Monday, October 27, 2014

Focus and Leverage Part 386

I am totally surprised by the overwhelming reception my most recent blog postings have received.  In fact, in the last several days, new daily records for page views have been set to the point that for the month my blog is tracking to surpass 300,000 page views......a total I never dreamed was possible.  So for all of you readers, I say thank you.  In today's posting I will complete my series on Debra and Chad Smith's new book, Demand Driven Performance Using Smart Metrics.  I can't emphasize enough how important the teachings in this book truly are.

In Chapter 5 of this book the authors present some facts, or maybe I should say some problem areas being experienced, from a fictitious company in their normal monthly meeting.  In attendance are the company's sales manager, plant manager, accounting manager and engineering manager and needless to say, there is a lot of finger-pointing going on as to who is to blame for their lackluster results.  Here is a list of issues presented during this meeting:
  1. The plant has low on-time delivery performance for make-to-order product.
  2. The plant has a backlog of make-to-order product
  3. There are stock-outs for make-to-stock product, and poor customer fill rates,
  4. There is excess inventory in all forms; inventory turns are low.
  5. They have poor cash flow.
  6. They are losing customers.
  7. Sales is missing plan.
  8. ROI is low.
  9. Resource efficiencies are high.
  10. Unit costs are low.
  11. Operations is making plan.
One of the theories proposed as to why these issues exist is that the plant is not focused on the right priorities.  But this point is easily dismissed by their report showing all of the resources in the plant are operating efficiently.  The plant is beating the standard cost and producing a net favorable cost variance.  And because of these high efficiencies, they are making the operating plan and beating budget.  My question to you is, "How many of your companies are experiencing some or all of these same problems in your company?"  Do you have an idea on how to solve these issues?

The authors use a scientific method to examine the problems being experienced by looking at a series of:
1. Combinations that are unexplained as follows:
  • There is a large sales backlog, but lots of excess inventory.
  • The plant is capacity constrained but the warehouses are full of finished stock.
  • The plant is on plan, sales are not....but the plant's plan was based on and derived from the sales plan.
  • Net profit is on target, but there is no cash available.
  • We need more efficient equipment to be able to satisfy the market (plant manager's opinion).
  • We also need more warehouse space to store the product we are making that the market is not pulling.
2. We develop an explanation:
  • The plant's focus on its monthly profit through cost of goods sold (CoGS) dollar credits is getting in the way of its ability to service the market.
3.  We test the explanation with an experiment that gives us facts.
  • We use rigorous logic to create solid effect, cause and effect connections from the explanation as the core cause, the their facts resulting in poor performance.
The authors then develop a logic diagram known as a Current Reality Tree (CRT) and is one of TOC's Thinking Process tools.  It is read from the bottom up with the tail of the arrow being "if" and the tip of the arrow being "then."  The ellipse shape connecting the arrows is the logical "and," implying that either condition alone is not sufficient to create the cause.

In my next, and truly my last posting on Debra and Chad's book, I will post the actual CRT they developed and then complete my discussion on their Demand Driven Performance.
Bob Sproull

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