Sunday, April 27, 2014

Focus and Leverage Part 342

In this posting, I want to cover the basics of what my blog was originally intended to communicate to the world .  There is a reason why I chose the name, Focus and Leverage.  Focus and leverage is actually what happens when you correctly apply the integrated methodology that I have written about many times.  Of course the integrated  methodology that I speak of is combining Lean, Six Sigma and the Theory of Constraints.  This method differentiates itself from what most other organizations teach and facilitate in that it provides organizations with the correct area to focus improvement efforts.  Because it’s based upon a triadic approach, it is my belief that it supplies that missing ingredient….focus and leverage.  It is my belief that, knowing where organizations should focus their improvement efforts, creates the leverage point to assure optimal success.

In 2009, my second book was published, The Ultimate Improvement Cycle – Maximizing Profits Through the Integration of Lean, Six Sigma and the Theory of Constraints.  In this book what I wanted to introduce to the world a method that exemplified the importance of knowing where to focus improvements.  For those of you interested in learning more about this method, refer to Parts 308 through 316 where I discuss this methodology in much more detail.

The Theory fo Constraints or as it is also known, Constraints Management (CM) operates at many different levels, but certainly it is a management philosophy which leads managers to make much more effective decisions.  In its basic form, CM encompasses a simple 5-Step process for improvement which results in maximum improvement in the shortest time possible, and it does so with the system in mind.  CM offers a set of Thinking Processes (TP’s) used to analyze the organization to zero-in on the organization’s one or two core problems that are causing most of the negative symptoms observed within it.  The same TP’s are then used to develop and implement out-of-the-box solutions in the fastest and most effective way.

Constraints Management also offers prescribed and time-tested solutions to such areas as Finance and Accounting, Distribution and Supply Chain, Synchronized Production, Project Management, Marketing and Sales, and Strategic Planning.  Imagine a simple day-to-day financial decision-making method where everyone understands, in advance, the outcome of their decisions and actions.  Imagine too, projects that are completed on time, on scope, and on budget with durations shrinking by 30 to 50 %.  Finally, imagine a custom-made growth plan which delivers net profits in 4 years, equal to today’s sales revenues!  Constraints Management doesn’t make assumptions about what’s wrong within the organization, but rather identifies the organization’s core problem through a series of logic-based tools and methods and then develops logical solutions to the core problem(s).

One of the keys to success for Constraints Management is how it views the pathway to enhanced profitability.  Assuming the Goal of the organization is to make more money now and in the future, CM offers a different form of accounting known as Throughput Accounting (TA) also referred to as Throughput-Based Decision-Making.  CM and TA challenges  the conventional Cost Accounting (CA) belief that the path to profitability is through saving money (i.e. cost cutting).  Instead, CM and TA teach us that the more effective path to improved profitability is through making money and the two approaches are dramatically different which we will discuss in a later section.  In the next section of this posting, I want to address the basics of Constraints Management and how it can take your organization to significantly higher levels of performance just by focusing on the leverage point.

The Basics of Constraints Management (CM)

In any chain, there is a weakest link that determines the overall strength of the chain.  If you wanted to improve the strength of the chain, you must first identify this weakest link and then focus your improvement effort on it.  Strengthening any other link in the chain will not improve the chain’s overall strength.

Although demonstrating CM’s basic principles has typically been done by using this chain analogy, I have always believed that a much more effective analogy to demonstrate these principles is by using the flow of water through different diameter pipes.
Ask yourself this question, “If you wanted to increase the flow of water through this piping system, what must you do?”  Obviously the only way to accomplish this would be to increase the diameter of Section E proportionally to the amount of water increase you needed.  Now ask yourself this question, “Would increasing the diameter of any other pipe deliver more water?”  The obvious answer is no, only increasing Section E’s diameter would deliver more water. 

Now let’s take this analogy to a simple process example.  The figure below is a simple 4-step process, not unlike any process within your company.

In this process, with the cycle times listed, raw materials enter at Step 1 and then are processed through the remaining 3 steps until a finished good exits.  If you were attempting to increase the output of this process, what must you do?  The only way to do this is to reduce the cycle time at Step 3 which has the longest processing time.  In other words, Step 3 is constraining this process.   Like the piping system, reducing the cycle time of any other step would not produce any more products through this process.  Since Step 3 is limiting the throughput of this process, it is referred to as the system constraint.  Doesn’t it make sense that you must focus your improvement efforts on the system constraint (the leverage point) in order to improve the throughput of your process or system.

Many companies have been taught to maximize the speed of every step in their process to drive manpower efficiencies or equipment utilizations higher, but is this the right thing to do?  Consider what would happen if we were to run each step of our 4-Step process at maximum capacity.  The figure below displays a different process with the eventual outcome if all steps were run at their capacity.

Because Step 3, with a cycle time of 8 days, controls the throughput of this process and it can only process incoming materials from Step 2 at this rate, a backlog of work appears in front of it.  Also, because Step 2 is much slower than Step 1, a queue also appears in front of it.  The decision to run faster than the slowest operation does not make much sense, nor do the metrics efficiency and utilization.

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 the 4-Step process)
  2. Decide how to exploit the system constraint (i.e. 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 the process of on-going improvement.  The concept of inertia means not to become complacent when you break the original constraint).

This is Constraints Management in its most basic form, but Constraints Management operates at many levels and in my next posting, I will discuss some of these.

Bob Sproull

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