Tuesday, June 19, 2012

Focus and Leverage Part 125

For anyone who engages in discussions on LinkedIn, or more specifically the TLS Group on LinkedIn, we have been having a series of discussions on the strengths and weaknesses of TOC primarily.  In my 2009 book, The Ultimate Improvement Cycle – Maximizing Profits Through the Integration of Lean, Six Sigma and the Theory of Constraints, I had written a chapter which had included a similar discussion.  In today’s posting I’d like to share that excerpt from my book.

Comparison of Lean, Six Sigma and TOC
Early on in my book I talked about Goldratt’s throughput accounting measures (i.e. Throughput (T), Inventory (I), and Operating Expense (OE)).  I stated that during this first cycle of improvement we should have lowered inventory by not over-producing product at the non-constraint operations and we should have also “burned off” any excess inventory that had collected within our system prior to the first cycle of the UIC.  If we did these two things, then this reduction should have had an immediate, one-time positive impact on cash flow for the company.  In addition, our operating expenses should have decreased as well because we now have fewer defects, fewer repairs, less scrap, and less waste within our process.  While both the inventory and operating expense should be respectable in terms of bottom line improvement, the real impact on the company will have come from increased throughput!  Assuming we haven’t added large amounts of labor to break the constraint, which we should not have had to do, all of our new throughput (revenue minus truly variable costs) should flow directly to the bottom line!

So now let’s try one more time to answer the question of why so many Lean, Six Sigma and TOC initiatives might have failed.  Some authors have stated incorrectly, or at least implied, that the Lean and Six Sigma philosophies are at odds with or are contradictory to TOC.  Still others have suggested, also incorrectly, that Lean and Six Sigma are just complementary to TOC.  It is my belief that Lean and Six Sigma are, in fact, essential ingredients for success of TOC.  By the same token, success in Lean and Six Sigma initiatives is driven by adopting TOC as the basis for improvement simply because TOC supplies both the focus and leverage points needed for true improvement. It is my contention that all three initiatives, when implemented in concert with each other as presented in the Ultimate Improvement Cycle, represent the best possible strategy for maximizing revenues and profits!  These three initiatives form a symbiosis where they not only co-exist, they benefit from each other’s presence.  In fact, they form the ultimate improvement cycle and act as a guide for maximizing profits!

Table 1 summarizes all three improvement initiatives.  Look at it closely.  Is it apparent to you yet why lean and six sigma are not just complementary philosophies to the TOC?  They are all vital ingredients for success!  Look at the principle activity of each initiative and you’ll see that they are all complementary and not independent as some have suggested.  The primary deliverables of each initiative cover the entire gamut of improvement.  Think about it, fewer defects, less variation, less waste, faster cycles and improved capacity.  Aren’t these all the things we want out of an improvement initiative?  Finally, the financial impact of these three initiatives, reduced operating expense, reduced inventory, and increased throughput and revenue all translate into big profits.  Problems and processes are each contained within any system and potentially add intrinsic value to the system if we just capitalize on them.
Table 1
Why the Integration Works
In addition to the financial case made for integrating these three improvement methodologies, there are other rational and logical reasons why this integration works so well.  In attempting to answer which of these three initiatives a company should use or “which tune a company should dance to,” Jason Thompson presents an excellent summary of the fundamental elements, strengths and weaknesses for each improvement initiative.  In doing so, Thompson has inadvertently (or perhaps purposely) answered the underlying question of why the three improvement initiatives should be combined and integrated rather than choosing one over the other.

The first four columns in Table 2 reflect the summary of Thompson’s comparison (i.e. the initiative, fundamental elements, strengths and weaknesses).  I have added a fifth column, “Counter Balance” that demonstrates how the strengths of one initiative counter-balance or compensate for the weaknesses of the others.  As a matter of fact, by comparing each of the weaknesses and strengths of each of the three initiatives, we see that all of the weaknesses of each individual initiative are neutralized by one or both of the strengths of the other two. This is such an important point for those companies that have experienced implementation problems for any of the three individual improvement initiatives done solo.  Let’s look at several examples.

Table 2 again tells us that weakness 1 in Lean, “May promote risk taking without reasonable balance to consequence,” is counter balanced by Six Sigma strength 3, “The focus on reduction of variation drives down risk and improves predictability.”  One thing we know for certain is that as we reduce variation in our process, we reduce risk and our ability to predict future outcomes improves dramatically.  This is the cornerstone of statistical process control which means that risks can be minimized if we rely on this Six Sigma strength to do so.

Continuing, Lean weakness 2 tells us that we may not provide sufficient evidence of business benefit for traditional cost accounting.  This weakness is countered by both Six Sigma strength Number 2, the data gathering provides strong business cases to get management support for resources and by TOC strength Number 4, provides direction on appropriate simplified measures (Throughput, Inventory and Operating Expense). As I have stated many times before, traditional cost accounting induces us to make incorrect decisions, so by adopting Throughput Accounting practices, from the Theory of Constraints, we will have sufficient evidence to make changes to our process, assuming we are focusing on the constraint operation.

Lean weakness 3 states that Lean has a limitation when dealing with complex interactive and recurring problems (uses trial and error problem solving) is countered by Six Sigma strength 1, the rigor and discipline of the statistical approach resolves complex problems that cannot be solved by simple intuition or trial and error and TOC strength 3, (distinguishes policy vs. physical constraints).  One of the Six Sigma tools that permit us to solve complex interactive and recurring problems is designed experiments (DOE).  DOE’s identify significant factors that cause problems and identifies insignificant factors that do not.  TOC strength 3 helps us in two ways.  First, if the problem we are facing is a policy constraint, we use TOC’s Current Reality Tree to identify it and the Evaporating Cloud to solve it.  Both of these strengths will compensate for this weakness in Lean.

Now let’s look at one of the Six Sigma and TOC weaknesses and see how they are compensated for by other strengths.  For example, look at Six Sigma weakness 2, the heavy reliance on statistical methods by its very nature is reactive, as it requires a repetition of the process to develop trends and confidence levels.  This weakness is off-set by lean strength 2, directly promotes radical breakthrough innovation, and by lean strength 3, emphasis on fast response to opportunities (just go do it).  Likewise, TOC weakness 3, TOC’s inability to address the need for cultural change, is off-set by lean strength 4. 

In the same way, if we compare all of the weaknesses in Lean, Six Sigma and TOC to the strengths found in the other initiatives, the three initiatives not only complement each other, but they rely on each other.  So, in addition to the demonstrated financial benefits of this symbiotic trilogy, we now see evidence from a logical perspective as to why they should be implemented in unison as a single improvement strategy.

Bob Sproull

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