Section – Potential

This is the most interesting question: “What benefit can I gain if I introduce Critical Chain?”

To answer this you have to look not just at a single project, not at the project organisation – you have to look at the division or company as a whole.

In most companies projects have a direct impact on the profit. Either you are selling projects – then every project you can sell increases your profit. Or you are selling products and the projects are used to generate new products to sell. In both cases the more projects you can deliver (with the same costs) the better your profit. That is the idea behind estimating the increase in profit by introducing Critical Chain.

“The Magic Question”

The base to roughly estimate the benefit is the potential in decreasing the mean effort you need to deliver a project.

If your division or company shows significant symptoms (see section symptoms) then there will be more negative effects that unnecessarily consume effort.

That leads to the “magic situation”:

Imagine - your division/company stays exactly the same, except: Your highest priority project is the only active project. All necessary resources are immediately available. Next steps start immediately after prior work packages are completed. Everybody is focused only on this project.

Then all the symptoms should disappear and the following positive effects should occur:

  •     higher quality - less rework
  •     less negative Multitasking - concentrated work, less set-up-times
  •     focus on buffer consumers - measures to get flow at the right spot -
        continuous improvement
  •     better synchronization - faster concepts and faster problem solving
  •     less reporting - team lead, developer and project manager get capacity
  •     less escalations about operative priority
  •     project manager can concentrate on project order clarification, conceptual work
  •     impediments become clear - capacity to solve them - kaizen
  •     easier and fast decisions - less latency - reduced effort to solve problems
  •     less communication needed - more focused

And now to the “magic question”:

To what extend can the effort be reduced?

100% means – nothing changed. After removing all the negative effects the mean effort will stay the same. That makes no sense – removing negative effects should result in some decrease of the mean effort – otherwise you would not have negative effects.

e.g. 70% means – 30% of the current mean effort is waste that can be reduced. The idea is to imagine the situation will be in the “magic situation” – just one project – full focus – no negative symptoms.

Typically this is a range – but to calculate it is necessary to have just one value. In the next steps it is easy to play with this parameter to get a feeling on how it influences the profit.

“Increase in Throughput”

The increase in the throughput is the first result when you are able to decrease the mean effort of a project. Throughput defined in the sense of finished projects per time frame.

If you are able to reduce the mean effort by x% the throughput will increase by 1/x%-1.

eliminated wasteremaining mean effortIncrease in throughput
-5%95%+5%
-10%90%+11%
-20%80%+25%
-30%70%+43%
-40%60%+67%
-50%50%+100%

As you can see the increase in throughput is getting bigger and bigger with each small percent of eliminated waste. So it is absolutely important not just to do a small improvement but really to reach -20% or -30%. There are many examples where the companies were able to reduce the mean effort by 50% or more.

“Potential in Profit”

And now to the most interesting part – what will be the effect of the increase in throughput on the profit?

As stated in the beginning it is calculated like this: All starts with the normal calculation of the profit of a division or company.

The throughput (T) is sales (S) minus the total variable costs (TVC). The total variable costs are more or less the real material costs or if you have to buy something to put into the product you sell. It is very near to the contribution margin but a little more consequent. It is really like this – if you sell one unit less of your product then you do not have to pay the total variable costs for this.

E.g. you have sales of about 100k€ and total variable costs of 50k€ then your throughput is 50k€.

The profit (P) is equal to the throughput (T) minus the operational expenses (OE). Operational expenses are all the rest you have to pay for regardless of whether you sell a little more or less. This is mainly buildings, computers and all the salaries for all the employees.

E.g. you have a throughput of 50k€ and operational expenses of 45k€ then you have a profit of 5k€.

And now what happens if you increase the throughput of your projects. If your market allows you to sell more and you increase the throughput in projects you will be able to sell, after some time, more products. This is of course even more valid if you earn your money directly with projects.

So an increase in projects by 10% leads to more sales of about 10%. And it leads to an increase in total variable costs of also 10%. And it results in an increased throughput of 10%.

What stays the same are the operational expenses. And that is the trick – grow in throughput faster than in operational expenses.

E.g. with the example above – and 10% more throughput in projects you will get an increased throughput of 55k€. The operational expenses stay the same at 45k€. And the profit (P) equals throughput (T) minus operational expenses (OE) will increase to 10k€! In this example the profit doubled!

There are many different industries with different ratios of sales to throughput or throughput to operational expenses. Therefore there is a small table you can use to calculate these figures.

The effect is always the same – some decrease in mean project effort will result in big increase on the profit.

Therefore it makes so much sense to invest in project management or even better in critical chain project management.

“Increase in Profit”

That is easy if you are still profitable, you can just divide the new profit by the old profit minus 1 and you will have the increase.

E.g. in the last example before Critical Chain you had 5k€ profit – after 10k€ profit. That means 10/5 minus 1 equals 100% increase in profit.

It is worth undergoing the Critical Chain change if the increase will be higher than +15%.

If you are not profitable at all than any increase can help you to get profitable again. That can be worth even more!