I have come across scenarios, we planned everything and tried our best to execute it as per plan. All the team members and resources were almost occupied all the time, still we didn’t get the desired output.
I am sure, I am not the only person, who faced such problems. Not only once, couple of times or even quite often.
We need to find out what went wrong and how do we fix it.
Let’s start from beginning to understand the purpose, problem and then to solution. Without proper finances the vision and ambition of company will go nowhere. Hence, for me :
Goal of the company : Making Money.
How do we achieve that : To make money by increasing net profit at the same time increasing return on investment, and simultaneously increasing cash flow.
How do we measure that?
- Throughput: Throughput is the rate at which system generates money through sales. Here the important point to note is “through sales – not production”.
- Inventory : Inventory is all the money that the system has invested in purchasing things which it intends to sell.
- Operational Expense: Operational expense is all the money the system spends in order to turn inventory into throughput.
One important thing we miss out most of the times, is getting confused with the goal of company. Often, We get confused, what is more important, “Efficiency or Making money”. Most of the time our struggle for high efficiency takes us in the opposite direction of our goal.
One harsh reality is “A company in which everyone is working all the time is very inefficient”. Yes, you read it right, keeping all the resources occupied all the times may not yield in best efficiency. Things which look efficient may not be doing the productive work at all. This method may result in excess inventory, but the goal is not increasing inventory but to increase throughput.
Let me explain this part, for any product process there are multiple sub components processes are involved. A systems efficiency is defined by its least efficient component, which could be referred as bottleneck. Any system’s throughput can never be higher than its bottleneck’s efficiency. And if other components are more efficient than bottleneck, either they are not contributing to the throughput or they are hindering the throughput. They are just increasing the inventory and thereby increasing the cost for the company. That is why I had mentioned earlier, sometimes just by focusing on efficiency of individual process/component, we miss out the overall goal of company.
The 5 steps Approach to handle such situations could be the following :
- Identify the system’s bottleneck.
- Decide how to exploit the bottleneck (improve the efficiency of bottleneck and throughput will increase).
- Subordinate everything else to above decision (making sure everything else marches to the tune of the constraints).
- Elevate the system’s bottleneck (any extra support can be brought in to reduce the stress on bottleneck).
- Warning!!! If in the previous step if a bottleneck has been broken or something else has become bottleneck now then go back to step 1.
I wish I would have learnt these lessons a bit earlier in life. First of all thanks to “Eliyahu M. Goldratt” for writing an amazing book called “The Goal: A Process of Ongoing Improvement”. This book helped me learn these lessons a bit faster. I strongly recommend this book to all the Entrepreneurs and Operations heads.
According to you, what is the goal of a company and how do you achieve it? Do share your views on the same.
And if you want to read more on our entrepreneurial journey you can check out our blog by our co-founder about his experience meeting Kiran Bedi.