The Impact of What We Do, on YOUR Business
There are really 3 types of business case that might apply to you.
- The first type is more of a judgment call than a real business case, and we’d still encourage you to formally “run the numbers.” But if you KNOW, without doubt, that the company’s outlook would be very different if you could shrink lead times by 50% to 70% while increasing on-time performance or service level into the 98% or better range … well, that might be all you need. Because these types of results are routine for us, typically in 45 – 90 days, sometimes less.
- At the other extreme is the relatively rare situation where a company wants to find a path to DRAMATIC sales and profit growth – for example, making a transition from revenues of $5 MM today to PROFITS of $5MM in just a few years. The impact really doesn’t need a business case making for the upside , but there IS a price to pay for such growth, and it’s mostly not in dollars. Owners and managers have to be willing to make the changes needed. We know what these changes are … but management has to be willing to execute. Most aren’t.
(Note: We are actively looking for 2 companies wanting this type of aggressive sales growth – and we’d be willing to stake up to 90% of our fee on performance bonuses over several years, for a qualifying company.)
- But the most straightforward business case arises with our bread-and-butter implementations – and it’s stunning. Risk is virtually non-existent, the impact is huge and the dollars reach the bottom line in a hurry.
The bread-and-butter business case for a Theory of Constraints implementation in a small- to medium- sized manufacturing business.
This is the “classic” Theory of Constraints combination:
- Reduce lead time to best-in-class levels
- Improve on-time delivery to best-in-class levels
- AND IMPROVE THE PRODUCTIVITY OF THE PLANT SO IT CAN GENERATE AND SHIP 20% TO 40% MORE PRODUCT WITH LITTLE OR NO ADDITIONAL OPERATING EXPENSE – just for the cost of the additional materials.
Here are the major assumptions we’re making for purposes of illustration of the basic business case.
1. The company in question has sales of $10 MM per year. (The logic remains the same for companies of all sizes – our smallest client is a 3-man band, the largest recorded $75 MM in sales.)
2. Material costs represent 35% of the Revenue figure. (We encounter material costs of 10% to 60% … but 35% is a common ballpark.)
3. 20% additional Throughput is achieved from the company’s resources following the implementation – for example, 20% more products produced and sold at standard prices.
Note: In reality 10% is ALWAYS achievable, almost effortlessly. 20% is routine. 30% is often recorded. And 40% and more is not unheard-of.
4. The added output CAN be sold, at regular prices or better. If necessary, taking advantage of the improved lead time and on-time performance. (Note: Theory of Constraints also offers companies some innovative and powerful ways to sell more product, if necessary.)
From a dollar perspective, these assumptions lead to the following:
- The additional revenues would be 20% X $10MM = $2MM for the first full year.
- The added expenditure on materials to produce the additional revenues will be 35% X $2MM = $700,000.
- The additional Operating Expense needed to generate the additional products and additional revenues (beyond the investment in the implementation) is typically zero, or negligible. Even in a busy plant. Even in a 24/7 plant that seems to be max’d out. On rare occasions some increase in Operating Expense IS genuinely necessary in the early stages; but it is always trivial relative to the scale of the added Throughput, and typically recovered within 30 days.
In this case, the additional Net Profit from the plant in the first full year …
is $1.3 MM ($2 MM added Revenue less $700K material costs).
If for the sake of illustration we choose to value the business using an earnings multiple of 3.5, the value of this business has just increased by $4.5 MM …
And with TOC, it can.
There is an assumption in this calculation that the additional production can be sold.
Well – once again, we cheat.
First of all, we prefer to look for companies where this is true (i.e. where the superb competitive performance means that the additional output can be sold, by the existing sales force using mostly existing sales methods) – and where management shares the philosophy of wanting to make more money from sales growth, rather than from trimming people.
Fortunately, this is still a large market.
But if the improved performance cannot easily be translated into added sales using existing sales channels, resources, and methods … well, we can apply the TOC to the sales process to expose a LOT of sales capacity, and we can help a company develop a “Mafia Offer” or “Unrefusable Offer” … an offer that takes advantage of the TOC-based high-level performance in the plant to create such a definitive competitive edge that added sales are inevitable.
There is also an assumption that the increase in output can genuinely be achieved with little or no increase in payroll.
In our experience (and that of scores of other Theory of Constraints consultants over the years) this is a valid expectation. 20%, 30%, even 40% with the same resources.
But if we’re wrong, it really doesn’t matter a whole lot.
If in the above example we needed to add someone in Order Entry or Customer Service to manage the increased front-end load, perhaps someone in shipping, perhaps a couple of people in the plant, what are we looking at … an increase in Operating Expense of $120,000? Let’s double it. $240,000. And the increase in Net Profit is STILL 7 figures.
When the owners want VERY aggressive sales and profit growth: the “Mafia Offer,” aka the Unrefusable Offer
This is a special case; it’s the “Home Run” of business performance improvement, and one that separates the Theory of Constraints technology from the pack.
Some companies have what we call a “Mafia Offer” opportunity.
Meaning that their products, resources, and markets combine, when performance is improved to TOC levels, to present an opportunity – one that management typically do not see, by the way, until we get involved – that gives the company a good shot at very aggressive profit growth. For example, clients where the target is for their Net Profit in 4 or 5 years to exceed their Revenues at the start of the project.
Not every company qualifies. And not every owner of a company that does qualify is interested.
This is not a trivial project, and there is usually more risk than with a “bread-and-butter” implementation because the scope of changes needed is likely to affect every part of the business – methodically, of course, and in a focused manner, and with superb tools to handle the change.
But the upside, the business case, is certainly compelling.
If this $10MM Revenue company grew to record $10MM Net Profit per year in 4 or 5 years, for example … you don’t need a calculator to understand the scale of the financial impact.
The biggest impact would of course be on the valuation of the business; not only is the income an order of magnitude greater but with consistent and consistently high performance over a period of years, the earnings multiplier is also much higher.
As the foundation for an Exit Strategy, this takes some beating.
Interested? Then take the easy next steps.
1. Sign-up now to receive our monthly newsletter, “Inside Edge on Improvement” – where we’ll explain some of the “Insider’s” perspectives, tips and techniques that make an enormous different to the success of your performance improvement efforts.
There’s gold in every edition; we give away “secrets” in these newsletters that not 1 manufacturer in 100 knows. And I’m not trying to hype this up; these literally ARE secrets, in terms of … most manufacturers simply have no awareness of them whatsoever.
2. Schedule a (free) 15-minute phone call. Click the link, give us 2 possible dates and times when we can reach you, we’ll confirm by email, and … let’s talk.
The 1/2-day session is stunning, and typically rocks managers back on their heels with some of the immediate insights they gain into cause-effect impacts in their business.
And the First Assessment, while only one day, is powerful.
In a single day of visiting your operation and talking to a few managers on-site, we can give you a solid, rational and fully justified sense of the nature and the scale of the opportunity in YOUR organization, the most obvious sacred cows and some of their implications on your performance, the type of improvement you should expect, the general direction of how you could get there from here, and our recommendation for your most sensible next step – should you choose to take one.
Incidentally, my partner and I – with a combined 60 years of industrial experience – do all the work ourselves. Assessments, education, implementation.
And yes … several more steps down the road, if you see that a clear-cut opportunity for massive, sustainable improvement is PROVEN to your management team’s satisfaction, and if you choose to discuss the option of us working with you to turn it into reality … we will certainly consider linking a significant portion of our compensation, to your results. If our approach is as powerful and effective as we claim, why wouldn’t we?
And, offer you terms that give you the potential for a positive cash flow from your improvements while the project itself is still “live.”
So … sign-up now. And schedule that call. It’ll only take you 2 minutes.