30 December 2009

The New ERP – Part 34

What executives and managers need to know

It seems we must constantly return to fundamentals – to simplicity. Meredith Levinson , writing for CIO magazine, points all too clearly to the fact that executives and managers in far too many business enterprises do not understand clearly the three simple things necessary to improve an organization:

  1. What needs to change
  2. What the change should look like
  3. How to effect the change
Levinson writes: "Part of the reason project managers don't know projects are strategic is because the projects are chosen in many organizations in an ad-hoc manner. Half of survey respondents said that projects are selected in their organizations on the basis of a stakeholder requiring it or some through some other informal process, or they indicated that they didn't know how projects were chosen.

"Since projects are often initiated through informal processes, organizations shift project priorities in an equally informal manner. This severely complicates project managers' work." (Levinson 2009)

It seems all too apparent from Levinson's findings that organizations spend far more time and energy trying to figure out how to assure that their selected projects are "successful" – i.e., they are on-time, on-budget, and delivered with some measure of quality – than they do deciding whether the projects should be done at all. Worse! Shifting priorities within the organization make even efforts on poorly selected projects less likely to produce the desired results.

Only one reason to select an improvement project

For-profit organizations (i.e., business enterprises) will find themselves in one of four classes based on two critical criteria:

  • How effectively are they increasing Throughput?
  • Are they significantly differentiated (in a positive way) from their competitors?
The four classes become:

  1. Failing – firms that are neither effective at increasing Throughput nor differentiated from their competitors
  2. Risking – firms that are differentiated from the competition, but ineffective at increasing Throughput (sometimes, "bleeding edge")
  3. Competing – firms that are effective at increasing Throughput, but are not significantly differentiated from the competition ("commodity" firms)
  4. Leading – firms that are both effective at increasing Throughput and successful at differentiating themselves from their competitors

Note: For readers unfamiliar with the definition of Throughput or other terms used in this section, see Part I in this series.

In the New ERP – Extended Readiness for Profit, we advise that executives and managers always seeking to maximize R.O.I. (return on investment) according to the following formula:

ROI = (delta-T – delta-OE) / delta-I

where T = Throughput,
OE = Operating Expenses, and
I = Investment

For executives and managers, the analysis becomes a simple matter of maximizing the change in T (delta-T), with the lowest possible change in OE and I. Doing so assures that the planned action will help the organization achieve more of its goal of making more money – both today and in the future.

Being rescued from cost-world thinking

Executives and managers looking at this simple formula are immediately rescued from cost-world thinking and are transported into the realm of guiding their organization toward achieving the potential for which they are already paying. Guided by new understandings brought to light through the application of the Thinking Processes executives and managers in companies of all sizes are exposing heretofore unrealized potential within their own organizations. As published in The World of the Theory of Constraints, Vicky Mabin and Steven Balderstone report the following astonishing results:

  • Lead Times – 70% mean reduction in lead times
  • Cycle Times – 65% mean reduction in cycle times
  • Inventory Levels – 49% mean reduction in inventory
  • Due Date Performance – 44% improvement in on-time delivery
  • Combined Financial Variable – 63% improvement in combined financial results
  • Revenue/Throughput – 73% mean increase

    (Mabin and Steven 1999)
Cost-world thinking causes management teams to shrink their organizations in an attempt to hold costs and expenses within present revenues. Unfortunately, this leads to diminishing returns in several ways. However, getting your management team to focus on increasing Throughput and helping them achieve breakthrough thinking on new ways to differentiate what you do, leading to increasing market segmentation and penetration, can help your firm unlock more and more of its potential for making money.

©2009 Richard D. Cushing

Works Cited

Levinson, Meridith. Business Strategy: The 'Best Determinant' of Project Success. Nov 17, 2009. http://www.cio.com/article/508018/Business_Strategy_The_Best_Determinant_of_Project_Success (accessed Nov 17, 2009).

Mabin, Vicky, and Balderston Steven. The World of the Theory of Constraints. Boca Raton, FL: St. Lucie Press, 1999.

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