Saturday, January 14, 2012

Focus and Leverage Part 74

I’ve been asked many times, which of Goldratt’s 5 focusing steps is the most difficult for company’s to embrace.  From my perspective and experience, it’s Step 3 which deals with subordinating everything to the constraint.  One of the major reasons for this is based in Cost Accounting (CA) or even more specifically the performance metrics that CA embraces and mandates.  In particular, the performance metric Operator Efficiency in places other than the constraint is, in my mind, the most difficult mindset to overcome for many companies.
Step 3 of Goldratt’s 5 focusing steps tells us to subordinate non-constraints to the constraint operation. So in real terms, what does that really mean? If we were to look in a dictionary for the definitions of subordinate we would probably find something like Belonging to a lower or inferior  class or rank; secondary or subject to the authority or control of another.  The fact that a subordinate is secondary and subject to the authority or control of another really says it all. Literally, the constraint operation should dictate everything that goes on in a system and process. Of course you want the constraint working at the rate required to satisfy customer orders, but the non-constraint operations should work only at the pace that the constraint does, neither faster nor slower.
Upstream non-constraints have the responsibility of never letting the constraint operation run out of material because the throughput of the system would stop, and so would new revenue. But by the same token, the non-constraint operations should not work faster than the constraint simply because running faster would not result in more system throughput. In fact, running faster would end up costing the operation more because of the added carrying costs of excess inventory, extended cycle time and ultimately a drop in on-time deliveries.
In reality, subordinating non-constraint operations to the constraint operation involves taking a back seat to the constraint. For example, if the constraint operation is experiencing equipment downtime, maintenance must drop everything else, move to the constraint, and get the equipment back on line. If there is a quality problem on the constraint operation, the focus must be on correcting the problem, even at the expense of a non-constraint quality problem. Because the non-constraint operations have “sprint capacity,” in the event of downtime, they should be able to shut down and wait for resources without negatively impacting throughput at the constraint.
Subordination is not limited to typical manufacturing functions either. For example, engineering must always be available to move to a constraint-based problem at the expense of non-constraints. Sales must be constantly aware of and pursuing new orders that will keep the constraint operation busy, but not beyond its capacity. In effect, all resources, which include all functional groups and non-constraint operations, must be available to actively support the needs of the constraint operations without exception. Remember, a constraint operation should never be left idle because lost production can never be recovered.
The question I have been asked many time is, why is it so important to subordinate the non-constraint resources to the constraints? At the risk of being redundant and belaboring the point, because the system constraint determines the overall system throughput and the ultimate profitability of the organization.  To quote Debra Smith in her great book, The Measurement Nightmare, “The ability to subordinate will define a company’s ability to succeed with the Theory of Constraints. Exploitation of the constraint is dependent on effective subordination.”
Smith further states, “Disruptions cause waste and accumulation of delays.  Delays and waste cause costs to go up and throughput to go down.”  Any improvement initiative that utilizes all or parts of the Theory of Constraints must be locked into and committed to the concept of subordination. Without embracing subordination, at some point in time the constraint operation will be starved, throughput will decrease, and profits will be less than optimal. And remember, lost throughput is lost forever and can never be regained.
Improvement efforts that focus on areas other than the constraint operations are, for the most part, generally fruitless. That is, improving the output of a non-constraint operation not only increases carrying cost of inventory, but also lengthens the product cycle time and causes deterioration of on-time delivery rates. Although the other parts of the system could produce more, there simply is no point in doing so. Subordination changes the way an organization carries out its business and redefines the objectives in every part of the global system. As I mentioned earlier, material should be released according to the needs of the constraint only and according to firm orders. Maintenance priorities will be set according to the needs of the system constraint. Manufacturing engineering will be at the beck and call of the constraint. Every group and employee in the organization must recognize that the key to short- and long-term profitability, and hence realization of the organization’s goal, is the recognition and belief that the system constraint is the first priority.
Now that you have an idea of what subordination is and why you should subordinate the non-constraints to the constraint, the question then becomes one of how you do it. But before I answer this question, there are some basic guidelines—or maybe a better word is truths—to discuss. And for your typical American company, these guidelines may be a difficult pill to swallow, because the leadership and management of many companies have been taught, rewarded, and disciplined using these basic beliefs for many years.
·         If your company is currently using manpower efficiency or equipment utilization as its primary performance metric, be prepared to abandon or at least scale back its relative importance significantly in your non-constraint operations.  Measuring the efficiency of a non-constraint may result in local improvements, but it will not ensure that the overall performance of the organization will improve. In fact, focusing on improvements in non-constraint efficiencies will actually cause the performance of the total organization to become worse, not better. Just remember that system improvement is not the sum of local improvements.
·         Because you will now be optimizing and making decisions about the organization from a system perspective, rather than optimizing locally like so many companies do, be prepared to have some of your non-constraint operators and machines sitting idle at different periods of time for the good of the total organization. The important point to remember here is, contrary to some beliefs, an idle resource is not a significant source of waste. I realize this is contrary to what Lean and Cost Accounting teaches us, but the fact is 100 percent utilization of non-constraints is not a good thing.
·         The reality is that constraints do exist, and if you do not manage them, they will manage you. If you do not manage them, your organization will be in a constant fire-fighting mode. Managing constraints is one of the keys to organizational and operational success.
·        Focusing resources on a non-constraint process will not result in a maximization of a company’s return on investment. Focusing resources on the system constraint to improve performance will improve the performance of the total system and will maximize the return on investment.
·         Be prepared to find many nonphysical constraints. In fact, most of the constraints you will identify will probably be rooted in outdated policies and beliefs that probably were effective at one point in time, but have outlived their usefulness and are now hurting the organization. These policies are usually traced to things like staffing decisions, how products and materials were scheduled, purchased, and supplied, product pricing policies, how performance is measured, and how people in the organization should be managed.  All these type constraints usually are based upon flawed and outdated assumptions, and many times they are observed as unwritten rules that have been passed down from previous leadership. But beware, nonphysical constraints are not necessarily easy to correct. In fact, most times they are much more difficult to correct simply because they have become part of the DNA of the organization.

But fear not, subordinating non-constraints to constraints may not be as difficult as you might think or as difficult as some writers have suggested. Dettmer, in his classic book Breaking the Constraints to World Class Performance, presents what he calls a TOC decision matrix. In this matrix, Dettmer converts three traditional global measures (i.e., net profit, return on investment, and cash flow) into TOC terms and local measures of optimization. He then lists a series of questions, which require a yes or no answer. Dettmer concludes that if the answer to the question is yes, do it.  If the answer is no, do not do it….pretty straight-forward.  These questions can be used to evaluate local decisions and answer the question of how to subordinate non-constraints to the constraint operation.  Dettmer’s questions that require only a yes or no answer are:
·         Will it increase sales?
·         Will it speed up deliveries to clients?
·         Will it reduce backlogs?
·         Will it reduce your need for production materials?
·         Will it shorten production time?
·         Will it reduce fixed expenses?
·         Will it shorten the time between product or service delivery and time of payment?
·         Will it increase the volume of revenue received in the same time period?
·         Will it shorten the time between receipt of order and delivery to the customer?
·         Will it free excess capacity?
·         Will it make better use of the constraint?
·         Will you need fewer materials on hand?
·         Will you need less equipment?
When considering any kind of improvement or, in this case, considering an action aimed at subordinating a non-constraint to a constraint operation, just ask and answer these questions and you will make the right decision.

Bob Sproull


Anonymous said...

Excellent post! I think you've encapsulated the mission of this blog and our challenge.

Bob Sproull said...

Thanks very much many followers named Anonymous... :)

Bob Sproull

Rhonda R.Otter said...

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