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Recently, in an interview, I was asked this question:


How often do you find that insufficient financial and operations management software represents the weakest link in a firm's ability to grow and increase profitability?


Here was my answer:


These days, the straight answer to your question is, “Almost never.”


When I started in this business, the PC (personal computer) had just been introduced and I was helping most of my clients move off paper-based systems onto their first computer-based accounting system. I also help with automating other areas like digital estimating systems and more.


Today, however, most business entities we touch have been through at least one ERP implementation. Some have been through several.


That’s why, a few years ago, I created a new acronym for “ERP.” Traditional ERP, I say, was an “Everything Replacement Project”—a wholesale renovation of how an organization works, reports and captures historical data. Most companies today will benefit little—if at all—from another whole renovation.


“The New ERP is ‘Extended Readiness for Profit,’” I tell folks now. We are no longer looking for ways to cut costs (even though that is likely to happen as a side-effect), we are looking for new ways to increase Throughput and profit.


My answer has an even broader impact for supply chain managers. Increasing Throughput and profit means increasing the demand-driven flow of products from raw materials through production and into the consumers' hands. Cost-cutting and a vain effort at improving forecasts will not get most firms far down the road toward really making more money. Cost have already been cut and forecasts have been honed. It's time to focus on Throughput!


Supply chain integration and collaboration technologies are pretty much useless if there does not already exist in the supply chain real and effective collaboration between the trading partners or if there is no effective operational integration or cooperation on the principles that increase the flow of products to the consumer based on actual demand.


Technology supports what is in place, for the most part. "Pouring in" technology doesn't magically create collaboration and integration.




We would like to hear your thoughts on this topic. Please leave your comments here, or contact us directly, if you would prefer.


As the name “Theory of Constraints” implies, this approach to management suggests that every business—indeed, every system—has at least one constraint that keeps it from achieving more of its goal. If the goal of a for-profit enterprise is to make more money tomorrow than it is making today (that is, growth), then we know the system has at least one constraint or the organization’s profits would be approaching infinity.


At a more practical level, however—coming down from the stratosphere of hypothetical infinite profits—the best way to assure ongoing improvement in an organization is to understand the system’s constraint or constraints. Then change that brings improvement can be focused on that very small number of factors that assure progress toward the goal.


Unlike Six Sigma, as a contra-example, which seeks improvement everywhere in the system, ToC (the Theory of Constraints) seeks to focus the organization’s most precious resources of management attention, time, energy and money on those things that are most likely to affect the system’s constraint(s). ToC does this through what are known as the Five Focusing Steps:

  1. Identify the constraint
  2. Exploit the constraint
  3. Subordinate everything else to constraint
  4. Elevate the constraint
  5. Go back to step 1 – don’t let inertia set in


ToC also creates focus by simplifying the calculations. Here are the dominant numbers used in ToC analytics:

  • Throughput
  • Truly Variable Cost
  • Operating Expenses
  • Investment


When we work with ToC, we always prioritize our efforts in this way around these metrics:

  • First priority: anything that increases Throughput
  • Second priority: anything that reduces Investment (especially, inventories)
  • Third priority: anything that reduces Operating Expenses


These priorities are quite the opposite of most enterprise operations. Most executives and managers are constantly searching for ideas about how to “cut operating expenses.” In doing so, they also all too often, cut away at the system’s protective capacity that helps guard Throughput from the damaging effects of “Murphy.”


Furthermore, we encourage executives and managers to consider this: suppose you have a $100 million (revenue) operation. Its operations look something like this:


Statement of Operations






Less Truly Variable Costs









Less Operating Expenses:













Suppose they would like to add $5 million dollars in profit to their bottom line over the next three years. Given today’s business environment, where most companies are already trying to minimize labor and operating expenses, is it likely that they can squeeze another $5 million out of raw materials, labor or other operating expenses?


Probably not.


Besides, if they could, they couldn’t do it again in the next three years to grow their bottom line.


But, think of this: If they can increase Throughput by increasing revenues by 12.5 percent, doing so will add the desired $5 million to the bottom line provided it can be done without changing the ratio of TVCs to revenues and they can hold the line on operating expenses. Plus, if they have discovered the way to increase revenues, chances are they can do it again in the years following this initiative.


Since trying to drive operating expenses down always has a limit and even small reductions may be damaging to the company’s long-term goals, we always, always focus on increasing Throughput using ToC tools.




We hope you found this article enlightening. We would be delighted to hear your comments. Please leave them below, or feel free to contact us directly, if you prefer.

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