Maximizing Profitability Part 1

In this series of blog posts, I want to lay out what I believe is the real secret to maximizing your company's profitability.  While many people believe that profit margins are improved by cutting costs, the real secret lies in those efforts aimed at increasing revenue.

Improvement Efforts

How's your improvement effort working for you?  If you're like many companies, you've invested lots of money in training, but you're not seeing much hit the bottom line.  Like any other investment you expected a fast and acceptable ROI, but it isn't happening.  Maybe your investment was in Six Sigma and you've trained hundreds of people to become green belts and black belts?  Maybe you've invested a large sum on money training people on Lean Manufacturing?  Or maybe you've gone the Lean Six Sigma route?  So why aren't you seeing an acceptable return on investment?  You know improvements are happening because you see the improvement reports, but you're just not seeing the return on investment that you expected.

I too experienced this dilemma, so I decided to analyze the results of failed and successful improvement initiatives.  What I found changed my approach forever.  What I discovered was that it was all about focus and leverage.  By knowing where to focus my improvement efforts transformed me.  In doing so, I discovered something called The Theory of Constraints (TOC).  TOC teaches us that within a company there are leverage points that truly control the rate of money generated by a company.  Sometimes these leverage points are physical bottlenecks, but sometimes they are policies that prevent us from realizing our true profit potential.  Over the course of the postings in this series, I'm going to demonstrate exactly how TOC can work for you.  I'm going to show you how to use the power of TOC to truly jump-start your improvement efforts.  Better yet, I'm going to help you turn all of those training $'s (or whatever currency you use) into immediate profits and then show you how to sustain your efforts over the long haul.

Before we get into the solution, let’s take a look at the problem of why the bottom line isn’t improving fast enough to suit you or your leadership. If you’re like many companies, there seems to be a rush to run out and start improvement projects without really considering the bottom-line impact of the projects selected. Many companies even develop a performance metric that measures the number of on-going projects and attempt to drive the number higher and higher. Instead of developing a strategically focused and manageable plan, many companies try to “solve world hunger” instead of focusing on the areas of greatest payback. Many Lean initiatives attempt to drive waste out of the entire value chain while Six Sigma initiatives attempt to do the same thing with variation. There’s nothing wrong with either of these strategies if they are focused on the right area.

The real problem with failed Lean and Six Sigma initiatives is really two-fold, too many projects and focusing on cost reduction. Many companies simply have too many on-going projects that drain valuable resources needed for the day-to-day issues facing them. Knowing what to do next can really be confusing to managers who have reached their saturation point and are not able to distinguish which projects are vital or important and which ones are not. The economic reality that supersedes and overrides everything else is that companies have always wanted the most improvement for the least amount of investment. Attacking all processes and problems simultaneously, as part of an enterprise-wide Lean-Six Sigma initiative, quite simply overloads the organization and does not deliver an acceptable ROI. In fact, according to the Lean Enterprise Institute annual surveys, the failure rates of LSS initiatives are hovering around fifty percent. With failure rates this high is it any wonder why companies abandon the initiatives and back-slide to their old ways?

Earlier I said that focusing projects on cost reduction was one of the reasons that many Lean-Six Sigma initiatives are failing. Across-the board cost cutting initiatives are pretty much standard for many businesses. Companies spend inordinate amounts of money on external consultants and in-house training programs and then focus on ways to reduce costs. The truth is that focusing only on cost reduction is a huge mistake. So, if this misguided focus isn’t right, then what is the right approach? In my next blog, I’ll demonstrate why this focus is misguided, but more importantly where the right focus should be.

Based upon my experiences in a variety of organizations and industries, the disappointing results coming from Lean and Six Sigma are directly linked to failing to adequately answer three basic questions: What should I change? What should I change to? and How do I cause the change to happen? Take a look at your own company. Are your projects focused on cost reduction? Do you have an army of green belts and black belts? Do you have so many projects that they are bogging down your company? Are your Six Sigma projects typically taking 3-6 months to complete? Are they providing you with real bottom line impact or are they a mirage? In the next blog we’ll begin to address how we can take advantage of the LSS training that’s already been provided to accelerate your company’s profits and where to focus your efforts.

Bob Sproull