Advanced Fundamentals · Lesson 8 of 8
Inherent potential
The fourth belief: every situation can be substantially improved. See what released capacity does to a loss-making company, what a decisive competitive edge is, and test your thinking on a final case.
The fourth belief
TOC rests on four fundamental beliefs:
- Inherent simplicity: every situation, however complex it looks, is governed by a few causes.
- Inherent harmony: every conflict can be removed, because it rests on an erroneous assumption.
- Inherent goodness of people: people are good; look for the conflict or measure behind behaviour before blaming the person.
- Inherent potential: every situation can be substantially improved; even the sky is not the limit.
Some practitioners add one more: never say “I know.” Certainty closes inquiry; progress comes from challenging even beloved assumptions.
Can we turn the company around?
A company sells ₹200 crore a year. Its throughput (sales minus truly variable cost) is 28% of sales, ₹56 crore, and its operating expense is ₹57 crore. It is losing ₹1 crore. To make a profit, what does it need?
Ten per cent more sales, from capacity released by better flow, adds ₹5.6 crore of throughput while operating expense stays flat: the loss becomes a profit of about ₹4.6 crore. Better flow also cuts freight, overtime and write-offs, which adds more.
The next leap. When on-time performance improves, the plant runs on autopilot and the sales team’s bandwidth is released. Now the company can go after a segment it couldn’t serve before, such as small orders with a limited range. These carry about 40% contribution, double the normal. Just ₹15 crore of such orders adds ₹6 crore straight to the bottom line: profit rises to about ₹10.6 crore, around 5% of sales, from the same plant and the same people.
A decisive competitive edge
Where does the next round of growth come from? TOC’s answer is a decisive competitive edge: an offer that meets a customer’s significant need to an extent no significant competitor can match. It is sometimes called a mafia offer, “an offer they can’t refuse.”
It isn’t invented in a marketing meeting. It comes from first building an operational capability competitors lack, through flow in production, replenishment in distribution or critical chain in projects, and then making an offer on top of it: guaranteed availability, half the industry’s lead time, a due-date guarantee with a penalty. Made too early, before the capability exists, the offer destroys trust faster than it builds it.
The TOC body of knowledge
Put together, TOC covers:
- Thinking Processes: the tools of the last four lessons.
- Management skills: effective decision making, conflict resolution, empowerment, communication and teamwork.
- Standard solutions for common environments: operations, supply chain, projects and new product development.
- Customised solutions built with the thinking tools: marketing, strategy and tactics, and any other subject.
- Finance and measures: throughput accounting.
Final case: is the consultant right?
An aluminium extrusion company can’t deliver components to its customers on time. The managing director hires a consultant. The consultant’s data shows the presses keep failing: operators often raise the extrusion speed, hydraulics fail, and dies break. The consultant recommends preventive maintenance to improve press availability, and a better heat treatment to strengthen the dies.
Is the consultant right?
- Yes: failures are the root cause, so fix the presses
- Yes, but only the heat treatment
- Only partly: the failures are real, but they are an effect. Ask why operators run the presses beyond safe pressure
- No: the data is wrong
Build the tree. The company produces to forecast, and forecasts are never accurate, so some products run short. Customers won’t wait, so additional orders are expedited. The quickest way to expedite is to run the presses faster, so operators raise the pressure beyond the safe limit. Components, hydraulics and dies fail, and every failure means long downtime, which lengthens lead times further and triggers more expediting. The failures are an effect of producing to forecast. Fix only the maintenance, and the pressure to run fast remains. The leverage point is upstream: move from producing to forecast to replenishing what was consumed.
“One, people are good. Two, every conflict can be removed. Three, every situation, no matter how complex it initially looks, is exceedingly simple. Four, every situation can be substantially improved.” — Dr. Eliyahu Goldratt, The Choice
Check your understanding
Answer all five. Get four right to complete the lesson.
1. Which is NOT one of TOC’s four fundamental beliefs?
- Inherent simplicity
- Inherent harmony
- Inherent potential
- Inherent scarcity
The four are simplicity, harmony, goodness of people and potential.
2. In the turnaround example, why does 10% more sales turn a loss into a profit?
- Prices rise
- Operating expense stays flat, so the extra throughput goes straight to profit
- Variable costs vanish
- Taxes fall
The capacity was already paid for.
3. A decisive competitive edge is…
- An offer meeting a significant customer need to an extent no significant competitor can match
- The lowest price in the market
- A bigger advertising budget
- A new product every year
Built on an operational capability competitors lack.
4. Why make the offer only after the operational capability exists?
- Marketing is slow
- Customers prefer surprises
- An offer you can’t deliver destroys trust faster than it builds it
- Competitors might copy it
Capability first, offer second.
5. In the extrusion case, the leverage point is…
- Better maintenance
- Stronger dies
- Hiring more operators
- Moving from producing to forecast to replenishing what was consumed
That removes the expediting that drives the overspeeding and the failures.