This starts a 9 part series of conversations about Maximizing Profitability the TOC (Theory of Constraints) Way. While Science of Business, Inc. focuses on highly custom job shop scheduling and machine shop scheduling, we will make sure the content of these conversations will apply equally well to all other organizations. Feel free – please- to leave comments below this post.
Brad: “In my opinion, most businesses are not making nearly as much money as they should. In fact, too many go through a tremendous amount of work and risk just to breakeven or a little better. What do you think?”
Dr. Lisa: “For sure. And they do not have the systems and processes in place to cause a productivity improvement, either. Management’s role is to implement systems and processes that will make more money now and in the future.”
Brad: “The problem is not that the business owner does not want to make more money.”
Dr. Lisa: “Correct. The business owner and management are dealing with so many issues; they find it difficult, if not impossible, to focus their collective attention on the things that will result in making more money.”
Brad: “If you look at their strategy, or plans, or to-do lists – if they even exist – you will not see what is needed to really improve profitability.
Dr. Lisa: “Let’s consider what is possible. If a company improved the productivity (and I do not mean efficiency) of its resources (people and machines), and then could sell that additional capacity, the additional margin drops to the bottom line.”
Brad: “So, let’s talk about what might be possible for a small machine shop, even though we know that the solution is equally scalable for larger organizations, as well as, for different types of organizations.”
Dr. Lisa: “Let’s also be conservative about the numbers. Say that the machine shop has only a million dollars in sales. Its (Throughput) margin after paying its vendors (the Truly Variable Costs) is only 50%, though we know that in many cases it’s much higher. And the productivity improvement the machine shop gains is only 20% with its current resources, though we know that is usually much higher, too. That capacity is sold at typical prices, creating $200,000 in additional sales. At a 50% margin, that means that the bottom line improves by $100,000.”
Brad: “If the company started with $10 million in sales, the bottom line improves by $1 million.”
Dr. Lisa: Yes, BUT many of our readers will just think that’s nice talk and they’ll want know if it’s actually possible for them and how.
To be continued.
P.S. Feel free – please- to leave comments and questions on this post.
P.P.S. To find out more about improving productivity in highly custom job shops and machine shops, watch our How to Get More Jobs Done Faster webinar.
P. P.P.S. If you have plenty of capacity, but can’t sell it, visit www.MafiaOffers.com.
P.P.P.P.S. For help putting YOUR financials in throughput accounting terms, pricing and making decisions, visit www.VelocityPricingSystem.com for one on one help or TheoryofConstraintsCPE.com for self study courses.