Saturday, July 26, 2014

Focus and Leverage Part 366

In my last posting I continued my discussion on systems thinking.  I told you that Constraints Management is based on four assumptions about how all systems function.  But before presenting more material on systems thinking, I want to start this posting by restating these four assumptions.  I’m doing so because these four assumptions form the basis for an effective systems thinking analysis.  A bit later on in this post, I want to discuss Goldratt’s 5 Focusing Steps in detail because they are an extremely important element of a systems thinking analysis and subsequent improvements to it.  The four assumptions are:

-  Every system has a goal and a finite set of necessary conditions that must be satisfied in order to achieve that goal.
The sum of a system’s local optima does not equal the global system optimum.
Very few variables limit the performance of every system at any one point in time.
All systems are subject to logical cause-and-effect relationships.

This first assumption is such an important one for everyone simply because that by defining where you are going (the goal) and how you are going to get there (Critical Success Factors (CSF’s) and Necessary Conditions (NC’s)), you have taken the first step in revealing the right pathway to take. The bottom line is, if you haven’t defined your pathway to your goal, then you will be lost along the way and it will be very difficult to reach your destination.  Unfortunately, many organizations don’t take the time to define their goal.

The importance of identifying a system’s (organization’s) goal, critical success factors and necessary conditions is that they will become the new standard for both results and decisions.  In addition to the Goal, CSF’s and NC’s, I always recommend complementary performance metrics.  As I have written about many times on this blog, performance metrics like operator efficiency or equipment utilization are simply not effective metrics to measure how well and organization is doing.  If they are measured in the constraint, they are effective metrics, but not in non-constraints.  Trying to optimize a non-constraint’s efficiency, for example, will only serve to pile up inventory and negatively impact on time delivery.   So my advice is to make certain that whatever metrics are chosen that as they move in a positive direction, the system benefits and not disparate parts of the system.

Once the Goal, CSF’s and NC’s are in place, it is time to apply Goldratt’s Five Focusing Steps.  For those of you who are unfamiliar with these steps, I’ve listed them below, along with the two prerequisites that must be in place if they are to be successfully applied.
-  Prerequisites to Goldratt’s 5 Focusing Steps
          -  Identify the Goal of the system plus the Critical Success Factors and Necessary Conditions
          -  Decide on the performance metrics for the system
-  Goldratt’s 5 Focusing Steps
     1.  Identify the current and next system constraint
     2.  Decide how to exploit the current system constraint
     3.  Subordinate everything else to the system constraint
     4.  If necessary, elevate the system constraint
     5.  When the current constraint is broken (or no longer is the constraint), return to Step 1, but don’t let inertia create a new constraint.

Let’s now take some time to discuss each of these 5 focusing steps in more detail so that the true meaning and intent of each step is better understood.
Step 1:  Identify the current and next system constraint: What we’re looking for here is to locate that part of the system that is currently limiting the system’s overall performance.  Remember back to our previous posting when I told you that we must first decide whether the constraint is located internally or externally to the system.  If it’s inside the system, then it’s usually a resource or a policy of some kind.  In other words, we don’t have the capacity to satisfy the current market demand.  On the other hand, if it’s external to the system, then we have more capacity than we have demand and therefore need more orders for our product or service.  Something important that many people seem to ignore when using the focusing steps, is that once the system constraint has been  identified, if you think you know how to break it without too much time, effort or investment, do so immediately and go right back to Step 1 and identify the new constraint.  What I also recommend is, in the process of identifying the current constraint; think to yourself, where the next one would be if you were able to break the current one. If it can be broken without much investment, then immediately do so, and revert to the first step again. By identifying the next constraint, in advance, the improvement process becomes much faster.  But if the current constraint can’t be easily broken, then move on to Step 2.
Step 2:  Decide how to exploit the system constraint. In this step, what we must do is decide how to exploit the current system constraint. Exploiting the constraint simply means to consider ways get more out of it without expending large amounts of time or spending large amounts of money. In other words, how can you change the way the constraint is operating so as to achieve the maximum throughput and financial benefit.  For example, if the system constraint is market demand (external, not enough sales), it simply means that you must make your product or service more attractive to perspective buyers.  You have excess capacity for more orders, so you must make yourself more competitive to attract additional customers.
On the other hand, if the constraint is an internal resource or policy, it means deciding what you must change in order to increase the capacity to match or exceed the demand being placed on it.  This might mean improving the quality of your product or service, improving the flow through the constraint to achieve better on-time delivery, or some other competitive edge factor. Exploitation of the constraint means that you must develop ways of ensuring superior system performance to meet or exceed the demand being placed on it.
Step 3:  Subordinate everything else to the system constraint. Goldratt’s original Step 3 stated that you must “subordinate everything else to the exploitation decision, but for me it is not the decision, it is the constraint itself.  So once the decision on how to exploit the constraint has been made, subordinate everything else to that constraint. In my opinion, this step is perhaps the most important one to apply, but it is also the most difficult for organizations to apply and accomplish.  Why do I say this? For me, the primary reason this step is so difficult is because of the “death grip” traditional cost accounting has on organizations.  Many companies still use manpower efficiency or equipment utilization as one of their primary metrics.  Both of these metrics view excess capacity as a way of cutting costs, when in reality excess capacity at non-constraints, should be viewed as favorable.  Excess capacity in process steps in front of the constraint is actually a safety net in the event there is downtime in one of these steps.  Subordination requires that everyone within the organization put their local needs behind the constraint for the good of the system.  It requires everyone, from top management on down, to accept the idea that excess capacity in the system at most locations is not just acceptable, it is a desired state.  The important thing to remember is that all non-constraints are there to assure the constraint is never idled/ Often times egos get in the way and managers have trouble accepting the idea that someone else’s process is more important than their own. As a result of these damaged egos, other people working at non-constraints will often struggle to do the things necessary to subordinate the rest of the system to the constraint. As I said, for me subordination is the most important of the five focusing steps and the primary reason why organizations have difficulty implementing the 5 focusing steps.
Subordinating non-constraints to the system constraint is intended to focus the efforts of the non-constraints so that the constraint can be exploited in the best way possible.  And even though the non-constraints could produce more, every effort should be made to not do so.  If the non-constraints produce to their individual capacity, the net result is an excessive amount of work-in-process inventory (WIP) which typically results in diminishing on time deliveries.  It’s entirely possible that, once subordination is fully in place, the system constraint might be broken and move to a new location. If this happens, then go back to Step 1 and begin the Five Focusing Steps again. But since you’ve already identified the most logical next constraint, you will actually just move to Step 2 and begin the exploitation step.
Step 4:  If necessary, elevate the system constraint: It has been my experience that most of the time, after you have completed your subordination step, the current constraint will have been broken, but sometimes this is not the case.  If this is not the case, then in order for the system constraint to be broken, you may have to make an investment.  This is the essence of the concept of elevation.  If you weren’t able to achieve enough of an increase in capacity to support the demand being placed on it, quite simply you may have to spend some money.  What this step requires is an evaluation of alternative ways to raise the capacity of the current constraint.   It could be that if the constraint is equipment related, then you might have to purchase more of it.  Or if it’s resource related, you may have to add more through additional shifts, overtime, adding additional headcount or, as a last resort, outsourcing.
If, on the other hand, the constraint is an external one (i.e. lack of sales), elevation might simply involve adding a new product line, additional advertising, or improving the competitive edge factors like reduced prices, better on-time delivery, or other factors needed to entice customers to want more of your product or service.  Unfortunately, many times elevating the constraint typically means spending more money in order to make more money. My advice is to evaluate multiple alternatives because some alternatives may offer intangible advantages.  For example, some alternatives might cost more, but are much easier to manage, so consider the entire package before deciding.
One last thought on elevation is that it is entirely possible that the constraint-breaking alternative that you have chosen might actually change the location of the new constraint from the one you predicted in Step 1.  Just be aware that this might happen so you are prepared for it.
Step 5:  When the current constraint is broken (or no longer is the constraint), return to Step 1, but don’t let inertia create a new constraint.  Once again, my experience has shown that if, after the exploit and subordinate steps don’t break the system constraint, then the elevation step most likely will. Once this happens, you must return to Step 1 or 2 to begin either identifying the new constraint or begin exploiting it, if you already identified it.
So what does the warning about inertia mean for you?  Quite simply, it’s a warning not to become complacent.  There are two distinct reasons for this warning. First and foremost, sometimes the improvement actions we put into place during the exploitation and subordination steps may no longer be relevant to the new constraint. The second reason is that there is often a tendency to relax after the first constraint is broken.  Do not relax! An organization can easily become complacent after the current constraint has been broken and that is simply the wrong thing to do.  I always advise clients to put effective controls in place to guard against complacency.  You must not let the actions or policies that you’ve put in place to fall by the wayside.  Depending upon the actions taken to break the current constraint, maybe something as simple as a process audit or even a control chart will work.
In my next posting, we’ll take a look at some of the tools we can use to adequately perform a systems analysis.  In particular, I want to discuss the Intermediate Objectives Map (a.k.a. The Goal Tree) as a way of establishing your Goal, Critical Success Factors and Necessary Conditions.
Bob Sproull



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