Saturday, August 13, 2011

Focus and Leverage Part 48

I started my blog posting a year ago by saying 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?” Our experience tells us that there are a host of things that are preventing 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, doesn’t it follow that your throughput is too low. Remember, throughput is not building products to store in racks waiting for orders. Throughput involves money exchanging hands through sales of your products (or services). 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. So how do 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 contained within each processing step, within each of the processing times, there is value-added time (VA), non-value-added time (NVA) and non-value-added, but necessary times (NVABN). We can’t do much about the NVABN times, so if we want to decrease our processing times and ultimately our cycle time, then we are left with basically three choices:

1. We can reduce value-added time

2. Reduce non-value-added time

3. Do some of both.

One thing we know to be true is that 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 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 more 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, in my opinion, 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 focus on and 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 only there and seek to reduce both the non-value-added and value-added times within the current processing time. It’s really that simple!

I know there will be push-back from many Lean and/or Six Sigma zealots whose comfort zones are seated in the belief that the sum total of all local improvements will roll up to improve the total system, but from a throughput perspective, this is simply not the case. Attempting to solve world hunger by focusing improvements everywhere is not the most effective path to success. In fact, it is the main reason why we see so many Lean Six and Sigma efforts are failing. By attempting to improve everything, the bottom line is not impacted nearly to the extent that focusing your improvement efforts on the constraint will deliver.

If your entire operation is able to accept the prerequisite beliefs of constraint leverage and focus, then you have taken the first step. When I say the entire operation, I am referring to everyone! All of the individual departments, functional groups, and employees in your organization must become focused on the leveraging power of the constraining operation if significant and lasting improvement is to be achieved. Unless and until all functional groups within your organization are singing from the same sheet of music, you simply will not make the rapid gains in bottom line improvement that your organization is capable of achieving.

In my next posting, I will expand on this notion of focus and leverage and how the entire organization must work if profit maximization is to be achieved. Please feel free to contact me directly if you have questions.

Bob Sproull

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