Sunday, March 9, 2014

Focus and Leverage Part 318

In my last posting I introduced you to what I think is the best book ever written on Throughput Accounting.  In today’s posting I want to lay the foundation for the Theory of Constraints (TOC) for all of the readers who aren’t familiar with TOC.  For those of you who are totally familiar with TOC and what it will do for you, please bear with me while I present the basics.  I want to open this posting by quoting part of Steven Bragg’s introduction to Chapter 1 of his book, Throughput Accounting.

“Every now and then, a completely new idea comes along that can be described as refreshing, disturbing, or both.  Within the accounting profession, the theory of constraints is that change.  It originated in the 1980s through the writings of Eliyahu Goldratt.  His training as a physicist, rather than an accountant, appears to have given him a sufficiently different mind-set to derive several startling changes to the concepts of operational enhancement and cost accounting.  The theory of constraints is based on the concept that a company must determine its overriding goal, and then create a system that clearly defines the main capacity constraint that will allow it to maximize that goal.”

This posting is focused primarily on the basics of the Theory of Constraints (TOC) for everyone who is new to this subject and not familiar with its basic teachings.  I have found that the best way to present the basics of TOC, is through a series of visual images starting with what I believe lays out the basic concepts quite nicely.  The figure above is a basic piping system used to deliver water.  This system is gravity fed with water entering Section A then flows through a series of pipes with varying diameters until it is finally collected in a receptacle at the bottom.

The question becomes, what if the amount of water flowing through this piping system was insufficient to satisfy the amount that you needed?  In other words, if you wanted water to pass through this piping system at a faster rate, what would you do?  After examining the piping system, most people would say that we need to change/enlarge the diameter of Section E.  And while this is the correct conclusion, the question becomes, “How large should I make the new diameter of Section E?”  In other words, what must you know to be able to decide what the new diameter of Section E should be?  Of course the answer to this question is that it depends upon how much more water you need.  So you go through some flow calculations and change the diameter of Section E as is seen in the figure below.


The figure above is this same piping system with the new Section E diameter pipe.  Let’s look closely at this new piping system.  Whereas, in the original piping system, Section E was the controlling factor on how much water would flow through the system, it now appears as though this control point has moved to Section B.   How do we know?  It’s the new constraint because the water is now backed up in front of it.
Ask yourself this question, “If we would have changed the diameter of any other section of this piping system, would the flow of water increased?”  The answer is, absolutely not……..only by identifying the constraint and increasing its diameter would more water flow through the system.  So let’s review the steps we have done so far.
  1. We first observed the entire system and identified the leverage point in the system that is controlling the flow of water which we will refer to as the system constraint or bottleneck operation.
  2. Next, we decided what we had to do to increase the flow of water through this system.  In other words, we decided how we were going to exploit the system constraint.
These are the first two steps in Dr. Goldratt’s 5 Focusing Steps (i.e. identify and exploit).
Let’s now take a look at a process that either produces a product or delivers some kind of service.  That is, let’s look at a manufacturing process or maybe a healthcare process in a hospital.  In these systems, rather than looking at water flow rate through different diameter pipes, we now turn our attention to how much time each process step takes to perform its function.  Consider the following 4-step process.
In this process, we could have either healthcare patients showing up for a treatment or raw materials being brought to the front of a production line to produce some kind of finished product. The point I am making here is that it matters not what type of process we’re looking at because the same techniques should be followed.  In this process we see that Step 1 takes 30 minutes to complete and then passes the semi-finished product or patient on to Step 2 which takes 45 minutes.  Step 3 takes 90 minutes and Step 4, 30 minutes.
Like the example using the piping system, if you were charged with the responsibility of increasing the number of patients served or products produced, what would you do?  Like the piping system delivering water, your first step would be to identify that process step that is limiting the throughput of patients or products through this process.  It should be clear that Step 3, at 90 minutes, is the step that controls the throughput rate of products or patients through this process.  So in order to improve the throughput rate, the key would be to reduce the time at this process step.  Step 3 is the system constraint within this process and you must decide how to exploit it, if you are ever going to get more patients or products through it.  But what if it wasn’t readily apparent where the constraint was located?
Referring back to Steven Bragg’s book, Throughput Accounting – A Guide to Constraint Management, Bragg provides us with a list of indicators as to where the constraint might be residing.
  1. Where is there a work backlog?  If there is an area where work virtually never catches up with demand, where expediters are constantly hovering, and where there are large quantities of inventory piled up, this is likely the constraint area.
  2. Where do most problems originate?  Where is the area where management spends most of its time working on problems?  Bragg tells us that because the constraint is forced to run in a constant mode, many times preventive maintenance is sacrificed which then translates into excessive unplanned downtime
  3. Where are the expediters?  Because Expediters are charged with physically steering a high-priority job through the production process, there presence at a specific location is usually a good indicator of a bottleneck operation.
  4. Which work centers have high utilization?  Many companies measure the level of utilization of individual work centers, so if one particular operation has the highest continual level of utilization, there’s a good chance it is the constraint.
  5. What happens to total throughput when the constraint capacity changes?  Bragg asks, if we add to the capacity of the supposed constraint, is there a noticeable increase in throughput?  On the other hand, if the capacity of the suspected constraint is reduced, does overall throughput decrease?  If throughput does change in either case, there’s a good chance that we have located the system constraint.
Bragg also tells us that if, after this analysis, a company has picked the wrong operation as its constrained resource, the real constraint will soon appear because of changes in inventory in front of the real constraint.  Now that we have come up with things to look for to identify the bottleneck or constraint operation, let’s now turn our attention to the second of Goldratt’s 5 focusing steps, the exploitation step.  In my next posting we will discuss this next step.
Bob Sproull

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