This continues our conversation with Dr. Lisa Lang on Theory of Constraints.

TF: Intuitively, we try to maximize efficiency (profitability) of the entire company by working in each functional area to maximize its efficiency. We are thinking if every area is absolutely efficient, then by default, the entire company will be profitable. You disagree.

Dr. Lisa: Take an extreme case where a company may break itself into separate P&Ls. The logic is that if we maximize each P&L then we will maximize the P&L of the company as a whole. (And of course it’s much easier to hold each manager accountable only for their own P&L.)

I have a client, a not for profit, who collects donations that they sell in 14 retail stores. Each store has its own P&L and each store manager is measured and rewarded accordingly. The average selling price of an item is $2.25.

Imagine you are one of the underperforming stores in this company. To improve your profit, you need to sell a lot of volume at $2.25.

There are, however, some donated items that fetch $100 or more and sell very quickly. All the store managers love these items. Yet, there is one item that sells for $100 in 13 of the 14 stores, yet, sells for $200 in one of the stores, because of its location. It’s a cowboy item and this store is located near cowboys.

If I hold this item up in front of the group of 14 store managers, which store manager wants it for THEIR store? Of course, they all want the item, but, who should get the item to sell? The cowboy store can sell it for double.

So, if one of the other stores (not the cowboy store) gets a walk-in donation of one of these cowboy items, what should that store manager do?

Most store managers would keep quiet and sell the item quickly for $100 to improve their own P&L. This maximizes their own silo, but steals valuable profit from the company as a whole. This story illustrates how maximizing each silo does not necessarily benefit the system as a whole.

When management teams attack a problem, most often they try to fix a small segment of the company without even seeing the larger system problem.
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Dr. Lisa Lang has many resources on her website www.scienceofbusiness.com. She has made this offer to our readers. If you would like to receive her three hour audio and workbook (usually $199) for $99, please drop her an email at drlisa@scienceofbusiness.com.

We will continue our conversation tomorrow.

A couple of weeks ago, I got to spend some time with Dr. Lisa Lang about one of my favorite subjects, Theory of Constraints. Like many of my favorite subjects, Theory of Constraints is a mindset that leads you to take action (make the right move) that is counterintuitive. In other words, left to your own devices, you would intuitively do exactly the wrong thing.

Theory of Constraints helps us to do the opposite. Theory of Constraints has been around for quite a while, but was most coherently explained by Eli Goldratt in a series of books starting with The Goal. Lisa Lang (Dr. Lisa) spent three years as the Marketing Director for Global Consulting at the Goldratt Institute. During the past two decades she has used Theory of Constraints (TOC) to help companies solve their most serious problems. This week, I will share with you some of our conversations.

TF: When a management team realizes it has a system problem, what mistakes does it make trying to attack the situation?

Dr. Lisa: Most often, the team doesn’t realize it’s a system problem. Because we are taught to manage in silos, or departments, or teams, most often, we attack the problem inside the silo, and don’t impact the system much, if at all.

By silos, I mean, we tackle sales problems separate from operations problems separate from admin problems. This happens, in part, because we have been trained to work inside our own area, indeed, not to meddle in other areas.

If you look at your organizational chart, you know the silos that exist in your company. Silos, in and of themselves are not bad. It’s that we measure each silo thinking that if we maximize each silo then we will maximize the system or the company as a whole and that’s just not what happens.
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Dr. Lisa Lang has many resources on her website www.scienceofbusiness.com. She has made this offer to our readers. If you would like to receive her three hour audio and workbook (usually $199) for $99, please drop her an email at drlisa@scienceofbusiness.com.

We will continue our conversation tomorrow.