Guest article by Graham W. Scott
Stop wasting money! Discover the hidden engine of your business and unleash its full potential. Learn the power of the Theory of Constraints and how focusing on your business's bottleneck can revolutionize profitability. From maximizing work flow to optimizing the mixture of tasks, uncover the counterintuitive truths that challenge conventional beliefs. Don't let inefficiencies and misbeliefs hold your business back – it's time to think in bottlenecks and transform the way you approach success!
Have you ever wondered why almost none of your business improvement initiatives ever seem to have any significant effect on bottom line profits?
It’s usually obvious when someone tells you! Every business has a rate-determining step or a bottleneck that determines the upper limit of its output. Unless the improvements are directly affecting the bottleneck, then of course you won’t see extra profit! It’s like putting a new sound system in your car and expecting it to go faster. If it doesn’t directly affect the engine, the improvement is unlikely to make a difference!
So, what is the engine of your business? And what is preventing it from working at maximum output?
It is this simple, commonsense approach that first attracted me to the Theory of Constraints. Applying its principles to my own accounting practice caused enough increase in profitability and reliability to enable me to travel the world for 9 months with my family. And when I got back, I made is my mission to learn more about TOC and apply it to my clients’ businesses. The concept of a business bottleneck was easy for the clients to understand. And how if that bottleneck is restricted in any way, then the flow of work and money will also be restricted.
Being an accountant by training, I need to know the numbers. I want to know what your output and profitability is before we make any changes. Then I want to identify your bottleneck and make sure it’s running at full capacity. (And I can say from experience, that it is never running at full capacity! How can it be, if you have never thought of your business as having a bottleneck?)
Then once that capacity is filled up, we need to adjust the mixture of work to get the highest $/minute through the bottleneck that we can. And since the bottleneck determines how much money the business makes, by default we are then maximizing the money through the business.
So, step one, we maximize the flow of work through the business by ensuring the bottleneck is working at full capacity. Then, step two, we adjust the mixture of work to maximize the flow of money through the bottleneck (and therefore), the business. From there, it’s a matter of organizing the rest of the business, (the non-bottlenecks), to support the bottleneck. And this is where it gets interesting! We need some counterintuitive thinking because all of the following, widely held, conventional beliefs, get in the way:
If everyone is busy, we have maximized our productivity
Idle people cause inefficiency
Cutting costs is the best way to increase profit
Work In Process (WIP) is an asset
Unpredictability is best solved by planning and budgeting
Starting a job early means finishing it early
Milestones ensure projects finish on time
For instance, if we chase efficiency everywhere in our business, we won’t have protective idle capacity at non-bottlenecks. When the pressure comes on, we will get “wandering bottlenecks”. Places or people that shouldn’t be bottlenecks take over the role. This causes our real bottleneck to become idle and stop making money. Only the true bottleneck should be efficient. Non-bottlenecks should be effective (at keeping the bottleneck efficient!) And although us accountants treat Work In Process as an asset for financial reporting purposes, from an operations point of view, it’s a liability. WIP ties up cash, it clogs up throughput, it increases lead time, it prevents us from invoicing and it distracts us from bottleneck efficiency. Excess WIP blocks the flow of work and therefore the flow of money through a business! Which means minimizing WIP needs to be a focus for the operations department, along with anything else that will slow down the bottleneck. Afterall, their job is to turn inputs into outputs as quickly as possible. Having uncovered hidden bottleneck capacity, maximized its monetary output and organized the rest of the business around it, we need to make sure there is enough future work for our bottleneck. That’s another area conventional accounting falls down. Finding out after the month is over that you should have made more money is of no practical use. And the usual way to predict future profit is to use budgets and forecasting, which are usually based on previous budgets and results. We need a different form of forward financial radar. It makes more sense to find the one lead indicator that will predict profit in the upcoming months. I’ve worked with various clients to find that one thing and it’s never the budget! For instance, we have used:
Quotes written during the month
Enough quotes written this month means
The factory is full next month, which means
The bank account is full the month after
Operating lists or appointment books are full
Mortgage broker whose income correlated with the average number of meetings she had the previous 3 months
Software company
Known work allocated to delivery team to identify the gaps
The Sales Pipeline is monitored closely to fill the gaps
Monitoring lead indicators of profit has been an effective way of smoothing the workflow through these businesses and many others. They effectively have a tap that can be turned up and down to reduce surging, making profit and cash flow much more predictable. They have also become calmer places to work! Your business can only make money at the speed of its bottleneck. Any part of the business running faster than that is just an illusion. When you understand that, you’ll know why improving non-bottlenecks or taking a “shotgun” approach and fixing everything, are so wasteful. While a shotgun approach might eventually fix the limiting factor, wouldn’t it make more sense to just find the limiting factor first, and then fix that? And if your profit is limited by the work going through the bottleneck, then doesn’t it also make sense to measure the money at the bottleneck? Thinking in bottlenecks has completely changed the way I think about business. Of course it might not work for your business.
