Thursday, March 29, 2012

Focus and Leverage Part 100

This is my 100th Focus and Leverage posting, so I thought it might be appropriate to dedicate this posting to the integration that I have written so much about…..TLS.  The subject of my blog today is the relevance of all three of these methods…..not in isolation from each other, but as a single, unified strategy for improvement. .  I might add that some of what I’m going to write today is actually a collection of excerpts from Bruce Nelson’s and my book, Epiphanized: Integrating Theory of Constraints, Lean and Six Sigma.  I hope you enjoy it and as always, please feel free to add any comments or email me directly at ras8202@live.com.  Compared to my other postings, this one will be longer than usual.
 
For quite some time now there have been numerous improvement initiatives that have attempted to improve both the quality and output of products and services. Many have originated in the United States while the origin of others has been in other places around the world.  With all of these initiatives there have been seemingly new tools, principles and techniques that many different people have contributed.  There are usually abbreviations or acronyms pinned on each one of these and then new ones come to take their place.  In the future, I don’t see this pattern changing much
                                                              
In today’s world there are three primary improvement methodologies that dot our landscape, namely the Theory of Constraints (TOC), Lean, and Six Sigma.  Each seems to bring its own unique perspective to the improvement playing field and each appears to have its own following of zealots and camps.  And when you talk to the followers of any of the three methodologies, you get the idea that it’s either their way or the highway.  For all of you zealots out there, the fact is, it doesn’t have to be an either/or experience.   The question I keep asking myself is, “Why do people believe that “their method” has to exist in isolation?”  After quite a few years, I still haven’t found a good answer to this question.  Let’s first take a look at each of these three initiatives
 
Theory of Constraints (TOC)

In the early 1980’s Dr. Eliyahu Goldratt introduced the world to a new way of looking at profitability through his now famous Theory of Constraints (TOC), which was presented in his book The Goal.  In principle, Goldratt’s argued that instead of trying to save money through cost reductions, companies would be much more profitable if they focused instead on making money.  But aren’t the two ideas synonymous?  The answer is—absolutely not! These two ideas represent very different and divergent approaches. Saving money is not the same as making money.  And the management strategy you choose to employ to make money is very different than the one you employ to save money.  This is a very important message for everyone.
 
Goldratt’s emphasis is that the goal of for-profit companies is to make money now and in the future.  Goldratt analogized this concept using a chain.  He stated that the weakest link in a chain controls the overall strength of the chain, and that any attempt to strengthen any link other than the weakest one will do nothing to improve the total strength of the chain.  Organizationally this means that every action or decision taken by the organization must be judged by its impact on the organization’s overall goal of making money.  If the decision does not get you closer to that goal, then the decision is probably ineffective.
 
Goldratt defined a system constraint as anything that limits the system from achieving higher performance relative to its goal.  So if the goal of the organization is to make money, then the systems constraint must be identified first. Goldratt explained that in order to determine whether an organization is moving toward its goal and not away from it, three simple questions must be asked and answered.
 
  1. How much money does your organization generate? (i.e. Throughput)
  2. How much money does your organization invest? (i.e. Inventory or Investment)
  3. How much money does your organization spend to make it operate? (i.e. Operating Expense)
From his research, Goldratt developed his own simplified system of accounting that he referred to as Throughput Accounting (TA).  With these three simple measurements, Throughput, Inventory (or Investment) and Operating Expense (i.e. T, I and OE), organizations are able to determine the immediate or future impact of their actions and decisions on the financial performance of their organization rather than waiting for some monthly financial report that typically arrives after the fact and doesn’t really provide helpful information.
 
Goldratt expanded his Throughput Accounting (TA) definitions still further by defining Net Profit and Return on Investment as follows:
Net Profit (NP) = Throughput minus Operating Expense or NP = T – OE
  • Return on Investment (ROI) = (Throughput minus Operating Expense divided by Investment or ROI = (T – OE)/I
I want to emphasize that what distinguishes Goldratt’s definition of Throughput from traditional definitions is that Throughput is not considered to be valuable until money exchanges hands between the organization and its customers.  At any point in time before the sale, the product is still considered Inventory, even in a finished goods status.  Basically, any product that is produced and not sold to a customer is simply termed Inventory or Investment and it has a cost associated with it.  This is a major departure from the traditional definition of Throughput and its overall implications are far reaching. The key take-away from TA, is that the best actions are those that increase T, while simultaneously reducing I and OE?  This is the key to making money!
 
The Theory of Constraints operates under what Goldratt refers to as his Five Focusing Steps:
Step 1: Identify the system constraint.  The constraint is commonly considered anything within a system that limits the system from achieving higher performance relative to its goal.  Sometimes the constraint is physical, but surprisingly, most of the time (i.e. greater than 90%) it’s some kind of policy or procedure.
Step 2: Decide how to exploit the System Constraint.  Exploitation simply means that you are getting more from what you already have.  It requires that you understand why you are currently getting what you are getting and what steps are necessary to maximize the throughput of the constraint.  How do you get more from this constraining operation?
Step 3: Subordinate everything else to the System Constraint.  Subordination simply means that all other non-constraint processes activate to the same level as the constraint.  That is, even though they can run faster, they don’t run faster than the constraint.  They don’t run slower either….they run at the same speed as the constraint.  This seems contrary to popular belief, but sometimes in order to go faster, you have to go slower. This is what being synchronized actually means.
Step 4: If necessary, elevate the system constraint. Elevation implies that you need more constraint capacity if the market demand on the system still exceeds your constraint’s current capacity.  At this point, it may be required to spend some money to increase throughput—but only during Step 4 and not during Step 2.
Step 5: Return to step 1. When the constraint has rolled or moved to a new location in the system, then go back to Step 1 and follow the sequence again.  This is the TOC Process of On-Going Improvement (POOGI).
 
You may be wondering why these Five Focusing Steps are important to someone who uses Lean, Six Sigma or even the hybrid, Lean-Sigma.  The fact is that without the understanding of the global system focus provided by TOC, many of the Lean and Six Sigma initiatives will fail to deliver any significant bottom line improvement.  This failure is the primary reason why CEO’s and the rest of the leadership team in many companies become disenchanted with Lean and Six Sigma initiatives.  From their point of view, when they invest big sums of money in something like training, they rightfully expect an acceptable return on their training investment.
 
The fundamental key to impacting the bottom line is directly proportional to the company’s ability to drive Throughput to higher levels while at the same time reducing Inventory and Operating Expense.  Even if your OE remains the same and T is increasing, your margins are improving.  The concept here is driving the system to make money, rather than trying to save money.  Think about it, if your financial model is based upon how much cost you can remove from a process (reducing OE) then, your ROI has a clear mathematical limit.  Likewise, if your focus is only on reducing Inventory, it too has a functional and mathematical lower limit.   Throughput, on the other hand, has no theoretical upper limit.  Think, for a moment, about the financial impact of simultaneously increasing T while reducing OE and I.  The crucial focus of increasing T is what drives NP and ROI!

Lean

Much has been written about Lean over the past several years, but its basic philosophy is centered on a whole-systems approach that focuses on the existence and removal of non-value-added (NVA) activities within a process or system.  These NVA activities are characterized as waste in the Lean vernacular. As an improvement initiative, Lean rightfully teaches you to recognize that waste is present within every process and that we should take extreme actions to either eliminate it or significantly reduce it.  The entire premise for doing this action is to facilitate a flow of value through the entire process.  If this is true, then it begs the question—What is value?
 
There have been many attempts to define value, but the best definition is based on the customer value and not the producer value.  In its simplest terms, value, is whatever the customer feels good about paying for.  Customers know what they want, when they want it and how much it is reasonable to pay for it—so in the long run, value clarifies itself.  Lean has become recognized as one of the most effective business improvement strategies used in the world today, but if this is so, then why are so many Lean implementations failing at such an alarming rate?  In this case, failure implies the inability to not only achieve, but also sustain, the needed effort. The fact is, the primary focus of many Lean initiatives is on saving money rather than on making money.  And as I said earlier, the actions required for making money are drastically different than saving money.  Let’s look at Six Sigma.
 
Six Sigma

Like Lean, much has been written about Six-Sigma methods and the now infamous acronym DMAIC.   Whereas Lean is attempting to remove non-value-added and wasteful activities, Six Sigma is attempting to remove unnecessary and unwanted variation.  Six Sigma uses the road map  Define, Measure, Analyze, Improve and Control (DMAIC) to seek out sources of variation, and through various statistically based tools and techniques, attempts to limit and control variation to the lowest possible level.  The fact of the matter is, you can never eliminate variation, but using Six Sigma, you can control it.
 
The professed power of Six Sigma lies in the disciplined structure and use of the tools and techniques.  However, this supposed power sometimes ends up being a detriment to some companies because in many instances they will experience enormous information overload, coupled with a failure to launch the information into viable solutions.  In essence, these companies are suffering from analysis paralysis.  Like Lean, many Six Sigma initiatives have failed to deliver true quantifiable bottom line improvements and, therefore, have been abandoned.  It’s not unusual for Six Sigma projects to take months to complete and this becomes a source of frustration for many business leaders.  All of this time spent on a project that doesn’t deliver meaningful improvement to the bottom line.  Is it any wonder that leadership becomes frustrated?
 
Six Sigma can also be difficult to employ.  It is heavily dependent on mathematics (statistics) and formula derivatives that quite frankly most people do not enjoy or involve themselves with.  At times is seems as if you need to call Merlin the Magician just to get started.
 
There is also popular hybrid of Lean and Six Sigma known as Lean-Sigma which, as the name suggests, is a blend of the two initiatives.  The primary assumption of Lean-Sigma is that eliminating or reducing waste and variation in the system will lead to major cost reductions.  It seems to make perfect sense that if each initiative delivers its own separate improvement, then combining output from both of them should optimize the process and result in a double-dip reduction in cost.  However, in the final analysis, the primary functions of Lean and Six Sigma are both aimed at cost savings. As I’ve said many times already, saving money is indeed a strategy, but it’s just not an effective strategy for making money.
 
The overall issue is not with either one of these methodologies, but rather the belief that the way to increase profitability is through cost reduction.  Cost reductions have implied mathematical limits, and once those limits are reached, the improvement effort stops or slows down significantly.  Consider this—have you ever heard of a company that has actually saved themselves into prosperity?    If cost reduction is not the answer, then what is the best route to profitability?
 
Focus and Leverage

In other postings, I’ve used a piping system with different diameters to demonstrate the concept of system’s constraints.  In Figure 1 below, we see the drawing of this piping system delivering water that is gravity fed to an awaiting receptacle.  Since Section E has the smallest diameter, the delivery of water is limited by the size of the opening.  Because Section E limits the throughput of water, any desired increase in how much water exits the system will require us to exploit the constraint.  And any attempt to improve other diameters will not result in any more water exiting this system.

Figure 1

This is the basic premise of the Theory of Constraints.  Meaningful bottom line improvement only occurs when we focus on the system constraint.  If we make money when we sell more product or deliver more of our services, then the only way we can do so is by freeing up that which is limiting our ability to do so….our system constraint.
 
The basic principles for understanding constraints are all around us.  For example, we could have demonstrated the constraint by drawing an electric circuit with different sized resistors and measured the flow of electricity through the circuit.  The resistor location with the highest resistance to electrical flow would be the equivalent of Section E in the piping diagram.  We could have used automobiles in a traffic jam or even trying to herd cattle into a fence opening.  The key point in all of these examples is that throughput is limited by the system constraint and that the only way to gain more throughput is to focus on and leverage the constraint.
 
This is where Lean and Six Sigma come into play.  The fact of the matter is, the Theory of Constraints in isolation will not take you to the promised land.  In fact, TOC needs Lean and Six Sigma to be all it can be, just like Lean and Six Sigma need TOC.  It might surprise you, but I don’t rank order these three initiatives at all!  Any of the three used in isolation simply will not deliver all you need to drive your company’s profitability to levels not seen before.  Only when these three are integrated…when they are melded together, will your company grow and flourish.  This is the reason I write this blog…..to show company leaders that there is a right way…..a better way to make money.  I encourage you to email a link of this blog to the leadership team in your company and give them a chance to see a better way.  At the end of the day, they’ll thank you.
 
Bob Sproull

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