12 - Oded Cohen_32 TOCPA_Italy_23 March 2017

32nd International Conference of the TOC Practitioners Alliance - TOCPA www.tocpractice.com

23 March, 2017 – Milan, Italy

Handling Interactive Constraints in a Small Manufacturing Company Oded Cohen tocExpert Israel, Estonia 23rd March, 2017

Oded Cohen Oded has over 38 years of experience in developing, teaching and implementing TOC methodology, solutions and implementation processes working directly with Dr. Goldratt all over the world. Among the countries to which Oded brings his expertise are the USA, Canada, Japan, India, China, the UK, Poland, Russia, Ukraine, Colombia, Chile, Peru, Turkey and many others. Oded has authored multiple TOC articles and contributed to numerous TOC books. Oded in the is the author of Ever Improve – A Guide to Managing Production the TOC Way, published in June 2010. Oded co-authored the book Deming & Goldratt: The Theory of Constraints and the System of Profound Knowledge – The Decalogue. Together with Jelena Fedurko Oded has co-authored the book Theory of Constraints Fundamentals. [email protected]

Oded is International Director of TOC Strategic Solutions Ltd www.tocexpert.com and Founder and Co-President of TOCPA. www.toc-strategicsolutions.com www.tocpractice.com www.tocpractice.com

32nd International Conference of the TOC Practitioners Alliance - TOCPA

Small does not mean Simple Managing small businesses may not be that simple! It is even more challenging when a small company has been shrinking for several years. Some companies do not survive but some may be determined to continue and want to flourish again. Usually, management turns to TOC practitioners when the company is already losing money. There is huge amount of experience demonstrating that engaging TOC in medium and large companies produces outstanding results. Yet, introducing TOC to small companies may be challenging due to the existence of several interactive constraints 3

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Current State of a small company in trouble An Example Sales: (2016) 6 million Euro (was 7m. In 2014) Net Profit: (2016) -600K

(2014) -100K

About 35 employees (50 people in 2014) Core competences: Production, Engineering Market Share: Domestic <10%, Export countries < 3% Competition: • Import from the Far East and from EU countries that have cheaper labor • Larger domestic companies – 4 companies each with 1525% market share • In-house capabilities within the customers www.tocpractice.com

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Understanding the Situation Sales Analysis: sales of the last 5 years show continued loss. Net Profit was also on continued fall 10

Year

Sales

Net Profit

POS

2011

9

1

11%

2012

7

0.5

7%

2013

8

-0.4

-5%

2014

7

-0.1

-1%

2015

6

-0.3

-5%

2016

6

-0.6

-10%

8

6 Sales 4 Net Profit 2

0 2011

2012

2013

2014

2015

2016

-2

By the end of 2016, the company decided to ask the help of a TOC Expert in order to get out of the red. 5

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Understanding the Situation The situation at the beginning of 2017 is the outcome of the evolution that the company has gone through in the recent years. The company was built in the 1980s. It was profitable and grew nicely until the 2008. Thereafter, sales stagnated and profits started to go down. In order to be able to suggest what to do it is important to understand the managerial thinking that has been taking place in the recent years. Warning: It is risky to copy ideas that were successful elsewhere without understanding the conditions in which they are likely to provide the expected results and benefits. This is true also for TOC ideas! TOC operates on very clear and specific conditions. www.tocpractice.com

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So, What is the Constraint?

It is obvious that the primary constraint is the Market! It has been for several years. What has been the reaction of top management to the falling sales? • Increased the pressure on the sales department • Increased prices • Reduced manpower – production and office people • Started selling third parties products Some of the actions had positive impact for short term but were not enough to take the company out of the red! 7

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International Conference of the TOC Practitioners Alliance - TOCPA

Analyzing through TOC Was Step 2 of Focusing followed?

Increasing pressure on the sales department (from Jan 2013) This is traditional reaction. Based on the perception that sales people are not making enough efforts and that putting ambitious targets will generate more sales. Results: 2013: +14% sales but NP = -5% (down from +7%) Reasons: Accepting orders will low throughput. Making commitments that are difficult to deliver

Continuous reduction in sales suggests that the company has been losing its competitive edge in the markets it operates. Sales people were complaining that the prices were too high. 8

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Increasing prices (Jan 2014) This is traditional reaction: Due to increase of TVC and /or OE, trying to maintain margin or prevent “loss” (while using traditional costing) Assumption is that customers will agree. Yes? All? For how long?

Results 2014: Sales down 8.75% but Loss is down to 1.4% Reasons: Some customers stopped buying Better throughput Less OE - due to starting layoffs

Lack of qualified and experienced sales director created a Capacity Constraint in Sales

The sales director resigned in 2014! 9

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Reducing manpower – (from mid 2014) This is traditional reaction: An attempt to balance expenses with income Usually, decisions are based on cost saving. Many times experienced people are urged to go as they are close to retirement age. Usually, there is no analysis of the expected outcome of the operational performance of the company

Results for 2015: Sales -14% and Loss grew to 5% Reasons: Loss of some big accounts (lack of confidence?) Emerging capacity constraint resources – CCRs in production & engineering

Creating one or more Capacity Constraint Resource(s) - CCRs 10

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Reselling third parties products (from mid 2015) This is traditional reaction – diversification / opportunity Some customers were in need of products and were willing to buy from the company Buying in large quantities provided the company with price advantage Purchasing department could do it without extra manpower There was ample space for storage

Results for 2016: Sales remain the same. Loss grew to 10% Reasons: Third party sales have smaller throughput Cash reserves went down

Creating Cash Constraint (a type of Capacity Constraint )

The company had to borrow money for operating capital 11

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Offering DTO – Design to Order Using the capabilities of the engineering department to modify existing products and/or design new products according to the needs of the customers. This direction allowed the company to get new orders with potentially better throughput. DTO demanded extending the sales process by adding more activities such as: initial design, quotation and negotiation. These activities have been performed by engineering resources. Positive outcome: orders to replace lost sales Negative: Engineering became a constraint

Capacity Constraint Resource – CCR in Engineering 12

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Managing an environment with Several Constraints Situation by the end of 2016: Even though Market has been the Primary Constraint the decisions how to Exploit it must consider the other constraints – as they may not be able to subordinate. This situation makes the system to be subject to Interactive Constraints:

Market Constraint

CCR in Sales

CCR in Engineering Cash Constraint

CCRs in Production 13

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So, What shall be done? Dealing with Interactive constraints means that Step 2 and Step 3 should be performed through careful synchronization between the constraints: Each one of the function should have its own flow management system based on TOC principles The company should be managed through a central system. The Central system is for ascertaining relevant input from the critical functional systems in order to ensure that all commitments given to the market are: Realistic, Provide Financial Benefits and are protected against murphy. Management is provided with a TOC dashboard stating: The financial position of the company (current & projected) The status and trends of all relevant TOC buffers Suggested areas for management interventions 14

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Managing Interactive Constraints Reducing the negative impact of the interdependencies between the constraints through synchronization.

Market Constraint CCR in Sales

CCR in Engineering

Central System

Pipeline Mng

Cash Constraint

DTO Cash Flow Mng

Stock Mng

MTO/ MTA Capacity mng

Capacity mng

CCRs in Production 15

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Conclusion TOC has good solutions for every critical function of the company: Sales, Production, Engineering, Finance, Purchasing (stock management) Generally, building a decisive competitive edge (DCE) can provide the overall synchronization to support the growth of the company When a company is too small or does not have the time to build DCE, the company may consider to use the approach of this presentation, which is based on the 5 steps of focusing. The Central System for managing interactive constraints should be simple and practical, while utilizing existing computerized or manual systems and expanding gradually to incorporate more IT modules.

There is no need to make it into a major IT project – it is possible to start with an Excel file! www.tocpractice.com

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12 - Oded Cohen_32 TOCPA_Italy_23 March 2017

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