Why Focus Makes Your Value Chain Successful?

 I hope Steve Biro does not mind me using his great picture!

Summary and Conclusions:

What has all I have written below to do with making your “Value Chain” successful?

1.     Your Value Chain, no matter how you define it, is a system. The 5 Focusing Steps apply to the super system and to any and all subsystems. 

2.     Your business is both sub- and super-system. Production, distribution, product development etc. are all subsystems of your business. One of these subsystems likely blocks Throughput and profits. It should be your improvement team’s target and focus.

3.     Within the blocking subsystem there will be a resource (an even smaller sub-system) that blocks that subsystem.

4.     IF you improve a non-constraint sub-system, you will get little or no positive impact to your bottom line. In fact, the added cost to implement the (not yet necessary) improvement, often results in a negative bottom line impact.

5.     Ultimately all managers must have an appreciation (understanding) of the entire system, the constraint and the constraint's (managers’, employees, departments’) role.  Non-constraint managers need to understand what their job is and how they must help the constraint succeed! Focus on local optimisation is no longer an option!

Defining your Value Chain?

Michael Porter coined the term Value Chain in his book “Competitive Advantage: Creating and Sustaining superior Performance” (1985). Value chain analysis describes the activities the organisation performs and links them to the organizations competitive position.

Examples of Value Chains:

1. 1.   Automobiles: No automotive company produces everything from iron ore all the way to distributing cars to consumers. The German economy is full of suppliers to VW, Audi, BMW, Mercedes, Opel, Ford, Porsche & to export markets. A large part of auto sales, (I believe) is performed by (independent) distributors. The car companies dominate these value chains. How well these value chains cooperate and align is a big factor in overall & individual success. 
2. 2.   Textiles: Raw materials for textiles are either natural products (cotton or wool) or stem from chemical processes – nylon, polyester, acrylics, acetate etc. Steps to transform fibres into textiles (clothing, carpets, home textiles, reinforcement fabrics for tires etc.) are long & varied. Distribution includes shops, catalogues & internet. Textiles for protective clothing (fire protection is an example). There are 2 competitive value chains – aramids (like Nomex?) and treated cotton fabrics. Aramids are much more expensive than treated cotton – textile companies are ‘poor’; they do not like to stock aramid fabrics. This has put aramids at a disadvantage because of the time it takes to make a garment from aramids since stock of aramid fibre will be far from the garment producers. Treated cotton fabrics are cheaper and have a significantly shorter chain from intermediate stock Despite aramid protection effectiveness, they are at quite a disadvantage, whenever lead-time is critical. The aramid supply chain may work well. It is (or was) not coordinated & aligned well enough to compete well against the treated cotton fabric lead-times.
3. Houses: The building trades are notorious for poor alignment and coordination. Rather than work as a team trades people and every (small) company involved looks after its own (financial) interests – they keep their resources busy to bill all hours spent. The misalignment of trades results insignificantly suboptimal results. The building trades have significant financial potential if only they learn to align and coordinate!

Since it is rare for any company to perform all activities, from nature’s raw materials to delivering the product to end-customers, an organisation should carefully consider what part of the chain it wants to manage or it can influence.

These 3 examples provide an indication of what can be involved to properly align and coordinate a value chain.

As indicated the 1st question a company should ask is: “How much of the extended value chain should we manage or influence? How much can we actually manage or influence enough in order for our influence to be valuable to us?”

Clearly, we want to manage or influence those value chain components with significant impact on our business. Examples of how our “partners” influence our business :

• Inventory: Companies carry (finance) stock due to both long lead-times and uncertainties their value chain partners introduce.
• Inventory: Your company holds stock to cover your operation’s lead-times & the uncertainties from your customers (& their clients). What, how much and when will they buy is one important question?
• Sales: Your company depends on how well your customers service their clients in terms of product availability, lead-time and on-time reliability. Your customers depend on your product availability, reliability and lead-times. Partners in a value chain are all dependent on each others' performance.
• Cost: Your cost depends in part on the quality you receive, the price you pay for materials and components and the efforts your company expends to deal with supplier and customer uncertainties especially including lead-times.
• Our capacity & ability to supply clients depends on the damage suppliers and clients may cause our value chain’s or our internal constraint(s).

Your (and your value chain partners’) performance depends to the largest extent on how well your value chain’s weakest link (or leverage point) performs. (It gets a bit more complicated whenever partners in a value chain buy from and supply to other value chains. Nevertheless, the 5 Focusing Steps thought process is always important. This is so even though partners will likely have varying priorities and attraction for the different value chains involved.) Your company needs to think very hard about how to get the right professional service from its value chain partners.

Before you look too far outside your company’s system it is important to have your operation in order. Your company is a sub-system of the value chain super-system. Within your company subsystem you have several even smaller subsystems – production, sales, product development etc. One of these is your company’s weakest link or constraint. To find your company’s weakest should be your first focus – it may be a supplier, or it may be the market that does not buy enough or you have an internal constraint. Wherever you find your constraint, that is the location with the greatest potential for increased Throughput, Profit and Profitability!

How much potential lies hidden in your weakest link – the thing that blocks your company from making more money.

By definition your ‘weakest link or constraint’, is the entity defining the maximum you are able to produce and sell to your market(s); the maximum is defined by whatever blocks you from selling more. If you can cause your weakest link to create more sales (without adding resources or cost) you gain sales. The cost of the additional sales is only materials (or totally variable cost). Such added sales almost always have much higher margins than whatever your business currently enjoys. The table below demonstrates.

The impact of a small 5% improvement to your constraint output is enormous. Because most value chains and most companies do not correctly focus on their constraint (or weakest link), improvements when the do start to focus correctly are likely to be very big. (Often the weakest link is blamed rather than helped.)

Step 1 is therefore “Identify your constraint” so that you can take advantage of the large potential lurking there. Having a constraint and knowing where it is, is a very positive thing.

Once you encounter your constraint it is time to decide how to exploit it. Producing the greatest number of “widgets” may be the target you are given. However, I suggest maximising your financial Throughput[1]is a significantly better target to pursue. You can see ‘Throughput’ in the table above. It is what most managers know as gross margin, Goldratt thought ‘the rate at which the company makes money is a better term– because it emphasises its importance.

Throughput can be maximised by the following actions (you may find more ways):

1. The constraint is never be stopped from producing Throughput; the constraint always has material waiting to be transformed. That way it never stops due to a lack of material. (However, production into inventory does not generate Throughput and sales – it is not ‘real’ production, it adds to inventory and investment and consumes cash.)
2. Never stopped also means faulty product is never sent to the constraint – if the constraint transforms faulty product its time is wasted – for all practical purposes it is stopped. Similarly, production steps after the constraint must never introduce faults – that would be the same as a constraint stop! The time between units of production should approach zero. (Set-up time and even the time it takes to move the completed item out and the new item into the ‘machine’.) (Ask yourself how important such speed is at non-constraints.)
3. The business ensures that widgets our constraint produces and that are sold yield the highest Throughput – use or consume constraint capacity in the most effective way.

In the continual improvement community, there is discussion about what a constraint is. In this article look at constraints as something physical. Policies, Measures and Behaviours (PMBs which some people call constraints) can and often do damage your company’s Throughput. These PMBs should simply be changed to more appropriate Ps, Ms or Bs. Other terms for constraint are also used … such as “leverage point”. Using a leverage point correctly is something for the steps 2 (decide how to exploit) or 4 (subordinate everything else to the above decision). Thinking about the constraint, leverage points, PMBs and the like is important for the discussion, but, whatever you call them, the 5 focusing steps always apply as an important thought process – even if you must deviate from the strict definitions of the steps – such as ‘simply’ changing PMBs (not one of the steps) to something more appropriate.

Keep in mind that these 5 steps are helpful no matter which system or subsystem you choose to focus on. It is important to choose the right focus on the right subsystem.

Step 2 is to decide, to plan and decide, how your company wants to exploit (use) its constraint, its weakest link. Exploit is deliberately provocative to catch your attention. Another way to say the same thing is: “Step 2 is to decide, how best to deploy your constraint.

I assume your plan is (or will be) to deploy your constraint in order to maximise company Throughput. Now the question becomes, how must the rest of your company behave in order to ensure your constraint can actually deliver to its maximum potential? Focus on the constraint does not absolve non-constraints from doing the right things. The question is how can they know what their focus, their actions, must be? Will current common business practice (the PMBs) cause your non-constraints to behave correctly? Before you read on, what do you think?

Current common practice is “local optimisation”. Top management tells every department to improve – to become more efficient and more cost effective (and there may be other targets too, like quality, due date performance, inventory levels etc.). Given local optimisation exists, what will the impact be on your constraint? Will non-constraint departments help the constraint department through local optimisation in their (non-constraint) department? Is there a significant risk that constraint performance is damaged by local optimisation everywhere else?

Think about just two key departments, sales and production and how these two impact each other. Here are some questions to consider:

1. When selling, do salespeople preferentially sell those items that most effectively consume the production constraint resource? How do salespeople decide into which products they will put most of their sales effort? Does management provide the guidance necessary so that salespeople know which products use the constraint most effectively?
2. Do your production managers consider what combination of lead-time, due date reliability and quality will best support the sales constraint? Isn’t production often in a dilemma between producing great lead-times, great on-time reliability and great quality vs. lowest cost production?
3. What is management’s real focus; what is management’s top priority? Cost? Throughput? Inventory? What should management’s top priority be?

I Claim: If your company’s top priority is Throughput (the company goal is to make a lot of money now and more in the future) AND your company focuses properly & correctly on its constraint (decides how the constraint will be deployed and guides all non-constraints to focus on how best to help the constraint reach its potential) then your company is very likely to perform much better. Much better than the alternative of focus on cost and efficiency. (Throughput focus is the best way to focus on cost and efficiency! (This will be the title for a future article.)

Step 3 is therefore for all other resources (the non-constraints) to subordinate to the decision made in step 2.

1. Management subordinates by providing the necessary guidance to all non-constraints. 
2. Maintenance people always prioritise the constraint – it must have the smallest downtime and must never wait for maintenance or repairs.
3. In production poor quality is not allowed to reach the constraint; processes after the constraint only very rarely introduce quality problems to the product.
4. Etc. (These are a three subordination examples; you can probably think of more.

Subordinate (like exploit) is a provocative and powerful word. Eli Goldratt again chose it to emphasise how important the right non-constraint behaviour is. 

Too often the simple rule “focus on the constraint” is simply too simplistic! In reality your entire value chain (system) is involved with getting the most from your constraint (or the value chain’s constraint). The critical change you must make is to ensure non-constraints stop their local optimisation in favour of focusing optimisation efforts on those actions that ensure your system constraint can maximise its performance. (As long as your constraint continues to be your systems constraint, it will continue to determine the maximum Throughput and profit your company can achieve[2].)

Now that all of your organisation, all of your non-constraints are properly supporting your company’s decision how to exploit your constraint, is the constraint still active? The combination of “decide how to exploit” and “subordinate everything else” will often be enough for your constraint to move to a new location. However, if it does not move; if your constraint is still your constraint, then you have the necessary knowledge where to expand capacity – which of your resources you will expand.

 Step 4. If, after proper (complete) exploitation and subordination, your constraint still exists in the original place, then elevate (expand) it.

If your team has implemented the actions from the 1st 3 steps well and your constraint is still the constraint, then you know that investing in the expansion of your constraint will certainly give a further boost to Throughput and profit. This is a certainty because your constraint will still be blocking Throughput. You will also know that such an expansion will impact your bottom line positively.

When you arrive at this point the decision to expand becomes a strategic one. Two key questions are:

·        Where should your constraint be?

Should your constraint be internal or external to the company? If our constraint is internal to our company, then your company must lose sales – all those we could make had our capacity been greater.

If our constraint is the market (the market is not buying enough of our products) our cost per unit may be higher, but we can more easily take advantage of market opportunities. If our competitors are (unit) cost focused, then we have a significantly higher chance of successfully growing sales and market share than competitors blocked by their internal constraint.

If we are better than competitors at exploitation and subordination, then we will be more effective at using our capacity, we can produce more than we used to, and we will have already been able to gain some additional sales.

• Do we want to keep our constraint fixed in one place, or are we happy for it to move around? Letting the constraint move around presents a problem for management. Every time the constraint moves, managers must retrain all employees to subordinate correctly to the decision how to exploit the new constraint. On the other hand, investing in a way that maintains the constraint in 1 place is more investment intensive. Management has the dilemma (TOC has a tool to help you solve such dilemmas) of investing more vs. spending more operating expense in training and re-training.
• Some managers are tempted to balance capacities. This is not a good idea as resources with the same capacity will interact to damage the overall capacity of your operations (your factory). If any of the balanced resources is down for any reason, then the entire chain must also stop. Suggesting buffers to keep resources busy during a machine’s downtime is fine; BUT how will you rebuild the buffers if none of your resources have excess capacity to do so?

Eventually our constraint will move – probably soon after exploit/subordination efforts take effect or later after investing in new capacity. When the constraint moves to a new location you have a new system with a new constraint and different set of non-constraints.

You have an existing decision how to exploit your constraint and guidelines for all non-constraints to subordinate correctly to the decision. As soon as the constraint moves your exploit decision and your subordinate guidelines become obsolete! You need to rebuild the decision and the guidelines to reflect the new constraint. Paradigms must change.

Since we rely on paradigms in our work and daily life we tend to suffer from inertia – we hang onto our paradigms for too long thus hurting performance. We must go back to step 1 (identify our constraint) and work through the 5 steps again. We must fight our inertia in order to quickly respond to the new constraint. The 5th step is written as the following:

Step 5. If during any of the above steps the constraint has moved go back to step 1. BUT do NOT let your natural inertia become the systems “constraint”. (Actually, inertia is a behaviour so not really a constraint. Nevertheless, the behaviour (inertia) must change by quickly re-evaluating your constraint and how to manage it.

What has all I have written to do with making your “Value Chain” successful? (I repeat the summary from the beginning of my article.)

1. Your Value Chain, no matter how you define it, is a system. The 5 Focusing Steps apply to the super system and to any and all subsystems. 
2. Your business is both sub- and super-system. Production, distribution, product development etc. are all subsystems of your business. One of these subsystems likely blocks Throughput and profits. It should be your improvement team’s target and focus.
3. Within the blocking subsystem there will be a resource (a smaller sub-system) that blocks that subsystem.
4. IF you improve a non-constraint sub-system, you will get little or no positive impact to your bottom line. In fact, the added cost to implement the (not yet necessary) improvement, often results in a negative bottom line impact.
5. Ultimately all managers must have an appreciation (understanding) of the entire system, the constraint and their (the managers’, the departments’) role.  They need to understand what their job is and how they must help the constraint! Focus on local optimisation is no longer an option!

What your FOCUS Philosophy might look like!

[1] Throughput is defined as the rate at which we make money – therefore it is a financial number. Conventionally most managers understand Throughput as a physical number – the number of units produced.

[2] If your company contains more than 1 independent value chain, then each a separate independent business unit has its constraint. Each value chain’s constraint determines the Throughput of the chain or business unit concerned.