Saturday, November 8, 2014

Focus and Leverage Part 390

In the first thirteen chapters of my book, The Ultimate Improvement Cycle, I laid out the steps I take to radically improve the profitability of your company and have hopefully convinced you of its value for your company.  If I have convinced you, then you probably are wondering about the best way to get started.  “Do I go out and just start at step 1a of the Ultimate Improvement Cycle?”  The answer is no, because if you did that, you would almost immediately begin hitting barriers and obstacles that would limit your success or maybe even question the validity of this cycle of improvement.  So if not step 1a, then what?  For those of you who haven’t read The UIC, here is an updated version of my original graphic found in my book.

Let’s first consider the question of what we are attempting to do.  I started my book by stating that the basic goal of all “for profit” organizations is to make money now and in the future.  If you’re already making money, perhaps your goal might be better stated as to make more money now and more money in the future.  If this is your goal, then the question I would ask myself is, “What is preventing me from making more money now and more money in the future?”  My experience tells me that there are a host of things that prevent companies from making more money.

In its most basic form, making money involves generating revenue that is greater than what it costs to generate it.  So obviously if operating expenses are too high and you aren’t generating enough revenue, then you won’t make money.  So the question is just how do you generate more revenue?  Assume for a moment that you have more orders than you have capacity to fill them.  Since you are unable to satisfy market demand, it follows that your throughput is too low.  If your throughput is too low, it also means that your cycle times are too long.  So then the key to generating more revenue must be reducing cycle times? Right?  So, how do we reduce cycle times?  Let’s first look at Little’s Law.

Since Little’s Law states that Cycle time equals WIP divided by Throughput (i.e. CT = WIP/TH) it should be clear that reducing cycle time implies reducing WIP as long as throughput remains constant.  So if you have large amounts of WIP, then clearly you have an opportunity to reduce cycle time.  But what if you don’t have large amounts of WIP in your plant (I’m betting you do though)?  How else might we reduce cycle times?

We know that cycle time is equal to the sum of all processing times for each process step.  We also know that cycle time is the sum of all value-added time plus all non-value-added time in the total process.  So if we want to decrease cycle time, then we have three choices:
  1. We can reduce value-added time
  2. Reduce non-value-added time
  3. Do some of both
One thing we know to be true is that non-value-added time by far and away accounts for the largest percentage of total cycle time in all processes.  This would imply that if we significantly reduce non-value-added time in our process, then we could significantly reduce cycle time which would, in turn, significantly improve our throughput and revenue.  So what are these non-value-added times that I’m referring to?

Just think about which activities add value versus those that do not.  Let’s make a list.

  1. Transport time – moving product from point A to point B
  2. Set-up time – converting a process from one configuration to another
  3. Queue time – time spent waiting to be processed
  4. Process batch time – time waiting within a batch
  5. Move batch time – time waiting to move a batch to the next operation which could also include time in storage
  6. Wait-to-match time – time waiting for another component to be ready for assembly
  7. Drying time – time waiting for things like adhesives to become ready to be assembled
  8. Inspection time – time waiting for products to be inspected
There might be others we could add to our list, but for now assume this is our list.  Which of these items add value?  Clearly none of them do, so they would all be classified as non-value-added.  There obviously are things we could do to reduce each one of these.  For example, process batch time is driven by the process batch size, so we could do two things that would reduce this time.  We could optimize the batch size that we produce and in conjunction with this we could reduce the time required for set-up.  In doing these two things we would probably also reduce the move batch time and maybe even the wait-to-match time.  Clearly these actions would reduce the overall cycle time…..right?

But even if we were successful in reducing cycle time, we would not realize a single piece of throughput unless we reduced the processing time and non-value-added time of the operation that is constraining the throughput, the constraint.  In my opinion, any attempts to reduce processing times in operations that are not constraining throughput are quite simply wasted effort.

The key to making more money now and in the future is, in reality, tied to two single beliefs, focus and leverage.  In TOC terminology these two beliefs of leverage and focus are fundamental to the idea of exploiting the constraint.  If you want to increase your throughput, then there is only one effective way to accomplish it.  You must leverage the operation that is limiting your throughput, your constraint operation!  And how do you leverage your constraining operation?  You do so by focusing your available resources on your constraint and reduce the non-value-added and value-added times within the current cycle time.  It’s really that simple!

In my next posting, I’m going to discuss what I call the 10 Prerequisite Beliefs for becoming more profitable and having a successful company.

Bob Sproull



Mhammed Elzubair M. A.Wahab said...

Dear Bob,

I will describe my current challenging situation using your own paragraph with changes in the scenario:
"In its most basic form, making money involves generating revenue that is greater than what it costs to generate it. So obviously if operating expenses are too high and you aren’t generating enough revenue, then you won’t make money. So the question is just how do you generate more revenue? Assume for a moment that you have no more orders to fill your existing capacity."

what is your advice here: no enough orders to fill the existing capacity.. less revenue..less money generation.

Bob Sproull said...

Hi Mhammed. Your question is a good one and the simple answer is, in order to generate more orders, you must improve your competitive edge factors. The competitive edge factors are things like on-time delivery, short lead times from order to fulfillment, quality, etc. Those elements of a business that would inspire potential customers to buy products from you. I would only ask one question of you....are you using TOC in your business? Bob

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