Manufacturing Breakthrough Blog
Friday October 16, 2015
The Case Study Refresher
In my last post I described a company that manufactures a variety of different products for diverse industry segments. I explained that some orders are build-to-order while others would be considered orders for mass production parts and although this company had plenty of orders to fill, they were having trouble not only filling them, but filling them on time. Because of not being able to fill the orders on time, this company’s profitability was fluctuating between making money one month and losing money the next. The board of directors decided to make a leadership change and hired a new CEO to “right the ship.”
When the new CEO arrived, he had called a meeting of his direct reports to meet them and assess their capabilities. Before arriving, the new CEO had decided that the best approach to turning this company’s profitability around and stabilizing it would be to use the Theory of Constraints Thinking Processes. But after meeting his new team and evaluating their capabilities, and since time was of the essence, he decided instead to use the Goal Tree/IO Map to lay out an improvement strategy.
The First Meeting
The CEO’s first order of business was to provide a brief training session on how to construct a Goal Tree/IO Map to his new staff. The first step was to define the boundaries of their system which included receipt of raw materials from suppliers to shipping of their products to their customers. Within these boundaries, the team concluded that they clearly had defined their span of control because they had unilateral change authority. They also decided that they could influence their suppliers and somewhat the same with their customers, so their sphere of influence was also defined.
In advance of this first meeting with his staff, the CEO had met with the board of directors to determine what the goal of this company would be. After all, he concluded, it’s the owner’s responsibility to define the goal of the system which was “Maximum Profitability.” After discussing his meeting with the board of directors to his team and the goal they had decided upon, the CEO posted the goal on the top of a flip chart as follows:
The CEO knew that the board of directors wanted maximum profitability both now and in the future, so he added the future reference to the Goal box. But before moving on to the Critical Success Factors (CSFs), the CEO decided that it would be helpful if he explained the basic principles of both the concept of the system constraint and Throughput Accounting. His staff needed to understand why focusing on the constraint would result in maximum throughput, but equally important, his staff needed to understand how the three components of profitability, Throughput (T), Operating Expense (OE) and Investment/Inventory ( I ) worked together to maximize profitability.
The CEO explained that Throughput was equal to Revenue minus Totally Variable Costs (TVC) and that Net Profit was equal to T – OE. Finally he explained that Return on Investment (ROI) was equal to NP/I. With this brief training behind them, he then challenged his staff to tell him what they needed to have in place to satisfy this profitability goal both today and tomorrow. That is, what must be in place to maximize net profit now and in the future?
After much discussion, his staff offered three Critical Success Factors which the CEO inserted beneath the Goal. After learning the basics of TOC’s concept of the constraint and Throughput Accounting (TA), his staff knew that because they needed to increase Net Profit (T – OE), then maximizing throughput had to be one of the CSF’s. They also concluded that in order to maximize net profit, minimizing OE had to be another one. And finally, because Return on Investment (ROI) was equal to Net Profit divided by their Investment (i.e. NP = (T ÷ I), they needed to include minimum investment as one of the CSF’s. The CEO felt very good about the progress they had made with their first Goal Tree/IO Map, but it was time for lunch so they decided to break and come back later to complete the Goal Tree/IO Map.
In my next posting we will continue with the construction of this team’s Goal Tree/IO Map by developing the Necessary Conditions (NCs). As always, if you have any questions or comments about any of my posts, leave me a message and I will respond.
Until next time.
 Dettmer, H. William. The Logical Thinking Process: A Systems Approach to Complex Problem Solving. Milwaukee, WI: ASQ Quality Press, 2007