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2009

Creating a Current Reality Tree (CRT)

 

STEP 4:

Beginning with an initial pair of related UDEs (as described in the preceding post), continue building your logic by working out and agreeing upon cause-and-effect connections between the other UDEs as you add them to the whiteboard.

 

In our example, someone from purchasing has identified an unwritten policy of always buying from the lowest-priced supplier as being one of the things that is keeping the organization from making more money. This is, most likely, an astute observation, especially since it is counter-intuitive. The same party also said that "not including quality criteria" in the organization's purchase agreements with vendors leads to more problems. We've added these as entities 30 and 40 in the figure below.

 

As you build your logical tree, the arguments regarding the logic should be restricted to the following categories of legitimate reservations:

  1. Clarity - Every statement (entity) should be clearly understood as to its meaning and intent.

  2. Entity Existence - Be sure that the entity (UDE) actually exists.

  3. Causality Existence - Does the proposed cause-and-effect (arrow) represent reality? It must be the actual cause and effect in a CRT. In other logical tree forms it may be a planned or desired effect.

  4. Cause Insufficiency - Ask the team, "Does Entity A actually lead to Entity B all by itself?" If not, then you may need to add clarifying entities (as we did in our example in the preceding post).

  5. Additional Cause - It may be true that Entity A causes Entity B, but there may be a additional cause that also leads to B. It is possible that both "If A, then B" and "If C, then B" both exist simultaneously.

  6. Predicted Effect Existence - This technique may validate or invalidate logic by demonstrating how the existing of one thing logically proves or disproves some other proposed reasoning. For example, if someone were to say, "Joe Smith is struggling financially," someone else might say, "If Joe Smith were struggling financially, one could predict that he would NOT be in the process of purchasing a new yacht for $1.5 million."

  7. Tautology - A tautology is a statement that must be true by definition, but does not necessarily indicate a cause-and-effect relationship. For example, if we say, "There are ambulances on the freeway, so there must be an accident," we are not necessarily implying that the ambulances caused the accident. In fact, the presence of ambulances on the freeway does not necessarily imply that there is an accident at all. They could be going about other business, such as transporting a patient not related to any car accident.

It is important to restrict your team to using these kinds of logical arguments relative to the logic in your tree. This prohibits (or, at least, exposes) the introduction of "company politics" into the logic so that you and your team can see "reality" and not some slanted view of what is working and not working in your organization.

 

Continue building your CRT until you have incorporated all of your UDEs. (On rare occasions we will exclude some UDEs in the construction of a CRT. Generally, the cause for such exclusions is that one or more of the UDEs is really outside the scope of the "system" being considered. For example, if the "system" being addressed is limited to the "sales process," we may omit UDEs related to post-sales actions.)

 

When topping off your CRT, be sure to get to your statements about not reaching your goal. For example, if your team's goal were (as we suggested) "to make more money both now and in the future," then some of evidences of not reaching your goal might be entities at the top of your tree like: "We do not generate enough Throughput" and "Our Operating Expenses are too high."

 

NOTE: If you'd like to receive a sample of a full CRT, please contact me at this email address: rcushing(at)ceoexpress(dot)com.

 

(c)2009 Richard D. Cushing - all rights reserved

 

Go to GeeWhiz to R.O.I. for more information.

Creating Your CRT (continued)

 

STEP 2:

Having collected some ten to 20 UDEs from your team, weed out any duplicates and make certain that the UDEs are clearly understood by everyone on the team, rewording them as necessary.

 

A well-written UDE will contain an "actor" as well as some description of the affects being experienced. For example, your team would need to clarify further a UDE that says only "poor quality." Is the poor quality coming from a vendor or is it your own organization that is producing poor quality? You will need to clarify such a UDE, after discussion, by rewriting it as, "We are getting up to 10% defect rates on widgets coming from ABC Company."

 

Another factor to consider: If you end up with UDEs that read something like "Because we get poor quality widgets from ABC Company, we end up with high scrap rates in Z-machine processing," then you will want to break that down into two UDEs that might read as:

  1. "QC reports that we are getting up to 10% defect rates on widgets coming from ABC Company" and
  2. "We have high scrap rates in our Z-machine process"

The reason for doing this is that the CRT construction itself will define the cause-and-effect logic, as we will see shortly.

 

Once everyone on the team is clear on the meanings of the UDEs you have collected, you and your team will be ready to move on to the next step in the construction of your CRT.

 

STEP 3:

In this step you and your team will begin linking the UDEs in cause-and-effect relationships. We usually do this on a whiteboard using the sticky-notes for the UDE entities and drawing in the connecting if-then arrows on the whiteboard.

 

Since one of the UDEs submitted had a "because" in it, and since we needed to break down that UDE into its components, we have a great place to start building our CRT, using logic already implied in our discussion.

 

Note that we assign numbers to the entities as we place them on the board. This is merely for the purpose of facilitating discussion and documentation. The numbers become shorthand for referring to an entity (rather than restating the entities whole contents).

 

One would read this beginning logic as: "IF [10] we get up to 10% defect rates on widgets from ABC Company, THEN [20] we have high scrap rates on our Z-machine processing."

 

There is additional logic implied in this statement, and everyone may be fully satisfied with the statement as it stands (understanding that the defective widgets consumed by the Z-machine process contribute to the defect coming out of that processing. However, if there are any questions, one might simply add a clarifying entity (as shown below).

Here you will note that we used a letter (rather than a number) to identify clarifying entities in the logic tree. We have also used an oval to encircle the two arrows leading from [A] and [10] to [20]. This oval constitutes an AND JOIN, so that the logic would be read as: "IF [10] we get up to 10% defect rates on widgets from ABC Company, AND [A] we use widgets from ABC Company in our Z-machine processing, THEN [20] we get high scrap rates on our Z-machine processing."

 

When building your CRT, you and your team may begin anywhere. Pick a couple of UDEs that appear to have some fairly obvious cause-and-effect relationship and place them on the whiteboard and join them with an arrow. Then seek the team's agreement with the logic before moving on to add another entity.

 

As I said, we typically do this on a whiteboard using sticky-notes. It can get a little messy. Don't let it get too out of hand, as you will need to be able to read your CRT and make sense of it when you're through building it.

 

However, once you're done with building it on the whiteboard, someone will have to undertake to document the CRT for review and final approval. We generally do this using Microsoft Visio, but any flow charting software (or even the drawing tools in Microsoft Word) could be used to create your final version. When creating a first draft, clean up the language in the entities to make the tree read relatively naturally from bottom to top. Also, rearrange the entities to reduce the number of arrows crossing one another just for general clarity.

 

(c)2009 Richard D. Cushing - All rights reserved


GeeWhiz to R.O.I. for more information.

Thinking Processes to the rescue

 

Dr. Eliyahu M. Goldratt introduced the Theory of Constraints (TOC) to the world in his book entitled The Goal, back in 1984. In the 25 years since its introduction, TOC has been applied successfully in a vast array of businesses, industries, not-for-profit organizations and government entities.

 

Too many executives and managers are stumbled by the use of the word "theory" in TOC. Unfortunately, this is something you'll likely have to just "get over." Dr. Goldratt was a physicist before becoming involved in the world of business, so he calls it a "theory," under the assumption that someone, someday may prove it wrong -- that an exception may be found. To date, however, no such exception has been discovered.

 

The "Thinking Processes" are five interrelated methods to allow the rational analysis of any system in support of focused improvement leading to ongoing improvement. By applying these tools, it is possible for an organization to construct a rational framework that accurately describes how an organization works and interacts within its industry and the economy in general. The primary Thinking Process to be applied in mapping the system's (organization's) current state is the Current Reality Tree (CRT). The accompanying figure is an example of such a logical tree.

 

The Current Reality Tree (CRT)

The CRT is predicated upon the fact that, in most organizations or "systems," the many factors that may be identified as "problems" really arise from a relatively small number of "roots" or "root causes." Applying the CRT Thinking Process allows executives and managers to capture and decode "tribal knowledge" about how their organizations function, and what is or is not working in a logical, re-readable written form.

 

Once placed in the CRT form, using rules of logic, this written document may be used by the entire management team to read, re-read, discuss and modify the logic until everyone is certain that the logic presented in the CRT reflects the "reality" expressed within the organization's operations. Hence, the tool's name is the "Current Reality Tree."

 

Constructing a Current Reality Tree

While experience in guiding a team through the Thinking Processes is beneficial, there is no magic in creating a CRT or applying any of the other TOC principles. You do not need me or any other consultant to do this. There are a number of good resources available online and in print that may be used to guide your firm through the effort. However, if you want a short-cut to effective, first-time application the Thinking Processes -- if you'd like to make real progress in the first day of your effort -- then using an experienced consultant may be the most cost-effective way of getting there.

 

Nevertheless, here are the basic steps:

 

STEP ONE

To begin constructing a CRT, executives should gather a cross-functional team of ten or 15 key people from across the organization. This team should be briefed on the goal of creating a CRT and why it is important to the organization.

 

Having gathered the team, the members of the team should be asked select a single "goal" for the system (organization). In a for-profit organization, and where working on the "big picture" for the entire system, we recommend a goal similar to "To make more money -- both today and in the future." (While this is likely not something you want to put on company brochures as a mission statement, it is the true goal of every for-profit organization and every other goal is subsidiary to it. Quality, customer service, market leadership, or any other goal cannot be maintained for long in the absence of making money.)

 

With the single goal in mind, the next question to set before the team is this: "What is keeping us from reaching this goal?"

 

Naturally, when this question is asked, you are likely to get different responses from the sales and marketing folks than you will get from accounting or the production department. Ask them to jot down their responses as simple, clear sentences. Generally, I ask them to do so on 3"x3" sticky-notes. Ask them to include an "actor" in each sentence. Also, ask them to NOT include any "because" statements. Simply state the hurdle or blockage to achieving the goal.

 

Examples might be:

  • Salespeople spend too much time in the office doing paperwork
  • Our prices aren't competitive
  • The warehouse has too many out-of-stocks
  • Our lead times aren't competitive
  • ... and so forth

In working with the Thinking Processes, we stop referring to these as "problems," right away. We call these "Un-Desirable Effects" or "UDEs" (pronounced: YOU-dee-eez), for short. The reason we do this is because when we have "problems" we want to solve them. But, as we will see, all of these cannot be "solved" by addressing them directly. They are caused by occurrences elsewhere in the "system."

 

(c)2009 Richard D. Cushing - All rights reserved

What executives and managers in most organizations lack is a sound "theory" about how their own organization works and responds to its environment as a "system." They know how each department works -- more or less -- but they have never really stopped to think how the "system" works as a whole.

 

Asked directly, most executives and managers could not tell you -- with specifics -- why three of the initiatives that they have undertaken in the last two years seem to have delivered some improvement (but not all that they expected). Nor could they describe for you precisely why another five of the initiatives they labored over delivered no measurable results -- assuming that they actually did no damage to the organization. (Of course, this whole conversation assumes that you can actually get such executives or managers to admit that things they tried produced no results, in fact. Generally, they have willingly pushed out of their mind those matters over which they have expended precious time and energy to no effect -- only to give up in disgust. Then they tried the next management fad in its place.)

 

"I am not yet convinced regarding the connection between 'knowledge' and 'theory,'" I hear you saying. Then consider this:

 

How many people had seen apples falling from trees (or witnessed similar events) for how many hundreds or thousands of years before Sir Isaac Newton postulated a "theory" about a force we call gravity? Everyone had experienced gravity and everyone had information about the effects of gravity, but until Newton, no one had any knowledge about gravity.

 

Once the "theory" was set forth, cause-and-effect experiments could be developed to measure the effects of gravity. Based on the results of these experiments, one could then postulate if-then correlations: if we do X, then Y should be the result.

 

If management is anything, it is about being able to propose actions with a predictable -- not random -- effect on the "system" to which the action is being applied.

 

But, what of the second wrong assumption in the chain of reasoning (in the prior post)?

 

It should be clear now that it is not more information that will help us manage better. Rather, it is a sound theory or logical framework by which to understand how the "system" functions and interacts with its environment. The second wrong assumption is, then, "More information means we can manage better."

 

The correct approach would be to say: "If we can develop a sound and effective framework or theory by which to interpret the information coming from our organization (our "system"), then we will be able to manage better."

 

And, since developing a theoretical framework is likely not a function that will be much enhanced by technologies, then the next step is not to rush out to buy new software or hardware. Clearly, the next step should be to find a way to develop such a sound theoretical framework.

 

[To be continued]

Failure No. 3: Substantial -- sometimes even huge -- budget overruns

Unfortunately, the causes of the "go-live" delays typically are also the major contributors to exorbitant budget overruns, too. Executives and managers that have lost sight of specific and measurable objectives -- or they never had any such objectives in mind from the beginning -- are likely to make many foolish decisions related to customizations and modifications. Having lost focus -- or never having had any focus -- such projects will soon take on a life of their own. Managers may be incapable of bringing them back under control without the direst of actions.

 

Failure No. 4: Stopping or slowing production and delivery

This is clearly the worst-case scenario: the very technology investment undertaken with some vague and likely unquantified hope of delivering business advantages becomes an albatross around the neck of the whole organization. Rather than delivering a "sustainable business advantage," the new technology bogs down or stops the organization's ability to produce Throughput entirely.

 

Almost without exception, this dire result can be traced back to a poor understanding of the organization's real situation prior to the decision to deploy new technologies. The circumstances may be further aggravated by the fact that the organization did not obtain a valid proof-of-concept from the technology vendor before the purchasing decision was made and the Everything Replacement Project (traditional ERP) undertaken.

 


The Everything Replacement Project (traditional ERP) decision to buy

 

Since the introduction of the computer especially, executives and managers with money to spend on technologies have often carried about within themselves a peculiar mindset. That mindset tells them, "If I just had more data; if I just knew more details about my enterprise, then I could manage better. In fact, if I could know in detail everything about my enterprise, then I could manage perfectly."

 

Of course, traditional ERP (Everthing Replacement Project) vendors prey on this mindset. In fact, they often help instill and solidify this mindset within their prospects and clients. As a result, the decision-making process regarding whether executives and managers should buy new or more technology often follows along these lines:

There are at least two incorrect assumptions in this chain of reasoning.

 

The first wrong assumption is that "information" is the key to better management. Information is not the key to better management. Knowledge is the key to better management and information is not knowledge.

 

Data gathered and presented by technology is a representation of what your organization has experienced. That experience (history) may include what you sold, some cost data, some profit data, data about your expenses, and so forth. However, as W. Edwards Deming put it so plainly, "Experience teaches you nothing without theory." He also said, "Knowledge comes from theory."

 

[To be continued]

So, what's wrong with traditional approaches to ERP? Why do so many ERP implementations lead to disappointing results? Why do so many companies spend so much money on new technologies and then end up reaping so little return on their investment?

 

Failure No. 1: Not achieving the planned return on investment (ROI)

It remains today a regrettable fact that many small to mid-sized companies considering new technologies have only the vaguest of notions about the ROI that their new investment should deliver. This is not to say that executives and managers haven't thought out ROI, or even that they may not have already "pinned a number" on the ROI that they'd like to see from the expenditure of their time, energy and money.

 

What they do not know -- far too frequently -- is precisely how the new technology will deliver results. They have not tied the expected results to specific improvements in Throughput, specific reductions in Investment, or specific savings in Operating Expenses. Rather, there appears to be a general consensus among executives and managers -- despite considerable evidence to the contrary -- that investments in information technologies (IT) sort of auto-magically deliver a return on investment (ROI). That, somehow, IT and automation investments bear an inherent capacity to make the company better and more profitable.

 

Over the more than 25 years that I have been working with IT from both sides of the desk -- as an executive and as a consultant -- there have been fewer than a handful of companies with which I have worked that actually calculated an ROI for their investment in technology. Fewer still had any measurable objectives for specific IT investments beyond some number clearly picked from the air like "increase revenues by 5%" or "cut manufacturing costs by 7%." Almost none of these firms could tie specific technology functional deployments to the expected ROI.

 

Given these facts, it is no wonder that traditional ERP (Everything Replacement Project) fails to deliver ROI. The executives and managers deploying the new ERP have not based their ROI expectations on much more than "gut feelings" and some vague sense that having more data will make them better managers.

 

Failure No. 2: "Go-live" delayed inordinately

Substantial delays to "go-live" in Everything Replacement Projects (traditional ERP) are generally attributable to one or more of the following factors:

  • Poor decisions related to customizations or modifications -- when they are selected; how the program code is designed, developed and managed; and the methods chosen for testing and deployment

  • Executive management's improper view of the goals and objectives of a valid ERP project -- thus leading to out-of-control scope creep, usually with absolutely no correlation to project ROI

  • The organization being overwhelmed by an Everything Replacement Project -- rather than being focused on leveraging specific technologies for the benefit of the "system" (i.e., the organization) as a whole

 

[To be continued]

Unfortunately, the trade press has been rife with horror stories describing ERP (enterprise resource planning) projects that have gone off-track or failed entirely. The stories have gone on for well more than a decade and, although the number seems to be decreasing, in part that decrease is due to the smaller number of companies actually making their first leap in ERP solutions.

 

In a KPMG Canada survey from 1997, more than 61% of the respondents deemed their ERP implementation as less than a success. Four years later (2001), a Robbins-Gioia survey found that 51% reported their ERP implementations were not successful. And, Bob Lewis, writing in InfoWorld has suggested that only about 30% of ERP implementations are actually considered "successful" by some measures.

 

It appears that traditional approaches to ERP software selection, planning and deployment have, by almost any measure, proven to be capable of delivering any sustainable business advantage in fewer than half the reported cases.

 

In the following series of posts I will begin introducing what I believe to be a radical new approach to ERP, an approach I call Extended Readiness for Profit -- The New ERP. The results of this approach on the working relationship between business (financial) goals, measurable business objectives, and new technologies include:

  1. A holistic view of the enterprise that encompasses its people, its processes, its products and services, its trading partners, and its technologies

  2. Clarity and focus on finding and making the changes in the organization and supplying technologies when and where they will deliver a sustainable business advantage

  3. Concepts that help executives and management in the organization establish sound budgets for each key component of any technology initiative based on calculated and measurable benefits expected to flow from the implementation

  4. Sound techniques that will help executives and managers unlock the enterprise's "tribal knowledge" in order to leverage what the organization already knows in a process of ongoing improvement (POOGI)

SOME DEFINITIONS

  • Revenues (R) - We will employ the standard accounting definition of revenues or sales where this term is employed.

  • Truly Variable Costs (TVC) - Here we include only the costs involved in producing a unit of Revenue that truly variable with the unit of Revenue. Typically, TVCs include direct materials, subcontract or piece-rate labor, commissions, royalties, other outside services, and so forth. However, since normal employee labor is not directly variable with a unit of production, production labor is not included in TVC calculations.

  • Throughput (T) - Throughput is equal to Revenues less Truly Variable Costs, as in the formula: T = R - TVC.

  • Inventory or Investment (I) - In most inventory-based enterprises, the most volatile form of investment is inventory. However, since a key component in the calculation of ROI (Return on Investment) is the value invested, we will not limit discussions of "I" to only inventory.

  • Operating Expenses (OE) - Operating Expenses is all the money the organization pays out day-after-day, month-after-month to support the production of Revenues. Since most employees -- even so-called "direct labor" employees -- are paid on this basis (i.e., they are not sent home early if work is slow; they are seldom laid off; they get paid the same whether their work unit produced 100 widgets or 1,000 widgets in a given period of time). If Revenues are down in a given month, for example, chances are the payroll amount was the same (within a few percentage points, anyway).

  • Return On Investment (ROI) - As with Revenue, the traditional calculation method may be used. However, for clarity and for improved accountability, we will link specific initiatives to specific measurable results. Therefore, when considering any specific POOGI initiative, we calculate ROI for that initiative using the following formula:

    If no change in Investment (I) is required, then a simpler formula may be applied:
  • Net Profit Before Taxes (NPBT) - Our definition will be equivalent to the general accounting definition, but calculated using the following formula:

    NPBT = R - TVC - OE

    Or, since T = R - TVC, we may substitute and shorten the formula to read:

    NPBT = T - OE

 

[Next time: What's wrong with traditional ERP approaches?]

Here is an article entitled ERP Decisions Ride on Total Cost of Ownership.

 

Read the linked article and then, as one involved in running a business, tell me what's wrong with this picture.

I'll tell you what I see wrong with the picture painted in this article and, generally speaking, in the whole world of ERP: From both the ERP vendors' side and from the potential ERP buyers' side, all the talk is about costs (in this case, Total Cost of Ownership).

Why is it that the managers and executives at firms considering ERP upgrades or other similar actions are not talking about return on investment (ROI) instead of costs? There are simple ways to calculate and evaluate these actions.

In my opinion, they should not only be talking about ROI internally -- amongst themselves; they should be talking about ROI with their ERP vendors -- and holding them to "proofs of concept" that will deliver pre-calculated ROI based on specific (not generic) improvements.

Read more at:
http://geewhiz2roi.blogspot.com and get on the right track with THE NEW ERP - EXTENDED READINESS FOR PROFIT.

...

In this portion of our series, we're going to talk about how to put a "framework" or "theory" around what you already know about your business enterprise. This is not an exercise in "business theory." This is a real and practical approach to gaining effective control of your enterprise after (perhaps) years of "muddling through" with more or less mediocre results.

 

One of the reasons executives and managers are not able to really "understand" what they "know" about their own organizations is that, since they are unaware of a "tool set" to aid them, they never actually put what they "know" (we call it "tribal knowledge") about how their organization works -- or doesn't work -- on paper. Therefore, in the absence of such a written document, the managers themselves cannot read and re-read their own logic about cause-and-effect relationships that flow throughout their enterprise.

 

The human mind makes thousands of assumptions about what we think we "know." Our mind processes these assumptions and incoming information so rapidly, we are unable to filter out our incorrect thinking or invalid assumptions adequately. Putting our thoughts down on paper helps us step through the logic that is leading us to certain conclusions.

 

Equally important, however, is that fact that, if we never get our reasoning down on paper, it is nearly impossible for us to invite others to truly analyze our logic -- to critically review our thinking -- in an effort to help us bring about lasting improvement. As a result, not only do we not realize that we have flaws in our thinking about what's happening in our organization, others who might bring beneficial insights to our aid cannot do so because they, too, cannot help us find the flaws in our rationale. This inevitably leads to the fact that these undiscovered flaws in our thinking about how our organization really works -- or does not work -- remain embedded in our decision-making processes.

 

The good news is that there is an outstanding set of tools that are readily accessible, easily understood, and relatively simple to apply that will help executives and managers lay hold of "tribal knowledge" and reduce it to an understandable framework (or "theory") about how their organizations function in a real and practical way. Others who have applied the tool set of which I speak have said things like:

  • "I have never seen my business so clearly before."

  • "We truly understand our business for the first time."

  • "This process has helped us regain a sense of control over our enterprise."

  • "For the first time in a long time, we are empowered to move proactively toward real, lasting improvement."

  • "We now have a consistent framework for diagnosing problems and planning for improvement."

What is this simple, yet amazing, tool set for executives and managers?

 

It is simply the TOC (Theory of Constraints) Thinking Processes as developed by Eliyahu Goldratt, a suite of logic trees that provide a simple, yet effective, road map for diagnosis and change.

 

So, continue to say, "We know!" and miss out on the opportunity for real, practical and sustainable improvements to your enterprise, or discover a whole new, easy-to-use and effective tool set for starting down the road to ongoing improvement.

 

See more at GeeWhiz to R.O.I. or contact me at rcushing(at)ceoexpress(dot)com.

 

...

In Part 1 of this series, I discussed how many executives and managers fail to reap benefits from new methods and ideas -- especially if these new methods and ideas arrive in the form of a "consultant" -- simply because these executives and managers believe that the already know what can be known about their organizations and their industries. This prevents many organizations from growing to their full potential.

 

W. Edwards Deming put it bluntly: "Information is not knowledge. Knowledge comes from theory."

 

Unfortunately, what far to many executives and managers have is a lot of information about their businesses and their industries. What they desperately lack is "theory" by which to interpret and understand the information at their disposal.

 

G. K. Chesterton put it this way in Tremendous Trifles (Beaconsfield, Britain: Darwen Finlayson, 1968): "One of the four or five paradoxes which should be taught to every infant prattling on his mother's knee is the following: that the more a man looks at a thing the less he can see it, and the more a man learns a thing the less he knows it. The Fabian argument of the expert, that the man who is trained should be the man who is trusted would be absolutely unanswerable if it were really true that the man who studied a thing and practised it every day went on seeing more and more of its significance. But he does not. He goes on seeing less and less of its significance."

 

Think of Sir Isaac Newton and the story of his having begun his development of the theory of gravity because he had seen an apple falling from a tree. Surely there had been tens of thousands of individuals that had witnessed objects falling to the ground under the influence of gravity for several millennia prior to Sir Newton's experience. Yet, no one understood "gravity."

 

It has only been since Isaac Newton put a "theory" around gravity that men could take what they had experienced with gravity and put it into a framework -- a theoretical context -- that made the experience understandable to them. Furthermore, the framework (the "theory") gave men the opportunity to predict outcomes of certain actions relative to the gravitational affects. This meant that men could plan and execute with some real certainty as to the results they would obtain under "gravity."

 

Precisely the same is true of business.

 

Executives and managers have all manner of data in their hands relative to the performance of their enterprises. What they lack is a "theory" by which that data may be abstracted and understood for the purposes of effective management. A framework that will help them bring simplicity out of the complexity before them.

 

In all too many cases, the missing "data" for beginning the process of ongoing improvement is to be found within the organization at all. The missing component for executives and managers is quite often this simple point: there is a simple method available to help organizational leadership logically analyze what they already know internally.

 

In the absence of a "tool set" that helps management bring forth "knowledge" from their "information," executives and managers tend to continue "tinkering" with their businesses. They make changes here or there to see if the change helps.

 

Sometimes such change seems to help, other times the change actually makes things go worse than before. Still other times, the change is made and their is no perceptible affect on the organization at all.

 

This is no way to run a business -- or any other kind of organization!

 

Executives and managers are yearning -- sometimes without even recognizing what is lacking -- for a simple, effective tool to help them gain control of their enterprises once again.

 

[Next time: Gaining Control]

As a consultant, I meet folks in business very frequently that are pretty much convinced along one or more of the following lines:

 

  1. "We already know about our business." By this owners and managers mean to express the sense that they already understand how their business works and what it will take to make the business better.

  2. "There might be some room for improvement, but the returns on any improvement we could make would be so small, it's not worth the effort." This statement or mind-set by owners and managers is a restatement of the so-called "law of diminishing returns."

  3. "Our business (or industry) is unique, so we have to work this way." This is an argument suggesting that a consultant, being an outsider to the business or the industry, can't possibly bring any valuable insight. Furthermore, even if he or she does, we probably couldn't make the recommended changes anyway.

 

On far too many occasions, when I meet such owners and managers, I am simultaneously witnessing an organization that started off great, grew rapidly, and still has the entrepreneurs that started the firm in the driver's seat. They are also, quite often, over-the-hill.

 

I'm not talking about the owners or managers being over 40 (or over 50) years of age. I'm talking about the fact that their once booming organization is now in a state of coasting on its earlier success or even in the early stages of decline. Sometimes management hasn't even recognized that fact yet. They may be thinking that they are just in a temporary slump, that things will inevitably pick up again, and their firm will regain its earlier vigor.

 

Sadly, the chances of such a revitalization are usually slim.

 

While it is unequivocally true that a consultant can never learn everything about an enterprise that the owners and management know from all their years in their industry and in their own business, it is equally true that there are more things that are similar about human organizations than there are things that are different between human organizations.

 

Among the key things that are TRUE about all human organizations is that they all rely upon the same three scarce resources:

  1. Time
  2. Energy
  3. Money

 

Furthermore, contrary to popular opinion, managing the first two -- time and energy -- is more important than managing the third (money). This is true simply because if you had unlimited time and unlimited energy, you could have all the money you wanted or needed.

 

For this simple reason, focus is everything. As organizations grow and expand, the entrepreneurs who manage them start to lose focus, and they do not have within their knowledge or skills a set of tools to help them focus again on those few simple things that will revitalize their over-the-hill firms.

 

Having gained, perhaps, many years of experience in their industry and with their own firm, they frequently find that their experience really does not contribute that much toward discovering effective responses to the new challenges their firm now faces. What is missing is a method for discovering a new theory or framework that clarifies how their grown and expanded organization now works -- or doesn't work -- at making more money.

 

[Next time: Why is it so difficult for owners, executives and managers to discover how to effectively change their companies for ongoing, vital growth?]

So, let's suppose that you've decided that applying the TOC Thinking Processes might really help your organization bridge the chasm -- successfully make the leap from entrepreneurial to enterprise. What kind of results might your firm expect from a sound and diligent application of TOC-based continuous improvement?

 

Here's a summary from an independent study as the results were published in a white paper available from AGI - Goldratt Institute:

  • Mean reduction in lead times = 70%
  • Mean improvement in on-time deliveries = 44%
  • Mean reduction in cycle times = 65%
  • Mean increase in combined financial variables performance = 63%
  • Mean reduction in inventory levels = 49%
  • Mean increase in revenue/throughput = 73%

 

If you'd like to get started on a path to improvements like these, contact me today at rcushing(at)ceoexpress(dot)com.

 

Thank you.

So, what is this "tool set" that can help the entrepreneur and his management team decode the complexity of the growing enterprise in order to extract simplicity out of its seemingly endless layers of complexity?

 

The answer is: The TOC (Theory of Constraints) Thinking Processes.

 

As Victoria Mabin of the School of Business and Public Management of the Victoria University of Wellington states: "[T]he TOC Thinking Processes... are a suite of logical trees that provide a roadmap for change, by addressing the three basic questions of What to change, What to change to, and How to cause the change. They guide the user through the decision making process of problem structuring, problem identification, solution building, identification of barriers to be overcome, and implementation of the solution." [Emphasis added.]

 

This tool set is not new, as Mabin makes clear: "The TOC has evolved over [more than] 20 years.... [and] is now used worldwide by companies of all sizes.... [M]any managers who routinely use TOC believe they understand their businesses for the first time.... [T]hey gain a sense of control and of being able to act proactively.... TOC empowers managers by providing a consistent framework for diagnosing problems." [Emphasis added.]

 

Now, even though I'm a consultant and I get paid for helping companies make effective decisions by applying the TOC Thinking Processes, let me say up front: You don't need me to apply the TOC Thinking Processes. You could attend a workshop or do self-study in order to learn how to apply these tools in your business. The workshops will likely cost you $5,000 to upwards of $10,000. Self-study and trial-and-error might take you some months -- or even years. There are, however, a good number of books available to guide you through this process.

 

So, while you don't need me to leverage these tools, connecting with me might be the fastest and lowest-cost method of getting to solutions you need in the very near future. If you'd like to connect with me, email me at rcushing(at)ceoexpress(dot)com.

 

In our next post, we'll talk about what kinds of results are typical with the application of TOC principles.

 

[To be continued...]

So, just how many things does an executive or a manager need to know to manage an organization -- a "system" -- effectively?

 

Answer: Exactly 3 things!

 

Here they are:

 

  1. What needs to change

  2. What the change should look like

  3. How to effect the change in the system

 

This sound easy and hard at the same time, doesn't it?

 

Well, I am a firm believer in a concept called inherent simplicity, although I cannot take credit for creating the concept. The concept was developed and articulated by Eliyahu Goldratt in his recent book The Choice. The basic thought of inherent simplicity is that underlying all complexity in systems is a concealed simplicity. If that simplicity can be made apparent, then any "problems" within the complex system will require only relatively simple solutions.

 

Consider a complex manufacturing machine with hundreds of moving and interrelated parts. No one would design such a machine so as to require that one touch every one of the hundreds of parts in order to effect an adjustment in the machine's operations and outcomes. A machine with hundreds -- or even thousands -- of interrelated, interdependent moving parts may often be adjusted to produce different results simply by making changes in a small handful of parts. These simple adjustments are made available because the inter-dependencies between the various moving parts are known and understood -- at least to the persons that designed the machine and wrote the instruction manual.

 

Similarly, if the entrepreneur can find a tool set that will help him or her decipher, document and understand the inter-dependencies in the organization (i.e., system) as it moves toward enterprise proportions and complexity, then the entrepreneur will also be able to discover the relatively small handful of places he or she needs to "adjust" the "system" in order to produce different results.

 

Is there such a tool set? Is it readily available? Is it of a nature that the entrepreneur can readily grasp the tools and make use of them effectively?

 

I firmly believe that there is.

 

[To be continued...]

In prior posts in this series, we have talked about why organizations frequently face significant challenges in getting more of what they really want -- to make more money tomorrow than they are making today. We have connected this to what we call "making the leap from entrepreneurial to enterprise."

 

We have also identified the underlying issue as being the loss of that view once held by the entrepreneurial leadership of the firm -- namely, the view that the whole company is one integrated "system" with one unifying goal. Instead, departmental silos are created and layers of management erode that thinking away into ultimate oblivion in the minds of the once entrepreneurial leadership.

 

The question we are facing now, in this post, is: If executives and managers have recognized the negative symptoms in their organization, and they surely have a desire for improvement, what is actually keeping organizational leadership from clearing away the barriers to making more money?

 

There are really multiple answers to this question, and the true response will -- naturally -- vary from organization to organization. However, consider these as a small sampling:

 

  • Firms that are already suffering from poor performance -- or performance below management's expectations, at least -- are often so consumed with trying to meet short-term objectives that they do not have time to back away from the details to even consider the "system" as a whole. All of management's time, energy, and way too much money is being consumed day by day in activities like meeting month-end sales goals, expediting production, tracking down late shipments from vendors, or getting late shipments to customers out the door. There is just no time to step back and figure out why everyone is pulling their hair out but profits keep declining -- or at least, not growing.

  • The organization has grown to be so large so fast (say, from 12 up to 55 employees in one year or so) that the entrepreneurial management just can't figure out which "lever to pull" to get the results it wants. What used to be a simple decision now seems overwhelming in complexity.

  • The entrepreneurial leadership has some ideas that might improve the company, but they can't figure out how to come to final decision because it just seems too hard and too complex to figure out the balance between the risks (investment) involved and the rewards (profits) that any given change might bring to the firm.

Consider this: If a small firm has just 5 people working in it, there are 120 different permutations of interactions between those 5 parties. Add a sixth person into the mix and that number jumps to 720 ways they might interact with one another. If you get to 10 employees, the permutations jump to more than 3,000,000; and with 15 the number is 1,307,674,368,000. Of course, this doesn't even count interactions with customers and vendors.

 

It's no wonder that entrepreneurs with great ideas and great companies can easily become overwhelmed by apparent complexity as their organizations grow. No wonder the once confident entrepreneur-executive can no longer decide which "lever to pull" to get the result he or she desires.

 

Fortunately, the number of things that any executive or manager needs to know in order to manage effectively is a very small number. I'll tell you just how small in the next post.

 

[To be continued...]

Last time we talked about how a growing and expanding entrepreneurial business organization can all too easily lose sight of what should be its singular goal -- making more money tomorrow than it's making today. Once the managers and executives do so, they also lose sight of the fact that, in serving its customers, the whole organization is a single and seamless "system" -- not a collection of loosely connected departments or functions.

 

So, what are the symptoms exhibited by an organization that is not being measured and managed as a "system"?

  • Lower than desired overall performance
  • Challenges in achieving or maintaining a strategic advantage in the marketplace
  • Ongoing or recurring financial difficulties
  • Almost constant "fire-fighting"
  • Frequent failure to meet customers' expectations
  • "Bottlenecks" in the organization that move frequently from function to function or department to department
  • An ongoing state of conflict between parties representing various functions or departments within the organization

 

If you and your management team can nod your head "Yes" to three or more of these symptoms being present in your firm, then chances are you need help to once again see your organization as a "system" and turning the corner toward measuring and managing it in an effective way.

 

But what really keeps owners, executives and managers from tearing down these roadblocks to success?

 

They aren't stupid. They've known for (perhaps) years about the constant "fire-fighting," the company politics, and conflicts between departments or functions.

 

What is blocking executives and owners from taking effective action against those things, of which they are well aware? What is keeping their firm from doing what they clearly want to do: making more money tomorrow than they are making today?

 

[To be continued...]

So, what is happening when successful entrepreneurs and their organizations find it increasingly challenging to do today what used to be intuitively easy for them -- namely, making more money tomorrow than they are making today?

 

What we see here is a mistake that is almost universal: Managers and executives do not give enough credit to their intuition. Instead, they believe that management must be "scientific" and "by-the-numbers."  Unfortunately, it our intuition is correct more frequently than actions taken "by the numbers." The problem is that most management theories provide no method for documenting and checking what our organization knows intuitively.  This intuitive information I generally call "tribal knowledge" when dealing with my clients.

 

Now, let's return to the specifics of what is happening in the entrepreneur's mind as his or her organization grows and changes over time.

 

Consider this: When the organization was purely entrepreneurial, likely it was small, had few employees, and operated in a relatively simple (unsophisticated) way. There were fewer things to touch and change -- fewer levers to push or pull -- to reach the desired result. Whatever management did produced nearly immediate reactions -- either good or bad. Feedback was frequently direct to the entrepreneurial leadership -- few or no layers of management or complexity, and fewer "dependencies" in the customer-to-cash stream.

 

In short, the entrepreneurial leadership was managing the organization as a single integrated "system" with a single goal -- to make more money tomorrow than it is making today!

 

However, with growth and (possibly) geographical expansion, the organization evolved from being integrated and homogeneous to being composed of departments -- the accounts payable department, the accounts receivable department, the production department, the shipping department, the receiving department, the sales department, ad infinitum. Of course, with departments came also department managers and maybe even layers of middle management.

 

More significantly, however, came a creeping mindset -- a mindset in executives and other managers that the sensible way to manage this growing organization is "by department." Instead of continuing to see the whole organization as one integrated "system" with a singular goal -- i.e., making more money tomorrow than it made today -- management began to set differing goals for different parts of the organization.

 

The production department's goals were all about quantities and quality; the sales department's goals were all about prospects, customers and orders; the accounting department's goals were tied to profits and cash flow; and so forth. Everyone was concentrating on managing their individual functions, but the "system" view that had brought early entrepreneurial success had almost entirely vanished from sight and memory.

 

Management had come to the (wrong) conclusion: That the way to optimize the "system" is to make sure the each individual part (departmental silo or function) is optimized. Unfortunately, without seeing this in the context of the "system" as a whole -- that is, the entire organization as "the system", this conclusion leads to spending precious time, energy, and money on portions of the enterprise that do not add new profits and, in many cases, add to investment or add to operating expenses rather than decreasing them.

 

[To be continued...]

Most of my clients are small to mid-sized businesses when I meet them. Many of them have already achieved a significant level of success. These firms have proven themselves and grown -- many of them have grown rapidly -- and frequently they are on the precipice of making the leap from entrepreneurial to enterprise.

 

Generally, what makes an entrepreneur successful is something of a sixth sense that communicates to them an almost instinctive connection between opportunities (or revenues) and truly variable costs (TVC).

 

Entrepreneurs thrive and grow on this instinct and worry about the "cost accounting details" later. However, two things begin to change as their organization begins to grow:

 

  1. The entrepreneurial individuals in the firm -- the founder and his or her closest associates -- may become less connected to each opportunity the firm may encounter and similarly disconnected from a sense of the TVCs involved.

  2. The more disconnected these, now, executives become from the details surrounding opportunities and TVCs, the more they begin to rely on standard "cost accounting methods" to guide their organization's decision-making.

 

Interestingly, the more "sophisticated" the decision-making process becomes in their organization, the more profits and profitability growth may tend to level-off or even decline. The entrepreneurs find it increasingly difficult to make that leap from entrepreneurial to enterprise capabilities.

 

What's keeping entrepreneurs and firms in this position from getting more of what they want? What's stopping them from making more money tomorrow than they are making today?

 

[To be continued...]

I found this quote on a Web site which will remain unidentified in this article:

World Class Manufacturing - A definition

World Class Manufacturers are those that demonstrate industry best practice. To achieve this companies should attempt to be best in the field at each of the competitive priorities (quality, price, delivery speed, delivery reliability, flexibility and innovation). Organisations should therefore aim to maximise performance in these areas in order to maximise competitiveness. However, as resources are unlikely to allow improvement in all areas, organisations should concentrate on maintaining performance in 'qualifying' factors and improving 'competitive edge' factors.... The priorities will change over time and must therefore be reviewed.

The author here identifies six "priorities":

  1. Quality
  2. Price
  3. Delivery speed
  4. Delivery reliability
  5. Flexibility
  6. Innovation

 

I would contend, however, that none of these 6 priorities may be achieved without setting the organization's primary focus on making money -- making money both today and in the future. Without making profit the first priority, there is no money to spend on improving quality; there is no money to spend on improving the speed or reliability of delivery; and there is no money to spend on improving flexibility or innovation.

 

One might say, "Well, if we improve quality, we will make more money." But unless the framework for the planning and focus of the organization has demonstrated by some rational method that improving quality will, in fact, lead to improved profits, then that statement remains only a "hope" and not a plan or a true "goal." The same may be said for the other five "focus" points in the article.

 

If the manufacturer has no sound framework by which to determine precisely what steps it must take beginning today to increase its profitability -- to make it more effective at making money -- there is a chance it may not survive long enough to work on any of the six "priorities" listed above.

 

"Without theory there is no knowing." -- W. Edwards Deming

 

Having a valid theory -- a consistent "framework" -- by which to evaluate all that transpires within your business is critical to constancy of purpose and effective leadership by management.

 

These 6 factors are likely in evidence at virtually all manufacturers deemed to be "world-class"; however, it is equally likely that these factors came into existence at these companies as a result of each enterprise's pursuit of profits. Management first developed a theoretical framework of thinking in which they discovered that "quality," or "price," or "speed of delivery," or one of the other factors was keeping them from making more money. Then, as part of initiative to increase Throughput or reduce Operating Costs -- which leads to making more money -- they took appropriate actions.

 

Focusing on any one or all of these 6 factors without careful consideration of how management's addressing of the factors will change Throughput and profit will probably result in a misaiming and misapplication of the precious resources of time, energy and money -- something most companies can ill afford in today's economic environment.

 

(c)2008, 2009 Richard D. Cushing

In today’s exceedingly challenging business environment, it is becoming increasingly important for executive management to establish corporate strategies that include extending the reach and power of the organization's information technologies beyond the four walls of the firm. If your company is not building "communities" of customers or connecting with your vendors and customers in real time up and down your supply chain, then it is likely that you are falling behind your competition.

 

No Technology for Technology's Sake

I am not advocating new "gee-whiz" connections beyond your enterprise just so the CEO can brag about them on the golf course or in the steam room at the club. Before embarking on a spending spree to extend your IT systems beyond the walls of your enterprise, it is important that you determine what you want to accomplish by moving forward with such efforts. Generally speaking, the valid reasons for investing in the extended enter-prise may be reduced to three fundamental categories:

 

1. Increasing Throughput (Revenue less Truly Variable Costs),

 

2. Reducing Inventories or the need for new Investment, and

 

3. Cutting or holding the line on Operating Expenses.

 

 

Let's consider some of the thinking that might go into such an analysis.

 

Increasing Throughput

When considering increasing Throughput, your team should ask questions like these: Could a CRM (customer relationship management) system, a corporate blog or forum, or other enterprise extensions improve our ability to connect with our customers? Could such efforts improve our comprehension of our customers' needs? Could we better anticipate their business requirements so that we be able to bring to market products that meet their needs in advance of our competitors? Could the new insights lead to improved products, enhanced market segmentation, and the ability to create superior win-win offers?

 

If the answers to any or all of these questions are affirmative, then the next step would be to quantify the estimated impact and to set specific goals for any investments in new technologies. Each individual part of the IT investment plan should be directly correlated to rationally calculated quantifiable results. How many new customers will be added? How many additional sales to existing customers are to be expected? What additional market share are we likely to gain as a result of these efforts and investments?

 

Reducing Inventories or the Need for New Investment

The questions that should arise regarding inventories or investments should be along these lines: Will improved supply chain visibility with our customers allow us to better manage and reduce the volume of inventory lying between our manufacturing plants and our products' end users? Will linking our inventory systems with those of our suppliers allow us to reduce lead times and, as a result, reduce the amount of inventory we keep on-hand? Will improved end-to-end supply chain linkages reduce losses due to obsolescence and shrinkage? Again, if asking these questions leads to some "yes" answers, then the organization should take steps to calculate and quantify the benefits that are likely to accrue to the organization from reduced carrying costs, managing and handling less inventory, and (if true) the reduction in a potential investment in additional warehouses or production space (i.e., investment), for example.

 

Slashing or Holding the Line on Operating Expenses

Generally, this area faces a two-fold battle: First, most organizations today have already done all the cost-cutting that they really can (or should) do. This is no longer the 1980’s – the heyday of cost-cutting as U.S. industry was struggling against the onslaught of Japanese products. Second, when you are talking about implementing new technologies, it is really difficult to get buy-in from your organization if the move is likely to lead to a significant reduction in the workforce.

 

However, results stemming from efforts to increase Throughput and reduce inventories are likely to drive growth, on the one hand, and internal improvements, on the other. Normally, then, a case can be made on the basis of these combined factors (i.e., growth and internal improvements) that your organization can support 30%, 60% or even 100% growth in the near future with little or no increase in operating expenses. The net result is often estimated and stated as savings in FTEs (full-time equivalents, i.e., the average cost of a full-time employee). In this way, the effect of “holding the line on operating expenses” may be properly factored in to the benefits accruing from investments in new technologies.

 

Conclusion

There is no longer a place for business as usual. In today’s highly competitive markets – driven to a significant degree by the international reach of the Internet and other technologies – every business owner, CEO, and strategic CFO should be considering how extending their information technologies beyond the four walls of their enterprise might lead to increasing throughput and reducing inventories, while holding the line on operating expenses. However, every investment in technology should be carefully planned, be geared to achieving measurable goals, and be fully aligned with the enterprise’s strategic and tactical objectives.

 

©2008,2009 Richard D. Cushing