“Yes, but sometimes, profit erosion occurs by some unforeseen circumstance, some outside force, that’s not part of your system. Profit erosion is not always caused by a broken system,” Jacob explained.

“You’re absolutely right,” I agreed. “That’s why I want to see WHO is in charge of your system. The role, at Stratum III, is not only to create your system, but to monitor your system. And when one of those outside forces, or unforeseen circumstance occurs, I want that Stratum III manager to ask this question, ‘Why didn’t our system anticipate this outside force, or at least mitigate the damage from this unforeseen circumstance?’

“The role at Stratum III is to create the system, monitor the system and constantly improve the system. The role is to adapt our systems to prevent new problems from occurring a second time.”

“And I know, the profit margin you designed into your price list, or your estimating system, is the same percent profit you report on your tax return at the end of the year,” I smiled.

Minor chuckling erupted.

“You know, some of you call me up. And tell me you are experiencing profit erosion, either gross profit, or net profit, and ask if I can help. So, I ask to see your organization chart.

“You protest. ‘It’s not our organization chart. It’s a pricing problem, or cost containment, waste or scrap.’

“No, I really do understand. If you experience profit erosion, something that your system was designed to prevent, then something is out of kilter with your system. Something in your system is broken. And one of the things I have discovered when I look for the cause of the problem, I try to figure out WHAT’S the problem. Turns out, the problem is seldom a WHAT. It’s almost always a WHO.”

“It’s just that, with our volume down, it seemed that the supervisor’s role could be covered by one of our managers,” Rene defended.

“For that matter,” I replied, “your production roles are simple enough, couldn’t the manager step in and cover those as well?”

Rene laughed. “We joked about that, but you don’t save any money by laying off a production person. You save more by laying off the supervisor.”

“And how much are you saving, now, running your manager in a supervisor’s role and letting your systems go to hell in a handbasket?”

The smile left Rene’s face. “I know, I know. We haven’t counted up what this is costing us, but with the over-runs and under-runs, and customers on backorder, I figure it took us two weeks to lose back what we may have saved in the last 18 months.”

“You are running short and running long,” I repeated. “Are there any patterns to the fluctuations that would help us understand.”

“Absolutely, but the manager is working as a supervisor and doesn’t have the time to lay it all out,” Rene continued. “We have spreadsheet models that we used two years ago, but the assumptions don’t hold up, need to be tweaked. You know, it’s funny. The manager asked me last week if, what he is doing now, as a supervisor, is really the best use of his time?”

“What did he mean?”

“I don’t know,” Rene replied. “For a minute, I though we might have a motivation problem. You know, right now, everybody has to pitch in and do whatever it takes. But it did get me to thinking. We didn’t hire him to be a supervisor, it’s just now, that’s what we need him to do.”

“That’s what you need him to do, or someone else to do? Do you need someone to put out all the fires or do you need your manager to work on the system that will prevent most of those fires?”

“What gives?” I asked. (This is known as a probing diagnostic question.)

“We’re having difficulty ramping back up,” Rene replied. “It’s interesting that when we were doing four times the volume, things seemed easier. We had almost no back-orders. We never built excess inventory in our finished goods. I know we are running with fewer people, but we have brought back plenty of production people to cover the output.”

“How do you get both backorders and excess finished goods at the same time?” I wanted to know.

“Easy. One product line runs short, the next one runs long. And we’re not that busy. You would think this would be easy.”

“And, what does the supervisor say?”

“Well, we reorganized last year, to deal with the recession,” Rene explained. “So, we have a manager watching the area, actually three areas. And that’s where the problem seems to be. He tells me that he is constantly putting out fires. Like yesterday, we ran short on raw materials for one of the lines.”

“I thought you had an MRP system that was supposed to take care of those issues?” I pressed.

“We do. But we adjusted our min/max re-order points to deplete some of our inventory during the recession and the manager hasn’t had time to go back and re-adjust as our volume ramps up. Not to mention, lead times from our suppliers, the ones still left, are all over the place.”

“They are buying the work,” Tony explained. “They bid the job below our cost, so I know they are not making money. Sooner or later, it is going to catch up with them and they will go out of business.”

“How many projects have they beaten you on, just this year?” I asked.

“More than you can count on both hands and one foot,” Tony replied.

“Tony, you can give me all the excuses you want. Their bid was lower than yours because they have a lower cost structure than you. Their bid was below your cost and there is still profit in the job for them. You have costs in your system that your customer doesn’t value, isn’t willing to pay for and it’s killing your edge in the marketplace.”

Tony’s face was sullen. He had expected me to agree with him. “Look, we have done our layoffs, reduced our inventories. We value engineer every project. What else are we supposed to do?”

“The answer is not some incremental, value engineering, corner cutting line item. You have to go back to fundamentals and look inside your systems, and how your systems handoff, and how your systems impact each other. There are likely three or four game changers, permanent game changers. Your competitor has already figured out some steps that you are unwilling or unable to take. That difference can be counted on both hands and one foot.”

“You said there were four elements in the goal that I had to look at,” Denise reminded. “I have to look at the quantity required, the quality standard, the resources I have and what else?”

“What else is missing?” I replied. “And this element may be the most important element.”

Denise looked up and to the left.

“How long does it take for one cycle to go through your system?” I asked.

“Time,” she nodded. “Time span. How could I forget about time span?”
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“There are four elements to every goal,” I explained. “You correctly identified two of those elements, the quantity required and the quality standard. But there are two more elements.”

Denise looked up, eyes open.

“You may have to add or modify steps in your system based on the resources that you have available.”

Denise looked down at the picture of her system. Her pencil went to circle number seven. “Yep,” she said. “Here we have to move some of the finished pieces to a temporary storage bin because, sometimes, we don’t have enough people to do the next step.”

“So, because of the limit in your resources, you have added a temporary storage step in your system?”

“Yes, and you know, it’s only because the machine that produces step number six can produce about ten times the parts that we actually need running through our system.”

“How do you know it’s ten times the part you need?” I asked.

“All I have to do is look at the goal,” Denise smiled.
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Her pencil turned over and she erased some of the marks in the picture of her system.

“It’s funny, as I look at some of the steps in this system,” Denise explained, “I remember we put them in because it just seemed like a good idea. But when I look at the goal, especially the quality standard, I can see two steps that are not necessary.”

“How long ago did you create those steps?” I asked.

“Three years ago. One is a part that we buff up, makes it shiny. It gives you the impression that it is a higher quality part. It’s not, it’s just shiny. Then we put it inside the unit, so no one ever sees it again.”

“Why did you make a decision like that in the first place?”

“Four years ago, we had some failures in the field. The service techs would take the unit apart and then badmouth the “low quality” of the part. The failure had nothing to do with the part, but with a seal that was leaking.”

“And when you buffed up the part, what happened?”

Denise smiled. “Well, we fixed the leaky seal about the same time, but we actually got feedback from the field telling us they were happy that we started using higher quality parts. They were the same parts, just shiny.”

“So, someone does see the parts?”

“Not anymore. We have only had three failures in the past two years over 300,000 units. We don’t fix them anymore. With only three failures, it’s cheaper to replace the whole unit. We don’t have to train a field technician to take it apart.”

“So, we can simplify the system by looking at the goal?” -TF
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“I don’t know,” Denise delayed, mulling things over in her mind. “How do you just make something simpler?”

“It calls for a bit of analysis,” I replied. “Tell me about a simple process that your team does on a repetitive basis, something with several steps that they do over and over.”

Denise nodded and began to describe a system, with thirteen steps. On step number three, I stopped her.

“I want you to draw a simple picture, a series of circle, each circle representing a step in your system. And draw a line between each of the circles.”

I watched as she turned the paper to get all the circles on one page, carefully labeling each of the thirteen steps.

“Now what?” she asked.

“Now, ask which of these steps is necessary to achieve the goal.”

“The goal?”

“Yes, I want you to add one more circle and describe the goal, the quantity we want to produce at the quality standard necessary.”

Denise drew an empty circle and I could see the churn in her mind. As soon as she wrote something in the goal circle, I could see her make mental connections to the other circles.
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