Friday, November 21, 2014

Preface to the Ultimate Improvement Cycle

This past week I received and email from one of my readers telling me I should publish the Preface from my second book, The Ultimate Improvement Cycle - Maximizing Profits Through the Integration of Lean, Six Sigma and the Theory of Constraints.  When I asked the reader why, he told me that it is a message worth sharing.  So in deference to this reader, here is the aforementioned Preface (with some slight modifications since it was first published).

When I first began my career in a manufacturing environment, I’ll be the first to tell you that I knew nothing about the inner workings of a manufacturing facility.  I knew that you had to process customer orders, order raw materials, create a production schedule, process them into a finished product and then deliver them to a customer in a timely manner.  What I was unaware of were the intricacies involved in doing all of this.  In the years that followed I began to better understand the different roles of other groups within a typical company and how they impacted the success of the company.  I learned that processes don’t always produce product according to plan because of things like downtime and quality problems.  I began to realize the impact and influence that leadership can have on an organization and how performance metrics invariably influence the behaviors of the resources within the organization.  I’ve been at it for many, many years now and have come to several conclusions that apply to all manufacturing companies.  Some of these conclusions directly contradict what I had learned along the way from the various mentors and leaders that shaped and influenced my career.

In hopes of not offending too many Cost Accountants, the first and perhaps the most important conclusion of all is my belief that Cost Accounting influences the behaviors of many manufacturing organizations in very negative ways.  I had always been taught that if you were able to minimize the cost of each individual operation that the total system would operate at minimal cost.  I had also been taught that the total cost of each operation is directly proportional to the cost of direct labor for each operation and that the total cost for the system minus the raw material cost is proportional to the sum of direct labor costs.

I had been taught that if I maximized efficiencies and utilizations of each individual operation I would therefore maximize the efficiencies and utilization of the entire system.  More succinctly, I was taught that the key to reaching global optimization was by achieving local optimums.  I was taught that every operation was equal in value and that the key to increasing profits was to reduce the amount of money required to operate each individual process.  In so doing I was taught that manpower was expendable so it was okay to lay-off excess manpower.

Finally, I was taught that inventory was needed to protect all of the steps in the process so that if we had downtime on the previous step, we could use inventory to continue running.  In essence I was taught that inventory was a good thing because it was impossible to avoid downtime and defects that resulted in rework and scrap.  And besides, inventory was viewed by Cost Accounting as an asset, so how could it possibly be bad?

As I continued learning, I began to realize that some of things I had taken as being the gospel were in fact, pretty much bogus!  First, I realized that maximizing the efficiency and utilization of each operation did not result in optimization of the total system at all.  In fact, I learned that maximizing the efficiency of all operations only served to create mountains of work-in-process inventory.  I learned that inventory was not an asset at all because it actually had a carrying cost associated with it.  But more importantly excess inventory increased the effective cycle time which decreased an organization’s ability to ship product on time.  I also learned that inventory tends to hide other problems.

I learned that cutting the cost of each individual operation did not result in the system cost being minimized.  In fact many times, in an attempt to minimize the cost of individual operations, companies made drastic cuts in operating expense and labor that were too deep causing motivational, quality and delivery problems!

My second conclusion is that in every organization there are only a few (and most of the time only one) operations that control the rate of revenue generation and hence the profits.  All processes are comprised of constraining and non-constraining resources and that the key improvement consideration is always focusing on the operation that is constraining throughput.  Attempts to improve non-constraining resources usually result in very little improvement at all from a system perspective.  In fact much of the time trying to improve non-constraints is actually wasted effort.

My third conclusion is that variability is the root of all evil in a manufacturing process.  Variability in product characteristics or variability in process parameters or variability in processing times all degrade the performance of a process, an organization, or a company.  The presence of variability degrades our ability to effectively plan and execute our scheduled production, increases operational expense, and decreases our chances of producing and delivering product to our customers when they want them and at the cost they want to pay.  Because variability is so devastating every effort must be made to reduce it as much as possible.

Although in the beginning of my education on variability, I was taught that there are two primary types of variability…..common or natural cause variation and special cause variation.  I now believe there are four types because I now view demand variation and supplier variation.  Customers change their minds and suppliers don’t always deliver when and what manufacturers have ordered.  Demand variation causes a ripple of variation which eventually negatively impacts suppliers and supplier variation cause a ripple of variation which eventually negatively impacts customers.  And the poor manufacturer is caught squarely in the middle.  Because of these two types of variation, I’ve learned that it’s important to dampen both waves of variation by adding decoupling points and control points to maintain some semblance of stability.

My fourth conclusion is that excessive waste exists in every process and unless and until it is identified and removed, real process improvement will not happen.  While there are many forms of waste the most obvious, and perhaps the two most debilitating types are the waste associated with waiting and over-producing.  Waiting and over-production both work to lengthen the overall cycle time.  But having said that it’s important to identify and remove this waste, it’s more important to recognize and focus the waste reduction activities primarily on the system constraint because improving the system constraint results in the maximum improvement to the system.

My fifth conclusion is that how people and organizations are measured significantly dictates their behavior.  If, for example, a company measures operator efficiency and values high efficiency in every step in the operation, then predictably the organization will have high levels of inventory, low values of quality, and a high incidence of late or missed shipments.  As a corollary to this, maximizing the efficiency of an operation that is limiting throughput (i.e. the constraint operation) is mandatory to maximizing revenue and profits!

My sixth conclusion is that most companies don’t know how to focus and leverage their improvement efforts in the right area.  Many companies have embraced Lean or Six Sigma or a combination of the two and in so doing have attempted to solve world hunger by struggling to improve every operation.  When this happens the efforts become diluted and improvements become protracted to the point of frustration.  Both of these initiatives would have worked well if they had only been focused in the right area of the organization!  This is the reason I have integrated the Theory of Constraints with Lean and Six Sigma.  And when I did so, fantastic things happened immediately!!

My seventh conclusion is that organizations that fail to involve their work force typically do not succeed in the long run.  Everyone in the organization needs to know the goals of the company and how they are doing relative to these goals.  But even more importantly, everyone must be permitted to contribute to these goals.  After all of these years it is apparent to me that the shop floor workers have a vast array of information and ideas, both of which must be harvested.

Unfortunately many of the companies that I have been involved with don’t practice what I have learned.  Many companies still use ineffective performance metrics and outdated accounting systems.  Many companies fail to recognize and capitalize on the constraints that exist within their systems.  Many companies still don’t appreciate that waste and variability encumber their processes and that the general workforce is needed to make them successful.

As a consultant I have been able to study the inner workings of many companies in many types of industries and I have discovered a better way to make the most of your precious resources.  Not only do I have an idea of why you might have failed to achieve an acceptable and sustainable return on your improvement investment, I have a solution for you as well.  The solution isn’t revolutionary, but it is innovative.  What I have to offer you is a way to make certain that your improvement effort is focused in the right place, at the right time, using the right methods and tools and the right amount of resources to deliver the maximum amount of return on your improvement investment.  This method addresses the problems associated with cost accounting, variation, waste and performance measurements.  But most of all it will focus your organization on the right area to optimize your throughput, operating expense, inventory, revenues and margins.

I know, I know, you’ve heard it all before.  You’ve heard the same declaration from experts in TQM, JIT, Six Sigma, TOC, Lean and all of the others, but I believe once you see the simplicity and logic behind what I term the Ultimate Improvement Cycle, you will be motivated and maybe even inspired to move forward with it.  The Ultimate Improvement Cycle is based upon the basic principles associated with Lean, Six Sigma and the Theory of Constraints, but it is unique in that it capitalizes on a time-released formula for use of the key tools, techniques, principles and actions of all three initiatives focused on the right area.  It doesn’t require any more resources than you currently have available, but it does provide the focus needed to achieve maximum resource utilization which translates into maximum return on investment.  Using this method will provide you with a self-funded improvement effort that will sustain itself.

The Theory of Constraints reveals interdependencies that exist within our operation and focuses our efforts on the constraining operation.  While TOC provides the necessary focus, Lean works to simplify and free the constraint of unnecessary waste as well as increasing the throughput of your total system.  While Lean is doing this, Six Sigma removes variation and defects while working to sustain the improvements.

The genesis behind the Ultimate Improvement Cycle is based upon many years of analysis of both failures and successes using Lean, Six Sigma and the Theory of Constraints as stand-alone improvement initiatives.  My analysis revealed a common thread between successful initiatives no matter whether they were based on Lean, Six Sigma or TOC models.  The key to success is the leverage point or where the improvement efforts were focused.  While eliminating waste (Lean) and reducing variation (Six Sigma) are both critical components of all successful improvement initiatives, where these efforts are focused will determine the ultimate impact on a company’s bottom line.  By integrating Lean, Six Sigma and the Theory of Constraints into a single improvement cycle, I have developed a recipe that will maximize your return on investment, cash flow and net profit.

Throughout this book, in an attempt to improve understanding and knowledge of what drives particular steps in the process, I will introduce simple factory physics laws and principles.  It is my belief that in order to fully understand why the Ultimate Improvement Cycle works so well, you must have a basic understanding of the factory physics laws and principles driving the steps.

In Chapter 1 of The Ultimate Improvement Cycle I introduce what I refer to as the Ultimate Improvement Cycle, an amalgam of all three of the individual improvement initiatives, Lean, Six Sigma and the Theory of Constraints.  I explain why attempting to implement each discrete initiative as a stand-alone improvement process can result in failure for many companies if the improvement focus is ill-placed.  At the same time, I go to great links to demonstrate how the weaknesses of one initiative, are compensated for by the strengths of the other two, thus making a non-financial argument for combining the best of all three into a single, more formidable process of on-going improvement.

In Chapter 2, I provide a more detailed picture of each initiative focusing on the principles, tools and techniques for each.  In Chapter 3 I discuss the first step in the Ultimate Improvement Cycle, the importance of identifying the value stream, the current and next constraint and appropriate constraint and non-constraint performance metrics.  In Chapter 4, I explain my methods for identifying waste and variation and then focus on and discuss how variation degrades a manufacturing organization as well as some of the best ways to reduce it.

In Chapter 5, I discuss, in detail, how to develop a plan to exploit the constraint operation through waste and variation reduction to maximize revenue and profits.  In Chapter 6 I demonstrate how to implement your plan to remove waste and reduce variation within your processes as well as discussing how to maximize the use of your resources.

In Chapter 7, I explain one of the keys to maximizing throughput and the significance of subordinating your non-constraint resources to your constraint operation.  In Chapter 8 I discuss the need for improving flow, optimizing balance in your process, reducing batch sizes and establishing one piece flow wherever possible.  In Chapter 9, I discuss the importance of and the need to establish and optimize strategically placed buffers and why it is important to establish pull systems to schedule non-constraints.

In Chapter 10, I discuss why sometimes we must elevate the constraint and how to develop and implement protective controls to sustain the gains we have made.  In Chapter 11, I explain how to increase the capacity of the constraint while in Chapter 12 I talk about implementing protective controls to sustain all of the gains we have achieved.  In Chapter 13 I introduce the reader to policy constraints that can limit the rate of revenue generation.  In Chapter 14 I will tie all of the previous 13 chapters together to make some sense of what we’re doing and what beliefs companies must accept if they are to be successful.

I think you will find The Ultimate Improvement Cycle to be both stimulating and thought provoking, but more importantly it will provide your organization with a roadmap for maximizing the use of your resources to achieve more bottom line improvement than you ever imagined possible.  I’m convinced that The Ultimate Improvement Cycle is the definitive improvement strategy going forward and I’m confident that, if you follow the guidelines developed in this book, your company will not only survive in this new global economy, it will flourish.

Bob Sproull



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