In my last post I presented some practical answers to help overcome the challenges by presenting to decision-makers a simpler frame of references. I also presented what Kendall  calls the five major areas of judgement as well as Throughput Accounting to judge the financial impact of decisions at any level of the organization. In today’s post we will discuss the New Frame of Reference, Part II: The Five Focusing Steps.
The New Frame of Reference – Part II: The Five Focusing Steps
Kendall  tells the following story in his book, Viable Vision. “In the early 1990’s, some of the major American automotive companies were losing billions of dollars per year because of the Japanese domination of the market, the economy and other factors that reduced their market share. In a book describing a new process, Business Process Reengineering, a huge success was written about in one of the big three American auto companies using this new method. It seems that by re-engineering its accounts payable department, the company improved performance and reduced head count from several hundred to several dozen. The dollar improvement was cited as around $50 million, less than a 2 percent impact on the multibillion dollar losses that same year.
The company’s biggest problem was not in its accounts payable department, however; obviously not, because the billion dollar losses continued. What is not so obvious is that the resources invested here (significant IT effort, the use of top project managers in the company, plus major cross-functional effort) damaged the improvement effort in the company’s real constraint area.”
So why did I start off with this story? I did so to make the point that in order to identify the true leverage point in a company, you must follow Dr. Goldratt’s  five focusing steps. In the case of the auto company’s efforts in their accounts payable department, its biggest leverage point to improve their bottom line results was actually in the market! They needed more sales! If we look at Goldratt’s five focusing steps, we see that the first step is to identify the system’s constraint. If this auto company had taken this step, do you think they would have concluded that it was the accounts payable department when the real problem was a lack of sales? So let’s review Dr. Goldratt’s five focusing steps:
- Identify the system’s constraint
- Decide how to exploit the system’s constraint
- Subordinate everything else to the above decision(s)
- Elevate the system’s constraint
- If in the previous step, a constraint has been broken, go back to step 1, but do not let inertia cause a system’s constraint.
So we now have a way to overcome the distortions caused by cost accounting. Kendall’s new frame of reference, Throughput Accounting and the Five Focusing Steps, Kendall explains that “this is the beginning of a new language for all of management and a powerful base for a Viable Vision.” Since about 70 percent of all companies today will find their constraint in the market, my next post will describe how to apply the new framework there.
In my next post, we will look into how our new frame of reference can impact your marketing effort and the impact on our Viable Vision. As always, if you have any questions or comments about any of my posts, leave me a message and I will respond.
Until next time.
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