Sunday, October 31, 2010

Focus and Leverage Part 18

In previous blogs I focused on identifying the physical constraints in a manufacturing process and how to break them, but what if the constraint isn’t located inside the process? What if the constraint is policy related or something non-physical such as the efficiency metric? The next several blogs are going to focus on another part of the Theory of Constraints (TOC) referred to as the Logical Thinking Processes (TP). Dettmer1 explains that, “Identifying and breaking constraints becomes a little easier if there is an orderly way to classify them.” Dettmer tells us that there are seven basic types of constraints as follows:

1. Resource/Capacity Constraints
2. Market Constraints
3. Material Constraints
4. Supplier/Vendor Constraints
5. Financial Constraints
6. Knowledge/Competence Constraints
7. Policy Constraints

Before we get into a discussion about the TP, let’s first talk about each of these constraints and what they mean to us.

Resource/Capacity Constraints
This type of constraint exists when the ability to produce or deliver the product is less than the demands of the marketplace. That is, the orders exist, but the company has insufficient capacity to deliver. These types of constraints have been what we have been discussing since we started this blog and why using the UIC will increase capacity (throughput) to high enough levels. In fact, eliminating this type of constraint, leads directly to the next one.

Market Constraint
This type of constraint exists when the demand for a product or service is less than the capacity to produce or deliver the product or service. That is, the company has not developed a competitive edge to realize enough orders for their product or service. Market constraints come about simply because the company is unable to differentiate itself from its competition. So how can a company differentiate itself? Quite simply, there are four primary factors associated with having or not having a competitive edge as follows:

1. Quality – In its most basic form, quality is a measure of how well a product conforms to design standards. The secret to becoming quality competitive is first, designing quality into products; second, the complete eradication of special cause variation; and third, developing processes that are both capable and in control.

2. On-Time Delivery – This factor requires that you produce products (or deliver services) to the rate at which customers expect them. This means that you must have product flow within your facility that is better than that of your competition. As you now know, this involves identifying, focusing on and improving your constraint. It also involves reducing unnecessary inventory that both lengthens cycle times and hides defects.

3. Customer Service – This simply means that you are responsive to the needs of your customer base. Customers must feel comfortable that if their market changes, their supply base will be able to change right along with them without missing a beat. If the customer has an immediate need for more product, the supplier that can deliver will become the supplier of choice.

4. Cost – This factor is perhaps the greatest differentiator of all especially in a down economy like we have now. But having said this, low cost without the other three factors will not guarantee you more market share. The good news is, if you are improving throughput at a fast enough rate, the amount you charge a customer for their business can be used to capture it. So as long as your selling price is greater than your totally variable costs, the net flows to the bottom line.

Material Constraints
This type of constraint occurs because the company is unable to obtain the essential materials in the quantity or quality needed to satisfy the demand of the marketplace. Material constraints are very real for production managers and over the years they have been such a problem that material replenishment systems like MRP and SAP were developed in an attempt to fix them. However, as you know (or should know) MRP and SAP haven’t delivered the needed fix and as a result companies have spent millions of $’s needlessly because these systems haven’t addressed the root cause of the shortages.

Supplier/Vendor Constraints
This type of constraint is closely related to Material Constraints but the difference is that suppliers are inconsistent because of excessive lead times in responding to orders. The net effect is that because the raw materials are late arriving, products cannot be built and shipped on time.

Financial Constraints
This type of constraint exists when a company has inadequate cash flow needed to purchase raw materials for future orders. Under this scenario companies typically must wait to receive payments for an existing order before taking any new orders. An example of this type of constraint is a weak accounts receivable process whereby companies deliver products, but payments take long times to be received and posted.

Knowledge/Competence Constraints
This type of constraint exists because the knowledge or skills required to improve business performance or perform at a higher level is not available within the company. An example of this is a company purchasing robotics, but fails to develop the necessary infrastructure and knowledge to support the new technology. What typically happens is the equipment breaks down and remains down for extended periods of time thus losing needed throughput.

Policy Constraints
Last, but certainly not least, is the policy constraint which includes all of the written and unwritten policies, rules, laws or business practices that get in the way of moving your company closer to your goal of making more money now and in the future. In fact, Dettmer tells us, “In most cases, a policy is most likely behind a constraint from any of the first six categories. For this reason, TOC assigns a very high importance to policy analysis.”2 The most common examples of policy constraints include the use of performance metrics like operator efficiency or machine utilization where there is a push to maximize metrics in all steps in the process when in reality maximizing them in the constraint is the only place that matters.

In my next blog posting, we will begin to discuss the tools associated with TOC’s logical thinking processes and how to deal with these type constraints.

1 H. William Dettmer, Breaking the Constraints to World Class Performance, (Milwaukee, WI:, Quality Press, 1998)

2 H. William Dettmer, Goldratt’s Theory of Constraints: A System’s Approach to Continuous Improvement (Milwaukee, WI, :Quality Press, 1996)

Bob Sproull

Friday, October 22, 2010

Focus and Leverage Part 17

There has been push-back by some people on the whole concept of Throughput Accounting and as a result, they don’t buy into using TA as a reason for integrating TOC, Lean and Six Sigma. So let’s put the financial side of this integration to the side for a moment. In addition to the financial case made for integrating these three improvement methodologies, there are other rational and logical reasons why this integration works so well. In attempting to answer which of these three initiatives a company should use or “which tune a company should dance to,” Thompson* presents an excellent summary of the fundamental elements, strengths and weaknesses for each improvement initiative. In doing so, Thompson has inadvertently (or perhaps purposely) answered the underlying question of why the three improvement initiatives should be combined and integrated rather than choosing one over the other.

The first four columns in the table below reflect the summary of Thompson’s comparison (i.e. the initiative, fundamental elements, strengths and weaknesses). I have added a fifth column, “Counter Balance” that demonstrates how the strengths of one initiative counter-balance or compensate for the weaknesses of the others. As a matter of fact, by comparing each of the weaknesses and strengths of each of the three initiatives, we see that all of the weaknesses of each individual initiative are neutralized by one or both of the strengths of the other two. This is such an important point for those companies that have experienced implementation problems for any of the three individual improvement initiatives done solo. Let’s look at several examples.

The table tells us that Weakness 1 in Lean, “May promote risk taking without reasonable balance to consequence,” is counter balanced by Six Sigma Strength 3, “The focus on reduction of variation drives down risk and improves predictability.” One thing we know for certain is that as we reduce variation in our process, we reduce risk and our ability to predict future outcomes improves dramatically. This is the cornerstone of statistical process control which means that risks can be minimized if we rely on this Six Sigma strength to do so. Continuing, Lean Weakness 2 tells us that we may not provide sufficient evidence of business benefit for traditional cost accounting. This weakness is countered by both Six Sigma Strength Number 2, the data gathering provides strong business cases to get management support for resources and by TOC Strength Number 4, provides direction on appropriate simplified measures (Throughput, Inventory and Operating Expense). As I have stated many times before, traditional cost accounting induces us to make incorrect decisions, so by adopting Throughput Accounting practices, from the Theory of Constraints, we will have sufficient evidence to make changes to our process, assuming we are focusing on the constraint operation.

Lean Weakness 3 states that Lean has a limitation when dealing with complex interactive and recurring problems (uses trial and error problem solving) is countered by Six Sigma Strength 1, the rigor and discipline of the statistical approach resolves complex problems that cannot be solved by simple intuition or trial and error and TOC Strength 3, (distinguishes policy vs. physical constraints). One of the Six Sigma tools that permit us to solve complex interactive and recurring problems is designed experiments (DOE). DOE’s identify significant factors that cause problems and identifies insignificant factors that do not. TOC Strength 3 helps us in two ways. First, if the problem we are facing is a policy constraint, we use TOC’s Current Reality Tree to identify it and TOC’s Evaporating Cloud to solve it. Both of these strengths will compensate for this weakness in Lean.

Now let’s look at one of the Six Sigma and TOC weaknesses and see how they are compensated for by other strengths. For example, look at Six Sigma Weakness 2, the heavy reliance on statistical methods by its very nature is reactive, as it requires a repetition of the process to develop trends and confidence levels. This weakness is off-set by lean strength 2, directly promotes radical breakthrough innovation, and by lean Strength 3, emphasis on fast response to opportunities (just go do it). Likewise, TOC Weakness 3, TOC’s inability to address the need for cultural change, is off-set by Lean strength 4.

In the same way, if we compare all of the weaknesses in Lean, Six Sigma and TOC to the strengths found in the other initiatives, the three initiatives not only complement each other, but they rely on each other. So, in addition to the demonstrated financial benefits of this symbiotic trilogy, we now see evidence from a logical perspective as to why they should be implemented in unison as a single improvement strategy.
* Steven W. Thompson, Lean, TOC or Six Sigma Which tune should a company dance to?, Article in e-newsletter, Lean Directions
Bob Sproull

Friday, October 15, 2010

Focus and Leverage Part 16

In my last blog I told you not to just jump right into the UIC and begin the improvement process. In this blog posting I’m going to give you 10 prerequisite beliefs that your organization must embrace before your organization will be able to successfully implement and navigate through the Ultimate Improvement Cycle:

1. Believing that leveraging the constraint and focusing your resources on the constraint is the key to improved profitability. Because of this, the constraint can never sit idle.

2. Believing that it is imperative to subordinate all non-constraints to the constraint. If you violate this key belief, your throughput will not improve and your WIP will grow to unacceptable levels thus draining cash from your coffers.

3. Believing that improving your process is a never-ending cycle. You must be ready to re-focus your resources when the constraint moves and it will move eventually.

4. Believing that involving and empowering your total workforce is critical to success. Your work force has the answers if you will first listen to what they have to say and then engage them to design the solution.

5. Believing that abandoning outdated performance metrics like efficiency and utilization, reward or incentive programs, and variances is essential to moving forward. As Goldratt says in his book, The Goal, “Show me how you measure me and I’ll show you how I’ll behave.” These outdated metrics and practices are archaic tools from the past….so let them go.

6. Believing that excessive waste is in your process and that it must be removed. Studies have confirmed that typical processes have less than 10% value-added work meaning that waste accounts for 90% of the available time.

7. Believing that excessive variation is in your process and that it must be reduced. One of the keys to growth in profitability is consistent and reliable processes. Processes are full of variation and uncertainty and unless and until variation is reduced, moving forward will be difficult.

8. Believing that problems and conflicts must be addressed and solved. You can no longer afford to hide problems with inventory. When problems arise, you must stop the process and take the time to solve them. By solving them, I’m talking about finding and eliminating the root cause(s).

9. Believing that constraints can be internal, external, physical or policy or any combination of the four. In the real world, over 90% of all constraints are policy related. Policies and procedures must be scrutinized, changed and sometimes thrown in the garbage and replaced with policies that make sense.

10. Believing that the organization is a chain of dependent functions and that systems thinking must replace individual thinking. It is no longer acceptable to focus on improving single steps in the process if it isn’t the weakest link. This focus on local optima must be replaced with system optimization.

If your entire operation is able to accept the prerequisite beliefs of constraint leverage and focus, then you have taken the first step, but it must include everyone….and every department. Your entire organization must become focused on the leveraging power of the constraining operation. If you can’t do that, then there simply is no need to continue. Unless and until all functional groups within your organization are singing from the same sheet of music, you simply will not make any progress.

Of all the TOC focusing steps, subordination will be the most difficult one to apply. It simply means that every decision made and every action taken by the entire organization must be done so based on its impact on the constraining resource. And when I say the entire organization, I mean everyone!

Accounting must provide real time decision-making information to the organization and not hold onto financial measures that are based on what happened last month. Accounting must also eliminate outdated performance metrics like utilization and efficiency in non-constraint operations because they mean absolutely nothing. Purchasing must order parts and materials based upon the rate of consumption at the constraint and stop ordering in large quantities or only on the basis of lowest cost to satisfy another outdated performance metric, purchase price variance. Sales and Marketing must understand that unless and until the current constraint is broken, they must not make hollow promises on delivery dates in order to obtain more orders to supplement their sales commissions. Engineering must respond quickly to the needs of production to assure timely delivery and updates to specifications. Maintenance must always prioritize their work based upon the needs of the constraining operation including preventive and reactive maintenance activities. If there is an inspection station that impacts the constraint throughput, then inspectors (if they exist) must always provide timely and accurate inspections so as to never cause delays that negatively impact the flow of materials into and out of the constraint. Finally, Production Control must stop scheduling the plant on forecasts that we know are wrong using the outdated algorithms contained within the MRP system.

As you identify the constraint and subordinate the rest of the organization to the constraint, there will be idle time at the non-constraints. If you are like many organizations that use total system efficiency and utilization as key performance metrics, then you will see both of them predictably decline. You are normally trying to drive efficiencies and utilizations higher and higher at each of the individual operations under the mistaken assumption that the total efficiency of the system is sum of the individual efficiencies. In a TOC environment the only efficiencies or utilizations that really matter are those measured in the constraint operation. You may even be using work piece incentives in an effort to get your operators to produce more and I’m sure many of you are using variances as a key performance metric. Efficiencies, utilizations, incentives and variances are all counterproductive!

Believe me, no matter how good you think your processes are, they are full of waste and variation. You must accept the premise that every process contains both excessive amounts of waste and variation that are waiting to be identified, removed, and reduced. Your job will be to locate, reduce and hopefully eliminate the major sources of both. Variation corrupts a process, rendering it inconsistent and unpredictable. Without consistency and control you will not be able to plan and deliver products to your customers in the time frame you have promised. Waste drives up both operating expense and inventory, so improvements in both of these go directly to the bottom line as you improve the throughput of your process and more specifically your constraining operation. Yes, you will observe waste in your non-constraint operations, but for now focus your resources only on the constraint!

If your organization has truly accepted these ten prerequisite beliefs and all that goes with them, then you are ready to begin this exiting journey that has no destination. But simply saying you believe something can be hollow and empty. It is your day-to-day actions that matter most. Review these ten prerequisite beliefs as a group on a regular basis and hold people and yourself accountable to them. Post them for everyone to see. Utilizing the Ultimate Improvement Cycle and true acceptance of and employment of these ten beliefs will set the stage for levels of success you never believed were possible!

Bob Sproull

Friday, October 8, 2010

Focus and Leverage Part 15

In my last blog we completed the first rotation of the Ultimate Improvement Cycle, so now it’s time to get started with your own cycle of improvement. In the first fourteen blog entries I laid out the Ultimate Improvement Cycle and have hopefully convinced you of its value for your company. If I have convinced you, then you probably are wondering about the best way to get started. “Do I go out and just start at step 1a of the Ultimate Improvement Cycle?” The answer is no, because if you did that, you would almost immediately begin hitting barriers and obstacles that would limit your success or maybe even question the validity of this cycle of improvement. So if not step 1a, then what?

Let’s first consider the question of what we are attempting to do. I started these posting by stating that the basic goal of all “for profit” organizations is to make money now and in the future. If you’re already making money, perhaps your goal might be better stated as to make more money now and more money in the future. If this is your goal, then the question I would ask myself is, “What is preventing me from making more money now and more money in the future?” My experience tells me that there are a host of things that prevent companies from making more money.

In its most basic form, making money involves generating revenue that is greater than what it costs to generate it. So obviously if operating expenses are too high and you aren’t generating enough revenue, then you won’t make money. So the question is just how do you generate more revenue? Assume for a moment that you have more orders than you have capacity to fill them. Since you are unable to satisfy market demand, it follows that your throughput is too low. If your throughput is too low, it also means that your cycle times are too long. So then the key to generating more revenue must be reducing cycle times. How do we reduce cycle times? Let’s first look again at Little’s Law.

Since Little’s Law states that Cycle time equals WIP divided by Throughput (i.e. CT = WIP/TH) it should be clear that reducing cycle time implies reducing WIP as long as throughput remains constant. So if you have large amounts of WIP, then clearly you have an opportunity to reduce cycle time. But what if you don’t have large amounts of WIP in your plant (I’m betting you do though)? How else might we reduce cycle times?

We know that cycle time is equal to the sum of all processing times for each process step. We also know that cycle time is the sum of all value-added time plus all non-value-added time in the total process. So if we want to decrease cycle time, then we have three choices:

1. We can reduce value-added time

2. Reduce non-value-added time

3. Do some of both.

Figure 1

As is demonstrated in Figure 1, non-value-added time by far and away accounts for the largest percentage of total cycle time in all processes. This would imply that if we significantly reduce non-value-added time in our process, then we could significantly reduce cycle time which would, in turn, significantly improve our throughput and revenue. So what are these non-value-added times that I’m referring to? Just think about which activities add value versus those that do not. Let’s make a list.

1. Transport time – moving product from point A to point B.

2. Set-up time – converting a process from one configuration to another.

3. Queue time – time spent waiting to be processed

4. Process batch time – time waiting within a batch

5. Move batch time – time waiting to move a batch to the next operation which could also include time in storage

6. Wait-to-match time – time waiting for another component to be ready for assembly

7. Drying time – time waiting for things like adhesives to become ready to be assembled

8. Inspection wait time – time waiting for products to be inspected

There might be others we could add to our list, but for now assume this is our list. Which of these items add value? Clearly none of them do, so they would all be classified as non-value-added. There obviously are things we could do to reduce each one of these. For example, process batch time is driven by the process batch size, so we could do two things that would reduce this time. We could optimize the batch size that we produce and in conjunction with this we could reduce the time required for set-up. In doing these two things we would probably also reduce the move batch time and maybe even the wait-to-match time. Clearly these actions would reduce the overall cycle time.

But even if we were successful in reducing cycle time, we would not realize a single piece of throughput unless we reduced the processing time and non-value-added time of the operation that is constraining the throughput, the constraint. Any attempts to reduce processing times in operations that are not constraining throughput are quite simply wasted effort.

The key to making more money now and in the future is, in reality, tied to two single beliefs, focus and leverage. In TOC terminology these two beliefs of leverage and focus are fundamental to the idea of exploiting the constraint. If you want to increase your throughput, then there is only one effective way to accomplish it. You must leverage the operation that is limiting your throughput, your constraint operation! And how do you leverage your constraining operation? You do so by focusing your available improvement resources on your constraint and reduce the non-value-added and value-added times within the current cycle time. It’s really that simple!

So are you ready to begin your own cycle of improvement now? Not quite…. there are other important things that you must consider before beginning your own cycle of on-going improvement. There are 10 pre-requisite beliefs that apply to your organization that must be considered before you begin your journey. In my next blog, I will articulate these beliefs for you and then you will be ready to begin.

Bob Sproull

Saturday, October 2, 2010

Focus and Leverage Part 14

One of the key points to remember regarding the implementation of Drum-Buffer-Rope is that it will not be sustainable unless traditional performance metrics like operator efficiency, machine utilization and incentive systems are either abandoned or radically changed to be compatible with the principles of TOC. So, if these aren’t the correct metrics to track in non-constraints, then what metrics should we track. In my last posting we discussed buffer status….doesn’t it make sense that the non-constraint metrics should be measuring in some form how we are doing with respect to buffer management?

Remember, the properties of good performance metrics are:

• They must be objective, precisely defined, and quantifiable

• They must be well within the control of the people or process that is being measured

• They must stimulate the right behaviors

So, what behaviors are we trying to encourage in non-constraint operations? Think for a moment about the function of a non-constraint. First, a non-constraint in front of a constraint can never let the constraint starve. If it did, valuable throughput would be lost to the system. By the same token, a non-constraint downstream from the constraint can never be permitted to produce scraps because that too would be throughput lost to the system. Secondly, you know that protective inventory in front of the constraint simply adds unnecessary cost to the organization. Third, you know that the constraint operation sets the pace for all other resources, so schedule compliance in a non-constraint becomes important. So based upon these three functions, there are four generic metrics that should be considered:

• Workstation availability: The percentage of time the non-constraint was available to make product

• Yield: The percentage of “good” product produced for the constraint operation (or for downstream operations supplying the shipping buffer).
• On-Time Delivery to the next operation:  The percentage of compliance to schedule.
• Protective Buffer (parts and/or time) in front of the constraint, assembly and shipping: Percentage of protective buffer (too little, <100%; too much, >100%.

The final decision on which metrics to use for a non-constraint is situation dependent, but the decision should be based upon:

• Never starving a constraint operation (or shipping buffer)

• Impact of too little or too much inventory in the system

• Schedule compliance

Let’s finish the discussion on the UIC by looking at steps 4a, 4b and 4c. In these three steps we are concerned with planning how to elevate a constraint if it is necessary, actually elevating it and then implementing protective controls to sustain the gains we have made.

With any luck, by following the steps I’ve presented, you will have increased the capacity of your constraint meet the demands of the marketplace. If this is the case, then other, more extreme actions must be taken which usually involve spending some money. You have eliminated much of the waste and reduced variation, both of which have had a positive impact on cycle time and throughput, but you’re not quite there yet as far as producing enough product.

Goldratt’s fourth step tells us, if necessary, elevate the constraint. Increasing the capacity of the constraint can be done in a variety of ways like, using overtime, adding resources, purchasing additional equipment, etc. One thing you must keep in mind when you are elevating the constraint is what will happen when you are successful with this elevation. Remember back in Step 1, we said that you should identify both the current and next constraint? We did this for a reason. Suppose you have decided that in order to elevate the constraint, you must purchase a new piece of equipment. Your justification should only demonstrate the throughput improvement up to the limit of the next constraint. That is, if your current constraint is currently producing 5 parts per hour and you purchasing a new machine will double that to 10 parts per hour, that improvement is only correct if the next slowest resource is at 10 parts (or above) per hour. If, for example, the next constraint in the process is only producing 7 parts per hour, then you really can only claim a gain in throughput of 2 parts per hour for the new equipment. All I am saying is that make sure you consider the total process when making you decision on how to elevate the current constraint.

The final step in the UIC is to Implement Controls to Sustain the Gains. Sustaining the gains is the hallmark of great organizations, so how do we do this. Of course, if you have chosen the right performance metrics and you’re tracking them, this is one way, but is it the best way? One of the most effective tools to protect and preserve your accomplishments is by using a simple process audit. A typical process audit is a series of questions asked to the line leader and/or supervisor to demonstrate the status of the process. These questions should be focused upon how elements of your new process are working and to demonstrate that they are being used as intended. For example, suppose part of your plan involved implementing a control chart. Your questions would be focused on whether or not it’s being used; if out-of-control data points are being investigated, etc. You would of course then check the status of the control chart to verify the responses. These audits should not be planned in advance, but rather be done in a random time frame. One of the reasons audits of this nature fail to add value is that many times they are announced in advance. Anyone can look good for a day if they are given enough advanced notice. I also advocate having leadership perform some or all of these audits simply because it adds credibility to them. If leadership thinks they are important, then everyone else will too. In addition, I recommend scoring the audit by % compliance and posting the audit score as demonstrated in Figure 1.

Figure 1

You have just completed one revolution of the Ultimate Improvement Cycle and things should be greatly improved. Your throughput has increased, your cycle times are reduced, your quality is better, there is less variation and uncertainty and your bottom line is much better. Don’t stop here….move on to your next revolution and start the process all over again. This is your new Process of On-Going Improvement…your POOGI. Good luck! 

Let me hear some ideas on what you'd like me to discuss in my next posting.

Bob Sproull