Sunday, February 23, 2014

Focus and Leverage Part 310

Continuing with my series on excerpts from The Ultimate Improvement Cycle, in this posting we will look at the Theory of Constraints and its shortcomings and benefits and then begin to tie these three improvement benefits together.  The question becomes, should these methodologies have to exist in isolation from each other or should they be considered together?  One point I didn't mention about Six Sigma implementations is the length of time it takes to complete a project which is at least 3 months.  For me, this is a limiting factor because companies today are looking for rapid improvement and 3-5 months in many cases is simply too long.

The Drawbacks of TOC

And what about Theory of Constraints (TOC)? Has it failed as well? Eli Goldratt, author of The Goal, believed that organizations could not maximize profitability unless they maximized their throughput through the exploitation of the system’s weakest link. But like Six Sigma and Lean manufacturing, for many companies TOC has not delivered the huge rewards predicted by Goldratt. Some believe that the reason for this failure is strictly a question of poor planning and execution.  Still others believe that TOC is not an improvement initiative at all.  Theoretically, the implications of TOC to improvement initiatives can be profound. From a throughput accounting perspective, reduction in inventory (one of the benefits of Lean) has a functional lower limit of zero, and once you have reached zero inventory, there is none left to harvest. Lowering inventory can lead to substantial dollars, but it is a one-time occurrence. Operating expense reduction, the favorite of many Lean and Six Sigma aficionados, also has a functional lower limit, but when this lower limit is surpassed, further attempts to reduce it can actually debilitate an organization.

Throughput improvement, on the other hand, has no upper limit. Even if the productive capacity of the organization exceeds the number of customer orders, the market becomes the constraint, so lead time and cost reductions can be used to generate more sales. It is important to remember that if you have excess capacity, as long as your new product cost covers your cost of raw materials and you have not added excess labor to achieve this excess capacity, the net flows directly to the bottom line. Of course, all three of these actions (throughput increases, inventory reductions, and operating expense reduction) have a positive impact on net profit and return on investment. Think about this: If there were no constraints in a company, wouldn’t their profits be infinite?

What TOC Is

The Theory of Constraint’s process of ongoing improvement is a direct result of always focusing your efforts toward achieving the system’s goal. In order to achieve this focus, Goldratt developed a five-step process toward that end:

  1. Identify the system’s constraint(s).
  2. Decide how to exploit the system’s constraint(s).
  3. Subordinate everything else to the above decision.
  4. Elevate the system’s constraint(s).
  5. If in the previous steps a constraint has been broken, go back to step 1, but do not allow inertia to cause a system constraint.

The figure below is a graphic illustration of the Theory of Constraints improvement cycle, with the four major steps included. By making this cyclic representation, we automatically assumes that once a constraint has been elevated, it will be broken and a new constraint will take its place. Let us look at each of these individual steps in a bit more detail, with the help of Goldratt and Dettmer.

Identify the System Constraint(s)

Just as a chain has a weakest link, there will always be a resource of some kind that limits the system from maximizing its output. In order to improve the system’s performance, it is imperative that you locate the weakest organizational link and focus your improvements there. There is a logistical value chain of mutually supporting processes and operations in every company or manufacturing facility. Included within this value chain is the organization’s weakest link that limits the performance of the total organization. It may not be obvious to you, but when you are looking for a starting point, in any improvement initiative, it should always be the system’s constraint simply because it offers the greatest opportunity to increase profits in a relatively short period of time. Whether your constraint is a flow problem, a quality problem, a capacity problem, or a policy problem, it should be identified as the area on which to focus your efforts.  This first step answers the question “What should you change?”

Decide How to Exploit the System’s Constraint(s)

Once you have identified the restrictive link in the organizational chain that is limiting throughput, you must decide how to take advantage of or squeeze the most out of it. For example, if the constraint is one of the steps in a manufacturing process that is limiting the output of the entire process (a bottleneck), you must take all necessary actions to improve the rate at which parts flow through this bottleneck. If you do not increase the rate through the bottleneck, throughput will not increase. It is really that simple. By increasing the flow of product through the constraint, you automatically improve the system throughput, which translates into more revenue and more bottom-line dollars. This second step answers the question “What should you change to?”

Subordinate Everything Else to the Above Decision

This is one of the most important steps in terms of resource utilization, with “resources” meaning nonconstraint operations, people, and so on. The nonbottleneck resources should work only at the same pace as the constraint operation—neither faster nor slower. If the nonconstraints are permitted to run faster than the constraint, the result is excess in-process inventory and prolonged cycle times. If they are permitted to run slower than the constraint, the output of the constraining operation may be jeopardized, as would the organization’s throughput.  This subordination step is where most companies attempting to embrace and implement TOC have failed. Your organization must be totally committed to subordinating all other resources to the constraint operation or you will not realize all the potential throughput gains (and profits) that you could or should.  This step begins to answer the question “How do you make the change?”

Elevate the System’s Constraint(s)

If the actions taken in steps 2 and 3 do not break the constraint, you will be forced to take other actions on the constraint itself. These actions could include using additional shifts, additional overtime, adding additional resources (e.g., equipment or people), or as a last resort, radically changing the process through automation or a new product or process design. Although this step and step 3 answer part of the question “How do you make the change?” they do not provide enough insight as to what might be done.

If in the Previous Steps a Constraint Has Been Broken, Go Back to Step 1, But Do Not Allow Inertia to Cause a System Constraint

The aim of the first four steps of TOC is focused on breaking the organizational or system constraint. Once you have accomplished this, you must now guard against backsliding, which could result in the constraint becoming a constraint once again. For this reason, you must always develop some type of control that serves as an alert to guard against any kind of reversion to old ways.

In my next posting we’ll first discuss what TOC is  not and then discuss why we need to integrate these methodologies.

Bob Sproull

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