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TOCICO 2013 Conference

System Productivity

Presented By: Ravi Gilani Date: June 6, 2013



Organizational Goal

•  The goal of every ‘for profit’ organization is to ‘Make more and more money period after period’

•  Making money is also an index of customer satisfaction and employee satisfaction

•  Increasing Net Profit, Return on Investment (ROI), and Free Cash Flow are adequate measurements for making money

•  Many organizations do show an increase in sales year after year

•  However not every organization that increase their sales, also increase their profits year after year



Five levels of Financial health

•  Level 1: Unable to meet all financial commitments •  Level 2: Meeting all financial commitments but not making

profits •  Level 3: Meeting all financial commitments, making profits

but profits fluctuating •  Level 4: Meeting all financial commitments & increasing

profits continually period after period •  Level 5: Meeting all financial commitments, profits and

ROI increasing continually period after period



Current situation of Goal achievement

•  In one survey in September 2005 by Economic Times, less than 1% organizations could increase their profits continually over a period of 10 years (Financial health level 4)

•  None of these exceptional level 4 organizations could increase their ROI continually over the same time frame i.e. level 5

•  Why?

•  Is it complacency?

•  Or Stagnating at higher level?



Blockage for continuous financial performance improvement

•  Most organizations, that are unable to continually increase profits, often blame external factors i.e. layer 1 resistance

•  However what prevents the exceptional organizations (Financial health level 4) from increasing their ROI continually? Where is the blockage for these organizations?

•  Do most people in these organizations understand the concept of ROI or ROCE (Return On Capital Employed), and focus on improving this?

•  Is it possible for an organization to become complacent when profits are increasing period after period though ROI is not increasing in a similar fashion?



Expansion & Productivity

•  Expansion is when an organization improves its profit (performance) through deployment of additional resources

•  Productivity improvement is when an organization is improving its performance from the same resources (men, money)

•  TOC has 3 simple financial measurements-T (Throughput), I (Investment), and OE (Operating Expense)

•  For an organization that is continually increasing its sales & profits, do we know if it is through expansion ( Elevation) or productivity improvement (Exploitation & Subordination)?

•  Is it possible for an organization to improve its profits through expansion but with reduced overall productivity?



System Productivity

•  Most organizations track many local productivity measurements

•  While local productivity measurements show an upwards trend, global performance may not improve

•  In the absence of a relevant & easy to understand overall system productivity measure, it is possible for the organization to become complacent particularly when sales, profits are increasing period after period

•  Some TOC organizations do measure Operational productivity (T/OE) and Capital productivity (T/I)

•  What happens when one productivity measurement goes up but the other comes down?



System Productivity

•  We need a clear & unambiguous productivity measurement for the entire system

•  Suggested measure for system productivity is (T/OE)*(T/I)

•  Is this measurement superior to ROI or ROCE?

− T, I, OE are common terms & easy to understand in TOC organizations

− Operational productivity (T/OE) & Capital Productivity (T/I) are intuitively understandable

− System productivity can be explained easily



System Productivity 2006-7 2007-8 2008-9 2009-10 2010-11 2011-12

CAGR Sys Productivity

Dabur 3.04 3.52 2.65 2.66 2.30 1.77 -10%HUL 3.32 4.61 7.81 5.53 4.47 3.86 3%Britannia 3.16 1.88 1.77 1.69 1.88 2.52 -4%Marico 4.57 1.96 1.58 1.70 1.38 1.41 -21%

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1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

1 2 3 4 5 6

Dabur

HUL

Britannia

Marico

System Productivity Trend Chart



System Productivity

•  How will this measurement help improve the Goal units of an organization?

•  Since it can track changes in system productivity, it helps in overcoming layer 1 of the layers of resistance i.e. we do not have a problem!

•  In the previous system productivity trend chart, 3 out of 4 organizations had deterioration in system productivity though all these 4 organizations had increased their sales and profits by multiple times.

•  Is it useful in all situations? •  It is an heuristic parameter. It is not perfect though it helps

in focusing management attention in the right direction



Questions?



Ravi Gilani

Ravi Gilani, the founder and managing consultant of Goldratt India, introduced TOC in India in 1998. He has helped manufacturing organizations increase their profits by simplifying measurements. Ravi now focuses on expanding TOC knowledge base.

Ravi served on the board of TOCICO from 2005-2008

Ravi can be contacted at [email protected]

system productivity tocico 2013 - goldratt india · system productivity • most organizations...

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