The Cyclo

April 18, 2020

Gain is the most important measure

In order to discuss the Cyclo, it is necessary to assume that Gain is the most important measure when it comes to increase the Net Profit. Check the Net Profit and Gain formulas below:

NP: Net Profit; G: Gain; PS: Product Sales; RM: Raw Material; WF: Workforce; OH: Overhead

Definitely, it is possible to improve NP just by decreasing any of the expenses. But which expense to cut, if almost everything is important? From a certain point, it becomes difficult to keep reducing costs. Even supposing it is possible to overstate all costs, the total amount would at most go down to zero. That is, the reduction strategy is limited by the simple fact that costs are finite.

The Product Sales is the only term that contributes positively to the Net Profit. Unlike costs, sales volume has no limits, i.e. the sky is the limit!

Aren’t you convinced? This demonstration is not the objective here, please read more about it on Business Amplifier, also e-book and Amplificador de Negócios.

Why choosing G and not PS? Please note that Product Sales is intimately tied to Raw Material. One doesn’t live without the other, since for every sale it is necessary to invest in the raw materials used to build the product.

Since Gain is the most important measure, how to increase it? How can we at least guarantee that it will not decrease? The Gain only happens when there is a sale. What can facilitate or prevent a sale from occurring?

According to the Process specification, for a sale to happen, the product should pass through all the Stages of the Process. We know that in a chain of actions, the performance is determined by the strength of its weakest link. This is the main concept behind “The Theory of Constraints” created by Eli Goldratt in the 80’s.

The Process cycle

To assist investors and managers in decision-making toward the global optimum, relationships between Process Stages, suppliers and consumers need to be further deepened. How to provide first-class support for long-term trusts? Please remind rule six of Deming´s process specification that states: This is what I can do for you; here’s what you can do for me.

The Process Stages do not have a linear, one-time, and done behavior. The processing sequence repeats endlessly for each new product! Assets always enter in a Stage, are processed for some time and go to the next Stage. It looks like Process acts as n-stroke engine or n-pole generator, where n is the number of Process Stages.

For this reason, the tenth rule was added to the Process specification:

10. The Process consumes products of nature and transforms them into other products of nature.

In fact, this rule is nothing new. Raw materials are eventually purchased and entered into a Process that generates products for sale. Joining both ends of the Process with the Earth, everything comes out of Earth, everything comes back to Earth. Products are bought, treated, combined and become other products to be sold.

If the goal is globalization, at least the vision of the planet has emerged!

Each Stage individually contributes to keep the Process Cycle spinning. Together, they should keep up the pace, the teamwork can’t stop. The time taken by the slowest Stage is what determines the performance of the process cycle, in this case, the spin or angular speed.

Spin? What turns? See in the diagram that products and money cycle in opposite directions.

At the top, Earth’s first green arrow to “Sn” indicates the money from the consumer market that pays for Product Sales (PS). This money is used to pay the Raw Materials (RM) used in the Process Stages. The remaining balance is the Gain (G) which contributes to Company’s Net Profit.

On the other hand, the outer blue arrows leaving Earth to “S1” represent assets traversing the path in the opposite direction. Raw materials are purchased, enter into the process, and become products that the company intends to sell.

The Stages depend on each other to keep both streams spinning simultaneously:

• Money from selling products to the market by remunerating suppliers.
• Assets collected in the market being transformed into products sold;

These two streams are closely related, one only happens together with the other. Without payments there are no raw materials in production. Without raw materials there are no revenues. This is crucial for the most important measure to happen!

Published in Business Amplifier, also e-book and Amplificador de Negócios.