The Secret to Maximizing Profitability

A Business Novel on How to Successfully Combine The Theory of Constraints, Lean, and Six Sigma to Drive Profit Margins to New Levels

Bob Sproull

• Publisher: Productivity Press
• Year: 2019
• ISBN:
  9781000751789
• Edition: 1
• Topic: Business
• Subtopic: Operations
• Index: Business

This book fully details, as the title suggests, the real secret to maximizing an organization's profitability. While many companies have implemented improvement initiatives such as Six Sigma and Lean Manufacturing, there is a missing link which, when discovered and implemented, will take these same companies to profit levels not seen before. This missing link is the Theory of Constraints, and when it's combined with Lean and Six Sigma, true transformational improvements are sure to follow.

In this book, the author walks you through the step-by-step method on how to combine these three methodologies with the result being significant improvements to flow, major improvements in variation, substantial reductions in waste, superior on-time delivery, and ultimately, maximized profitability. He has been using this integrated methodology for many years and each time, the results realized were well beyond what the leadership teams had experienced previously. The genesis behind this combined improvement cycle is based upon many years of analysis of both failures and successes using Lean, Six Sigma, and the Theory of Constraints as stand-alone improvement initiatives.

By integrating Lean, Six Sigma and the Theory of Constraints into a single improvement cycle, the author has developed a recipe that will maximize your return on investment, cash flow, and net profit. The Secret to Maximizing Profitability is both stimulating and thought provoking, but more importantly it will provide your organization with a roadmap for maximizing the use of your resources to achieve more bottom-line improvement than you ever imagined possible.

1

The Company Profile

“What a terrible meeting that was,” he thought. Mark Roder was the General Manager of Tires for All, a manufacturing company that primarily produces tires for the transportation and auto industry. Mark had just attended a semi-annual board meeting where he had presented how the company was performing to Tires for All’s Board of Directors located in Chicago. Although the company was making money, the numbers did not impress the Board of Directors. As a result, Mark was given an ultimatum to either improve the bottom line of the company or else! And the “or else” was that the board was threatening to send someone into his plant to make improvements to his profit levels or fire Mark and hire a new General Manager.

Tires for All had roughly 700 employees and had been in existence for thirty plus years. There were numerous types of tires produced at their manufacturing facility, located in Western Pennsylvania, including tires for cars and small trucks, but they also produced tires for large trucks as well. They were generally considered one of the “best in the business.” Tires for All’s innovative tire design had wide acceptance throughout the industry and demand had been increasing significantly, year over year. So much so, that additional manufacturing expansion was becoming necessary in order to meet this increasing demand. Because of this demand requirement, their first major expansion had just been planned and executed where they added a new 60,000 square-feet of additional manufacturing space within their Western Pennsylvania facility.

Tires for All continued their growth through both conventional product line development and significant product diversification. But because demand for their products continued to increase, Tires for All was now contemplating new manufacturing plants for Florida, Alabama, and Georgia. In addition to designing and manufacturing car and truck tires, Tires for All also produced a variety of other rubber parts for automobiles and smaller trucks and it was these parts that prompted the expansion discussion. But even though their demand was increasing, Tires for All did have some negatives associated with them. Their on-time delivery percentage metric was not as good as it should be, as it was in the low seventies. In addition, their quality levels, which included metrics for scrap and rework, were 10 percent and 30 percent, respectively.

As Mark Roder drove back to his plant in Pennsylvania, he thought about the board meeting he had just attended. He had clearly been given an ultimatum to improve the financials of his plant and he had to do it relatively soon. As he drove, he thought about what might be done differently to turn his facility upward in terms of profitability. The demand for his products was at an all-time high and the cost of expansion would clearly be high, so he believed that the expansion would have a negative impact on their profitability. He thought about some of the areas that might reduce his cost of doing business. Things like the high cost associated with relatively high levels of scrap and repair, shipping costs, labor costs, and others. If he could just come up with a way to improve quality, he believed that would positively impact his bottom line.

One thing Mark knew for certain was that he had to have all his managers directly involved in reducing his plant’s costs. He truly believed that by reducing the cost of goods produced, his margins would improve. As he continued driving, he planned a meeting of his managers and direct reports. He called his secretary, Margie Newsome, and asked her to set up a meeting with his direct reports for the next day. Many thoughts came into his mind as to how he could save more money. “I need to have Jim Fredo take a look at the quality of products being produced,” he thought. Jim Fredo was his Director of Quality and had been in this role for the past fifteen years. “If Jim can come up with a way to reduce the levels of scrap and rework, this will surely have a positive impact on our bottom line.” He continued thinking about how he could reduce costs.

His next thought centered on the Maintenance arena. Frank Delaney was his Director of Maintenance and he thought, “If Frank can come up with ways to reduce equipment downtime, that would surely have a positive impact on quality, and the company’s bottom line.” “Reducing downtime should improve the flow of products through our processes which should also translate into bottom line improvement,” he reasoned. “What else can we do to improve our bottom line?” he thought. “What about Engineering?” he thought to himself.

“If we can reduce the number of steps in our processes, there would be less chance of mistakes, which should have a positive result in terms of the number of hourly workers we need to produce our tires,” he thought. “And if we reduce our hourly headcount, that would absolutely improve our product costs!” he reasoned. Bill Simpson was his Director of Engineering, so he made a mental note to make sure that was part of their improvement effort. He continued thinking, “I will need to have Sam Plankton, my Human Resources Manager work closely with Bill as headcount is reduced,” he concluded. He continued thinking, “I need to have my Finance Director, Tom Mahanan, involved in this effort as well, just to make sure we capitalize on all headcount reductions.” He continued, “I think Sally Hodges, my Industrial Engineering Manager needs to be a part of this effort as well, just so our flow is not interrupted.”

As Mark continued his drive home, he continued thinking about how he could improve things moving forward. “I need to get my Operations Manager, Cliff Hastings involved in all of this, just so that our Operations Supervisors understand the level of importance this effort must take on. And what about our Union Head, Chris Samuels?” he thought. “As soon as we start talking about reducing our headcount of hourly employees, Chris is going to be very upset!” He reasoned. “We need to have some kind of plan that will appease Chris,” he believed. “Have I included everyone I need?” he thought.

As Mark continued driving, his thoughts moved to Marketing and Sales. “So, if we have streamlined our product flow, our capacity should increase. And if we increase our capacity, we need to bring in more work,” he concluded. He decided, “I need to meet with Kathy Hendricks, my Sales Manager, and with Kristin James, my Marketing Manager, and have them work on a new sales and marketing plan. I think I’ve covered everything now.”

Mark finally arrived home at two o’clock in the morning and needless to say, he was very tired from his long drive. But even though he was exhausted, Mark had trouble falling asleep, simply because he knew he didn’t have much time to improve things at Tires for All. The Board of Director’s message was very clear in that he had been mandated to fix things, or else! He finally fell asleep but continued tossing and turning throughout the night. Obviously, the state of his manufacturing plant was squarely on his mind.

The Meeting

One by one, Mark’s direct reports entered the conference room, not knowing exactly what the subject of this meeting would be. When everyone was seated, Mark began speaking. “Good morning everyone,” he started. “As you know, yesterday I made a trip to Chicago to meet with our Board of Directors. The intent of that meeting was originally intended to be an update on our recent expansion, but as the meeting progressed, it took on an entirely different format. Yes, I presented the status of our expansion, but I was then asked to present, and defend, the financial state of our company. I did that and to my surprise, I was told that the Board was not happy with the profitability of our company. I explained that our profit margins were near 10 percent which did not sit well with the members of the Board. I was told by the Chairman of the Board that our bottom line had to improve significantly or else! And the ‘or else’ he was referring to was that the Board was ready to either send someone in to help us improve or they would simply hire a new General Manager! So, ladies and gentlemen, the purpose of this meeting is to begin our improvement journey! And this journey must come quickly, if we are to survive as a management team!”

Mark’s last comment about survival seemed to peak everyone’s interest! Mark continued speaking and said, “I have asked Tom Mahanan, our Director of Finance, to meet with each of you individually, so that everyone understands how your activities impact our profitability. We will then form a series of teams to focus efforts on how we intend to reduce costs, so that our profit margins will dramatically improve.” He continued, “Does everyone understand the seriousness of what I just said?” Everyone in the room nodded their heads indicating that they did understand.

Before Mark could continue, Jim Fredo, the Director of Quality, raised his hand to ask a question that was probably on everyone’s mind. Mark saw that Jim had a question and said, “Do you have a question Jim?” Jim nodded to indicate yes and asked a very simple question. “How much time do we have to make these improvements to our bottom line?” Mark looked him square in the eyes and responded, “My guess is that we probably have no more than three or four months.” Jim responded, “So, if our current profit rate is near 10 percent, what is our targeted margins?” Mark replied, “I wasn’t given a specific percentage, but I think if we shoot for 15 percent, we’ll probably satisfy the Board.” “Any other questions before I continue?” Mark asked. When there were no more questions, Mark continued.

“In the past week I have been reading about an improvement methodology known as Six Sigma,” he explained. He held up a book and said, “This book, Six Sigma—The Breakthrough Management Strategy Revolutionizing the World’s Top Corporations, by Mikel Harry and Richard Schroeder [1], lays out what Six Sigma is and how to go about implementing it. Basically, Six Sigma is an improvement methodology that is intended to continuously improve several different aspects of any business. Things like, reducing defects, streamlining the delivery of goods or services to customers, improving profitability, and contributing to the overall health of our company’s culture. The good news is that Six Sigma can be applied to virtually all businesses. Very positive results can be expected as long as our management team and employees stay committed to improving operations and the experiences for our customer base.” Mark looked around the room to see if all were engaged and they all seemed to be, so he continued.

“Six Sigma uses ‘projects’ to make improvements and these projects can be in any of the core processes, or support processes, or even external to the company. As I understand it, when Harry and Schroeder introduced their Six Sigma methodology, they laid out eight steps in their process,” he explained. He continued, “The first step is to recognize functional problems that link to operational issues. The second step is intended to define the processes that contribute to these functional problems. The third step is that you should measure the capability of each process that offers operational leverage. Step four tells us that we should analyze the data to assess prevalent patterns and trends. Step five explains that we should improve the key product characteristics created by these key processes. In step six, we need to control the process variables that exert undue influence, while step seven tells us to standardize the methods and processes that produce best-in-class performance. And finally, in step eight we need to integrate standard methods and processes into the design cycle. I know that’s a lot to digest, but it is my belief that if we follow these steps in order, our company is destined to improve and our profitability should move up,” he explained. “And don’t worry, we will bring someone in to provide training for everyone on Six Sigma,” he stated.

Mark continued, “Somewhere along the way, these eight steps have been distilled into five steps which are Define (D), Measure (M), Analyze (A), Improve (I), and Control (C). So, going forward we will use this DMAIC methodology to improve our processes. Based on what I’ve read, I believe that there are six simple tools and one a bit more complicated that are critical to master, but more importantly they are critical for us to learn and use. The names of these tools are Run Charts, Pareto Charts, Cause-and-Effect Diagrams, Causal Chains, Control Charts, and Check Sheets. I know you must be wondering what these tools look like, but trust me, all of you will receive training on them in the very near future, but until then, I’ll give you a brief description and purpose of all of them.”

“Each of these basic tools plays a valuable role in the improvement process and, as such, each has a distinct purpose. The Run Chart serves several important purposes. First, it provides a history of where the process or product variable has been, where it is operating right now, and where it could likely be in the future. When changes are made to our processes, the Run Chart lets us know what the impact of changes were and from a problem-solving perspective, being able to relate changes to shifts in the response variables we are attempting to improve is priceless. By recording the changes that you are making, or have made, directly onto the Run Chart, you get a visual presentation of the impact of the change,” Mark described.

“Pareto Charts serve a much different purpose than Run Charts in that they help us identify, focus on, and prioritize our defects and problems that offer the greatest opportunity for improvement. By seeing things in priority order, we have less of a tendency to waste our resources working on the wrong problem. Cause-and-Effect Diagrams help us organize potential causes of defects, problems, and so on, while Causal Chains facilitate the logical dissection of problems by continuing to ask why until we arrive at potential root causes of the problem we are attempting to solve,” Mark explained.

“Control Charts provide us with the opportunity to identify sources and types of process variation. They also help us reduce process variation, let us know whether or not our processes are in a state of statistical control, and then allow us to predict what future results might be. And finally, Check Sheets help us pinpoint where on the object the problem or defect is occurring. There is one more tool that I haven’t mentioned yet and it is called Design of Experiments or DOEs for short. DOEs are an important part of our improvement initiative and will help us identify which factors and interactions are most responsible for creating defects and excessive variation. DOEs also facilitate the optimization of our process and corresponding response variables. Every successful improvement tool kit must contain DOEs, but they are a bit complicated and I’m not sure how much we will be using them,” Mark said as he completed his presentation on these tools.

Mark continued his Six Sigma sermon, “As I understand it, the Six Sigma methodology can be functional for any sized business, no matter whether you manufacture products or deliver a service. And when you use Six Sigma, your primary goal is to reduce defect rates from where they are, to 3.4 defects per million opportunities. But the ultimate objective of Six Sigma should be that your customers have picture-perfect experiences,” he explained. He scanned the room and asked, “Are there any questions?”

Cliff Hastings, the Operations Manager asked, “So, what must we do to get started with this Six Sigma effort?” “Good question Cliff,” Mark responded. “One of the first things is that we need to put together a leadership team that helps us identify opportunities for improvement, and that will include most of the people in this room,” he explained. “We will then appoint a Six Sigma Deployment Leader, but as a management team we will drive our Six Sigma effort by doing some key things.” He turned to the flip chart in the conference room and wrote the following:

• We will establish business objectives and the role of Six Sigma to achieve those objectives.
• We will create an environment which permits success including goals, measures, coaching, and communica...

Table of contents

• Cover
• Half-Title
• Title
• Copyright
• Contents
• Author
• Introduction
• Chapter 1 The Company Profile
• Chapter 2 The Six Sigma Implementation
• Chapter 3 The Lean Initiative
• Chapter 4 Focus and Leverage
• Chapter 5 More on the Theory of Constraints
• Chapter 6 The New Improvement Journey
• Chapter 7 The New Beginning
• Chapter 8 TOC’s Parts Replenishment Solution
• Chapter 9 Planning and Scheduling
• Chapter 10 Combining TOC, Lean, and Six Sigma
• Chapter 11 The Deliverables of the Ultimate Improvement Cycle
• Chapter 12 The Logical Thinking Processes
• Chapter 13 The Goal Tree Improvement Initiative
• Chapter 14 The Strategic Plan
• Chapter 15 The Next Step
• Chapter 16 The New Direction
• Chapter 17 TOC Replenishment Solution
• Chapter 18 The Goal Tree
• Chapter 19 The Ultimate Improvement Cycle
• Chapter 20 The Portfolio Effort
• Index