Are you watching your money? Worried about your gross margin? If the answer is yes to either or both of those questions, we have some bad news for you. Watching your pennies won’t make dollars for you. In fact, the very practice of cost accounting is the number one enemy of manufacturers. It could threaten the profitable future of your company. Straight up – it’s not the answer.What? You shouldn’t focus on controlling your costs? We didn’t say that. Managing operational expense is definitely important – as is managing throughput and inventory. All three are measures that are integral components of the practical application of the Theory of Constraints (TOC).
At Alloy Engineering (AECo) we embrace the concept, wholeheartedly. TOC is the epicenter of our management philosophies and practices. We don’t watch pennies. We establish values and use TOC and continuous improvement practices to drive our top and bottom line performance.
We believe that nothing sets the stage more for our success or failure as a company than the values we embrace and how our employees behave in support of those values.
If you’re not familiar with the Theory of Constraints, it’s an overall management philosophy introduced by Eliyahu M. Goldratt in his book, The Goal. TOC is based on the premise that the rate of achievement of goals in a goal-oriented system is limited by at least one constraint. These constraints could be physical, non-physical, or policy. They can also be internal or external.
The constraint is the limiting factor that is preventing the organization from getting more throughput (typically, revenue through sales) even when nothing goes wrong.
An internal physical constraint, for example, could be equipment that is incapable of producing sufficiently saleable goods or services. It could be antiquated or simply not sufficient to produce goods that meet the market’s demand in volume or quality.
An internal non-physical constraint is centered on people. The lack of skilled workers in the system or a culture that negatively impacts behavior and performance are two examples.
An internal policy constraint is a written or even implied policy that prevents the team thinking or performing in a way that maximizes throughput, or jeopardizes the goals.
Keep in mind that we’re not talking about systems that break down – rather, systems that are flawed or restrictive, to begin with. Systems limited in their potential to achieve more throughput (sales revenue or production output) because of a constraint – a limiting factor that gets in the way even when nothing is going wrong.
Acceptance of a theory or management philosophy like TOC is often the result of not recognizing the ‘forest for the trees’, so to speak. AECo is a goal-oriented company. We’ve established a clear, quantifiable and defined goal – make money now and more in the future to maximize the return to our shareholders. We recognize that, to do this, we must always:
1. Have Satisfied Customers
2. Have Secure and Satisfied Employees
3. Honor our Guiding Values
Our Guiding Values are clearly defined and remain in constant focus, too:
1. Customers are the focus of everything we do.
2. Our People are the source of our competitive strength.
3. We expect the highest levels of performance and integrity from our People.
4. We promote an environment where People are valued as individuals and treated with respect
and dignity, fairness and equity.
5. We value and count on our Suppliers. We demand quality and on-time service and are willing to pay a fair price to get it. We value long term, mutually beneficial relationships.
6. Continuous improvement is essential to our success and is achieved via measurable progress.
7. Open, two-way communication is essential to the improvement process.
8. Long term profitability is the ultimate measure of our efficiency in serving our Customer’s needs.
Here’s the rub – as commendable as this focus may seem – we realize we have constraints that restrict achievement of our goal. As solid as we are as a company, we acknowledge, as the old idiom says, “we’re only as good as our weakest link”. Identifying and eliminating that link (or links) has become Project One for us.
We recently invited our team to share their individual lists of behaviors that do or do not support our Guiding Values. Our task, now, is to clearly define the constraints based on those behaviors that restrict our progress and to set out to systematically remove them.
We are practitioners of continuous improvement, which embraces TOC and reinforces the process of constraint removal. We firmly believe that an hour lost to a constraint is lost to the organization, forever, and can never be recovered. Ironically, we see many manufacturing companies that attack the symptoms of their failing systems rather than the cause. An hour seemingly saved by removing a symptom or non-constraint is a mirage. It has no long standing impact on the sustainable growth of saleable throughput and successfully managed operational expenses.
Goldratt’s message is a relevant today as it was in 1984 when The Goal was written. We’ll spend more time here, in the future, sharing particulars on the constraints we’ve uncovered and our strides to remove them. We’ll also dig deeper into TOC and lay out some constraint-breaking steps for you to consider in your own organization.
Until then – stop watching the pennies and shift your focus to making more money today – and into the future by managing inventory, throughput, and operational expense.