Over
the past year there’s been a growing recognition that we need something
different in the way we go about “improving” our processes and systems. I’ve written before about how Lean or Six
Sigma or Lean-Sigma have failed to deliver significant, quantifiable bottom
line improvement….at least to the extent that we’re covering the sometimes
massive training dollars for any of these methodologies. It seems as though we all work hard at
improvement, but the results just don’t seem to materialize on a consistent
basis. Yes, there are those occasional
homeruns that we achieve, but not consistently.
I’ve written many times about why I believe we are in this state, but I
keep getting emails to write about a better way. So the subject of this posting is focused on
that “better way” to improve processes and systems.
First
let me state up front that there’s absolutely nothing wrong with Lean or Six
Sigma or Lean-Sigma. Nothing wrong, that
is, with the principles and tools of each improvement methodology. However, there is something wrong with the
way we decide which process to “attack” first, then second and so on. The bottom line is this…..we need a method that
will allow us to identify and focus on the key leverage points in our processes
and system. Rather than sitting around a
conference room and hearing ideas about what we want to improve, we need a
method that doesn’t guess where to apply our improvement methods, but rather we
need a method that will provide a laser-like focus on what processes or systems
we need to improve.
For
those of you who follow my blog on a regular basis, you know I’m a huge fan of
the Theory of Constraints (TOC), but not at the expense of Lean or Six Sigma….not
at all. TOC by itself is not the answer,
but for me it is the starting point for successful improvement
initiatives. TOC can and will provide
the needed focus that is missing in most improvement efforts. So how does TOC do this?
When Dr. Goldratt first
introduced the world to TOC through his classic best seller, The Goal, he argued quite successfully
in my opinion, that the key to profitability was not through efforts to save money
through cost reductions. Instead he proposed that the key to
profitability was through making
money. These two approaches are
drastically different….in fact they are totally divergent. Goldratt used his now famous chain analogy to
demonstrate the concept of the weakest link dictating the overall strength of
the chain. Any attempt to strengthen a
link in the chain other than the weakest link was basically wasted effort
because the weakest link controls the strength of the total chain. So too is the case with our processes and
systems because each has a weakest link waiting to be identified and
exploited. When this happens, throughput
increases and increased throughput is what makes companies money.
Goldratt defined a system
constraint as anything that limits a system from achieving higher performance
relative to its goal. And if the goal of
an organization is to make more money, then the first step has to be to
identify or locate the system constraint.
Another
thing Goldratt gave the world was a different way of looking at accounting
which he called Throughput Accounting (TA). His definition of throughput was totally
different than the traditional definition in that he explained it as the rate
an organization generates new money primarily through sales. He explained that throughput was actually the
money received through the sale of a single unit of product minus totally
variable costs (TVC). TVC included
things like the cost of raw materials and sales commissions and anything else
that varies with the sale of products. Goldratt also defined Operating Expense (OE) differently than
the traditional definition. OE, to
Goldratt, was all of the money the organization spends to operate the business
and it included labor costs. He also
defined Investment or Inventory (I)
as the money a company invests in things it intends to sell. The key point here with TA is that simply
producing product does not create value until it’s sold and new money enters
the company.
So
let’s see how these two concepts, the existence of a system constraint and the
definition of throughput, play into successful improvement initiatives for
companies. If we were to successfully
identify the system constraint and we accept the idea that the key to increasing
throughput is by reducing the negative impact of the constraint, then doesn’t
it make sense that we should work toward improving the constraint first before
we do anything in non-constraints? And
how do you improve the system constraint?
By focusing you improvement efforts on the constraint using the tools of
Lean and Six Sigma. By doing so, imagine
throughput increasing while operating expenses are either remaining the same or
decreasing and inventory shrinking.
The
TA formula for throughput is T = Revenue – TVC and the formula for net profit
(NP) and return on investment (ROI) are T – OE and (T – OE)/I
respectively. So by focusing on the system
constraint your revenue increases which increases you NP and ROI assuming you
did not add any additional OE. Think
about it, if you increase the output of your constraint with the same labor
costs, what happens to your net profit and return on investment? Do you think that your CEO would be happy to
see such a thing?
Before
I finish this posting, let’s once more see Goldratt’s five focusing steps.
1.
Identify the system constraint. The constraint is defined
as anything that limits the system from achieving higher performance relative
to its goal.
2.
Decide how to exploit the System
Constraint. All this means is that once
you’ve identified the system constraint, how do you get more from it? In my world, I use the tools and methods of
Lean and Six Sigma.
3.
Subordinate
everything else to the System Constraint.
Subordination simply means that all of the non-constraint processes run
at the same speed as the constraint and that nothing new enters the system
until something exits the constraint.
4.
If
necessary, elevate the system constraint.
To elevate the constraint implies that you need more constraint capacity
to reach your market demand and it might mean spending some money.
5.
If
in the previous steps the constraint has been broken, go back to Step 1, but
don’t let inertia create a new constraint.
Breaking a constraint means that the current constraint no longer
prevents you from achieving market demand, but when this happens, a new
constraint will appear immediately. If
this is the case, follow the path just laid out. The idea of inertia causing a problem simply
means that in the process of improving the constraint you may have added new
policies and procedures that no longer apply, so get rid of them.
If you are someone who’s been using Lean, Six Sigma or Lean-Sigma,
I hope you can see why Goldratt’s five focusing steps are important to
you? The fact is that without a good
understanding of system focus that TOC delivers, your improvement initiative can
or will fail to deliver significant bottom line improvement. Bottom line improvement is what we all want
and the key to this is directly proportional to how well we drive throughput to
higher levels while either maintaining the same OE or reducing it as well as
reducing I. This is truly the difference
between trying to save money versus making money.
Bob Sproull
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