of those under a week. Only 7% of the population was over a month, and 13% are unemployable, institutionalized, or incarcerated. The correlation between time span and what a person expects as ‘fair felt pay’ was over 90%, and the curve was stable across currencies, cultures, continents, and time.”

Dr. Lisa: “In Requisite Organization, Elliott claims that the basic contract between an employer and employee is for their ‘Best Work’. He further claims that an incentive undermines that. It causes confusion. If instead of the employer expecting and the employee providing Best Work, the employee now is supposed to provide less than best work without an incentive and best work for an incentive.”

Brad: “Jacques did say the exception was some select individuals in sales. The solution was to make them 1099 independent contractors rather than W2 employees.”

Dr. Lisa: “With TOC, we concentrate on measures, not incentives. Policies, Procedures, and Measures drive behavior.”

Brad: “Yes, and I’ve found measures to be much simpler to implement and manage with. Measures are effective and incentives have too many negative side effects. Having a few measures is also consistent with the goal of having secure and satisfied employees. Pay them well, and expect reliable and effective performance. Measures are an immediate feedback mechanism.”

...to be continued.



Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.