Can YOU get the Max from a Complex Business?
Rudolf Burkhard
Focus is 2X Profit & ROI by: Apply the Theory of Constraints with me. Use 6-Sigma & Lean! Leverage capability. Gain capacity, cut lead time, get 100% reliability & control costs. Get more customers to buy more. DE/EN/FR
A complex business such as the one depicted in my graphic is not so easy to manage. They produce a polymer in the lower square. Different raw materials transform into products that result in intermediate products. The polymer transforms into many different product groups. Each with many individual products (T, H, C etc).
The business is huge. Each product category or product group (the letters) is a big business. Top management divided their business into profit centres. You are looking at the profit centres.
Every intermediate and product group has a market. The CEO measures profit centre Managers by profit and loss, and ROI. The profit centre managers compete for attention and for their careers.
The profit centres sell and buy from each other. Transfer prices should reflect the prices in the particular market.
Was this business set up to maximize profit and profitability?
There is plenty of demand in almost all product groups. Including the intermediate products. But, there is a constraint. It is between raw materials and polymer.?
Prices are (much) higher at the top. But margins are low there. Prices for the intermediate products are much lower but margins are high.?
Given all this how good do you think the performance was? Can you explain why you come to your conclusions? What mistakes if any do you think top management has made?
How would you manage such a business? Are you certain you will achieve a (much) better result? Why do you think your way to manage this is so much better?
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2 年Was the business set up to maximize profit and profitability? - No The profit is determined at the constraint. All the goods (finished and intermediate) should be priced based on the content of the constraint consumption. Maximizing the profit at the constraint will determine the product mix. Consideration should be given to the inventory required for each unit of constraint consumption margin.
Given all this how good do you think the performance was? Overall Gross profit OK but what is the Net? Cash tied up in Finishing profit centres. Can you explain why you come to your conclusions? The goal of a “for profit” biz is to generate profit and cash for owners. I assume no demand constraints at any stage. I assume that I own the business. What mistakes if any do you think top management has made? Not focused on the goal. How would you manage such a business? Retain ownership of the value creation engine and sell / MBO the Finishing profit centres; take the money and run. Are you certain you will achieve a (much) better result? Yes Why do you think your way to manage this is so much better? It delivers the goal.
Focus is 2X Profit & ROI by: Apply the Theory of Constraints with me. Use 6-Sigma & Lean! Leverage capability. Gain capacity, cut lead time, get 100% reliability & control costs. Get more customers to buy more. DE/EN/FR
2 年I asked questions … any one with answers?