Misleading allocations and how to fix it–Part 2

[This is a continuation that will make very little sense to you if you don’t go back to read Part 1. Sorry.]

ACTIVITY-BASED COSTING ALLOCATIONS

Well, the partners were disappointed with these results, for sure. So, they decide to try Activity-Based Costing (or ABC) allocations. The administrative overhead is allocated based on their analysis of the amount of activity that the partners must undertake with each job type.

The ABC allocation of non-administrative overhead was done based on production-hours ($9,000 divided by 1,000 hours = $9.00 per production-hour).

The results of the partners’ new calculations (based on the historical product mix) are shown in below where you will note that company profit remains the same ($4,100 per month).

However, new priorities emerge: now the most profitable jobs appear to be landscaping (at $35 per job) and gutter guards (at $28 per job).

Based on these data, the partners rearrange priorities to allocate resources (i.e., the 1,000 hours or production time available) to capture the available markets for these job-types first. The results of this change in priorities may be seen in the following table:

Like the previous example, at first things look good: “calculated profits” boost to $7,924, but after subtracting overhead not absorbed (by abandoned job-types), the results are disappointing. Only $1,300 per month in net profits.

HOW TO FIX IT: THROUGHPUT ACCOUNTING VIEW

Throughput accounting eliminates all allocations except those that are truly variable with the changes in revenue. Typically, those costs are things like raw materials, commissions (maybe), outside processing costs, piece-rate labor—but not much else.

When you look at these Throughput Calculations, you will see two critical factors:

1. Throughput per Job (Revenues less Truly Variable Costs or TVCs)
2. Throughput per Constraint-Hour (Throughput divided by the time used on the constraint—in this case, the 1,000 hours of production time from the workers is the constraint to making more money)

So, looking at the Current Business and Profitability, you will see that another column as been added that represents the company as a whole or “the system.” Throughput is totaled across the enterprise into this column and then operating expenses are deducted from Throughput.

“Direct Labor” is not included in TVC and is included in Operating Expenses. Why?

Because in most organizations, so-called direct labor is not a TVC. Many times the payroll expense for labor will be the same whether the firm produces 10,000, 12,000, or 8,000 widgets in a month. Not to mention the fact that the payroll for “direct labor” (falsely so-called) sometimes includes payments for PTO, training or other non-productive time.

Note, again, that using Throughput Accounting, we still get the same net profit calculations ($4,100 per month).

Now, with this new information in-hand, the partners decide to prioritize sales and production to capture the market in order by T/C-Hr (Throughput per Constraint-Hour) until they run out of constraint-hours (i.e., the 1,000 hours available to them each month). The results of these new priorities are shown in the table below marked as Revised by Throughput per Constraint-Hour.

Wow! Profits are boosted 230 percent—to $9,410 per month or $112,920 annually—after fully covering all of “the system’s” overhead. In this case, they sought out and captured the 250 plumbing jobs available to them in the market as a top priority. Their second priority was to capture the 145 gutter guard jobs available to them. They had a few of the 1,000 hours left, so they were able to also do 16 window cleaning jobs.

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Hopefully, this helps you see two things:

1. The inherent dangers in believing data coming from an ERP manufacturing (or project accounting) system where the profit figures are clouded by allocations of overhead.
2. The simplicity and clarity provided by looking at your clients’ organizations as “a system” and helping them view their goal as optimizing the entire “system,” not trying to make decisions based on data that may imperfectly represent “system” performance.

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Let me know if this is valuable to you. Thanks.

Understanding the “chain” in supply chain management

After 30 years of growth and development, I am not at all certain that I would rename “supply chain management” to anything else. What I might try to do is to get people to recognize the real implications of the name it already has.

Let's look at that key middle word in the name: "chain."

Very few organization "manage" the supply chain as a "chain."

A great many managers and executives are content to manage only their "link" in the chain. If things don't go well, they may try to substitute one connected link for another (e.g., change vendors or find new customers, for example). But they do not recognize or manage the chain as a chain. They still manage pretty much within the four walls of their own "link" (i.e., company).

The important thing to understand about a "chain" is the interdependence of the links and that the strength of the entire chain is governed entirely by the strength of the weakest link in the chain.

The interdependence of a chain should drive organizations inexorably toward supply chain collaboration and, even further, toward a genuine mutuality. In many cases, the fastest, best and most secure way for organizations to improve their own profitability is to work together with other supply chain participants to strengthen the weakest link in the chain—not seeking to replace that link. That means that all the participants in the supply chain—or at least the strategic links—must be (or become) open to collaboration and even invite new ideas from other participants in the chain.

Collaboration and end-to-end data sharing can help end the damaging effects of "the bullwhip," help firms in the supply chain break their frequently misguided addiction to large batch sizes, and help redefine purchasing and pricing metrics that can lead to more frequent replenishment while holding both truly variable costs and operating expenses low for all the participants.

High-level meetings should be sought between executives and managers for all the critical players in the supply chain. The healthiest supply chains are those where all the participants are making satisfactory profits and a few strong players in the supply chain are not using their leverage to increase profits through policies that weaken other important links in the chain.

How can you tell when your "supply chain management" team is beginning to act like they are part of a "chain" and not just content to manage their own "link"? Look for the following signs:

1. Metrics and actions taken for improvement reach outside "our link" and efforts are made to optimize the "whole chain" by identifying and seeking to strengthen the weakest link.
2. Management up and down the supply chain have learned to not ignore the industry's larger ecosystem. They monitor the ecosystem for signs of impending change, manage proactively, and share information freely.
3. Supply chain managers recognize that there will always be a "weakest link" and, while seeking to strengthen the present "weakest link," learn to pace the flow of products by the "drum" of the present "weakest link." They also recognize that any loss of productivity at the present "weakest link" is productivity lost to the whole supply chain. (As a corollary, supply chain managers should recognize that time, energy and money spent strengthening links other than the present "weakest link" will not improve the performance of the "chain.")
4. Managers and executives involved in the supply chain have ceased using metrics stuck in "cost-world" thinking and have seen that it is synchronizing product flow and increasing throughput that lead to ongoing improvement and higher profits.
5. Supply chain managers have recognized that profits depend upon meeting customers' needs and demands, and that understanding these needs and demands is essential from product design forward through all the processes and links in the supply chain.
6. Collaboration across the supply chain begins with product design so that maximum external variety (end-products) can be achieved with minimal internal variety (raw materials, components and subassemblies).
7. Supply chain collaboration is leading to strategic flexibility in both products and the processes of maintaining supply chain flows.
8. Wherever possible, all along the supply chain, the flow of product is buffered with capacity rather than inventory. (Supply chain partners may make strategic capital investments in other parts of the supply chain to build needed capacities as part of the collaboration.)
9. Managers and executives involved in the supply chain have made it a priority to develop strategic alliances and partnerships all along the supply chain in order to recognize and strengthen the present "weakest link."
10. All across the supply chain, metrics focus on increasing throughput (not cutting costs).
11. Forecasts are still used for planning, but "pull" is used to drive all execution in the supply chain.
12. The focus is now on synchronizing the flow of product across the supply chain, not on balancing supply chain capacities.

ONE ADDITIONAL NOTE:

On the contrary side, some "big dogs" (or "big dog" wannabees) in the supply chain think they are managing "the chain," but they treat it more like a "leash." They yank their smaller suppliers around until their suppliers are either driven out of business or simply won't do business with the "big dogs" at all any more.

This kind of attitude is bad for business and bad for the economy in general. The best suppliers are profitable suppliers. If any organization is destroying the supply chain's profitability one link at a time, it is destroying its supply chain by weakening one link after another. These weak links will not have reserve capacities to respond to changes in demand or make up for supply chain losses when "Murphy" strikes.

P.S. - I was going to write on the other words (i.e., "supply" and "management"), but this is probably enough for now. Thanks.

Herding vendors, customers and the rest of your supply chain

Not long ago I had an opportunity to watch Temple Grandin, a 2010 biopic directed by Mick Jackson and starring Claire Danes as Temple Grandin, a woman with autism who revolutionized practices for the humane handling of livestock on cattle ranches and slaughterhouses. This is an outstanding film that shows how one autistic woman, through loving support and sheer willpower, has brought much needed change to an industry.

But I think what Temple Grandin brought to cattle-handling has much broader implications. When pitching her revolutionary—and seemingly costly—design for cattle-handling facilities at the first slaughterhouse, she was roundly criticized because the managers and executives say only the cost of building the system. Only through her keen insight and persistence was she able to get them to see that every day they were pay higher costs by not using a system like the one she had designed.

It’s all about flow

Grandin’s vision was simple (see: inherent simplicity). She boldly suggested that the industry will make more money by understanding and working with the cattle than by failing to understand them and constantly struggling against them. Her facilities’ design simply leveraged the natural tendencies of the cattle themselves to keep them cool, calm and collected as they moved through the operations.

She properly pointed out how very costly it was to pay large numbers of cattle-handlers to be constantly poking and prodding the cattle through the chutes. Not to mention the lost time, lost productivity, and damage done when the anxious movements of the cattle led to backups, herd-busting breakouts, or animals with broken legs that required heavy equipment to get them out of the way.

Grandin was all about “flow” and how an unperturbed flow would increase both production and profitability.

Lessons learned

I don’t want to take anything away from the best reasons to watch this wonder film: Temple Grandin. The best reason to watch this film is, of course, because it is such a wonderful story about overcoming adversity and achieving something when it seems that all the odds are stacked against you.

Nevertheless, I think there is a huge message here for business—and the supply chain.

Why do we hire so many “cattle-handlers” and spend so much time, energy and money poking and prodding our customers, our vendors, and—yes—our employees trying to get them to move along a little faster? Why do we spend so much of our time, energy and resources trying to get the flow moving again when our vendors or employees just don’t seem to “act right”? Why is it our all too frequent first response to problems with our supply chain—from one end to the other—is, “We need to hire more ‘handlers’ to keep the flow moving”?

Don’t we have enough “handlers”? Don’t more “handlers” just keep adding to our operating expenses and make it just that much harder to turn a profit?

Isn’t it time that we took time to really understand what motivates, demotivates or even stampedes our customers, our vendors and our employees?

What we’re looking for is “flow” that doesn’t require so much poking and prodding. The way to get is to work with those who must contribute to the flow. Poking and prodding—and hiring more “handlers”—is just too costly. So, it’s time to redesign our flow in a way that leverages the participants’ natural motivations for productivity, profit and success.

What do you think?

Misaiming about metrics

In order to protect the guilty, my source for some the silly statements I read about business management will not be revealed. Recently, I read this statement in a book about business metrics.

“Measurement is the connecting fiber that can make all the parts work together [in a business or government enterprise]. Achieving this kind of coordination and alignment is impossible without exceptional performance measurement.”

Let’s consider the metaphor of a multi-movement mechanical watch. You know: the kind of watch that keeps time in minutes and seconds, tells you the day of the week, the day of the month, and the phases of moon.

Now, without a doubt, a huge number of measurements were made, formulas developed, and calculations made about the sizes of the gears, the number of teeth in each gear, their placement in relationship to one another and more. A watch is all about measurement. A watch’s whole purpose “measurement.” It only exists “to measure.”

Nevertheless, it is not the accuracy of the measurements that make the watch fulfill its functions properly. When you get right down to it, it is not even the accuracy of the calculations that went into the design of hundreds of moving parts. It is not the accuracy of its manufacture that—at the root—cause the timepiece to function as a “system” and do precisely what is expected of it.

It isn’t any of those things—at the root!

What, then, is at the root of a “system” that functions smoothly, efficiently and effectively? At the root of that highly effective watch’s ability to function is something entirely distinct from “measurement.”

What is that mysterious thing that all too frequently escapes the business intelligence fanatics? What lies at the very core, but is often overlooked by the “metrics maniacs”? What seems to conceal itself from those who seem to be convinced that if management could just get enough “information”—enough metrics—they could manage flawlessly?

The answer is—as W. Edwards Deming told us years ago—“theory.”

The people who designed all of the components of the multi-movement “watch” that does what it does so smoothly, efficiently and effectively had a “theory” about watchmaking long before they ever drew the first plans or began fabricating the first gear.



The business metrics book from which I got the quote at the opening of this article contained a diagram similar to that above. But this diagram is wrong in lots of ways. But, really, only two are critical.

Here’s what the diagram ought to look like:



The foundation of making a business that works—and stays working—is theory. And, more importantly, if the only “goal” of your “measurements” and “management” is a bunch of departments surrounded by a compensation system, then your business probably won’t last too long—except by “luck.”

The “goal” of your “system” should be—indeed, must be—profit. And, as W. Edwards Deming put it so well, “Information tells you nothing without theory.” Theory is the context by which information is interpreted and made the basis for action to change the outcomes.

[Cross-posted at Kinaxis Supply Chain Expert Community.]

The Dangerous Dichotomy—Part 3

[Continued]

The conclusion of the preceding article was that, without doubt, reducing out-of-stock occurrences will tend to increase revenues. Increasing revenues will certainly satisfy the sales and marketing team, who have been mandated by the firm’s executives with doing that very thing. But, the question remains, can actions be taken to reduce out-of-stock occurrences in such a way that will satisfy what should be everyone’s goal of helping the business make more money tomorrow than it is making today?

We believe it can.

Consider a distributor that buys products from Pacific rim suppliers. One line of products produces gross profits of about 80 percent. Of the costs associated with this product line, about 15 percent are the actual product cost (including any taxes and duties). The remaining five percent are the costs per unit of shipping the product by ship from its source to the firm’s distribution centers.

Like the product in the example provided in the preceding article (see “The Dangerous Dichotomy—Part 2”), this line comes in an array of styles (or color or sizes). Some of these variants sell better than others, naturally. However, because the distributor (wrongly) believe that they are stuck with a three-month or longer lead-time to get these products, they feel that they must forecast demand well in advance and place their orders based solely on this forecast.

The three-month lead time consists of the time it takes to produce enough product to fill a container (or meet some other policy-based “cost-saving” arrangement), plus the time for ocean-going transportation, and the time to get it takes to get the items through customs and provide land transportation to the destination distribution centers. But, because the forecast is always wrong, the firm inevitably finds itself in the situation we described in “The Dangerous Dichotomy—Part 2”; that is, they experience out-of-stocks on several of the variants while being overstocked on several other varieties of the product.

The firm is aware that they can ship these items by air—in much smaller quantities, of course. However, doing so doubles the per-unit cost of shipping these products.

When managers hear that simple phrase: “Shipping by air doubles our freight costs,” that is usually all they need to hear. They think of those “slashed margins” and “higher costs” and that is where the conversation ends.

But, consider this: Doubling the per-unit cost of shipping on this product line reduces the margin from 80 percent to 75 percent. Sure, that is, in fact, a reduction in profit margins on this product line.

Now, consider this: Shipping by air forces shipment in smaller batches. The smaller batches in the shipments mean that the manufacturer can produce the batches for shipment in less time—perhaps as short a time as a few days. Shorter lead times mean the original forecast and the original order need only cover the starter stock—the stock to be sold while the firm figures out what styles or colors are going to be the “big-sellers.”

When the “big-sellers” are known, replenishment stock can be ordered and shipped by air, but the firm is likely to actually make more money than they did when they were paying lower shipping costs.

Why?

The reason is simple: At a 75 percent gross margin and a five percent increase in shipping costs—between multi-mode sea-land transportation and air transportation—every additional sale (resulting from reduced out-of-stocks on the popular models) covers the difference in shipping costs for 15 units (i.e., 75 percent gross margin divided by the five percent increase in shipping costs).

Besides the obvious advantage found in the extremely high likelihood of increased profits—despite “doubling your shipping costs” and suffering “reduced margins”—this thoughtful approach has all of the following advantages, as well:

1. Happier and more satisfied customers
2. Less likelihood of customers being lost to competitive sources
3. Fewer lost customers means the firm is more likely to be able to sustain revenues with lower marketing costs
4. A happier and more productive sales and marketing staff—able to spend their time capturing new customers and markets instead of appeasing disgruntled customers who could not buy the product they wanted
5. A happier and more productive organization overall—with less in-fighting and a real sense of success and accomplishment
6. More satisfied management and executive team
7. A far greater opportunity for success in the future

All of these benefits accrue to an organization that discovers “system thinking” (i.e., seeing their organization as a whole, rather than as disconnected pieces and departments). Meanwhile, the firm still caught in “the dangerous dichotomy” is still fighting fires day-by-day and trying to keep the smoldering animosity between the factions from breaking out into open warfare.

Makes you want to give “system thinking” a try, doesn’t it?

The Dangerous Dichotomy - Part 1

Far too many business executives have created an artificial dichotomy within their own organization that is potentially dangerous to their firm's survival and almost certainly destructive of profits. What is that artificial dichotomy, I hear you ask?

The answer is simple: Businesses all too frequently put the responsibility for increasing revenues into the hands of one part of their organization, while putting an entirely different group--usually most of the rest of the organization--in charge of reducing costs.

While, on the surface, this may seem to make sense; it really does not.

Here's why.

The Revenue-Increasing Group
The folks in the organization put in charge of increasing revenues--usually the sales and marketing departments--generally are measured only on the things pertaining to revenues. Because it is not a part of their reward metric, the folks in sales and marketing are, therefore, wont to make decisions that may:

1. Increase the costs of production
2. Drive inventories up
3. Increase operating expenses
4. Reduce output

Now, they don't do these things intentionally. They are just trying to do what they have been mandated to do by management and senior executives.

But, if increases in revenue are stymied or shrunken by, say...

1. Failures to meet delivery-time promises
2. Out-of-stock conditions on finished goods or components
3. Lay-offs or cut-backs in production, warehousing or elsewhere

Then, the revenue-increasing group has an "out" for not performing up to expectations or forecasts. Their excuses are generally based on the performance of the other part of the organization.

The Cost-Cutting Group
The other part of the organization is, as I said, usually all the rest of the organization. These folks have all been instructed and, frequently, are being measured based on "keeping costs down." There interest is in doing everything they can to...

1. Keep the costs of production down
2. Holding inventory levels as low as possible
3. Making sure that operating expenses are minimized

These parts of the organization's management also want the organization to succeed. But they are not being measured based on the organization's (the "system's") success. They are being measure on their performance against budgets for costs and expenses.

The folks working in these other departments have no malice of intent, but when sales and marketing brings a request to engineering or production that is going to increase the costs of production, they are not likely to look too kindly upon the idea. When sales tells these folks that they could sell more if they just had more inventory, they may nod their heads in affirmation, but the are not likely to take affirmative action because they aren't rewarded for that effort. To the contrary, they are more likely to be rewarded for holding inventory levels down and increasing inventory turns.

So, the battle rages
And, of course, the battle does not end there. When cost-cutting fails to make the firm more profitable, this group is just as willing and able to point fingers at the "sales guys," and point out how their frequent interventions, their calls to change production or shipping priorities, and their demands that end-of-period orders "get out the door" prevent serious cost-cutting by...

1. Driving overtime expenses up
2. Increasing requirements for both raw material and finish goods inventories
3. Reducing production by breaking up shop floor production runs with new priorities on a daily basis

 Hence, these two separate factions--who should be working toward a single end--are first formed by management and then each becomes the excuse for the other for non-performance. Meanwhile, the firm as a whole suffers reduced profits, higher operating expenses, and--generally speaking--too much inventory (made even more unbearable by having too little of the things that the customers want when they want them).

To be continued...
If your organization is not presently experiencing this warfare--even if subtle or boiling just beneath the surface of a "mask" of "team work"--then you are a fortunate one and, more likely than not, you know a firm or have worked in a firm where this is or was true.

This internal conflict is evidence of the lack of "system thinking." When executives give different directives to different parts of the organization--in the hope of squeezing some profit out of "local optima," rather than global metrics that encompass the goal of the whole system--the whole organization--this is what one must expect.

There is an answer.

[Continued next post....]

Making more money in the service business

If you’re a regular reader of my writings, you will know that I do not endorse many products. And, even if a product delivers many outstanding benefits, I will give you the straight scoop about delivering on R.O.I. (return on investment).


Well, I just finished reviewing an outstanding product for the SMB (small-to-mid-sized business) service industry. If your company sells, installs and/or services high-value technical or industrial products – or even if you service products sold and installed by others (such as swimming pools and hot-tub systems) – SM-Plus(tm) from Single Source Systems could help you start making more money.

A study done by Aberdeen Group indicates that service companies that adopted end-to-end solutions that aided managing their business as a “system,” rather than in silos, saw an average of 14.2% increase in revenues over a two-year period. Since, for many service companies, their service revenues carry very little in Truly Variable Costs (TVCs), that means that almost all the dollar increase in revenues drops directly to the company’s bottom-line.
 
So, how does an service management end-to-end solution create this increase in revenue – and profit?
Here are a few of the key factors:

• Elimination of inter-departmental silos increases visibility of “bottlenecks” and helps executives and managers take effective action to increase Throughput.
• Integration with mobile computing devices reduces time lost for data-entry or trips back to the job site or warehouse. This means more available service hours are actually used performing billable services.
• End-to-end solutions are able to handle complex contract-based billing calculations, thus virtually eliminating “islands of information,” manual calculations and redundant data entry. This, in turn, means the enterprise can grow revenues without adding to operating expenses.

So, how would you determine if Single Source Systems’ SM-Plus would be a good investment for your service-centric enterprise?

The formula return on investment remains the same:
You and your team need to calculate how much your Throughput (T) (i.e., Revenue less TVC) might increase (see average of 14.2% over two years above, but calculate your own numbers) and any net effect on Operating Expenses (OE). Then, figure out what your investment would be to get started with a product like SM-Plus. Put those numbers into the formula for ROI (see illustration), and you can calculate your ROI simply and easily.

Give it some thought.

Drop me and email at rcushing(at)GeeWhiz2ROI(dot)com if you have further questions.

©2010 Richard D. Cushing

Technorati Tags: service management,SM-Plus,Single Source Systems,ROI,return on investment,Throughput,bottleneck,TVC,Truly Variable Costs,mobile computing,operating expenses,SMB,SME,Aberdeen Group

The New ERP – Part 27

Recap

This is Part 27 in our series, so let's take a moment to briefly recap what The New ERP – Extended Readiness for Profit has done for us so far in contrast to traditional ERP – Everything Replacement Project.

Aspect	Traditional ERP	The New ERP
Setting the goal	Lack of focus: Traditional ERP often has several goals (read: lack of focus) or a goal that is entirely generic (read: lack of focus). Therefore, ROI is frequently predicated on little more than hope that throwing new technology at the organization will somehow lead to improvement and better profits.	Laser-like focus: In The New ERP began with uniting executives and managers around a singular goal (in for-profit organizations that is typically making more money both now and in the future). Next, The New ERP applies the Thinking Processes to help management understand what is keeping the organization from achieving more of its goal. This gave management a clear view of: What needs to change What the change should look like How to effect the change
Linking ERP objectives to financial goals (IT alignment)	Loosely bound to financial goals: Far too many traditional ERP projects are bound to financial goals only by a tenuous thread of hope in the hearts of managers and executives. Others may calculate an ROI (return on investment) based on broad estimates of overall "improvement," but these are generally not tied to specific effects and measurable expected outcomes.	Tightly bound to financial goals: The New ERP – Extended Readiness for Profit uses what is learned through the application of the Thinking Processes to tightly aid managers and executives in linking measurable execution metrics to the achievement of financial goals. If "revenue is to increase by 12% in the first year," then the management team knows precisely which actions and improvements are expected to lead to these results.
Invention of the "solution"	Solution is a "package" brought from the outside: Traditional ERP frequently revolves around the organization defining their "needs" or "requirements," and then seeking a "package" brought to them from the outside (by a vendor or value-added reseller) to provide them with the "solution." If the executive team or the vendor cannot achieve enterprise-wide "buy-in" by the end-users, then the implementation of the "solution" may be more costly or less effective than intended, or it may fail entirely.	"Solution" is invented by the executives and managers in charge: By applying the Thinking Processes and determining with precision "what needs to change" and "what the change should look like" in order to achieve more of the organization's goal, the management team employing The New ERP becomes the inventor of their own "solution." By inventing their own solution, and by doing so using a rational toolset, "buy-in" becomes automatic. No one fights against their own invention.
Budget setting	See "Linking ERP objectives to financial goals" above	See "Linking ERP objectives to financial goals" above. The New ERP allows your management team to set rational budgets for specific, highly-targeted and measurable improvements so that the budgets make sense relative to the return on investment calculations. All of this is done with relative simplicity and paralysis by analysis is avoided entirely.
Software selection	Wholesale replacement: Traditional ERP – Everything Replacement Project does just what you would expect. It leads to replacing everything – or almost everything – in the organization. It is not focused on alleviating or eliminating organizational "bottlenecks."	Targeted Extensions: The New ERP – Extended Readiness for Profit is focused on effecting change in specific areas that have been rationally identified as being constraints ("bottlenecks") that are keeping the organization from achieving more of its goal. This focused approach means that the whole organization need not be disrupted to bring about effective improvement. Furthermore, very specific technologies selected to achieve very specific ends is the objective in software selection.
Vendor demonstrations	Unfocused review of functionalities: Vendor demonstrations under traditional ERP approaches often occupy days or weeks, sapping time, energy and money from all of the various departmental silos involved. This process alone may increase operating expenses by driving up overtime costs for "catch-up" work.	Tightly focused "proof of concept": Under the New ERP, vendors or resellers are invited to present proofs of concept around improvements that are very narrowly defined. They are also asked to speak specifically – and convincingly – about how their technologies will allow the "client" organization to achieve its goals within the budget prescribed.

What has been accomplished to date under the New ERP concept for the organization applying it (as in the table above) has likely saved the entire organization no small amount of time, energy and money. In addition, they are in a far better position to see actual results in the near future – results predicated on sound logic and real strategies, not hope and guesswork.

[To be continued]

The New ERP – Part 17

Requirements gathering as part of the sales process

We are continuing our review of methods and processes applied in the traditional ERP – Everything Replacement Project approach, comparing and contrasting those with what we have seen (in prior posts) about decision-making under the New ERP – Extended Readiness for Profit program. In this portion, we are going to look at the "requirements gathering" that is frequently a part of the sales process used by technology vendors or resellers.

Even if the subject organization has already undertaken its own requirements gathering (as we discussed in Part 16 of this series), another requirements gathering is likely to occur when the salespeople from the vendors or VARs (value-added resellers) get involved with the firm. Frequently, this is even a separate appointment for the sales team. In some cases, the sales team from the vendor may require several days to "gather requirements." This process is usually introduced by the salesperson in charge of the account saying something along the lines of, "Before we can do a 'demo' – or give you 'price', or whatever – we need to come out to do some 'requirements gathering' to make sure you're a good fit."

Now, this is not all bad. When a vendor or reseller gets involved in a technology sales transaction, you certainly want someone from their organization to stand up earlier, rather than later, to tell you if the technology they offer is definitely not a good fit for your intended application. However, think about it! As a manager or executive, do you really want the vendor's salespeople to be the final arbiter of your company's "requirements"? Of all people, they have the greatest incentive to sell you something and they have the least knowledge of those few things that actually need to change in order to effectively help your organization achieve more of the goal of making more money tomorrow and in the future.

In our earlier discussion regarding "internal requirements gathering" (see Part 16), we already indentified the weakness of the typical "requirements gathering" scenario as being the fact that the process itself holds no concept or concern with the "system" as a whole. The process assumes that improvement anywhere in the system will lead to improvement in the performance of the system as a whole. This is entirely false reasoning. This new presales team from the vendor that is now running about visiting silo after silo likely has not the faintest idea about what must change in your organization in order to increase Throughput (T), reduce Inventories or the demand for new investment (I), or how to contain Operating Expenses (OE) while increasing revenues and Throughput. (Although, I will grant you that they may know more about the least important factor – Operating Expenses – than the other two.) Certainly, however, these presales folks from the vendor's team will not be more qualified than is your own management team to identify your system's "bottleneck," or to isolate those few critical "roots" that encompass "what needs to change" in your organization.

Redefining "Requirements"

If we redefine "requirements" to mean "those few critical things that will help my organization – viewed as "system," a whole – become more effective at increasing T, reducing I, and holding the line on or slashing OE while supporting growth in revenues," then "requirements gathering" is best performed using the Current Reality Tree (CRT) as the framework by which to interpret what you already know about what is working and not working across the departmental silos.

Let us simply agree upon one simple matter: the technology vendor's or reseller's salespeople are not typically among those best qualified to determine your organization's "requirements" as we have defined them. We will speak more of this matter in later posts, as well.

[To be continued]

The New ERP – Part 16

Requirements Gathering

Now, let us consider some of the other aspects of what the management team from another firm that is following the traditional ERP – Everything Replacement Project model. One of those, of course, would be the standard "requirements gathering" effort.

In the traditional ERP – Everything Replacement Project, most organizations go through some form of requirements gathering. The method may vary and, in fact, may happen multiple times over the life of a single project. Here are some typical ways in which requirements gathering may be carried out.

In-House Requirements Gathering

The leadership in an organization that is considering an Everything Replacement Project (traditional ERP) may decide to do their own requirements gathering. If they do, this typically entails senior management announcing to functional managers all across the organizational silos that the firm is thinking about replacing their ERP software. "Therefore," the executives opine, "management needs to have each silo create a list of all the features and functions that they believe will be 'required' (hence the term: 'requirements gathering') in the new software."

The silos may also be at liberty to add to the "requirements list" features or functions that are, in fact, not requirements at all. We know that they are not requirements because these features and functions are to be specifically designated with some useful term such as "Nice-to-haves" or "Wish list items."

Even the "requirements" (so-called) may not necessarily be actual requirements. (This gets confusing, does it not?) In some organizations, the silos may be permitted to "rank" requirements in a "1-2-3" fashion. By this the organization intends to suggest that everything on the "Requirements List" with a ranking of "1" is a real and actual "requirement." Items with rankings of "2" or "3" are sort of "requirements – if we can get them and they don't cost too much."

So, what is the problem with this approach?

Let us assume that your organization has ten departmental silos and each of these silos comes up with 30 "requirements." Forget about whether these are real requirements or just maybe requirements.

You and your management team now have a list of 10 times 30, or 300, "requirements." However, the list, by itself, assumes that each "requirement" bears an equal responsibility for aiding the organization in effectively reaching its goal of making more money tomorrow than it is making today. No manager or executive can look at the list and empirically assign priorities based on the dollar-benefits or ROI of having or not having each one of the 300 so-called "requirements."

To make matters worse, since ERP software today is more alike than it is different in most aspects of its functionality – that is to say, the genuine differences between ERP applications today are found around the edges and not at the core – a good many of the 300 "requirements" that have been diligently gathered by the organization will likely exist (in one form or another) in almost every competing product. That may mean that only ten percent (say, 30 of the 300) really have any significance in the search for a product in the traditional Everything Replacement Project.

Next, consider the fact that the very nature of the announcement from the executives that each silo was to submit a list of "requirements" suggests that the management team holds to the concept that improvement anywhere in the organization will somehow improve the "system" (i.e., the organization) as a whole. This is a false assumption. As we have previously stated: Only improvement in the weakest link will strengthen a chain – and your organization is "chain" of dependent functions.

Of course, the management team could be admitting something even worse. They could be admitting that they really don't intend to improve everything, because we really don't know what to change to bring effective improvement or how to reach more of their goal. So, instead, they are going to undertake an Everything Replacement Project – yanking everything out and replacing it with "new and improved" – in the hope that, in the end, they get better results. Such "hope" is not a strategy.

While it is true that some silo-based changes may contribute to some positive aspect changes within an organization, that is not what should be of concern to an executive management team. What executive management should be concerned with is this: What few things need to change in our organization in order to effectively increase Throughput (T), decrease Inventories or drive down or out demand for new Investment (I), and reduce or hold the line on Operating Expenses (OE) while the firm grows?

By now you may have recognized that by using the Current Reality Tree (CRT – see prior posts) from the Thinking Processes, the real and practical "requirements" that will have an immediate effect on T, I and OE are made plainly evident in the roots of the tree. That is a key and critical difference between the traditional ERP – Everything Replacement Project approach and the New ERP – Extended Readiness for Profit program.

[To be continued]

The New ERP – Part 14

Compare with Traditional ERP – the Everything Replacement Project – approach

Let us stop to compare where our management team is now in its decision-making process with what an organization that embraces traditional ERP – the Everything Replacement Project – might be going through in their processes.

How do most small- to mid-sized businesses go about setting budgets for their major or minor IT initiatives? We will take a look at a few of the methods I have run into over the years:

• Don't set a budget: Far too many firms simply find out what the executives and managers think needs to be done, and then get quotes from some vendors or resellers on what it will cost. This gives them the "cost" – assuming it is accurate, but many times it is not. As for "benefits," may management teams just "expect improvement" in some unquantified and unquantifiable way. They don't have a "budget" and they don't have an "ROI." Furthermore, they generally don't measure the results of "improvement" afterwards either.
  
• Educated "guess": In such cases, frequently the CFO, the president, or someone from IT is simply asked to "put together some numbers." Frequently, these almost exclusively "cost" numbers come from telephone conversations with vendors or resellers, Internet searches, or conversations with people from other companies that have done something similar. Again, in far too many cases, the management team does not even attempt to quantify the "benefits" or calculate an ROI for the proposed initiative.
  
• How much can we afford? Naturally, this attempt at "budget"-setting comes directly from cost-world thinking and entirely neglects the fact that, if the organization is going to see no increase in Throughput (T), no decrease in Inventory or Investment demands (I), and no significant decrease or future savings in Operating Expenses (OE), then the budget that should be assigned to the project is zero-dollars.
  
• Find out: This approach is almost equivalent to "Don't set a budget" above inasmuch as the method (if you can call it that) amounts to "finding out" how much an Everything Replacement Project will cost, then factoring it for "overruns," which have come to be expected in the industry. Again, this approach has no bearing on the value the traditional ERP project will bring to the organization, only the anticipated "cost" to the firm accompanied (frequently) by only the vaguest of notions as to how the change will actually increase Throughput (T), or reduce Inventories or demand for new Investment (I), or drive-down or hold the line on Operating Expenses (OE) while sustaining growth. Unfortunately, often times even the "growth" itself is merely assumed.
  
• Comparatives: This approach is simply a variation on "Don't set a budget" or the "Educated 'guess'" methods. Here the way it's done is to get the CEO or other executives to ask their golfing buddies or other industry friends (and maybe even relatives) how much their companies paid for their last Everything Replacement Project. Once again, no focus is placed on specific areas of improvement and the far too frequently the estimates of "benefits" and "ROI" are vague – to say the least.
  

Now, I know you probably laughed out loud (or at least chuckled to yourself) when you read some of the above "methods." The fact is, it is funny to read these when the truth is laid out in some embarrassingly plain language. However, as sad as it may be, many of the budgets for IT initiatives I have run into over the years have no more substantial basis in reality or value for the enterprise what I have described above.

Of course, given the scenario for "budget setting," it can hardly be a surprise to find that many owners, executives and managers make many, many wrong decisions about what kinds of investments their firms should make in information technologies – or other improvement efforts, for that matter. They also frequently make wrong decisions regarding how much to spend on improvements in any given functional area, since they are quite often at a loss to link daily execution improvements with financial results.

By the way, as you can see from the approach we have laid out in our radically new Extended Readiness for Profit – the New ERP, it may be as foolish for a CEO to under-invest in technology (or other improvements) – because she does not understand the dollar-benefits that would be delivered by such investments – as it is to over-spend on technologies. (Here I draw the clear distinction between investing and spending. An organization is investing if they have calculated the benefit relative to the expenditure; whereas, an organization is only spending if they have not calculated the benefit relative to the expenditure or no actual increase in Throughput, reduction in other Investment, or decrease in Operating Expenses will likely result from the expenditure of time, energy and money.) Either way, the CEO is probably doing long-term damage to her own organization – making it less capable, not more capable, of delivering more profit today and in the future.

This clearly highlights the value of the Current Reality Tree (CRT) (see prior posts) in helping your management team identify "what needs to change" before taking any steps toward assuming that new technology – applied in a general way – will deliver some general, but unquantifiable, benefit to your organization.

If you and your management team are following along in our Extended Readiness for Profit – the New ERP approach for your own organization, then you now need to take some time to calculate the values for the changes in T, I, and OE with regard to the actions you may have under consideration – whether they are technology-related or not. Your proposed actions, of course, should be based on the findings at the roots of your CRT. (For those of you just catching up, you will probably need to go back and read prior posts on The New ERP.)

[To be continued]

The New ERP - Part 8

Creating your Current Reality Tree (CRT)

STEP 5:
Once you have completed your CRT, take a close look at the "roots." Roots are those entities at the bottom of the tree that have no arrow leading into them. Generally speaking, you will find that the roots of your CRT will fall into two very broad categories:

1. Things you can change or affect in some way, and
   
   
2. Things you likely cannot change or affect (de facto roots).

When classifying entities into the latter category (de facto) take great care. Do not allow yourself or your team to make excuses by simply saying that "we have no control over that." For example, quality issues from outside suppliers may not be in your direct control, but they are certainly within your realm of influence -- especially if you are a major customer of the vendor.

Once your team has identified all of the roots that fall into the first category, you will likely find that these roots may be further subdivided into three more categories:

1. Root causes for which improvement requires no new technologies
2. Root causes where you may achieve some improvement without the aid of new technologies, but further improvement may also be achieved by applying new technologies as part of an ongoing improvement process
3. Root causes where the most logical and most effective action toward improvement will involve the deployment of new technologies

Most of the organizations we work with find that more of the things they need to change for improvement do not involve investments in new technologies. If this is your case, then "Congratulations!" In less than one day (most likely) you and your management team have discovered how to begin system-wide improvement that

• May be commenced immediately
  
  
• May involve little or no cost
  
  
• Will likely deliver improvements that increase Throughput, reduce Inventories or the demand for new Investment, and/or will probably help you hold the line on Operating Expenses while you grow your business

Equally as important, however, is the fact that if you find the need for new technologies, the cash flow from the non-technology early-win improvements can help pave the way for the investment in new technologies in the near future.

[To be continued]

The New ERP - Part 7

Creating a Current Reality Tree (CRT)

STEP 4:
Beginning with an initial pair of related UDEs (as described in the preceding post), continue building your logic by working out and agreeing upon cause-and-effect connections between the other UDEs as you add them to the whiteboard.

In our example, someone from purchasing has identified an unwritten policy of always buying from the lowest-priced supplier as being one of the things that is keeping the organization from making more money. This is, most likely, an astute observation, especially since it is counter-intuitive. The same party also said that "not including quality criteria" in the organization's purchase agreements with vendors leads to more problems. We've added these as entities 30 and 40 in the figure below.

As you build your logical tree, the arguments regarding the logic should be restricted to the following categories of legitimate reservations:

1. Clarity - Every statement (entity) should be clearly understood as to its meaning and intent.
   
   
2. Entity Existence - Be sure that the entity (UDE) actually exists.
   
   
3. Causality Existence - Does the proposed cause-and-effect (arrow) represent reality? It must be the actual cause and effect in a CRT. In other logical tree forms it may be a planned or desired effect.
   
   
4. Cause Insufficiency - Ask the team, "Does Entity A actually lead to Entity B all by itself?" If not, then you may need to add clarifying entities (as we did in our example in the preceding post).
   
   
5. Additional Cause - It may be true that Entity A causes Entity B, but there may be a additional cause that also leads to B. It is possible that both "If A, then B" and "If C, then B" both exist simultaneously.
   
   
6. Predicted Effect Existence - This technique may validate or invalidate logic by demonstrating how the existing of one thing logically proves or disproves some other proposed reasoning. For example, if someone were to say, "Joe Smith is struggling financially," someone else might say, "If Joe Smith were struggling financially, one could predict that he would NOT be in the process of purchasing a new yacht for $1.5 million."
   
   
7. Tautology - A tautology is a statement that must be true by definition, but does not necessarily indicate a cause-and-effect relationship. For example, if we say, "There are ambulances on the freeway, so there must be an accident," we are not necessarily implying that the ambulances caused the accident. In fact, the presence of ambulances on the freeway does not necessarily imply that there is an accident at all. They could be going about other business, such as transporting a patient not related to any car accident.

It is important to restrict your team to using these kinds of logical arguments relative to the logic in your tree. This prohibits (or, at least, exposes) the introduction of "company politics" into the logic so that you and your team can see "reality" and not some slanted view of what is working and not working in your organization.

Continue building your CRT until you have incorporated all of your UDEs. (On rare occasions we will exclude some UDEs in the construction of a CRT. Generally, the cause for such exclusions is that one or more of the UDEs is really outside the scope of the "system" being considered. For example, if the "system" being addressed is limited to the "sales process," we may omit UDEs related to post-sales actions.)

When topping off your CRT, be sure to get to your statements about not reaching your goal. For example, if your team's goal were (as we suggested) "to make more money both now and in the future," then some of evidences of not reaching your goal might be entities at the top of your tree like: "We do not generate enough Throughput" and "Our Operating Expenses are too high."

NOTE: If you'd like to receive a sample of a full CRT, please contact me at this email address: rcushing(at)ceoexpress(dot)com.

[To be continued]

The New ERP - Part 5

Thinking Processes to the rescue

Dr. Eliyahu M. Goldratt introduced the Theory of Constraints (TOC) to the world in his book entitled The Goal, back in 1984. In the 25 years since its introduction, TOC has been applied successfully in a vast array of businesses, industries, not-for-profit organizations and government entities.

Too many executives and managers are stumbled by the use of the word "theory" in TOC. Unfortunately, this is something you'll likely have to just "get over." Dr. Goldratt was a physicist before becoming involved in the world of business, so he calls it a "theory," under the assumption that someone, someday may prove it wrong -- that an exception may be found. To date, however, no such exception has been discovered.

The "Thinking Processes" are five interrelated methods to allow the rational analysis of any system in support of focused improvement leading to ongoing improvement. By applying these tools, it is possible for an organization to construct a rational framework that accurately describes how an organization works and interacts within its industry and the economy in general. The primary Thinking Process to be applied in mapping the system's (organization's) current state is the Current Reality Tree (CRT). The accompanying figure is an example of such a logical tree.

The Current Reality Tree (CRT)
The CRT is predicated upon the fact that, in most organizations or "systems," the many factors that may be identified as "problems" really arise from a relatively small number of "roots" or "root causes." Applying the CRT Thinking Process allows executives and managers to capture and decode "tribal knowledge" about how their organizations function, and what is or is not working in a logical, re-readable written form.

Once placed in the CRT form, using rules of logic, this written document may be used by the entire management team to read, re-read, discuss and modify the logic until everyone is certain that the logic presented in the CRT reflects the "reality" expressed within the organization's operations. Hence, the tool's name is the "Current Reality Tree."

Constructing a Current Reality Tree
While experience in guiding a team through the Thinking Processes is beneficial, there is no magic in creating a CRT or applying any of the other TOC principles. You do not need me or any other consultant to do this. There are a number of good resources available online and in print that may be used to guide your firm through the effort. However, if you want a short-cut to effective, first-time application the Thinking Processes -- if you'd like to make real progress in the first day of your effort -- then using an experienced consultant may be the most cost-effective way of getting there.

Nevertheless, here are the basic steps:

STEP ONE
To begin constructing a CRT, executives should gather a cross-functional team of ten or 15 key people from across the organization. This team should be briefed on the goal of creating a CRT and why it is important to the organization.

Having gathered the team, the members of the team should be asked select a single "goal" for the system (organization). In a for-profit organization, and where working on the "big picture" for the entire system, we recommend a goal similar to "To make more money -- both today and in the future." (While this is likely not something you want to put on company brochures as a mission statement, it is the true goal of every for-profit organization and every other goal is subsidiary to it. Quality, customer service, market leadership, or any other goal cannot be maintained for long in the absence of making money.)

With the single goal in mind, the next question to set before the team is this: "What is keeping us from reaching this goal?"

Naturally, when this question is asked, you are likely to get different responses from the sales and marketing folks than you will get from accounting or the production department. Ask them to jot down their responses as simple, clear sentences. Generally, I ask them to do so on 3"x3" sticky-notes. Ask them to include an "actor" in each sentence. Also, ask them to NOT include any "because" statements. Simply state the hurdle or blockage to achieving the goal.

Examples might be:

• Salespeople spend too much time in the office doing paperwork
• Our prices aren't competitive
• The warehouse has too many out-of-stocks
• Our lead times aren't competitive
• ... and so forth

In working with the Thinking Processes, we stop referring to these as "problems," right away. We call these "Un-Desirable Effects" or "UDEs" (pronounced: YOU-dee-eez), for short. The reason we do this is because when we have "problems" we want to solve them. But, as we will see, all of these cannot be "solved" by addressing them directly. They are caused by occurrences elsewhere in the "system."

[To be continued]

The New ERP - Part 4

What executives and managers in most organizations lack is a sound "theory" about how their own organization works and responds to its environment as a "system." They know how each department works -- more or less -- but they have never really stopped to think how the "system" works as a whole.

Asked directly, most executives and managers could not tell you -- with specifics -- why three of the initiatives that they have undertaken in the last two years seem to have delivered some improvement (but not all that they expected). Nor could they describe for you precisely why another five of the initiatives they labored over delivered no measurable results -- assuming that they actually did no damage to the organization. (Of course, this whole conversation assumes that you can actually get such executives or managers to admit that things they tried produced no results, in fact. Generally, they have willingly pushed out of their mind those matters over which they have expended precious time and energy to no effect -- only to give up in disgust. Then they tried the next management fad in its place.)

"I am not yet convinced regarding the connection between 'knowledge' and 'theory,'" I hear you saying. Then consider this:

How many people had seen apples falling from trees (or witnessed similar events) for how many hundreds or thousands of years before Sir Isaac Newton postulated a "theory" about a force we call gravity? Everyone had experienced gravity and everyone had information about the effects of gravity, but until Newton, no one had any knowledge about gravity.

Once the "theory" was set forth, cause-and-effect experiments could be developed to measure the effects of gravity. Based on the results of these experiments, one could then postulate if-then correlations: if we do X, then Y should be the result.

If management is anything, it is about being able to propose actions with a predictable -- not random -- effect on the "system" to which the action is being applied.

But, what of the second wrong assumption in the chain of reasoning (in the prior post)?

It should be clear now that it is not more information that will help us manage better. Rather, it is a sound theory or logical framework by which to understand how the "system" functions and interacts with its environment. The second wrong assumption is, then, "More information means we can manage better."

The correct approach would be to say: "If we can develop a sound and effective framework or theory by which to interpret the information coming from our organization (our "system"), then we will be able to manage better."

And, since developing a theoretical framework is likely not a function that will be much enhanced by technologies, then the next step is not to rush out to buy new software or hardware. Clearly, the next step should be to find a way to develop such a sound theoretical framework.

[To be continued]

The New ERP - Part 2

So, what's wrong with traditional approaches to ERP? Why do so many ERP implementations lead to disappointing results? Why do so many companies spend so much money on new technologies and then end up reaping so little return on their investment?

Failure No. 1: Not achieving the planned return on investment (ROI)
It remains today a regrettable fact that many small to mid-sized companies considering new technologies have only the vaguest of notions about the ROI that their new investment should deliver. This is not to say that executives and managers haven't thought out ROI, or even that they may not have already "pinned a number" on the ROI that they'd like to see from the expenditure of their time, energy and money.

What they do not know -- far too frequently -- is precisely how the new technology will deliver results. They have not tied the expected results to specific improvements in Throughput, specific reductions in Investment, or specific savings in Operating Expenses. Rather, there appears to be a general consensus among executives and managers -- despite considerable evidence to the contrary -- that investments in information technologies (IT) sort of auto-magically deliver a return on investment (ROI). That, somehow, IT and automation investments bear an inherent capacity to make the company better and more profitable.

Over the more than 25 years that I have been working with IT from both sides of the desk -- as an executive and as a consultant -- there have been fewer than a handful of companies with which I have worked that actually calculated an ROI for their investment in technology. Fewer still had any measurable objectives for specific IT investments beyond some number clearly picked from the air like "increase revenues by 5%" or "cut manufacturing costs by 7%." Almost none of these firms could tie specific technology functional deployments to the expected ROI.

Given these facts, it is no wonder that traditional ERP (Everything Replacement Project) fails to deliver ROI. The executives and managers deploying the new ERP have not based their ROI expectations on much more than "gut feelings" and some vague sense that having more data will make them better managers.

Failure No. 2: "Go-live" delayed inordinately
Substantial delays to "go-live" in Everything Replacement Projects (traditional ERP) are generally attributable to one or more of the following factors:

• Poor decisions related to customizations or modifications -- when they are selected; how the program code is designed, developed and managed; and the methods chosen for testing and deployment
  
  
• Executive management's improper view of the goals and objectives of a valid ERP project -- thus leading to out-of-control scope creep, usually with absolutely no correlation to project ROI
  
  
• The organization being overwhelmed by an Everything Replacement Project -- rather than being focused on leveraging specific technologies for the benefit of the "system" (i.e., the organization) as a whole

[To be continued]

Contact me!

...

The danger of "We know!" - Part 1

As a consultant, I meet folks in business very frequently that are pretty much convinced along one or more of the following lines:

1. "We already know about our business." By this owners and managers mean to express the sense that they already understand how their business works and what it will take to make the business better.
   
   
2. "There might be some room for improvement, but the returns on any improvement we could make would be so small, it's not worth the effort." This statement or mind-set by owners and managers is a restatement of the so-called "law of diminishing returns."
   
   
3. "Our business (or industry) is unique, so we have to work this way." This is an argument suggesting that a consultant, being an outsider to the business or the industry, can't possibly bring any valuable insight. Furthermore, even if he or she does, we probably couldn't make the recommended changes anyway.

On far too many occasions, when I meet such owners and managers, I am simultaneously witnessing an organization that started off great, grew rapidly, and still has the entrepreneurs that started the firm in the driver's seat. They are also, quite often, over-the-hill.

I'm not talking about the owners or managers being over 40 (or over 50) years of age. I'm talking about the fact that their once booming organization is now in a state of coasting on its earlier success or even in the early stages of decline. Sometimes management hasn't even recognized that fact yet. They may be thinking that they are just in a temporary slump, that things will inevitably pick up again, and their firm will regain its earlier vigor.

Sadly, the chances of such a revitalization are usually slim.

While it is unequivocally true that a consultant can never learn everything about an enterprise that the owners and management know from all their years in their industry and in their own business, it is equally true that there are more things that are similar about human organizations than there are things that are different between human organizations.

Among the key things that are TRUE about all human organizations is that they all rely upon the same three scarce resources:

1. Time
2. Energy
3. Money

Furthermore, contrary to popular opinion, managing the first two -- time and energy -- is more important than managing the third (money). This is true simply because if you had unlimited time and unlimited energy, you could have all the money you wanted or needed.

For this simple reason, focus is everything. As organizations grow and expand, the entrepreneurs who manage them start to lose focus, and they do not have within their knowledge or skills a set of tools to help them focus again on those few simple things that will revitalize their over-the-hill firms.

Having gained, perhaps, many years of experience in their industry and with their own firm, they frequently find that their experience really does not contribute that much toward discovering effective responses to the new challenges their firm now faces. What is missing is a method for discovering a new theory or framework that clarifies how their grown and expanded organization now works -- or doesn't work -- at making more money.

[Next time: Why is it so difficult for owners, executives and managers to discover how to effectively change their companies for ongoing, vital growth?]

Contact me!

...

Getting more of what you want - Part 6

So, what is this "tool set" that can help the entrepreneur and his management team decode the complexity of the growing enterprise in order to extract simplicity out of its seemingly endless layers of complexity?

The answer is: The TOC (Theory of Constraints) Thinking Processes.

As Victoria Mabin of the School of Business and Public Management of the Victoria University of Wellington states: "[T]he TOC Thinking Processes... are a suite of logical trees that provide a roadmap for change, by addressing the three basic questions of What to change, What to change to, and How to cause the change. They guide the user through the decision making process of problem structuring, problem identification, solution building, identification of barriers to be overcome, and implementation of the solution." [Emphasis added.]

This tool set is not new, as Mabin makes clear: "The TOC has evolved over [more than] 20 years.... [and] is now used worldwide by companies of all sizes.... [M]any managers who routinely use TOC believe they understand their businesses for the first time.... [T]hey gain a sense of control and of being able to act proactively.... TOC empowers managers by providing a consistent framework for diagnosing problems." [Emphasis added.]

Now, even though I'm a consultant and I get paid for helping companies make effective decisions by applying the TOC Thinking Processes, let me say up front: You don't need me to apply the TOC Thinking Processes. You could attend a workshop or do self-study in order to learn how to apply these tools in your business.

The workshops will likely cost you $5,000 to upwards of $10,000. Self-study and trial-and-error might take you some months -- or even years. There are, however, a good number of books available to guide you through this process.

So, while you don't need me to leverage these tools, connecting with me might be the fastest and lowest-cost method of getting to solutions you need in the very near future. If you'd like to connect with me, email me at rcushing(at)ceoexpress(dot)com.

In our next post, we'll talk about what kinds of results are typical with the application of TOC principles.

[To be continued...]

Contact me!

...

Getting more of what you want - Part 4

In prior posts in this series, we have talked about why organizations frequently face significant challenges in getting more of what they really want -- to make more money tomorrow than they are making today. We have linked this to what we call "making the leap from entrepreneurial to enterprise."

We have also identified the underlying issue as being the loss of that view once held by the entrepreneurial leadership of the firm -- namely, the view that the whole company is one integrated "system" with one unifying goal. Instead, departments and layers of management erode that thinking away into ultimate oblivion in the minds of the entrepreneur.

The question we are facing now, in this post, is: If executives and managers have recognized the negative symptoms in their organization, and they surely have a desire for improvement, what is actually keeping organizational leadership from clearing away the barriers to making more money?

There are really multiple answers to this question, and the true response will -- naturally -- vary from organization to organization. However, consider these as a small sampling:

• Firms that are already suffering from poor performance -- or performance below management's expectations, at least -- are often so consumed with trying to meet short-term objectives that they do not have time to back away from the details to even consider the "system" as a whole. All of management's time, energy, and way too much money is being consumed in activities like meeting month-end sales goals, expediting production, tracking down late shipments from vendors, or getting late shipments to customers out the door. There is just no time to step back and figure out why everyone is pulling their hair out but profits keep declining.
  
• The organization has grown to be so large so fast (say, from 12 up to 55 employees in one year or so) that the entrepreneurial management just can't figure out which "lever to pull" to get the results it wants. What used to be a simple decision now seems overwhelming in complexity.
• The entrepreneurial leadership has some ideas that might improve the company, but they can't figure out how to come to final decision because it just seems too hard and too complex to figure out the balance between the risks (investment) involved and the rewards (profits) that any given change might bring to the firm.

Consider this: If a small firm has just 5 people working in it, there are 120 different permutations of interactions between those 5 parties. Add a sixth person into the mix and that number jumps to 720 ways they might interact. If you get to 10 employees, the permutations jump to more than 3,000,000; and with 15 the number is 1,307,674,368,000. Of course, this doesn't even count interactions with customers and vendors.

It's no wonder that entrepreneurs with great ideas and great companies can readily be overwhelmed by apparent complexity as their organizations grow. No wonder the once confident entrepreneur-executive can no longer which "lever to pull" to get the result he or she desires.

Fortunately, the number of things that any executive or manager needs to know in order to manage effectively is a very small number. I'll tell you just how small in the next post.

[To be continued...]

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