{"id":622,"date":"2023-10-02T02:22:06","date_gmt":"2023-10-02T02:22:06","guid":{"rendered":"https:\/\/keypractices.viagointernational.com\/?page_id=622"},"modified":"2023-12-07T21:18:02","modified_gmt":"2023-12-07T21:18:02","slug":"throughput-world-paradigm-application","status":"publish","type":"page","link":"https:\/\/keypractices.viagointernational.com\/?page_id=622","title":{"rendered":"Throughput World Paradigm Application"},"content":{"rendered":"\n
\"\"<\/figure>\n\n\n\n

Jean could tell there was going to be trouble as soon as he walked into the office. The door to his, the manager\u2019s, office had a big window in it, and through the window, Jean could see Sarah and Nigel glaring at each other. Nigel was head of the accounting department and was always trying to get Sarah to cut costs; Sarah was in charge of operations and always said that fulfilling the promises that got made to customers should take priority. The same argument had been going on for as long as Jean had been at this branch of Fibreglass Fabrications, and now it looked like Jean was going to get dragged into it. He sighed and pushed the door open.<\/p>\n\n\n\n

Sarah turned, looking pleased to see him. \u201cAt last! Jean, can you talk some sense into this guy? He wants me to cut my overtime budget at a time when we\u2019re running at full capacity just to keep up with sales!\u201d<\/p>\n\n\n\n

Nigel sniffed. \u201cYes, I am. That\u2019s because your labour costs are 30% over budget already, and I\u2019ll be very surprised if they don\u2019t hit 40% by the end of the month. Corporate is already harassing me for an explanation, and I\u2019m not going to cover up your inability to control costs.\u201d<\/p>\n\n\n\n

\u201cWell, what am I supposed to do?\u201d Sarah shot back. \u201cJust not start jobs? Maybe not deliver them instead? How much will corporate like that?\u201d<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Jean held up his hand and sat down behind his desk. \u201cCalm down, both of you. Now, I know you\u2019ve been over this dozens of times before, but I\u2019m not familiar with the details. Talk me through this, please. What\u2019s the argument actually about?\u201d<\/p>\n\n\n\n

Sarah and Nigel both started talking at once, and Jean held up his hand again. \u201cNigel, you first. Sarah, you\u2019ll get your turn when Nigel has finished. Now, Nigel, explain it to me like I\u2019m five years old, please.\u201d<\/p>\n\n\n\n

Nigel took a deep breath before speaking. \u201cThank you, Jean. And don\u2019t worry, this is actually very simple: the problem is that operations is spending so much money that some of our products yield a margin of $0, or worse! It\u2019s clear that the way operations is spending money on overtime is going to get worse, we must intervene now! They\u2019re so concerned with meeting deadlines or whatever that they\u2019re throwing overtime at everything. They have far too much inventory, enough for days or weeks of normal operations. To make matters worse, as soon as it looks like an order might not ship on time, someone\u2014\u201c he glared at Sarah \u201c\u2014authorises overtime like it\u2019s going out of fashion. Costs are going up so much that they\u2019re consuming all the income, which is absolutely ridiculous! We have to start making decisions based on what they\u2019ll cost, not some vague benefits to customers.\u201d<\/p>\n\n\n\n

Sarah looked like she was about to explode, so Jean nodded to Nigel. \u201cThank you for explaining that. Sarah, it looks like\u2014\u201c<\/p>\n\n\n\n

\u201cI\u2019ve got plenty to say about that!\u201d Sarah fumed.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

 \u201cThis\u2026 this\u2026 this bean-counter doesn\u2019t understand what happens when we do that! Sure, we can try to trim some of the costs \u2013 keep lower stocks of materials, batch jobs together, and so on. But demand isn\u2019t static, sales is always coming up with some scheme for selling left-handed screwdrivers or whatever and not telling us until the last minute. And if anything, anything at all goes wrong, we\u2019re stuffed! We have to wait until the batch finishes or more materials arrive or for the next shift to begin, or whatever it is, and in that time, customers get angry because they don\u2019t have their order.\u201d<\/p>\n\n\n\n

Sarah slumped back in her chair. \u201cWe lose responsiveness is what I\u2019m saying. Yes, overtime is expensive. So is keeping stocks of key materials so we don\u2019t run out, and so are all the other things we do. I don\u2019t really disagree with Nigel about that. But what he\u2019s not seeing is that we have to do it anyway, because if we lose that flexibility then our delivery performance to customers goes down the toilet, so we don\u2019t have a choice: we have to accept higher costs.\u201d<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Nigel sniffed and looked away from Sarah, who was staring glumly at the floor.<\/p>\n\n\n\n

\u201cOK, Sarah, I can see what you\u2019re saying.\u201d Jean sighed and thought for a moment. \u201cSarah, you feel the need to protect customer-facing performance, so you\u2019re saying we should use measurements of that when we\u2019re making decisions. And Nigel, you\u2019re trying to keep costs under control, so you\u2019re saying we should be looking at cost-based measures instead. Am I understanding this right?\u201d<\/p>\n\n\n\n

\u201cYeah\u2026\u201d Sarah muttered, and Nigel, not wanting to concede the point, nodded reluctantly.<\/p>\n\n\n\n

\u201cOK,\u201d Jean said again. \u201cNow, the fact that you two have been arguing about this over and over again tells me that you\u2019ve tried all the obvious stuff. Anything that looked easy or practical didn\u2019t work, or we wouldn\u2019t be here. So, are there any non-obvious ways out of this? Give me a solution, something out-of-the-box, but so crazy it just might work. Get creative, is what I\u2019m saying.\u201d<\/p>\n\n\n\n

Both Sarah and Nigel thought hard for a moment, but it was Nigel who raised his head first. It was strange to see a smile creeping over Nigel\u2019s face under these circumstances, but Jean was encouraged to see it.<\/p>\n\n\n\n

\u201cI think I\u2019ve got something, Jean,\u201d Nigel announced proudly. \u201cOutsourcing.\u201d<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

\u201cOutsourcing?\u201d Sarah looked like she was about to explode again. \u201cThat\u2019s more expensive per item than making them here! I only do that when I\u2019m desperate, and every time I do you complain that it costs too much! How is it suddenly going to be cheaper?\u201d<\/p>\n\n\n\n

\u201cThrough some accounting magic,\u201d Nigel grinned. \u201cSee, Sarah, it doesn\u2019t matter to you in operations, but in accounting terms, this factory is technically running as a cost recovery service provider. Corporate holds the revenues and pays cost recovery to operations for services to deliver the order stream. If your operations department is doing a job then the costs of any outsourcing for that job have to be allocated to our division, which is what blows out the budget. But if we outsource everything \u2013 not just the bits you don\u2019t have the capacity to do, but everything<\/em> \u2013 then the costs don\u2019t get allocated to you, because you\u2019re not doing the jobs. The costs would be allocated back to corporate instead.\u201d<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Nigel spread his hands proudly. \u201cAll of us at this division come out of this looking good! Our costs are controlled nicely, the jobs get done, and Jean here has solved one of our longest-standing problems!\u201d<\/p>\n\n\n\n

Sarah was staring at Nigel, looking shocked. Jean, meanwhile, was staring with his mouth open. It was like a lightbulb had just gone on behind his eyes; for a moment everything was blinding. This had to be one of the most surreal conversations he had ever been involved in. Jean shook his head, then looked back at Nigel.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

\u201cNigel\u2026\u201d he said gently. \u201cDo you know how this sounds? You\u2019re saying that having the entire operations department stand around idle, while we pay twice as much to get all our jobs outsourced, would make our costs look better than they\u2019ve ever been before.\u201d<\/p>\n\n\n\n

\u201cWell, you asked for a creative solution,\u201d Nigel pointed out reasonably. \u201cIt\u2019s not my fault if it sounds a bit\u2026 innovative.\u201d Jean had to take a moment to decide how to respond. Nigel didn\u2019t seem to realise it, but he\u2019d just shown Jean that their entire cost accounting system seemed to involve an element of fiction. It was all funny money, going round and round and jumping through hoops, a poor representation of what was actually happening in his Fibreglass Fabrications factory!<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

\u201cAll right,\u201d Jean said eventually. \u201cWe\u2019re going to try something different. Nigel, your input has been essential, but we\u2019re not going to outsource everything and leave Sarah wondering what to do with her people. Let\u2019s start by getting an idea of what performance considerations really are more important than cost. We also can\u2019t have constant fights over what interventions are going to be positive and who is allowed to authorise them. Whatever process we come up with, it has to produce decisions that our managers and head office largely agree with.\u201d<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Sarah frowned. \u201cOK, but\u2026 how are we going to do that? As long as we\u2019re looking at costs, it seems like we\u2019re going to end up in the same argument.\u201d \u201cI agree,\u201d Jean said, \u201cwhich is why we\u2019re not going to be looking at costs.\u201d Nigel started to say something, but Jean cut him off. \u201cNigel, looking at costs in isolation has ended up with keeping our entire factory idle looking like a sensible decision. That is, to be honest, ridiculous. We can\u2019t keep looking at cost minimisation. Instead, let\u2019s start thinking in terms of throughput, inventory, and expenses. We want to maximise throughput from this division \u2013 the amount of money we make over time \u2013 and minimise the money-draining effects of expenditure on inventory and operating expenses.\u201d<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Sarah nodded slowly. \u201cThat makes sense, I guess\u2026 but you haven\u2019t answered my question. How do we do that?\u201d<\/p>\n\n\n\n

\u201cIt\u2019s going to be a three-part process,\u201d Jean explained, \u201cand I want you and Nigel to work together on this. Start by choosing some recent decisions that ended up being made in favour of performance instead of cost, say five or so. For each of them, explain why the performance benefit was more important than the cost, and what the real or potential damage to sales or margins would have been if we\u2019d focused on cost.<\/p>\n\n\n\n

After you\u2019ve done that, use that information to come up with a set of rules people can follow when they\u2019re trying to make decisions about a performance spend. Once you\u2019ve got that bit working, I want us to harvest the throughput as early as we can, preferably before we incur the spend. So, add some other rules if you can about firming up the throughput, and reducing or deferring the inventory or expense costs.\u201d <\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

\u201cThis is all very theoretical,\u201d Nigel protested. \u201cThese rules aren\u2019t going to cover everything, and maybe not even most things!\u201d<\/p>\n\n\n\n

Jean nodded firmly. \u201cYou\u2019re right,\u201d he said, \u201cwhich is why we\u2019re going to test and tweak the rules. Keep on doing that \u2013 tweak the rules, test them on upcoming decisions, and tweak them again if needed \u2013 until the rules work for most decisions, most of the time. 80% or so, let\u2019s say. They won\u2019t be perfect, but they don\u2019t need to be perfect: they just need to be faster and better than the situation we have now, which can fairly be described as antagonistic chaos.\u201d<\/p>\n\n\n\n

Jean stared firmly at both Sarah and Nigel until they both nodded. \u201cGood. Now, get out of here. Work together on this and come back in a month and tell me how it\u2019s working out.\u201d<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Jean had never been a schoolteacher, but a month later he was feeling a lot like one as Nigel and Sarah sat in his office once again. They weren\u2019t even looking at each other, for all the world they looked like two naughty kids that had been sent to the principal\u2019s office.<\/p>\n\n\n\n

\u201cWell?\u201d Jean said. \u201cDid you get the worksheet, uh, working?\u201d Nigel looked like he\u2019d bitten into a lemon, but he nodded. \u201cYes,\u201d he admitted grudgingly. \u201cIt works. Costs have stabilised, and it feels like Sarah is more in control of operational spending.\u201d<\/p>\n\n\n\n

Sarah rolled her eyes at that, but then she sighed and nodded too. \u201cYeah\u2026 I agree with Nigel. It feels like we have more control. It used to feel like we had to panic and throw everything at an order that looked like it might be late. Now, we\u2019ve got a process to work through that tells us how much we should panic.\u201d<\/p>\n\n\n\n

Even Nigel managed a smile at that, and Jean started to hope that this might actually end up OK. \u201cAnd the decisions make sense to everyone?\u201d he asked.<\/p>\n\n\n\n

Both Nigel and Sarah nodded, more firmly this time. \u201cYes,\u201d Nigel said. \u201cI have to admit that I can\u2019t argue with how the decisions are made. If an operational spend gets made, it\u2019s usually for a good reason.\u201d<\/p>\n\n\n\n

\u201cAnd it works both ways,\u201d Sarah added. \u201cThere have been times that the decision has gone against my initial impulses\u2026 but I can accept that there was a good reason for it.<\/p>\n\n\n\n

Jean exhaled in relief. \u201cGood. It sounds like this is working.\u201d<\/p>\n\n\n\n

Nigel looked thoughtful. \u201cActually\u2026 I think it might be a bit better than that. I\u2019ve been looking at some of the performance metrics myself lately, and I think our divisional performance might actually have improved a bit, even with these performance-to-customer measurements. Sarah, have you noticed that?\u201d<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Sarah thought hard for a moment, then nodded again. \u201cYeah\u2026 I think it has. It goes back to that worksheet and it limiting how much we can panic, you know? We can sort of take a step back from the immediate situation and make a decision that\u2019s better in general. I think that has improved output \u2013 sorry, throughput \u2013 on its own. We can still make local optimisations here and there, but we are now more confident they won\u2019t come at the expense of divisional performance.\u201d<\/p>\n\n\n\n

\u201cInteresting\u2026 so, you think that this is a better system overall? Would you go back to how things were?\u201d Jean asked. Nigel looked shocked. \u201cOh no. No, not at all! We\u2019re finally in a situation where what makes sense to operations makes sense to those of us in accounting too, and the other way around as well. No, I don\u2019t want to lose that!\u201d<\/p>\n\n\n\n

Sarah shook her head firmly too. \u201cNo, this is better. We\u2019ve got more control, things are going more smoothly, and\u2026 I think we understand the business as a whole better, too. Once we started using those rules, it turns out that there are some issues where throwing overtime at them doesn\u2019t actually make any difference, but there are also a few areas where it makes a lot of difference to overall output. We can take a more focused approach to our spending approval requests, I guess that\u2019s what I\u2019m saying.\u201d<\/p>\n\n\n\n

\u201cGood,\u201d Jean said happily. \u201cI\u2019m glad that\u2019s settled, then.\u201d<\/p>\n\n\n\n

As he watched Sarah and Nigel leave his office, Jean wondered if any other branches of Fibreglass Fabrications had run into similar problems. Maybe it would be worth having a quick chat with his friends at corporate about this\u2026<\/p>\n\n\n\n

\"\"<\/figure>\n","protected":false},"excerpt":{"rendered":"

Jean could tell there was going to be trouble as soon as he walked into the office. The door to his, the manager\u2019s, office had a big window in it, and through the window, Jean could see Sarah and Nigel glaring at each other. Nigel was head of the accounting department and was always trying …<\/p>\n

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