Monday, July 8, 2013

Focus and Leverage Part 235

One of the ways that consulting firms (and any company for that matter) can differentiate themselves from other organizations who supply Continuous Improvement (CI) facilitation and mentorship is the approach to CI that they take.  While most firms utilize a mix of Lean and Six Sigma, I have always believed that these organizations are truly missing the most important ingredient of all… that provides focus and leverage.  It is my contention that if companies realized where to focus their improvement efforts, they would be able to leverage their maximum potential in terms of  Continuous Improvement success.  Regular followers of my blog know that the method I endorse is an improvement methodology that blends not only Lean and Six Sigma, but includes Constraints Management (a.k.a. Theory of Constraints) as well.  So for me, the missing ingredient I cited earlier is Constraints Management.
Constraints Management (CM) is, in its most basic form, a management philosophy which facilitates much more effective managerial decisions.  Effective from a bottom line improvement perspective that is.  In its most basic form, CM encompasses a simple 5-step process for system improvement which will always deliver maximum improvement in the shortest time possible.  One of the reasons so many other improvement methods fail to deliver sustainable bottom line improvements is that efforts are focused at the local level and not at the system level.  What actually ends up happening when the organization’s leverage point is missed are that “pockets” of improvement occur rather than improvements to the system as a whole.  Integrating CM into the mix assures that improvements are made with the system in mind.
In addition to the simple 5-step process, CM also offers a set of logic-based Thinking Processes (TP’s) used to scrutinize, identify and zero-in on the organization’s core problem(s).  The TP’s use both necessity and sufficiency based cause and effect logic to identify and interconnect all of the organization’s negative symptoms, terminating with the true core problem.  The cool thing is, these same TP tools can then be used to develop organization specific out-of-the-box solutions in the fastest and most effective way.
In addition to the TP’s, Constraints Management also offers ready-made solutions for such areas as Production, Finance, Distribution and Supply Chain, Project Management, Marketing and Sales, and Strategic Planning.  Imagine a simple day-to-day financial decision-making method where everyone understands the outcome of their decisions and actions before they are implemented.  Imagine projects that are routinely completed on time, on scope, and on budget with project durations being reduced by 30 to 50 % from what is normal.  Finally, imagine a customized growth plan which many times delivers a net profits in 4 years that is equal to today’s sales revenues!  Constraints Management does not make predetermined assumptions about what’s wrong within the organization, but rather systematically identifies the organization’s true core problem(s) and then develops sound solutions.
One of the keys that I’ve written about several times before is how Constraints Management views the conduit to greater profitability.  Assuming the Goal of the organization is to make more money now and in the future, CM offers a different form of financial accounting known as Throughput Accounting (TA) (also referred to as Throughput-Based Decision-Making).  CM and TA challenge conventional Cost Accounting’s (CA) belief that the path to profitability is through saving money (i.e. through cost cutting).  Instead, CM and TA teach us that the more effective path to profitability is by focusing on making money by improving Throughput.  These two approaches to profitability are dramatically different and have been discussed in earlier postings.  Let’s now look at the basics of Constraints Management and how it can take a company to significantly higher levels of performance just by identifying and focusing on the leverage point.
When CM or TOC was first introduced by Dr. Eliyahu Goldratt, he likened it to a chain.  He explained that in any chain there is always a weakest link that controls the strength of the chain.  It stands to reason then, if you wanted to increase the strength of the chain, you must first identify the weakest link and then focus your strengthening effort on it.  It then follows that strengthening any other link in the chain will simply not improve the chain’s strength.
Although I like the chain analogy, I believe a better understanding is gained by demonstrating the concept of the constraint  through using the flow of water through different diameter pipes as in the following figure.  In it, each section of pipe is depicted with a different diameter. Like improving the strength of the chain depends upon focusing improvements on its weakest link, if you wanted to improve the flow of water through this piping system, you could only do so by increasing the diameter of Section E.     And like strengthening the chain’s weakest link is the only way to improve the strength of the chain, increasing Section E’s diameter is the only way to improve the delivery rate of water through this system.  Increasing the diameter of any other pipe would have absolutely no impact on the flow of what through this system.

I also like to move this piping system analogy to a simple process example.  The figure below is a simple 4-step process, not unlike any process within most other companies. In this process, raw materials enter at Step 1 and are then processed through the remaining 3 steps until a finished good exits.  Each step has its own cycle time listed in each step’s box, so if you were trying to locate the system constraint, or the process step that is limiting how much product can be produced with this process,  your conclusion in this case would be based upon time.

If you wanted to increase the process throughput, the only way to do this is to reduce the cycle time at Step 3 which has the longest cycle time.  In other words, Step 3 is constraining this process.   Like the chain with its weakest link and the piping system with its smallest diameter pipe, reducing the cycle time of any other step in this process would not deliver any more finished products.  It should logically follow that in any system, you must focus your improvement efforts on that part of the process that is preventing you from achieving more of what you want.

One mistake that many companies often make is attempting to maximize the speed of every step in their process in order to drive manpower efficiencies or equipment utilizations higher.  While this may seem like the right things to do, is it really?  Let’s look at a different 4-step process and consider what would happen if we were to run each step at maximum capacity.  That is, Step 1 produces 1 part every day, Step 2 produces 1 part every 6 days and so on.  The figure below demonstrates the eventual outcome within this process if all four of these steps were forced to run at their maximum capacity.

Because Step 3, with a cycle time of 8 days, controls the throughput of this process and because it can only process incoming materials from Step 2 at this rate, a backlog of work would appear in front of it.  Also, because Step 2 is much slower than Step 1, a queue would also appear in front of it.  The decision to run faster than the slowest operation to drive overall efficiencies higher simply does not make much sense, nor do the metrics efficiency and utilization.  Having said this, it should also be clear that the only place these metrics do make sense is a measure of constraint performance.  One thing we know about the constraint is that it should never sit idle, so we strive for maximum efficiency (or equipment utilization).

The heart and soul of Constraints Management is actually a 5-step process with two prerequisites for applications as follows:
-  Identify the System Goal (e.g. Make more money now and in the future
-  Determine a Means to Measure Goal Attainment (e.g. Throuhput, ROI, etc.)
The actual 5 Focusing Steps of Constraints Management are:
1.  Identify the system constraint (i.e. Section E of the piping system and Step 3 of our 4-Step process).

2.  Decide how to exploit the system constraint or how can I get the most out of the system constraint (e.g. apply Lean Six Sigma to it).

3.  Subordinate everything else to the above decision (i.e. never permit any step in the process to outrun the system constraint).

4.  If necessary, elevate the system constraint (i.e. if in the previous 3 steps the system constraint has not been broken, you may have to spend some money).

5.  If the system constraint is broken, return to Step 1, but don’t let inertia create a new system constraint (i.e. This is TOC’s Process Of On-Going Improvement (POOGI).  The concept of inertia means reviewing all policies put in place to break the original constraint so as not to create a constraint caused by an outdated policy).

This is Constraints Management in its most basic form, but as I have written about on numerous posts, CM is much, much more.  In my next posting, I’ll write about another CM’s tool.

Bob Sproull

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