Sunday, November 9, 2014

Focus and Leverage Part 391

In my last posting section I told you not to just jump right into the UIC methodology and begin the improvement process.  If your entire operation is able to accept the prerequisite beliefs of constraint leverage and focus, then you have taken the first step.   When I say the entire operation, I am referring to everyone!  All of the individual departments, functional groups, and employees in your organization must become focused on the leveraging power of the constraining operation.  If you can’t do that, then there simply is no need to continue.  Accounting, Purchasing, Engineering, Sales and Marketing, Production, Production Control, Quality, Maintenance, etc. all must be aligned and in total agreement.  Unless and until all functional groups within your organization are singing from the same sheet of music, you simply will not make any progress.  So the first prerequisite is that your entire organization must accept the idea that the key to improvement is recognizing the power of focus and leverage.  That is, in order to increase throughput, and ultimately profitability, you must leverage your constraint operation by focusing all of your improvement resources on it.  So let's look at the other nine Prerequisite Beliefs that I believe must be in place and accepted by all.

The second belief that must be accepted by your entire organization is the concept of subordination.  Subordination simply means that every decision made and every action taken by the entire organization must be done so based on its impact on the constraining resource.  And when I say the entire organization, I mean everyone!  Accounting must provide real time decision-making information to the organization and not hold onto financial measures that are based on what happened last month (i.e. Cost Accounting and GAAP).  Accounting must also eliminate outdated performance metrics like utilization and efficiency in non-constraint operations because they mean absolutely nothing.  All these two metrics really do is create an environment that fosters and promotes over-production, resulting in higher carrying costs, extended lead times and excess inventory.  I want to add that GAAP reporting rules must be followed, but when GAAP was formed, it was never intended to be used to make routine financial decisions.

Purchasing must order parts and materials based upon the rate of consumption at the constraint and stop ordering in large quantities or only on the basis of lowest cost to satisfy another outdated performance metric, purchase price variance.  Sales and Marketing must understand that unless and until the current constraint is broken, they must not make hollow promises on delivery dates in order to obtain more orders to supplement their sales commissions.  Engineering must respond quickly to the needs of production to assure timely delivery and updates to specifications.  Maintenance must always prioritize their work based upon the needs of the constraining operation including preventive and reactive maintenance activities.  If there is an inspection station that impacts the constraint throughput, then inspectors (if they exist) must always provide timely and accurate inspections so as to never cause delays that negatively impact the flow of materials into and out of the constraint.  Finally, Production Control must stop scheduling the plant on forecasts that we know are wrong using the outdated algorithms contained within typical MRP systems.

If your entire organization believes in and is ready to subordinate to the constraint, then you have taken the second step.  If your organization is like so many others where individual departments exist as silos, then letting go of the apparent control that they now have will be a difficult pill to swallow, but one that is absolutely necessary.  If you’re not ready, then do not proceed any further!

The third belief that must be accepted by the entire organization is that improvement is never-ending.  The Ultimate Improvement Cycle is predicated on the fact that once a constraint is broken, a new one will appear immediately, so all organizational resources must be prepared to shift to it and subordinate actions and decisions toward the cycle of breaking the new constraint.  This cyclical process has no end, so be prepared to accept the idea of always getting better.

The fourth belief that the organization must accept is one of involvement of the entire workforce.  If you are like many other companies who practice traditional Cost Accounting practices, then you’ve probably been taught that improving profits means reducing expenses.  And reducing expenses has typically involved reducing the size of the labor force.  This is exactly opposite of the behavior that is needed to successfully navigate through the UIC.  Why would anyone be willing to participate in improving the operation to the point that they lose their job?  So if, in the past, you are a company that uses layoffs as a way of reducing or controlling expenses, then you are doomed to failure!  You must accept the fact that the key to making money now is increasing throughput and without everyone’s involvement, it simply won’t happen.  So if you can’t accept this belief, then stop here.

As you identify the constraint and subordinate the rest of the organization to the constraint, there will be idle time at the non-constraints.  If you are like many organizations that use total system efficiency and utilization as key performance metrics, then you will see both of them predictably decline.  You are normally trying to drive efficiencies and utilizations higher and higher at each of the individual operations under the mistaken assumption that the total efficiency of the system is sum of the individual efficiencies.  In a TOC environment the only efficiencies or utilizations that really matter are those measured in the constraint operation.  You may even be using work piece incentives in an effort to get your operators to produce more and I’m sure many of you are using variances as a key performance metric.  Efficiencies, utilizations, incentives and variances are all counterproductive!  So the fifth belief in preparing for the implementation of the UIC that must be accepted is abandoning outdated performance metrics, incentives and variances.  If you are unwilling to do this, then don’t attempt to use the UIC!

In my next posting I will lay out the remaining Prerequisite Beliefs (i.e.six through ten). 

Bob Sproull

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