Why is TOC Against Cutting Cost?

Why is TOC Against Cutting Cost?

In fact we are not against cutting cost. We are against cutting heads.

TOC has always focused on the moving the three TOC fundamental operational measures; T (Throughput), I (inventory or investment), and OE (operational expense) all in the right directions. We never make an improvement decision without taking all three into account. To be sure that an action will result in a bottom line improvement T must be greater than any increase in OE and ideally I should not increase.

See this podcast on T, I, and OE if you are not familiar with them they are extremely useful. There is a more in depth podcast here.
.

Why we say we do not work to cut cost is because most organisation first approach to cutting cost is by cutting people. No one needs our help to do this and we do not use TOC to find ways to operate with less people unless there is absolutely no other way of saving the organisation. Many of the processes we deliver will reduce cost significantly in other ways. The unit cost of producing a service or a cost is often much less in a TOC organisation than it is in any other.

It may seem that there is no other option especially today when we are in the grip of recession. Cost cutting as a direction to survive though is very negative and destructive, it is often taken because we have failed to deal with the real issue and can not think of a better one.

Have a look at this TOC Cloud.



Very few managers today will be unaware of the need to put there organisation on a process of ongoing improvement: POOGI.

In order to achieve this it is necessary to induce all our people to improve and to help to improve the organisation. In order to induce people to improve we should not punish them for their help, maybe we should reward them.

However, in order to put our organsiation on a POOGI we need to convert or turn local improvements into bottom line results.

And in order to turn a local improvement into a bottom line result e need to fire those that have improved the most! Why those people, because usually they are the ones that have the spare capacity - they have become more productive and those are the ones we do not have extra things to do to fill their time.

Turkey's do not vote for Christmas! If you fire people then you cannot expect them to help you improve. If you fire people you are working on the wrong thing. In the short term cutting heads does not save money it often cost money and many times organisations are forced to rehire people as some cost shortly afer cutting them.

Our direction should be to find more things for people to do to find more market share. The question is how to find more market and more customers.

The biggest obstacle to this is that many feel the market is limited. A quick check of the market soon addresses this concern for most. If we identify most organisation market they are a very small part of the overall market even in a huge recession. The real issue is not is there enough market but how do we capture more? There are many examples of companies that have done this and we need to do this now.

One of the biggest obstacles to getting more market is the perceived value of your offering. You have one perception based on cost and reasonable margin and the market has a different perception based on value.

When we look though at markets we see this type of price value perception illustrated by this graph.

 

There are always a large number that feel you are too expensive, those that buy but moan about your price but ther are also those tham buy that would have paid you more. Better identification of and understanding of the markets perception of value of your offering enables you to segment and target your price better to get more Throughput out of the market. It requires an better way of understanding the customers business issue not the service level you and your competitors have.

There is a very good TOC process that can be used to deal with this. Once the market is better understood the organisation needs to ensure it van deliver the price value needed. TOC is the best and fastest process to make this happen.


Our experience is that if you focus on growth whilst controlling Inventory and Operating expense you can tun a company around very quickly. Robert Fleming did it in the paper  bag market when it was in decline and Phillips Circuits did it in a step market recession. We would like to help many more to do it - we want to help people grow and make money not to help cut cost just to survive.

John Tripp


Edited by John - 25 Aug 2009 at 12:49pm

Dear Girish
Thank you for your post. I will email you in a couple of weeks with a fuller answer. At present I will give a short reply as I am away from my office until 03/07 on work.

There are a number of problems to address, three important ones for now.

1) Most products/offering are sold at a price calculated according to a cost plus formula. This should change.

2) As you say segment the market, otherwise the price obtained will degrade to the lowest offers made to some customers.

3) Use cause and effect to better understand the problems your offer does (or could with small modifications) solve for the customer. By doing this you will be able to tailor what you offer to obtain the best possible return for each sale. What you need to focus on initially is understanding the difficulties of your customers business not their problems with you or your competitors - what make their business difficult to run? If they do not have very valuable problems - go one link out and ask the same question about their customers.

If you have not done so can I suggest you read Its Not Luck by Eli Goldratt, and obtain his SLP on marketing and his SLP on strategy. This link will take you to Eli's marketing site which has a link to all the products I recommended, you can also buy via my site or Amazon which if you are based in India might be you best route.

To help me further to provide a good response would you send me a little information on the type of product/service you provide and the type of market you serve. There is a contact form on the main site or you can send me a private message via the forum. Thank you and sorry for the delay in responding

John Tripp