Forget cost cuts, improve income

No layoffs please, and forget cost cuts. That's the first thing Ravi Gilani, managing consultant of Goldratt India, a business consulting firm, tells his clients. 
 
At a time when lean and mean is the mantra for corporate India, it is tempting to dismiss Gilani's advice as yet another catchy, but irrelevant management jargon. 
 
The surprising bit is that an increasing number of Indian companies are listening to what Gilani says, with heartening results. 
 
"Cost cuts and layoffs can destroy the very competitiveness that they are meant to enhance. There is a better alternative," says Gilani who introduced Eli Goldratt's Theory of Constraints (TOC) in India. 
 
He is also India's first "Jonah" (TOC expert) and was personally trained by Goldratt in supply chain management. The relationship culminated in an agreement with Goldratt under which the celebrated management guru lent his name to Gilani's consulting firm. 
 
Consider the experience of some of the companies that have chosen to take Gilani seriously. Within five months of implementing TOC, Eicher's Demm plant at Thane in Mumbai recorded a 30 per cent improvement in its topline, and the improvement came after a gap of five years. 
 
At Salora, the manufacturing lead time went down from five days to less than a day; finished goods inventory by 30 per cent and work-in-progress inventory by 80 per cent. The company also reported a 30 per cent increase in productivity. 
 
The experiment is not limited to big companies alone. Hari Machines, an electrical manufacturing unit, improved its sales by 30 per cent and on-time delivery from less than 10 per cent to 84 per cent. 
 
The company started making profits after losing money for two years, and most importantly, increased cash by 17 per cent in less than three months through the application of TOC. 
 
And all this was achieved without any layoffs. 
 
The TOC, adopted long ago by global giants like Unilever, Ford Motor, Motorola and Rockwell International, is disarmingly simple: it likens an organisation to a chain whose strength is equal to the weakest link in the chain. That's because any number of strong links will be rendered useless if the weakest link snaps. 
 
For example, if a company has a 20-link chain, with 19 links that can carry a load of 1,000 kilograms each and with one link that can carry a load of only 100 kilograms, then we can expect the chain to carry a load of only 100 kilograms before breaking. The weakest link determines the load-carrying capacity of the entire chain. 
 
Often companies fail to identify the weakest link and waste their time and resources on making the 19 strong links even stronger. But the one weak link still limits the performance of the entire chain. So what's the solution? 
 
"Focus on strengthening the weakest link -- not by cutting it off [another word for layoff] -- but by adding more muscle," says Gilani. 
 
For the system that is a corporation, the often unidentified constraint prevents it from achieving infinite profits, just as a chain's weakest link limits the chain's capacity to transmit force, says Gilani. 
 
Companies that focus on reducing costs tend to focus on the weight of the chain so that it doesn't snap. According to TOC, what really determines the success of a company is not the weight of the chain, but the ultimate throughput (sales). 
 
The shift from looking at cost to looking at throughput is like shifting from concentrating on the weight of the chain to concentrating on its strength. 
 
Company-wide cost-cutting policies that eliminate over-capacity in all departments simply ensure that every department becomes a physical constraint. 
 
Surely, that doesn't mean that companies should learn to live with excess capacity? Goldratt has outlined a four-step process to solve this problem. 
 
First, identify the weakest link, which is the constraint. Identifying it, however, is the most difficult task because most business processes attempt to cope with fluctuating demands and random disruptions by maintaining buffer inventories. 
 
Take the example of a steel plant. The production department maximised its performance as measured in tonnes per hour even when there was no demand for the products in the market. 
 
By conventional measure, the production department was perceived to be the strongest link in the chain, although inventories kept piling up, leading to an overall loss for the company. Under TOC, the production department will be treated as a constraint. 
 
Second, exploit the constraint, meaning squeezing every drop of capacity out of the constraint. In cases where the market is the constraint, companies have to make sure that not a single sale is lost as a result of the company's own actions or lack of action. 
 
Third, concentrate improvement efforts on the weakest link. 
 
Fourth, if the improvement efforts are successful, eventually the weakest link will improve to the point that it is no longer the weakest link. The process then starts all over again.

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