We discuss increasing your profits, increasing sales w/ Mafia Offers, selling and presenting your Mafia Offer, increasing cash flow, increasing cash velocity, and Throughput Accounting using Eliyahu M Goldratt's Theory of Constraints, Lean and Six Sigma.
This is the second in the series of conversations.
Brad: “Just what should a highly custom job shop or machine shop company set as a profitability goal? What is reasonable? How high is up?”
Dr. Lisa: “I’ll give you Dr Eliyahu Goldratt’s answer and then I give my more direct answer. Dr. Goldratt stated that profitability goal of the business should be a level of return on sales that top management of a company agrees is definitely impossible to attain.”
Dr. Lisa: “For example, if everyone agrees that 5% Return of Sales is definitely possible, that is too low of a goal. If everyone feels the same about 6%, 7%, 8%, and 9%, they those levels are also too low of a goal. But if everyone agrees that 10% is not achievable, that then becomes the goal.”
Brad: “That would be an interesting exercise for any CEO to do with his or her top management team.”
Dr Lisa: “My answer: How high is up is going to be dependent on 1) what percent your Truly Variable Costs (TVCs) are of sales. And 2) how much capacity you can undercover – meaning how much productivity you can gain with the same people and resources.”
Dr Lisa: Knowing both of these numbers (better to be approximately right, than precisely wrong), will allow you to arrive at a very feasible goal and yet one that most will agree is not attainable based on previous experience.”
Dr Lisa: Using the same example from our last conversation, I’ve added the Return on Sales:
We’ve gone from 0% Return on Sales to 8.3% Return on Sales by being able to sell the 20% productivity gain that was achieved.
Brad: “Many job shops and machine shops that we work with have 20 to 35% TVCs (which typically includes raw materials, outside services, and sales commission if any). Some more some less, but this is common. When I initially analyze the financials of a company, I’m looking for the actions and implementation steps required to bring the company to reliably make a 20% Return on Sales month in and month out, year in and year out.”
Dr. Lisa: “Ha! Be careful, you’ll scare some business owners with that goal. He or she will definitely think that goal is unattainable!”
Brad: “A small business making 20% Return on Sales is a lot more fun to run than a larger business barely managing to reach breakeven.”
Dr. Lisa: “For sure. A company with sales of $2.5 million and a 20% Return on Sales has $500,000 of net income. And so does a company with $25 million of sales with a measly 2% Return on Sales”.
Brad: “Now the nifty thing is that TOC ‘silver bullets’ can be used with that same company with $25 million in sales to bring them to achieve a 20% Return on Sales – a jump from $500,000 to $5 million of net profit.”
Dr. Lisa: “Yes, no wonder that Merger & Acquisition and Turnaround Management Professionals are showing a lot of interest in TOC.”
Brad: “Okay, so let’s discuss more about how this fantastic improvement just might be possible…”
To be continued.
Best Wishes,
Dr Lisa and Brad Stillahn
P.S. To ask questions or leave a comment go below this post.
P.P.S. To find out more about improving productivity in highly custom job shops and machine shops, take a tour around this site. You'll want to check out the job shop scheduling ebook and the webinar.
P. P.P.S. If you have plenty of capacity, but can’t sell it, visit www.MafiaOffers.com.
By Dr Lisa Lang and Brad Stillahn
This article is copyrighted by Science of Business, Inc.
Visit our Re-post guidelines.
This is the fifth in the series of conversations.
Brad: “Let’s talk about job shop strategy. After all, it’s that time of year again.”
Dr. Lisa: “Yes, in the big companies you and I used to work for, the budgeting process starts early and continue for weeks and weeks – almost interminably.”
Brad: “In many companies, including the small -medium job shops that we work with the budgeting process passes for ‘Strategic Planning’. I seem to remember Eli disdainfully calling that ‘Strategic Bull-(something)’.”
Dr Lisa: “My experience matches Eli’s assessment. A lot of BS and little that’s really clear and actionable.”
Brad: “For sure! Having a budget that shows sales increasing by 25% does not mean that the business owner has any idea of exactly HOW that increase will be realized.”
Dr Lisa: “Yes, and I guess that’s my challenge to our readers – how EXACTLY are you going to make the budget that you want to be reality – actually reality!”
Brad: “That’s a really good and necessary challenge – so what guidance or words of advice do you have?”
Dr Lisa: “OK, let’s start easy. “
Brad: “Soooooo, you’re not starting with the Theory of Constraints Strategy and Tactic Trees?”
Dr Lisa: “Correct. Let’s start by stating the objective. What do you want to achieve next year? Be specific and be careful.”
Brad: “What do you mean by be careful?”
Dr Lisa: “I’ll explain with an example. If you state that you want to increase sales by 25% realize that that could happen and you make less profit.”
Brad: “Good point. So what is an objective?”
Dr Lisa: “Objectives are states of being as opposed to actions. What particular desired effect do you want? And the top objective is called The Goal.”
Brad: “Okay, so a business owner states their top level objective, then what?”
DrLisa: “Answer this question: What’s keeping you from reaching this goal? These are obstacles. Once you have the list of obstacles, you can convert each one to an objective.
Here are a couple questions to help you do that 1) What objective, if met, would overcome the obstacle? 2) What state(s) or condition(s) will need to been in place to overcome the obstacle?
Now write your goal at the top of a blank sheet of paper. Then ask – in order to achieve this goal, I must first achieve …. Put the objective(s) at the top which are closest in time to achieving your goal and work your way down the page. After you have the first objective(s) listed then asked for each of those – In order to achieve that, I must first … And so on, until you have placed all the objectives (and probably discovered a few more). The objectives at the bottom would be the first ones you would start working on.
This process is creating a PRT (that’s Goldratt Theory of Constraints speak for Pre-Requisite Tree). This map of objectives becomes your compass, your implementation plan. You follow this compass, this path, until you have learned something that changes your direction or until an opportunity comes along that allows you to skip several levels or is just better that what your were planning.”
Brad: “And if job shop owners go deep enough in this process, they’ll eventually reach a point where they know exactly how to create that state of being or condition.”
Dr Lisa: “Exactly. But if they don’t, they now know what they don’t know.”
To be continued.
Best Wishes,
Dr Lisa and Brad Stillahn
P.S. To find out more about improving productivity in highly custom job shops and machine shops, visit check out the How to Get More Jobs Done Faster webinar or the 9 Challenges ebook.
By Dr Lisa Lang and Brad Stillahn
This article is copyrighted by Science of Business, Inc.
Visit our Re-post guidelines.
"We have reduced the time that it takes for a job to go through the shop. It helped us get control of the schedule, by reducing the scramble of jobs in the shop. Now we do them in order and everyone in the company knows when to expect a job to be worked on and ready to ship." Steve, WI.
If you browse the various VSS testimonials, case studies, and results that custom job shops have reported you'll discover that none of the VSS clients are making widgets. None of these shops are doing high volume work of the same widgets over and over. One thing that VSS clients have in common is that they do NOT produce the same things over and over again. While some jobs, may on occasion, repeat for some of them (or they may make a few things to stock), others don't do any repeat work at all.
Job shop scheduling in a custom manufacturing shop is a challenge, to say the least! But it is this environment that Velocity Scheduling System was developed for.
You'll also notice that in some of the testimonials the specific shop is NOT identified. Why? Well, Steve in WI and many others don't want their competitors to know how they've managed to gain a competitive advantage. How is it that they can get more jobs done faster with the same people and resources? How is it that they've improved on time delivery? How are they more cash flush and more profitable?
To get the results that Steve got or that any of our clients have gotten, you don't need any job shop scheduling software. VSS is NOT software. It is a manual, visual scheduling system. It will work with any ERP software you may use, no ERP, QuickBooks, Excel or whatever software your using now.
In an interview with Amazon CEO Jeff Bezo, Jon Fortt for CNBC reported:
This summer he (Amazon CEO Jeff Bezo) spent time at Lab126, a Silicon Valley outpost about a mile from Apple headquarters where Amazon engineers hash out hardware designs. And he also hosted three all-day book clubs with Amazon's top executives, capped by nice dinners at the end. Bezos said he used the books as frameworks for sketching out the future of the company.
Which books? Bezos was kind enough to share the titles.
The Goal was originally published in 1984 but is still very relevant today. And, as you likely know, it take place in a machine shop. Many job shops and machine shops use The Goal as their Bible. The only problem is that most have no idea how to apply it to their unique shop.
Well, I have good news. If you own or manage a highly custom job shop or machine shop and want to apply what you read in The Goal to YOUR shop, you can do that with expert guidance very inexpensively. Just check out the Velocity Scheduling System (VSS) Coaching Program.
VSS is NOT software but a visual manual scheduling system developed specifically for highly custom job shops and machine shops which are typically low volume high mix environments where the constraint can move week to week or even day to day.
Who's the expert that would guide you? Well that's Dr Lisa Lang. She is one of the foremost Theory of Constraints experts who has worked with Dr Goldratt and specializes in applying Theory of Constraints to highly custom job shops and machine shops.
Check out Velocity Scheduling System here: www.VelocitySchedulingSystem.com When you're there check out the free webinar called "How to Get More Jobs Done Faster". You'll be glad you did!
Drum Buffer Rope (DBR) was developed by Eliyahu M. Goldratt (Eli Goldratt), the father of Theory of Constraints. His book The Goal tells a story of a plant manager applying the drum buffer rope concepts.
The drum is the constraint.
The resource that is limiting your output. Most shops typically only have one constraint at any point in time, but the issue is that for many custom job shops and machine shops the constraint can move as the mix changes.
A constraint is any resources that had demand greater than it's available capacity. Any time lost on the constraint is output lost by the entire system. Increasing output at the constraint, increases overall output.
Improving non-constraints has no effect on overall output. This is why measuring utilization everywhere makes no sense. Trying to 100% utilize non-constraints just results in too much WIP and the many issue associated with that.
The buffer is measured in time.
It's the amount of work expressed in time (like days worth) prior to the constraint. We control this amount of work with the rope.
By having a buffer of work in front of the constraint, we can ensure the constraint does not run out of work. The constraint is the only place where 100% utilization is a good thing!
The buffer's job is to absorb variability. In traditional Drum Buffer Rope there are 2 buffers - one for the constraint and a shipping buffer. The one before the constraints is there to protect the constraint and the shipping buffer protects the due date.
Simplified Drum Buffer Rope just has a shipping buffer. Drum is the same.
Any buffers are divided into 3 zones - red, yellow, green. If the buffer is red we find out why. The buffer is sized so that it turns red about 5% of the time. For continuous improvement we track the whys so that we can reduce or eliminate our biggest disruptions to flow. These improvements to flow lead to less variability and needing less buffer!
The rope is how we control the release of new work.
The idea is that if the constraint sets the pace, the drum beat, for the entire operation, then we should only release work at the rate that the constraint can consume it.
If we release work faster than the constraint can consume it, then WIP (work in process) piles up and bad things begin to happen. (See Little's Law.)
That's a brief Theory of Constraints summary of Drum Buffer Rope. The real challenge is figuring out how to make it work in YOUR shop.
The plant in The Goal is a machine shop. It's not the most complex of cases, but it is a machine shop.
Theory of Constraints Goldratt
Velocity Scheduling System was developed for the tough cases:
For the custom job shops and machine shops that run high mix and low volume work or prototypes.
For the shops where the constraint or bottleneck moves based on the mix of work.
For the shops that may not run many jobs twice but can also have a production job to fit in with everything else.
For the shops that do repairs (in house or on-site) or emergency work.
For the shops that don't have perfect employee or vendor performance.
For the shops who don't have perfectly cross trained employees, but have jobs that require a particular machine.
For the shops that produce a wide range of custom parts or products that have a wide range of lead-times, set-up times and outside processes.
For the shops that may not have 100% quality performance and or yields that are less than 100%.
And, for the shops who have customers call and change quantities, dates or both.
If your shop is a custom job shop or machine shop, check out the Scheduling Reports and Scheduling Webinar tabs. After you watch the webinar, we should talk to determine if your shop is a good fit.
By Dr Lisa Lang
This article is copyrighted by Science of Business, Inc.
