How to operate in times of uncertainty?
In Times Like These, It’s Good to Remember That There Have Always Been Times Like These.
— Paul Harvey
Everything that has happened in the past few weeks has placed us all in a completely new situation. It could be a fundamental shift in the way people will live in the future. But such changes frequently occur in human history. This might be the greatest economic stress the world has experienced in the last 70 years. However, the economic system is highly resilient, and sooner or later, this crisis will pass. Unfortunately, not all businesses will survive. Survival is never guaranteed…
In recent days, several colleagues—businesses I have consulted or teams we have trained—have reached out to us. The questions I hear are certainly relevant to many.
That’s why I’ve decided to share some recommendations for navigating this situation.
First and Foremost: The TOC Methodology
The Theory of Constraints (TOC) provides the most effective answers to today’s urgent questions. I’m glad to be working with companies that have already embraced TOC principles, as they are now tackling new challenges more smoothly and successfully.
Today, leaders must make decisions that may determine the fate of their businesses—as well as their own and their employees' futures. On the one hand, these decisions must be made quickly; on the other, they carry significant risks.
How can speed and risk reduction be balanced?
For those with even basic TOC knowledge or those interested in applying this powerful tool in today’s real-world situation, I offer a few solutions.
Basic Recommendations
This is a time when traditional accounting calculations cannot provide management with the data needed for quick and accurate decision-making. In fact, relying on such information may lead to poor decisions.
- Product profitability and cost calculations are now meaningless. A company producing only highly profitable products can still go bankrupt in a few weeks.
- Even an up-to-date profit and loss statement (if one can even be produced quickly) is useless. For instance, large inventories of finished goods and materials might need to be revalued at zero, rather than their defined or purchase price.
However, TOC’s decision-making technique, Throughput Accounting (TA), works flawlessly in this situation.
Even better, collecting the data required for TA decisions is simple. Any company can do it in minutes, even on a daily basis!
This involves tracking:
- S (Sales Revenue) and TVC (Total Variable Costs)—costs of purchased raw materials
- T (Throughput) = S - TVC
- OE (Operating Expenses)—tracked against prior periods
This provides management with all necessary real-time data for daily decision-making!
Different Business Scenarios
Each business is in a unique situation, which may fall into one of the following categories:
A. Business is closed or unable to operate due to external factors (government restrictions, loss of customer flow).
B. Business faces serious market constraints (customers cancel or reduce orders significantly, or clients fall into category A).
C. Business has no drastic order drop but faces supply chain disruptions (material shortages, transport or service restrictions, staff illnesses, self-isolation).
D. Business experiences a surge in orders but struggles with capacity (possibly due to supply chain disruptions or internal constraints).
Recommendations for Businesses in Category D:
- Apply the Five Focusing Steps (5FS) immediately to increase the system’s constraint throughput and maximize revenue (T).
- Accelerate internal cycle times (LT) to meet demand faster.
- Do not worry about rising material costs (Delta TVC), but adjust pricing if necessary, possibly through market segmentation.
- Consider reducing supplier payment terms in exchange for discounts—many suppliers face cash flow crises.
- If OE (Operating Expenses) increases but generates a positive Delta T - Delta OE, it is worth it.
- Monitor Free Cash Flow (FCF) and analyze the supply chain’s health.
IMPORTANT: Analyze the entire supply chain and buffer (BM) levels.
Be aware of the "Rebound Effect." If demand has surged, all supply chain participants may overorder, creating artificial demand spikes (Peter Senge’s "Beer Game" principle).
For example, if you manufacture buckwheat, demand may suddenly vanish in 2-3 months as excess stock builds up, leading to price wars and discounts. Prepare for this scenario today!
Recommendations for Businesses in Category B:
Your main problem is cash flow. Track FCF (Free Cash Flow) daily:
FCF = T - OE - Delta I
or
FCF = S - TVC - OE - Delta I
where:
- S = Total revenue (cash received)
- TVC = Money physically paid for raw materials
- Delta I = Investments (or cash gained from selling assets/inventory)
- OE = Operating expenses (rent, utilities, salaries, services, etc.)
If FCF is declining, calculate how long you can last before requiring external funding or transitioning to scenario A.
Recommendations for Businesses in Category A:
Your business is non-operational, but cash flow is still an issue. If there’s no revenue (S) and no direct costs (TVC), then:
FCF = Delta I - OE
If FCF is negative, determine how long you can sustain operations before bankruptcy or selling the business.
At this point, all available government support measures should be considered (wage subsidies, loan deferrals, financial aid).
Recommendations for Businesses in Category C:
Your business is in a "relatively normal" situation. You’ve faced similar challenges before. However, external conditions are different this time, affecting both you and your competitors.
This means new opportunities exist—but so do potential pitfalls. It’s up to you to decide how to respond.
You’ll find answers in TOC principles, particularly Throughput Accounting (TA), Load Time Planning (LTP), and Unrefusable Offers (URO).
This material is intended for specialists with at least basic knowledge of TOC. If you need to learn more, visit www.toc.lv.
For practical questions or online consultations, contact info@b4b.com.lv or georg@toc.lv.
Georgijs Buklovskis