Thursday, August 18, 2011

Focus and Leverage Part 49

In Chapter 14 of my last book, The Ultimate Improvement Cycle – Maximizing Profits Through the Integration of Lean, Six Sigma and the Theory of Constraints, I outline ten prerequisite beliefs that organizations must embrace if they are to be successful. In my last posting I presented the first belief and told you that if your entire operation is able to accept the existence of a constraint, focus on it, then you have taken the first step. When I said the entire operation, I truly meant everyone! All of the individual departments, functional groups, and employees in your organization must become focused on leveraging power of the constraining operation. If you aren’t willing to do this, then there simply is no need to continue. Accounting, Purchasing, Engineering, Sales and Marketing, Production, Production Control, Quality, Maintenance, etc. all must be aligned and in total agreement. So assuming that your company does buy into the concept of focus and leverage and that it does recognize the existence of this leverage point… that enough? The answer is no, but it’s an important first step and belief.

The second belief that must be accepted by your entire organization is the concept of subordination. Subordination 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, once again, 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 Accounting must also eliminate outdated performance metrics like utilization and efficiency in non-constraint operations because they mean absolutely nothing. All these two metrics really do is create an environment that fosters and promotes over-production, resulting in higher inventory levels and their associated carrying costs. But the real negative effect is the extended lead times that come from excess inventory.

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at the constraint and stop ordering in large quantities or only on the basis of lowest cost to satisfy another outdated performance metric, purchase price variance.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.

If your entire organization believes in and is ready to subordinate to the constraint, then you have taken the second important step. If your organization is like so many others where individual departments exist as silos, then letting go of the apparent control that they now have will be a difficult pill to swallow, but one that is absolutely necessary. If you’re not ready to subordinate, then don’t proceed any further!

The third belief that must be accepted by the entire organization is that improvement is never-ending. The Ultimate Improvement Cycle (UIC) is predicated on the fact that once a constraint is broken, a new one will appear immediately, so all organizational improvement resources must be prepared to shift to it and subordinate actions and decisions toward the cycle of breaking the new constraint. This cyclical process has no end, so be prepared to accept the idea of always getting better.

The fourth belief that the organization must accept is one of involvement of the entire workforce. If you are like many other companies, then you’ve probably been taught that improving profits means reducing expenses. And reducing expenses, for many companies, has typically involved reducing the size of the labor force. This is exactly the opposite behavior that is needed to successfully navigate through the UIC. Why would anyone be willing to participate in improving the operation to the point that they lose their job? So if, in the past, you are a company that uses layoffs as a way of reducing or controlling expenses, then you are doomed to failure! You must accept the fact that the key to making money now is increasing throughput and without everyone’s involvement, it simply won’t happen. So if you can’t accept this belief, then stop here.

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, at least in the beginning of your improvement journey. 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! So the fifth belief in preparing for the implementation of the UIC that must be accepted is abandoning outdated performance metrics, incentives and variances. If you are unwilling to do this, then don’t attempt to use the UIC!

The sixth and seventh beliefs that must be accepted involve waste and variation reduction. 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. No matter how perfect you might believe your process is, believe me it has variation and it is full of wasteful activities. 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. You can’t eliminate variation, so you must reduce it and then manage what’s left over. 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!

The eighth belief that your organization must embrace is that problems must be addressed instead of being swept under the carpet. You can no longer accept temporary fixes to your problems and believe me, problems will be uncovered as you progress through the UIC. If you’re like many companies, there are problems that have been hidden with excessive amounts of inventory used to guard against their negative effects. This way of thinking can no longer be accepted. Your organization must be committed to determining the root cause of problems and implementing effective and sustainable solutions or the UIC won’t work for you.

The ninth belief that your organization must accept, if you are to be successful, involves recognizing the type and location of the constraint. Constraints can be either internal or external to your organization and they can be either physical or policy related. If they are external, then this typically means that you have more capacity than you do orders. If this is the case, then you must use your improved process to leverage this constraint. That is, your improved process will result in less lead time which your sales team can use to leverage more sales. If you have excess capacity, then your sales team can even quote a lower sales cost to leverage additional sales. Think about it, as long as your expenses or truly variable costs are less than the sales price, you are adding more money directly to your bottom line. Yes the margins will be lower than normal, but it all flows to your company’s bottom line. If your constraint is found to be a policy constraint, then you know it involves a conflict that must be resolved. You now have the tools to resolve conflict, so you must be ready to use them. All of what’s involved in the Ultimate Improvement Cycle requires out-of-the-box thinking for your organization.

The tenth and final belief is the understanding that the organization is a chain of dependent functions that requires systems thinking rather than individual thinking. There are interdependencies that exist within the organization with all functions playing a role in the final outcome. Unless and until individual functions cease from protecting their own turf and begin collaborating as a team, real and sustainable progress will not be achieved.

As always, feel free to contact me with any questions or comments.

Bob Sproull

No comments: