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When economic times toughen you need to:
- Better control your expenses
- Postpone or cancel capital investment
- Cut your expenses to reduce overheads
- Cut your low profit products and services
- Consolidate your operations
- And the list goes on...
But could there be another way? What if you could extract more value from the existing business resources you already have to actually increase your throughput in tough economic times without further investment?
TOC helps you do this using the 5 Focusing Steps:
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Identify the system’s constraints.
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Decide how to Exploit the system’s constraints.
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Subordinate everything else to the above decision.
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Elevate the system’s constraints.
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If in the previous steps a constraint has been broken, Go back to step 1, but do not allow inertia to cause a system constraint.
Whilst it is good business practice to minimise and manage our operating expenses, there is only limited profit to be made by doing so as shown in the following diagram.
The arrows represent the cause and effect
relationships of sufficiency logic. You read the logic between two
boxes (called entities) connected by an arrow by saying "IF entity1
THEN entity2 ".
The ellipse represents an AND condition between two entities which you read by saying "IF entity1 AND entity2 THEN entity3.
For instance, you would say IF we have a desire to increase our business profit, now and in the future THEN we need to decrease our expenses, or, IF we need to decrease our expenses AND we have scope to cut costs THEN we "trim fat" to cut costs.
We quickly exhaust this method as a source of increased profit. So, it should be done, but the reasons for doing it should not be confused with the desire to pursue ongoing profit growth. It should only be done within the realm of good corporate governance and prudence, but not at the expense of the capacity, capability and ongoing viability of the business (and yet, sadly, there are many cases around the world where CEOs have vigorously pursued this method to the detriment and even demise of the company).
The true source of making more money, now and in the future is from increased Throughput. In the TOC world, Throughput = Sales - Truly (or Totally) Variable Costs. Truly Variable Costs are costs which, if you increased sales, would also increase. They are typically raw material and purchased parts costs and could include transport costs, contract labour costs and so on. All other costs, inluding labour, rent, utilities and overheads are considered as Operating Expense. They will be incurred regardless of whether you're business is producing your products or services or whether you're at your Christmas party.
In the Throughput world there is no allocation of overheads onto product costs to calculate product margins. In fact, product costs and product margins are meaningless terms in the throughput world!
Now, if you could increase Throughput with NO CAPITAL INVESTMENT would you do it? When spending is tight during an economic downturn, this would bring even more value to you than when times were good.
It is possible to do and has been proven many times in all types of different businesses. The question, therefore, is not if it is possible, but if it is possible in your business?
But in an economic downturn, people just don't spend their mony and aren't buying. If there is a constraint then it exists in the market and is beyond your control. Is this statement true? Can you control the way your products sell? Are your sales the constraint in your business, holding you back, or is your sales policy? You can't control your customers but you can control your internal policies which affect purchasing, sales and so on. Maybe, then, there is a way for you to at least influence the way your products sell by looking at the way you may have constrained your sales policy.
TOC is not just a manufacturing solution. It has proven applications in project management, distribution, sales and marketing and even accounting. In sales, TOC introduces the term of "the Mafia Offer". This is an offer which is simply too good to refuse. If you could change your sales policy to exploit or elevate any constraints you have inadvertently placed there and, on top of that, make your customers a Mafia Offer, one they couldn't refuse, would that not increase your throughput? Even in harsh economic circumstances?
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