Saturday, January 26, 2013

Focus and Leverage Part 183

In the next several postings I'm going to share a white paper that was published by the American Society for Quality (ASQ) last year in their Quality Forum magazine.  For those of you who may have read it already, please bear with me.  The title of this paper is, Maximizing Profits Through the Integration of Lean, Six Sigma and the Theory of Constraints.  This methodology used in this paper formed the basis for my second book, The Ultimate Improvement Cycle.

I must say that I’ve been very fortunate in my career.  Not because I have been successful financially, although I haven’t done badly.  I’ve been fortunate because I’ve been able to be a part of so many different improvement initiatives over the years.  I was around during the Deming years and was able to learn and apply his now famous 15 principles as well as his teachings regarding the significant impact variation has on processes and systems.  I was around when Lean and Six Sigma came upon the scene and was fortunate enough to have worked for a great TPS consulting firm.  All of these and more had a very profound impact on me as a professional.

Like most consultants I was looking to remove waste and variation in every process I touched.  After all, waste and variation exists everywhere right?  If I could reduce both of these harmful negatives from every process, surely the results would flow directly to the bottom line.  And they did, but not in what I thought were significant enough numbers!  What was I doing wrong?  I mean the companies I worked for certainly looked better because of my 5S events and our changeovers were being done in record time, but the bottom line was not growing enough to suit me.  Our process layouts were better, we had manufacturing cells in place, our inventory was lower, and there was much less waiting, but the financial results just weren’t there, at least not enough to satisfy me.  We even reduced the time it took to purchase supplies and materials.  And not only were we not seeing positive effects on the bottom line, our orders were still late getting to our customers.  Something had to change!
In the late 1980’s, however, something more powerful and influential came to me as a gift….a copy of The Goal by Eli Goldratt.  As I read The Goal I began to visualize how I could apply the many lessons I had read about.  I asked myself, “Could I actually utilize Goldratt’s teachings in the real world?”  After all, this was only a fictional setting and there really wasn’t an Alex Rogo.  It wasn’t apparent how I would use this information until the early 90’s when I had an epiphany or maybe some would say an out-of-body experience!  Goldratt’s simple, yet elegant message of identifying, deciding how to exploit the system constraint and subordinating everything else to the constraint changed me forever.

In addition, to the concept of constraints, Goldratt introduced me to what he called Throughput Accounting.  Specifically, Throughput (T), Inventory (I) and Operating Expense (OE) took on a whole new meaning for me.  It became apparent to me that reductions in inventory typically have a one-time impact on cash flow and after that little can be gained.  It was also evident that operating expense had a functional lower limit and once you hit it, you could actually do more harm than good to the organization by reducing it further.  Throughput, on the other hand, theoretically has no functional upper limit!  But more importantly, throughput was only throughput if money exchanged hands with the customer.  That is, producing products for sale is just not the same as receiving cash for them because, in reality, it’s simply inventory.
Learning about constraints and throughput accounting transformed me back then.  I came to the realization that everything I do in the name of improvement would give us a better return on investment if we focused our efforts on the operation that is limiting throughput.  I decided then and there that constraints are the company’s leverage points and if I wanted to maximize our profits, then our primary improvement efforts should be focused on the constraints.  So off I went and the results were immediate and significant.  Our on-time delivery sky rocketed!  Our profits rose at an unprecedented rate and everything was good in the world.  Good until the constraint moved that is!  All of a sudden my world came crashing in on me because I hadn’t anticipated this.  I should have, but I didn’t.  It wasn’t hard to find the new constraint since there was a pile of inventory sitting in front of it.  So we just moved our improvement efforts to the new constraint.  I learned what Goldratt meant about “breaking the constraint.”

So here's my message to everyone.  Although I am a huge supporter of both Lean and Six Sigma, the profits realized from these two initiatives or even the hybrid Lean-Sigma, pale in comparison to what can happen from an integrated Lean, Six Sigma, TOC (or as I called it in my second book, The Ultimate Improvement Cycle (UIC)).  These days this same integration is better known as TLS.  In fact, one double blind study (1) of 21 electronics plants has confirmed that an integrated L-SS-TOC improved profits roughly 22 times that of Lean and 13 times more than Six Sigma if these were both singular initiatives.  I know what many of you are thinking......I'm making this claim with a sample size of only one?  All I can tell you is that this integration works and it works every time!!

In my next posting I'll discuss the "nuts and bolts" of how this methodology works and how it was use to solve a real time problem that actually happened to me years ago.

Bob Sproull

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