Sunday, February 23, 2014

Focus and Leverage Part 311

In this posting we’ll continue our series of excerpts from my second book, The Ultimate Improvement Cycle – Maximizing Profits Through the Integration of Lean, Six Sigma and the Theory of Constraints.  In my last posting I indicated that I would fill you in as to what TOC is not.  And as you will see, it too has some limitations, but it also has some big time benefits.

What TOC Is Not

So what does the Theory of Constraints have to do with either Lean or Six Sigma, or vice versa? The answer to this question is, quite simply, everything. It is my belief that the key to successful Lean, Six Sigma, and TOC implementations, in terms of maximizing throughput and return on investment, is to ensure that your company’s efforts are focused on the right area of the business. The Theory of Constraints provides this focus. In other words, the right area of focus is always the system constraint.

Yet although TOC provides the needed focus, Six Sigma and Lean provide the tools needed for improvement. In effect, you need to use Lean, Six Sigma, and the TOC together in order to improve your business. These three together form the Ultimate Improvement Cycle, which is the focus of the remainder of this book.

As discussed in Chapter 1, the major difference between the Lean, Six Sigma, and Theory of Constraints (TOC) improvement initiatives is simply a matter of focus and leverage. Although Lean and Six Sigma implement improvements and measure reductions in inventory and operating expense as well as increases in throughput, TOC focuses up front on throughput and looks for ways to achieve higher and higher levels. The only way to increase throughput is to focus on the operation that is limiting it.

The Ultimate Improvement Cycle combines all three initiatives into one. The net effect of the Ultimate Improvement Cycle (UIC) is greater throughput, coupled with reductions in operating expenses and reductions in inventory costs.  All three financial profit components move in the right directions at a faster rate than if you had attempted any of the three as stand-alone initiatives.  Please keep in mind that I am not challenging the validity of Lean, Six Sigma, or the Theory of Constraints. I am simply presenting what I believe is a better approach for all three initiatives. All three initiatives are vital pieces to the improvement pie, and I believe this amalgam of the three is a better approach to improvement than each being pursued in isolation as stand-alone initiatives.  With the failure rates of all three initiatives being as high as they are, it seems to me that combining forces is intuitively a better approach.

Debra Smith, explaining the benefits of using TOC improvement tools and techniques, says: “In research sponsored by the Institute of Management Accounting that studied 21 companies in both Europe and North America, we found this payoff to be the case in nearly all the companies examined. Numerous studies have substantiated the quick and relatively painless superiority of TOC as a process of ongoing improvement to manage production.” But TOC by itself simply will not maximize a company’s return on investment to the same degree as the fusion of Lean, Six Sigma, and the Theory of Constraints, which I call the Ultimate Improvement Cycle. Yes, TOC does drive throughput up, but Lean and Six Sigma bring additional rigor and discipline, in order to sustain these gains, as well as offering key tools and techniques for reducing waste and variation.

In what I consider a very compelling study, Pirasteh and Farah present some very revealing statistics relative to a study performed in a “global electronics contract manufacturer” that compared the financial impact of implementing Lean, Six Sigma, and a combined Theory of Constraints, Lean, and Six Sigma approach.16 In this study, eleven plants applied only Six Sigma, four plants applied only Lean, and six plants applied UIC. This was a somewhat double-blind study, in that none of the plants knew that a comparison of results was being studied. A “plant” in this study was defined as a production facility that was fully capable of prototyping, designing, producing, and distributing customer products located in various regions in the United States. In total, there were 101 projects completed over a two-year period, with the results validated by company controllers and senior management.

Although there are some significant differences in the Pirasteh and Farah model when compared to the UIC that I have developed, the models are close enough to translate the findings in this study to similar results that I have achieved.  In fact, the Pirasteh and Farah process improvement methodology “delivered consistently higher cost savings to the company…. Specifically, its application resulted in a contribution of 89 percent of the total savings reported. Six Sigma by itself came in a distant second with a 7 percent contribution to company savings; followed by 4 percent from stand-alone Lean applications.” The figure below is a graphical representation of the savings contribution from each of these three methodologies. Think about it. Eighty-nine percent of the total improvement came as a result of combining Lean, Six Sigma, and the Theory of Constraints.
The Ultimate Improvement Cycle

If you were to combine the best of all three improvement initiatives into a single improvement process, what might this amalgamation look like? Logic would say that you would have an improvement process that reduces waste and variation, but primarily focusing in the operation that is constraining throughput.  The figure below shows the UIC that combines the power of Lean, Six Sigma, and Theory of Constraints improvement cycles to form a more powerful and profitable improvement strategy. The UIC improvement cycle weaves together the DNA of Lean and Six Sigma with the focusing power of the Theory of Constraints to deliver a powerful and compelling improvement methodology.

All the strategies, principles, tools, techniques, and methods contained within all three improvement initiatives are synergistically blended and time released to yield improvements that far exceed those obtained from doing these three initiatives in isolation from each other.

The UIC is not simply a collection of tools and techniques, but rather a viable and practical manufacturing strategy that focuses resources on the area that will generate the highest return on investment. The UIC is all about focusing on and leveraging the operation or policy that is constraining the organization and keeping it from realizing its full potential. By combining Lean, Six Sigma, and the Theory of Constraints, UIC forces us to take several steps, as discussed in the following sections.

In my next posting, we’ll discuss how this integration works and why I consider it to be the most effective improvement methodology of all.  We’ll complete the discussion by linking some of the more important tools within this methodology.

Bob Sproull

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