Theory of Constraints Handbook - James Cox Iii [366]
The Manufacturing S&T has two major branches—2.1 (see Table 18-2), representing the reliability competitive edge and 2.2 (see Fig. 18-4), representing the rapid response competitive edge. The S&T are generally implemented in a left-to-right sequence. In Branch 3.1.1, all of the basic processes are implemented to achieve an unheard of level of DDP, which is the assumed reliability needed to surpass competitors. Of course, this necessary assumption is not true for every manufacturer in the world. It’s true if the manufacturer has large enough target markets of customers suffering from unreliability of significant competitors of the manufacturer. When this has been implemented, we proceed to Reliability Selling as indicated in 3.1.2. (not shown here, use the Harmony S&T Viewer)
When constructing such a strategy, it’s hoped that the manufacturer can fully achieve their strategic goals using only the left branch of the tree—2.1 and those entities underneath. The right side beginning with the elements in 2.2 (not shown here, use Harmony S&T Viewer) can be called the bonus or the gravy for achieving or surpassing the strategy. In this tree, the left side proves that the company has the discipline and execution skills to achieve a target that few, if any, in their industry have achieved. The processes, including capacity elevation, marketing, and sales, are stable and provide a base to execute on the right side.
On the right side, using the TOC POOGI process for S-DBR (see Chapter 9) and Buffer Management (BM), production lead time is further reduced so that without taking special actions in manufacturing, the company is capable of filling custom orders in much shorter quoted lead times to customers. However, the shorter lead times are provided at a high premium to customers where they don’t have ready reliable alternatives and where the potential damage to them from regular lead times is so high, the premium for the rapid response pales in comparison.
One example is a high precision machine shop that was asked to provide a part for a multi-million dollar aircraft in one quarter of the typical lead time. The customer was happy to pay $800 for the part that was regularly $200 because it meant they could ship the aircraft to their customer in 2 weeks instead of 8 weeks. Note that there is no significant change in the manufacturer’s operating expense, typically. The manufacturer is doing exactly the same work, for a lot more money.
The implication of rapid response to the manufacturer’s bottom line is momentous. In Table 18-3, the example shows the difference between having regular sales at regular price, and having a rapid response offer that is taken up on 10 percent of the sales value, at a 50 percent premium of the regular price (on average). While total sales only grew 5 percent or $50,000 increase on $1,000,000 ($100,000 worth of regular sales were billed at a premium of $150,000), Throughput grew by 10 percent and net profit grew by 50 percent.
TABLE 18-3 Effect of Rapid Response on Bottom Line
From experience, the greatest challenge with rapid response offers to the market is not in operations. With the processes already established in implementing the left-hand side of the S&T, my experience is that operations needs little time to do the additional improvements required to accelerate production lead time. The real challenge is in sales and sometimes in management, where the common belief is that no customer would ever pay more for the same product or service. Some inside the company believe that such charges