Wednesday, December 19, 2012

Revenue First

Scott Adams wrote a Dilbert comic in which Dilbert says to the supplier's sales rep, "My company typically takes about four months to negotiate this type of contract. And during that time there's a 100% chance that we'll change our minds or you'll discontinue the product. Shall we save time by declaring failure and blaming each other?" The sales rep replies, "I gave up before I even handed you the contract."

I was reviewing some material for a one-day Lean course I'm designing. I found a telling commentary in Eli Schragenheim's and H. William Dettmer's book Manufacturing at Warp Speed. They describe how traditional management's priorities are:

  1. Reduce operating expenses (labor and other fixed costs)
  2. Reduce inventory
  3. Increase throughput (which is mostly the difference between revenue and material costs)
This ranking is understandable because every dollar saved for #1 and #2 helps net profits and cash flow.They then show how Lean (Just-in-Time and its kin) focus on:
  1. Reduce inventory
  2. Increase throughput
  3. Reduce operating expenses
We know that many Lean companies have been successful but not invulnerable. In direct conflict with traditional management, constraint management (from the Theory of Constraints) prioritize this way:
  1. Increase throughput
  2. Reduce inventory
  3. Reduce operating expenses
Most of the time, the constraint to earning more money is not internal. It's external. Therefore, we need to figure out how to change the constraint (increase demand), and that's not going to happen necessarily by immediately cutting operating expenses and inventory. As many wags have said, "We cannot cut costs continuously or we'll be out of business." Schragenheim and Dettmer ask: "Are we in business to save money or to make money?" There are practical limits to how much you can cut, while theoretically there's no limit on the revenue side. So shouldn't we focus on that aspect of our business the most? Shouldn't we figure out what investments will generate returns through increased revenue, not reduced costs?

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