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Maximizing Profitability the Theory of Constraints Way #7

by Dr Lisa on September 22, 2013

This is the seventh in the series of conversations. To read number 6, go here:  http://www.scienceofbusiness.com/theory-of-constraints-mafia-offer-reducing-wip-in-marketing/

TOC Community has answer for serious Low-T issue

Brad:  I’ve heard it’s a big, widespread problem.  And it’s one that’s not talked about openly.  Most business owners that have it aren’t sure about what to do about it.  Some are embarrassed about it.  Let’s call it “Low-T”.

Dr. Lisa:  It’s really important to have more and more Throughput (T).  Of course, the Theory of Constraints definition of Throughput is Sales (S) minus Totally Variable Costs (TVC).  In other words, Throughput is the dollar margin received on the Sales of the business.  If Throughput is high enough to cover Operating Expenses (OE) for the period, then the business makes a profit.  If Throughput is less than Operating Expenses, then the business loses money for the period.

Brad:  So, let’s define Low-T.  It will be a new TOC term.  Is it when T is lower than OE for the period and the business loses money for the period?

Dr. Lisa:  For sure.  Low-T exists when T is less than OE for the period.

Brad:  How about when a business is underperforming its potential, when its T is less than it should be due to poor marketing and/or to a poor sales process?

Dr.  Lisa:  Yes, there is Low-T when Throughput is absolutely less than it should be—when there is a T gap—due to ineffective and/or unreliable marketing and sales processes.

Brad:  Wow!  That covers just about every company most of the time.  I had no idea Low-T was that pervasive!  How about when Throughput is lower and/or declining due to poor economic conditions, or other things outside of the control of the business?

Dr. Lisa:  As you well know, TOC Experts challenge the assumption that things are outside of influence or control of people.  But to answer your question, yes, there is Low-T when Throughput is declining for any reason.

Brad:  I’d be depressed if I didn’t know you were a “Dr”.  What is the prescription for Low-T?  Do you have remedy?

Dr. Lisa:  Let’s first define what we want:  “High-T”.  Having High-T means you are profitable, making as much T as you should (no excuses), and T is growing irrespective of outside influences.

Brad:  Well, that is very consistent of what we would expect of a business that was implementing TOC.

Dr. Lisa:  Yes.  Specifically, let’s talk about marketing and sales.  A business with High-T would have its Mafia Offer and would be implementing it effectively through its sales processes.

Brad:  Are there any other necessary conditions?

Dr. Lisa:  Yes, the business would have its house in order.  Operations (whether in a manufacturing, service, distribution, or retail environment) would have very high and predictable due date performance (99+%) and highly predictable short lead-times.  This decisive competitive edge would enable the creation of the Mafia Offer. [Custom job shops that need to get their ops in shape, see www.VelocitySchedulingSystem.com]

Brad:  We have the cure for Low-T!  How could someone find out how to improve their operations and marketing so they can have High-T?

To be continued.

Best Wishes,

Dr Lisa and Brad Stillahn

P.S.  To ask questions or leave a comment, scroll down. (We WANT to hear from you.)

P.P.S.  To find out more about our Mafia Offer Boot Camp visit:  http://www.scienceofbusiness.com/events/mafia-offer-boot-camp/


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