Mark Woeppel on Management and Execution

We did a very successful Theory of Constraints Implementation a while back, that incorporated a wide variety of approaches. 

• Critical Chain Project Management
• Process Reengineering
• Supply Chain Management

The results were great.  So we made a presentation telling our story.  Here it is on slide share.

The Article is can be found on the website by clicking on the link below

Pit Crews cut final assembly time in half, giving FMC Technologies “The Racer’s Edge.”

Today, companies are focused on increasing throughput – the rate at which a company generates money through sales. They want to expand products, customer base, markets, and so on. They want to grow as much as possible, as quickly as possible. They do not want to focus on shrinking their company or labor force. Yet, the most commonly used financial tools tell companies to focus on cutting costs in order to maximize profits, making expenses the focus of companies, not sales generation. This often leads management to make decisions that actually harm a company.

Companies need to use financial tools that move them toward their goal. Throughput Accounting provides managers with a transparent and focused method to make decisions that consistently lead them in the right direction.  Through better managerial decision making, Throughput Accounting improves a company’s ability to make more money now and in the future because it approaches accounting from a cash management basis. It meets the need that companies have to meet management challenges, including outsourcing products, process improvement, and purchasing capital equipment.

Is Traditional Cost Accounting Bad for Decision Making?

It is often difficult to see how decisions made in a local area affect the organization as a whole.  This is particularly true of managers who are not able to see or affect every area of the organization.  The organizational view of most managers is typically limited to their own area of responsibility and those nearby. 

For a business leader in an enterprise, the issue is more troublesome, because he or she must concern themselves with the decision making of multiple managers involved in many aspects of the enterprise.  We know from experience that local managers often make decisions that are counter to the purpose of the enterprise.  A single person periodically making a bad decision is usually not significant, but if there is a systemic error in many managers’ understanding of the enterprise’s functioning, many poor decisions will be made, which could create significant, long lasting damage.

Larger, subdivided enterprises lose their system-wide perspective, and managers are forced to rely on decision rules that are typically based on Traditional Cost Accounting; the bigger the enterprise, the bigger the problem.

Download and read the rest of the Throughput Accounting Whitepaper

I have another relevant paper on the impact of cost accounting and productivity.  It’s a bit old, but I thought that as long as I was on this topic, you’d want to have it, too.

A recent study concluded that few companies achieved any return on their supply chain project investment. More than 850 companies were surveyed, including those that had highly publicized supply chain failures. One of the authors of the study, Vinod Singhal, said, “Much of the evidence [for payoff] is anecdotal.” Robert Austin of Harvard University, says, “Only a few lucky companies can prove that they achieved any real payoff from their SCM (supply chain management) efforts.”

With all these smart people working on supply chain management initiatives, why are there so few examples of real successful SCM improvements? Why, if management spends millions of dollars on supply chain management technology, aren’t we seeing breakthrough improvements in supply chain efficiency?

There are three fundamental mistakes managers make in supply chain management:

Supply Chain improvement is about efficiency
Supply Chain improvement is about technology
Supply Chain design is best done by the supply chain experts

The key to improve supply chain performance is to treat the supply chain as a system, where efficiency is a by-product of system performance, not a precursor to system performance. The emphasis in supply chain management must be first on performance – delivering product (and components) reliably. Only when that objective is accomplished, can managers focus on driving cost from the system.

Read the complete article and see a diagram of  on the Demand-Pull Supply Chain

Last week, I did an interview with Joe Dager of Business 901 on the topic of the integration of Theory of Constraints with Lean and Six Sigma.  We discuss how it all fits together and the biggest problem facing managers who want to implement a continuous improvement program.

Click below for a listen!

Well, maybe you won’t double them, maybe you’ll do better!

Many organizations struggle with their continuous improvement (CI) efforts; achieving real bottom line results, whether in cost savings or increased revenues, has proven to be difficult.  In spite of the widespread implementation of Lean and Six Sigma principles, poor results persist. The TLS process generates 15-20 times better performance than Lean or Six Sigma.  I’ve written a new paper (18 pages!) that shows the root causes of poor CI program performance and a systematic framework to create ongoing bottom line results.

You can get a free copy (requires registration) by clicking the link below.
TLS Theory of Constraints Lean Six Sigma

You’ve read all of the books on the Theory of Constraints and heard of the terrific successes other achieve with this method.  You may be wondering what a real implementation looks like.  I’ve led nearly 100 implementations and have seen a wide range of companies. 

All implementations of the Theory of Constraints will follow this general pattern: procedure development, education, implementation, [OH MY GOD! LOOK AT THE BOTTOM LINE!], procedure and policy refinement, re-education and re-implementation.  Implementations are fun and staggering in the bottom line results they achieve.  

What can you expect in your implementation?

It’s difficult to give a specific answer to that question, since every organization is different.  In general, the implementation goes like this:

• Enthusiastic changing of some policies
• Unbelievably positive improvement
• Less enthusiastic changing of more policies and procedures
• Positive improvement
• The constraint moves to an area not addressed by the initial implementation.
• Pretty good improvement
• Results level off
• Management looks elsewhere to improve

Most theory of constraints implementations in manufacturing are completed in less than 2 years.  The plant is now running like clockwork, costs are down, performance is up.  The constraint is no longer in manufacturing.  The focus of the business and the improvement projects must now shift to external issues.  So, rightfully so, the attention of the organization moves to other areas, not in manufacturing.

However in those 2 years you’ve implemented, your business will change in ways you can’t possibly imagine today.  Your performance will level off at a much higher level of performance you are enjoying today.  How about a 43% annual ROI?  Could you sit there awhile?  I know a company that did.  How about taking your order fulfillment cycle from 3 weeks to 3 hours and stalling there?  I know another company that did that.

The first stage of the implementation will be like housecleaning, with many constraints that you identify and then quickly break.  Each time you break one, results improve.  This period lasts about 90 days.  Eventually, you’ll find a constraint that will be difficult to break.  Might be the market.  Might be the product.  Might be a $2 million machine. 

Then comes the hard work.  Implementing the system to exploit and subordinate will take longer than the quick results you’ve been getting up until now.  If you don’t prepare for it, the implementation can get bogged down here.  This phase may take 30 days; it might take 6 months.  It’s at this time the commitment you’ve gained in the prior steps will pay off.  It’s not really that fun implementing a scheduling process and dealing with people that want to work on product early.  You’ll also encounter the “back to Egypt” crowd here.  (The “back to Egypt” crowd was the Israelites that thought they were better off being slaves in Egypt than being killed at the Red Sea – just before the Red Sea parted.)  They’re the ones who will insist that everything was better before the theory of constraints management concept came around.  They’ll resist changing.  Project deliverables will be missed.  People will be “reassigned” because they won’t change.  It will happen. 

The most difficult obstacle to continuing improvement is inertia.  Your implementation process must move people from working in the business to actively working on the business.  Anything you can do to remove the fear of change will help you achieve your goal.

A typical implementation of the theory of constraints gets positive bottom line results.  If you’re committed to managing the constraints and not letting them manage you, you’ll continue to see positive results on your bottom line.

In 2007, the Lean Enterprise Institute surveyed Lean practitioners about the biggest obstacles to their Lean Implementations.  Most practitioners cite “resistance to change” as the biggest obstacle; from every level of management, the middle, front line, and employees as well. 

Note that unrealized financial value ranks very low in obstacles, indicating the practitioners do not connect the lack of bottom line results to organizational resistance.  Rather, they seem to be focused on implementation “maturity”, which is another way of saying that the organization is using all the tools.  These results indicate that there is a disconnect between the goals of lean practitioners and management; emphasizing tool adoption over results achievement.

Why is everyone resisting the change?  Why wouldn’t the organization want to use these tools?  Certainly the lack of results is part of the problem, but it doesn’t explain the seemingly universal resistance.  To find the answer, we looked at a management fad from the past, Total Quality Management (TQM).

Malcolm Baldrige National Quality Award Research Results

To get insight into the reasons for CI success or failure, look at the Malcolm Baldrige Award, the award for business excellence in the United States.  The award establishes benchmark practices  and processses for business excellence, “To enhance the competitiveness, quality, and productivy of U.S. organizations for the benefit of all residents.”.  It has been criticized as being irrelevant to organizational competitiveness because many of the early recipients of the award subsequently failed.  In recent years this issue has been corrected and the award is focused more on the results the nominees achieve, with the tools adoption taking a secondary position.

Quite a bit of research has been done on the relevance of the Baldrige Award criteria.  In the spring of 2000 a study was commissioned to answer the question, “Is there a causal link between the Baldrige Criteria and actual performance of firms?”[1]

The research had several significant findings related to our discussion.

First, the most significant driver of system performance is not process, but leadership.  Leadership pervades everything the organization does, but those organizations that score well in leadership, score well everywhere.  This doesn’t mean that tools are not important, but they’re not as important as the core skill of leadership.

Process management is twice as important when predicting customer satisfaction as when predicting financial results.  We can conclude that having good processes are important to customers, but there is not a straight line from process excellence to financial performance.  So you might have happy customers, but unhappy stockholders.

The lesson for management and continuous improvement program directors is that the soft skills of leadership are very important to delivering results and that the program, to be financially successful must have strong leadership from the real leaders of the organization.  The real leaders must be commissioning, guiding, and delivering real accountability to CI teams.  CI and business excellence initiatives cannot be delegated to the “business excellence department”.  Leadership must be fully engaged in continuous improvement. 

Continuous Improvement and Business Excellence is not something to be added to the work of managers, it is the work of managers. 

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[1] An Empirical Investigation of the Malcolm Baldrige National Quality Award Causal Model 
Darryl D. Wilson, Sam M. Walton College of Business Administration, University of Arkansas
David A. Collier,  The Ohio State University

Here’s a short clip from my presentation last month.

Many organizations struggle with their continuous improvement (CI) efforts; achieving real bottom line results, whether in cost savings or increased revenues, has proven to be difficult.  In spite of the widespread implementation of Lean and Six Sigma principles, poor results persist.

The TLS process generates 15-20 times better performance than Lean or Six Sigma.  This presentation will show the root causes of poor CI program performance and a systematic framework to create ongoing bottom line results.

You can view the entire presentation by registering here

Probabilistic project scheduling uses an understanding of the variation in project tasks and the project environment (project risks) to make a quantitative prediction of a range of project outcomes. Instead of providing a fixed date to answer a question such as “When is first oil?” probabilistic scheduling provides a range of answers of the type, “There is a 50% chance of achieving first oil by date x or sooner, and a 90% chance of achieving it by date y or sooner.”

A more general application of probabilistic planning also considers the range of project costs and returns. This evaluation focused on the range of outcomes for key project dates, such as first oil. Quantifying the range and probability of outcomes can aid project planning and decision-making.

Probabilistic scheduling provides a method to quantify the risk management process. Quantifying the impact of potential risks improves decision-making affecting the control of those risks, and potentially on the overall financial viability of the project. It specifically aids the upfront recognition of critical issues and proactive management of those issues.

So how does better planning result in shorter project lead times? 

First of all, there are fewer surprises.  Having done a proper job of evaluating project risk and task durations, you’re prepared to deal with the “murphys” that always occur during project execution.  Since you’ve already prepared, you can respond much quicker, without wasting time.

Second, a good project plan moves these potential risk events off the critical path (if possible!).  By moving risk events off the path that determines project delivery, eliminating disruption to your deliveries.  That doesn’t happen without planning.

Third, the tasks themselves are stripped of the safety that most project plans have, with all task safety aggregated at the end of the critical chain.  Saftey aggregation allows you to manage the safety as a project level item, rather than letting it be dispersed to every resource in your project.  That means that you need less, and the overall project duration is shorter with greater certainty of completion on time.

Ok, I have a white paper that explains this much more.  Get it here.

So you’ve been hit by the economic crisis, eh?  Demand has softened up a bit, sales are uncertain.  You’re wondering what you’re going to to do with all that extra capacity.  You don’t want to lay anyone off, but if sales don’t pick up, you can’t stay solvent.  Here are some things you can do to avoid layoffs while keeping the wheels on and position yourself for the recovery.

Focus on customer service. I’m not talking about being nicer, I’m talking about the basics of performance.  The number one reason that customers change suppliers is because of reliability issues.  Not price, not quality.  On time delivery.  Are you delivering on time?  Are your lead times consistent with the competition?  Don’t give your customers a club to hit you with.  This is entirely under your control.

I have a number of customers that improved their on-time performance and not only improved the customer service, but actually increased revenues.  They became the suppliers of choice simply because they could be counted on to delivery the goods when the customers were in a tight spot.

Build customer relationships. I’m not talking about buying more steak dinners or tickets to the ball game (although building relationships is always good), I’m talking about finding new ways for your firm to add more value to your customers.  Take a look at your value proposition.  Can you find a way to deliver more value?  You have all those skilled people.  Can you redeploy them to find new ways of helping your customers?  New services?  Modifications to existing products or services?

One of my customers was able to increase the amount of business with a key customer because they added a service to keep their product on site for on demand consumption.   It cost them very little, but it cemented a critical relationship, locked out other suppliers and positioned them for more business with that supplier.

Conserve cash. Eliminating non-essential spending is a common strategy, but there are other opportunities to improve your cost structure now and position yourself for even better profitability when things turn around.

• Look at your receivables risk.  Maybe it’s time to offer discounts on those old debts to encourage customers to pay immediately.  Better something now than nothing later.
• Renegotiate your materials pricing.  Now is a good time to re-evaluate your supplier’s performance and pricing.  There is never a better time to negotiate long term agreements than when the price is low, just ask Southwest Airlines!  They saved nearly$2 B in fuel costs in 2008 because of their hedging strategy.
• Look at your compensation strategy, especially sales commissions.  Are you paying for results achieved lately or a long time ago?  Often we believe that sales reps are due a commission for life. That turns hunters into farmers.  In this economy, you need hunters.  Are you creating the incentive to generate new business or hang on to old business?
• Take a fresh look at outsourcing.  Do you have the capability to bring some of  that work you had sent offshore back home?  Sure, your people cost more, but anything you can do in-house will go a long way to cover your fixed costs and help you retain your people.

Focus sales efforts on the stars in your product portfolio. Don’t waste your effort on selling marginally profitable products.  Make sure your sales efforts are geared to sell the products that maximize the highest rate of return.  That means focus on the products that generate the fastest return.  It may not be the highest margin products that deserve the attention, but those products that earn the highest turnover.

For example, if you have a product that generates $5 in gross margin once a month, it’s not worth as much as a product that generates $2 in gross margin every week.

Reduce your lead times; finish early. Focusing on project or product lead times improves your rate of cash generation.  Reducing your lead times also reduces your cash requirements.  Less work in process equals less investment equals more cash flow.  If you have projects in the pipeline, early finish equals early benefit.  It may be worth the investment to focus on bringing those projects in early.

When business is down, managers often take a defensive approach and hunker down and wait for the storm to pass.    Use this time as an opportunity to make your business more competitive.   You’ll be healthier now and in a great position to respond when the economy picks up.