Mining A Gold Seam - APICS Vancouverapics-vancouver.org/images/downloads/nov_2_meeting_folder/summit... · Mining A Narrow Seam of ... Consultant, marketing/product manager MRP company

©20161 Synchronix.com

Mining A Narrow Seam of Gold in Supply Chains

Steve Jackson

[email protected]

604-668-3253

http://www.synchronix.com/


Internal Combustion Engine was developed

Slide rules gave way to Pocket Calculators

Women started playing Rugby

A “B” Actor became President of the United States

Oh yes, and Google, Facebook, ERP, Lean and Six Sigma emerged and Billions of people chose to engage with them.

What a lot of “movements” I’ve missed-out on.

Since I First Became Involved With TOC



1. Manufacturing summer jobs

2. Chemical Engineering degree

3. 150 year old manufacturing plant

4. Computer system - “make it work”

5. MRP “revolution” – 23 implementations

6. Consultant, marketing/product manager MRP company

7. Met Eli Goldratt, quit ALL involvement with manufacturing

8. Consulted to 6 High-Tech Start-ups

9. My own small manufacturing & distribution business

10. Goldratt again – Theory of Constraints – 1988 until now

My Background in 74 seconds



The Presenters today have Big Deal topics. Meat’n Potatoes.

So I’m just going to add a bit of horse-radish sauce. You never want too much of it.

But it gets the sinuses hyper-active.

Well … I aim to get the synapses hyper-active.

Based on stuff that no-one who’s not “into” TOC would know.

Even most of those who ARE “into” TOC aren’t doing it.

Those who choose to pursue this will find Gold!

For Once, I’m Leaving the Big Picture to Others



1. Discover those products that REALLY make you the most money.

(You do know that Cost Accounting doesn’t tell you... Right?)

2. Run’em through some criteria & pick the goodies

3. Look downstream at those companies that buy this stuff from your competitors

4. Construct a Mafia Offer (or a close approximation)

5. Have your sales folk get mediaeval with this market segment (we have our ways!)

Pulling Together 3 TOC Concepts



There’s a very important concept in Accounting that somehow was disregarded for decades.

TOC Concept #1: Knowing What REALLY Makes You Money

“Relevant information is the predicted future costs and revenues that will differ among alternative actions. The

existence of a limiting factor changes the basic assumptions underlying the cost and revenue opportunity of a potential

action.”

From “Introduction to Management Accounting,” ninth edition Horngren et al., Prentice Hall, 1993



Well, Dr. Eli Goldratt – originator of the Theory of Constraints technology, and a prolific author of books including “The Goal” – didn’t read about this concept. Rather, he developed the concept himself from

1st principles and turned it into something extraordinarily useful (especially in small- to mid-sized manufacturers).

Only later, when Accounting professionals paid more attention to what he was doing, did it emerge that this was a long-recognized principle.

The Theory of Constraints’ “take” on the metrics to be used for Operational decision support is called “Throughput Accounting.”

It took a long period of debate – close to 20 years – but eventually “Throughput Accounting” gained formal recognition and was added to

Management Accounting texts and curriculum.

A New Invention That Wasn’t



Why was Throughput Accounting necessary?

Dr. Goldratt recognized that standard fully-allocated Cost Accounting data –the data that 99% of the western world’s industry uses daily for Operational decision support – did not serve well in that role.

It was never supposed to, actually. It has other purposes.

However, managers needed some measurements to connect their actions and decisions to the bottom line.

So Dr. Goldratt developed an alternative.

He called it Throughput Accounting.

Hey, he was just a Physicist. What did he know?

Throughput Accounting



Surprising many … the Accounting profession largely agreed with him that the existing system was dysfunctional.

Over a few years, though, a War raged because what Accounting professionals recommended as an alternative was the ONLY thing we

could conceive of that was worse than the original.

Later, Lean guys came along, they also agreed that the standard body of knowledge wasn’t helpful, and they too had alternatives.

The outcome: predictably, the bulk of industry continues to use on a daily basis, metrics that have been discredited for 30 years (and

largely useless for most of a century).

Let Slip The Dogs of War



In 30 years, we have found Eli’s original solution to be BY FAR the most practical and useful.

Eli proposed 3 Fundamental Measurements.

Throughput – the rate at which the business GENERATES money through sales

Operating Expense – the money the company spends to operate the business

Investment – the money the company invests in plant, equipment, inventory

Simple and Powerful



The one that interests us the most for today is, THROUGHPUT.

Reducing OE has diminishing returns and a finite end (zero).

Reducing I has diminishing returns and a finite end (zero).

Throughput is the ONLY channel where there is no limit.

It’s the only channel without diminishing returns.

It’s also kinda why most businesses were formed.

Simple and Powerful



Throughput – the Rate at which the System Generates Money

Product #1: Sell price $100Material cost 40$Throughput $60

Sales/month: Product #1 1,000 units

Product $T/month: $60,000

Assume 4 similar products ….

Plant $T/month: $240,000



When an organization has a capacity constraint, then it’s easy to understand that resource governs the production rate of the company.

But more importantly, it governs the rate at which the company can generate $Throughput.

And suddenly, a new metric becomes very, very interesting.

$Throughput/hour of Constraint

A Very Interesting Metric from “Thinking Throughput”



If you only have 80 hours a week of a resource available, for example.

And when you manufacture one product,

Sell: $100 RM: $40 $T generated: $60

Time per part on Constraint: 30 minutes

Then … that product generates money (T) for the business at $2/hour

Another … Sell $90 RM $45 $T generated: $45

Time per part on Constraint: 15 minutes

Then, this part generates money (T) for the business at $3/hour

Now, if you only had 80 hours a week available, would you rather be selling those 80 hours for $2/hour or $3 per hour?

A Very Interesting Metric cont’d



Throughput Accounting is of course a serious topic and justifies a heck of a lot more exploration than we can cover today.

But just to get a sense of it … let’s start from an unusual angle.

If you want to earn a 20% Return on Sales.

And you KNOW your ballpark Operating Expense for the year to come.

And you realize Net Profit is simply $T - $OE

Then you can work out what your Throughput has to be, can’t you?

And if you know the hours that will be available on your constraint …

You can work out what the average T/hour will have to be … right?

(Wouldn’t it be interesting to see how your current reality stacks up?)

A Very Interesting Metric – Now Let’s Apply It



Of Course, You Have To Know Your Constraints!



Of Course, You Have To Know Your Constraints!



We call these spreadsheets their “Database of Products.”

They can be for a list of standard products.

Or a list of Jobs in a custom manufacturing environment.

Or some companies categorize the types of work.

They simply show …

We Encourage Companies to Develop a Certain Spreadsheet

• Products, or Jobs.

• Sell Price.

• Material Content.

• Throughput.

• Time on the Constraint.

• Throughput per hour of Constraint time.



The Bottom Performers From One Company?



Actually It Was WORSE Than That!



Top Performers (A few even better than this)



Think about that spread!

Now, for a company with a standard product line the distribution is less extreme.

But it’s still not unusual to find a 10X difference or more between the low performers and the high performers!

Now, let’s view it from a different angle.

Let’s analyze the distribution of T/hour in terms of, total hours on the Constraint.

The Database of Products is Always Interesting



Looking At How Well We Use Our Constraint To Make Money



If you really want to give yourself a good laugh, add a column to the spreadsheet.

It’s the “Margin %” that your Cost Accounting data provides you.

You’ll fall over laughing as you see products with GREAT margins that generate a pittance per hour from your most limited Resource.

While the products you’re desperately trying to drop from your product line because of poor margins prove to be absolute Seams of Gold.

If You Really Want A Chuckle



I’m trying to provoke thinking, of course.

But just be aware … a non-TOC company would have ZERO CLUE about any of the calculations, any of the data.

And I have to admit, most TOC users are hybrids. They take advantage of T, I, and OE thinking to improve their

Operations. But some of them hedge their bets on pricing etc.

Companies that really understand this stuff and choose to use it have a HUGE advantage over those that don’t.

The conventional companies all play by one set of rules.

You can choose not to … without telling them, of course.

A Non-TOC Company Would Not Know This



OK.

So now you know the products that, given your Constraints and your operating principles, generate the most $Throughput

for the business.

Next: Let’s run the top-performers through some criteria.

OK, Part 1 … Done.



• Is this a product you’d be happy to have increased sales in terms of, it’s not an Ops or a Production or a Supply headache?

(If it is a headache, this might also make it an opportunity! Is it also a headache for your competitors?)

• Do increased sales of this fit in with your strategic direction?

• Is there a means to identify those companies who are natural buyers for this product/these products/these types of products? It might mean tedious leg-work. (Still, that’s OK. It’ll be worth it. )

• Is the market for this product significant … so, it represents a segment worth going after?

• Is it something that a customer could buy from you even without it being part of a broader product offering, if the advantages you offered are large enough?

• Is this a door-opener, so that once it gets you “in the door” with a new customer you can choose to expand your offering?

Some Starting Criteria



You are going to position yourself to take business away from your competitors for your top money-makers.

One thing that’s greatly misunderstood: A simple competitive edge is not enough.

TOC Concept #2:



1. You need to dive deeper into the target customer’s reality than you ever have in your life, to find the trigger that will win you business away from your competitors.

2. Improvements that give you a simple competitive edge are NOT enough. They are unlikely to cause a potential customer to dump a supplier they may have worked with for years, with whom they have personal relationships perhaps, where all their internal systems are set-up to work with this existing supplier for ordering, shipping, receiving, invoicing, dealing with queries, etc.

3. You need improvements AND AN OFFER that creates a DEFINITIVE or DISTINCTIVE competitive edge. One that is so good, the prospect can’t say no!

A Competitive Edge is NOT Enough



Q: What are you aiming for this year, performance-wise?

A: 15% sales and profit growth.

Q: What’s your strategy?

A: “We’re implementing Lean.” (Steve’s note: Could have been anything!)

Q: What’s your biggest constraint to making more money?

A: “Need more Sales!”

Q: What are you doing about it?

A: “Lean will make a difference.”

Q: How will this help?

A: “Reduced lead time … 4 weeks or maybe better, versus the industry

standard 6 weeks.”

Superficial Thinking That’s All Too Common



Then the follow-up examination reveals:

1. Their major customers are make-to-stock manufacturers.

2. Those customers buy and stock the product from this company; then

they’ll make Finished Goods and hold them in stock.

3. The “Reducing Lead Time” company’s product represents less than 5% of

their customer’s total inventory.

4. The reduced lead time … has a trivial impact on them (basically, a little

less material inventory, and only if they are conscientious planners).

Superficial Thinking (continued)

5. No company will dump an existing trusted supplier to

gain this trivial benefit!

6. No customer will stop grinding on price – let alone grant

a price increase – to gain this trivial benefit!



• Before I explain what a Mafia Offer is … you don’t HAVE to have one in order to have a distinctive Competitive Edge.

• But to win business away from a competitor, unless the competitor is really bad at what they do, you DO typically have to have something of great perceived value.

• And “Mafia Offer thinking” can help even if you don’t develop it into full-blown Mafia Offers.

The Mafia Offer



• A Mafia Offer is an offer – NEVER, EVER based on a price reduction! –that offers tremendous bottom-line benefits to a customer.

• It’s an offer that can only be made when you have uncovered a deep-rooted, serious business problem that your customer (or a group of customers or even better an entire market segment) is forced to live with. OR when you have identified an opportunity for them to profit, that they believe is permanently out of reach, and you make it viable.

• It’s typically an offer that can only be made by a company that has improved to high levels of performance beyond any competitors, to a level that offers a DEFINITIVE Competitive edge. The type of performance that TOC or DDMRP (talk to Carol Ptak!) supplies.

• It’s aimed at winning business away from competitors. Properly constructed it allows you to increase sales AND increase prices … AND, it discourages competitors from trying to match you.

The Mafia Offer



• The most common way of positioning a Mafia Offer is to “go broad.” Let’s find a range of companies with a certain type of problem we can solve with our Offer.

• But we also have an opportunity here to go deep, instead; to say, let’s find all those companies who will be interested in JUST the product or products that make us the most money.

• Sometimes it’s the same thing. For some products, any company interested in buying that product is going to have similar problems, for example.

• But sometimes – because we’re being very product-centric here – it means that if we want to have the strongest possible Offer, we have to be prepared to make different offers as a prospect’s situation justifies. That calls for analytical sales skills.

What follows is to illustrate Mafia Offer thinking … not to be applied specifically to the “Go Deep and Narrow” strategy we’re talking about.

We’re Just Looking For A Tightly-Targeted Mafia Offer – Going Deep, Not Broad



There are some pre-formed “Template” Offers.

These can be a shortcut.

• One provides a Vendor Managed Inventory shaped offer, for when reduced inventory and immediate availability of a standard product is important.

• Another has a Mafia Offer for make-to-order environments where longer lead-times are “the norm” and on-time delivery is typically poor.

• Another is for situations where a company sells to retailers.

• Another when a company’s product is the outcome of a project (and so typically late, even though with a too-long quoted lead time).

How Do You Create A Mafia Offer?



• A simple approach to custom-building a Mafia Offer is to …

• Think about what you and your entire industry “does” to customers that is a result of industry-wide “Policy Constraints” i.e. you and all your competitors do it, all your customers take it for granted, it’s “just the way it is” in your industry … but it’s also hurtful to your customer.

For example, perhaps everyone in your industry offers big discounts for large orders. With awful downstream problems for the customer. Cash flow issues. Storage. Handling. Obsolescence. Damage.

• Then, because you use T, I and OE and are NOT blocked by Cost Accounting thinking, AND because of the improvements you have made in your Operations, you suggest something that appears to your competitors to be lunacy but offers huge advantages to your prospect.

Stop Banging Your Customer’s Head Against The Wall. They Appreciate This.



The Cause-Effect tools and thinking in the Theory of Constraints offer more advanced ways to analyze downstream circumstances and build very-tightly-targeted Mafia Offers.

• This is a learned skill that you can acquire.

• However, you can also hire TOC specialists to help you. Not all are equally strong with Mafia Offers, however! Some are specialists.

What follows is an example of some Cause-Effect thinking that leads to the construction of effective Offers. Simply as an illustration.

There Are Tools & Techniques



One Way To Find a Mafia Offer … Search For The Pain!

Do you sell to the

End User or to a

Manufacturer?

Manufacturer End User



If You Chose the Manufacturer, You MUST LearnThe Answer To Three Vital Questions

Manufacturer

Yes No

1. In your industry, is there a Long Lead Time for your products?

2. Is the Due-Date Performance poor, in general?

And the crucial question…3. Is your product only a small part of the cost of the product it goes

into?



If The “Yes” Path, Then It Is VITAL to Know…

Manufacturer1. Long Lead Time?

2. Poor DDP?

3. Small % of User’s Sell Price?

Yes

Are more than 5% of the orders you receive from those customers

Urgent Orders?

Rush Orders?

“We want it yesterday, or else” type orders?

Yes No



If the “Yes” Path … Recognize What You Now Know About this Customer (Maybe, this Market)

Yes

Are more than 5% of the orders you

receive from those customers

Urgent Orders?

Rush Orders?

“We want it yesterday, or else”

type orders?

The biggest issue is that if they don’t have something, it HURTS them.

You don’t get 5% of rush orders for a make-to-stock company who in turn sell products that sit on a customer’s shelf!

You know they are screaming at you because they are in deep trouble if they don’t get something shipped!

And you know this happens to them ROUTINELY!



You Now Know a Major Source of Pain that You Can Relieve!

Knowing what you now know … what would it be worth to the potential customers if they knew, with 99% certainty, you'd dig them out of the hole?

What business could THEY win if they knew, with 99% certainty, they could get your parts in a LOT less time than industry standard?



You Now Know a Major Source of Pain that You Can Relieve!

Your offer – assuming you have TOC-style Ops in place! - becomes:

• The industry standard is 8 weeks lead time…we’ll also sell it to you in 8 weeks, AND we’ll guarantee it - $x for every day late!

• BUT if you want it in

o 4 weeks, we can do that. AND guarantee it, $x for every day late. But here’s our premium.

o 2 weeks, same offer, guaranteed. And a premium!

o 1 week, sure. Same offer, guaranteed. And a premium!

You could only make this offer if the premiums were trivial from the

customer’s perspective. Hence the earlier question. And if they gave

different answers then the offer has little or no value, of course.



If they chose the “No” Path … Then The Next Thing You Need To Know

No

Are more than 5% of the orders you

receive from those customers

Urgent Orders?

Rush Orders?

“We want it yesterday, or else”

type orders?

• Are the orders typically Repeat Orders for the same parts?

If “Yes” then the next question:

• Are suppliers generally unreliable?

If “Yes” then the next question:

• Are there many emergency orders (as before)?

You can see how this works, right?

“One Size Fits All” improvement

strategies are … amateur hour!



So … once you have the Top-T products identified, this is the type of thinking you might consider in order to win business at a

high rate of closure.

And, you’re typically going to look further afield.

For example, a local client of mine … all their business is local.

BUT having identified a few products that are VERY lucrative, they are now looking Canada- and USA-wide to find those companies that buy these products (or similar ones that

have the same type of Routing and Pricing).

So. We Know WHAT, and We Know How To Win.



Now we have to convert the opportunity into Sales.

Maybe you’re already good at this.

But the Theory of Constraints has some tactics that might be useful.

Let’s Capitalize!



When we “shadow” sales people in many organizations there is sometimes <10% “Blue light” time. Often <20%.

Well, this is a time to move into 100% Blue light.

It can be as simple as common sense: take away from a “Hunting Dog” everything that’s not face-to-face selling.

Or, you can go to extremes. Sales Process Engineering.

Someone does lead generation. Some else sets appointments. The Hunting Dog salesman meets face-to-face 4 times a day, 5 days a week.

Imagine: this level of sales activity + a Mafia Offer.

On the products with the best T/hour!

TOC Concept #3: Moving Sales To A Whole New Level



Remember the Distribution Chart? & the $T/hour range on the Database of Products?

The Impact?



OK then: Small manufacturer.

Sales $10MM range.

Constraint (Department) hours available: 14,000/year

Average $T/hour target: $400 gives them the Return they want

So they aim to generate approx $5.6 MM T over the year

Target: Shift 15% of those hours from $300/Hr to $500/Hr

Additional T: $420,000/yr for the same Production Hours and $OE

AND you’ve gained entry into how many new customers?

The Impact?



Now you can return to the Big Picture!

Just be conscious of:

Throughput Accounting isn’t just to mine these seams.

Mafia Offers aren’t just to position the top products.

TOC Sales tactics aren’t just to “go deep” with the top sellers.

And the platform for these is the Theory of Constraints approach to Manufacturing & Distribution/Supply Chain.

Or to take it to an even higher level … Demand Driven Performance!

As I Said … Just A Seam of Gold, to Make You Think



What Next?

What we covered today wasn’t even the tip of the tip of the iceberg. Perhaps 1% of the body of knowledge.

If you have questions once the numbness of the fire-hose has worn-off, don’t hesitate to contact me.

I’m user-friendly, based near BCIT in Burnaby, LOVE talking about this stuff and happy to chat if you buy the coffee.

[email protected]

www.synchronix.com

604-668-3253 (office)

604-377-5263 (mobile)


mailto:[email protected]


Mining A Gold Seam - APICS Vancouverapics-vancouver.org/images/downloads/nov_2_meeting_folder/summit... · Mining A Narrow Seam of ... Consultant, marketing/product manager MRP company

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