Job Shop and Machine Shop Profitability part 2

  This is the second in the series of conversations. Brad:  “Just what should a highly custom job shop or machine shop company set as a profitability goal?  What is reasonable?  How high is up?” Dr. Lisa:  “I’ll give you Dr Eliyahu Goldratt’s answer and then I give my more direct answer.  Dr. Goldratt stated that profitability goal of the business should be a level of return on sales that top management of a company agrees is definitely impossible to attain.” Dr. Lisa:  “For example, if everyone agrees that 5% Return of Sales is definitely possible, that is too low of a goal.  If everyone feels the same about 6%, 7%, 8%, and 9%, they those levels are also too low of a goal.  But if everyone agrees that 10% is not achievable, that then becomes the goal.” Brad:  “That would be an interesting exercise for any CEO to do with his or her top management team.” Dr Lisa:  “My answer:  How high is up is going to be dependent on 1) what percent your Truly Variable Costs (TVCs) are of sales.  And 2) how much capacity you can undercover – meaning how much productivity you can gain with the same people and resources.” Dr Lisa:  Knowing both of these numbers (better to be approximately right, than precisely wrong), will allow you to arrive at a very feasible goal and yet one that most will agree is not attainable based on previous experience.” Dr Lisa:  Using the same example from our last conversation, I’ve added the Return on Sales:

We’ve gone from 0% Return on Sales to 8.3% Return on Sales by being able to sell the 20% productivity gain that was achieved. Brad:  “Many job shops and machine shops that we work with have 20 to 35% TVCs (which typically includes raw materials, outside services, and sales commission if any).  Some more some less, but this is common.  When I initially analyze the financials of a company, I’m looking for the actions and implementation steps required to bring the company to reliably make a 20% Return on Sales month in and month out, year in and year out.” Dr. Lisa:  “Ha!  Be careful, you’ll scare some business owners with that goal.  He or she will definitely think that goal is unattainable!” Brad:  “A small business making 20% Return on Sales is a lot more fun to run than a larger business barely managing to reach breakeven.” Dr. Lisa:  “For sure.  A company with sales of $2.5 million and a 20% Return on Sales has $500,000 of net income.  And so does a company with $25 million of sales with a measly 2% Return on Sales”. Brad:  “Now the nifty thing is that TOC ‘silver bullets’ can be used with that same company with $25 million in sales to bring them to achieve a 20% Return on Sales – a jump from $500,000 to $5 million of net profit.” Dr. Lisa:  “Yes, no wonder that Merger & Acquisition and Turnaround Management Professionals are showing a lot of interest in TOC.” Brad:  “Okay, so let’s discuss more about how this fantastic improvement just might be possible…” To be continued. Best Wishes, Dr Lisa and Brad Stillahn P.S.  To ask questions or leave a comment go below this post. P.P.S. To find out more about improving productivity in highly custom job shops and machine shops, take a tour around this site.  You'll want to check out the job shop scheduling ebook and the webinar. P. P.P.S. If you have plenty of capacity, but can’t sell it, visit www.MafiaOffers.com. By Dr Lisa Lang and Brad Stillahn This article is copyrighted by Science of Business, Inc. Visit our Re-post guidelines.

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Max Profit #5 - Strategic Planning for Job Shops Budgeting

Maximizing Profitability the TOC Way #5

  This is the fifth in the series of conversations. Brad:  “Let’s talk about job shop strategy.  After all, it’s that time of year again.” Dr. Lisa:  “Yes, in the big companies you and I used to work for, the budgeting process starts early and continue for weeks and weeks – almost interminably.” Brad:  “In many companies, including the small -medium job shops that we work with the budgeting process passes for ‘Strategic Planning’.  I seem to remember Eli disdainfully calling that ‘Strategic Bull-(something)’.” Dr Lisa:  “My experience matches Eli’s assessment.  A lot of BS and little that’s really clear and actionable.” Brad:  “For sure!  Having a budget that shows sales increasing by 25% does not mean that the business owner has any idea of exactly HOW that increase will be realized.” Dr Lisa:  “Yes, and I guess that’s my challenge to our readers – how EXACTLY are you going to make the budget that you want to be reality – actually reality!” Brad:  “That’s a really good and necessary challenge – so what guidance or words of advice do you have?” Dr Lisa:  “OK, let’s start easy.  “ Brad:  “Soooooo, you’re not starting with the Theory of Constraints Strategy and Tactic Trees?” Dr Lisa:  “Correct. Let’s start by stating the objective.  What do you want to achieve next year?  Be specific and be careful.” Brad:  “What do you mean by be careful?” Dr Lisa:  “I’ll explain with an example.  If you state that you want to increase sales by 25% realize that that could happen and you make less profit.” Brad:  “Good point.  So what is an objective?” Dr Lisa:  “Objectives are states of being as opposed to actions. What particular desired effect do you want?  And the top objective is called The Goal.” Brad:  “Okay, so a business owner states their top level objective, then what?” DrLisa:  “Answer this question:  What’s keeping you from reaching this goal?  These are obstacles.  Once you have the list of obstacles, you can convert each one to an objective. Here are a couple questions to help you do that 1) What objective, if met, would overcome the obstacle?  2) What state(s) or condition(s) will need to been in place to overcome the obstacle? Now write your goal at the top of a blank sheet of paper. Then ask – in order to achieve this goal, I must first achieve …. Put the objective(s) at the top which are closest in time to achieving your goal and work your way down the page. After you have the first objective(s) listed then asked for each of those – In order to achieve that, I must first … And so on, until you have placed all the objectives (and probably discovered a few more). The objectives at the bottom would be the first ones you would start working on. This process is creating a PRT (that’s Goldratt Theory of Constraints speak for Pre-Requisite Tree). This map of objectives becomes your compass, your implementation plan. You follow this compass, this path, until you have learned something that changes your direction or until an opportunity comes along that allows you to skip several levels or is just better that what your were planning.” Brad:  “And if job shop owners go deep enough in this process, they’ll eventually reach a point where they know exactly how to create that state of being or condition.” Dr Lisa:  “Exactly.  But if they don’t, they now know what they don’t know.” To be continued. Best Wishes, Dr Lisa and Brad Stillahn P.S.  To find out more about improving productivity in highly custom job shops and machine shops, visit check out the How to Get More Jobs Done Faster webinar or the 9 Challenges ebook.   By Dr Lisa Lang and Brad Stillahn This article is copyrighted by Science of Business, Inc. Visit our Re-post guidelines.

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