One of the benefits of the ‘good times,’ is that it’s much easier to make a profit; and a healthy one at that. When your business makes a significant profit, almost every aspect of life improves. Things at work seem to relax; employees are happier; there is less stress and life away from work gets better as well.
For most business owners and leaders, the good times create new opportunities. When you have money in the bank, you may consider investing in new growth; debt reduction, expansion into new businesses, or perhaps something as simple as upgrading your equipment or building a bigger corporate office.
It’s common to spend money during the good times. I’ve worked with a number of large businesses during those good times. On one occasion, the annual Capital budget for one business increased to hundreds of millions of dollars. Almost every member of the Senior Leadership Team presented business cases to the Capital Review Committee. Each leader did their best to justify why the funds should be released and how they would be used to improve the business. Many of the proposals were approved and the money in the bank was spent.
But here’s the thing.
Many of the businesses cases presented and approved, only focussed on the department. They were silo-centric. The business case did make sense from the department’s view or when you looked at the individual piece of equipment or process. However, when viewed from the perspective of the business, which is best viewed as a complex system of connected processes, some of the proposed improvements would harm the output from the system. When times are good, we are more comfortable spending money. But if we don’t have an accurate view of what our business is, we could potentially waste a lot of money during those times.
It’s uncommon to find leadership teams with a good understanding of systems theory, or the Theory of Constraints.
When your leaders view the business as a complex system of connected processes, they will recognise that ‘faster rates; increased capacity; reduced downtime for example, might not be achievable within the business.
While those results may be achievable in the department, or in relation to specific equipment or processes, the constraints in the complex system won’t be able to handle the improved performance.
When things are good, senior leaders must invest time and money improving their complex system. Let me explain. Some business owners and leaders think more broadly and longer-term than most. They lead businesses that make decisions on a long-term philosophy, even at the expense of short-term financial goals. You see, when you’re earning money in the good times, inefficiencies and waste are easily overlooked. Ignorantly, businesses are paying for waste and inefficiencies which means, operating costs are higher than they should be. This may be sustainable during the good times, but they quickly become unsustainable when times change.
After World War 2, Toyota Motor Company began developing an effective and efficient production system. They had to; it was estimated that compared with Germany, it took three Japanese workers to deliver the same result as one German employee. Compared to America, Toyota’s ratio was nine to one. So, Toyota relentlessly focused on improving quality and thoroughly eliminating waste from their complex system.
This went largely unnoticed during the good times, and only came to the attention of other business leaders during the first oil crisis in 1973. This was followed by a recession. Although profits for Toyota were impacted, they were able to deliver greater earnings in 1975, 1976 and 1977. This was extraordinary compared to most Japanese businesses at the time. Companies pay for their waste and inefficiencies both in good times and bad. Unless you have a good understanding of what waste is; how to identify it and eliminate it, and are relentlessly focusing on it, you too will be paying for it.
So let me end this post by asking you five questions, and be aware; your answers might reveal opportunities to immediately improve your business.
- Where is the dominant constraint in your business?
- How do your employees identify and eliminate waste?
- Do you review data that shows you where the waste is in your business?
- What is your underpinning philosophy (and how do you use it to make management decisions)?
- How well does your leadership team understand systems theory and the Theory of Constraints?