My blog is focused primarily on the Theory of Constraints and how to use it to maximize the profitability of any company. I also discuss why integrating TOC with Lean and Six Sigma is the most dynamic improvement methodology available today.
I got side-tracked from my
postings on the TLS series because of Atlanta’s significant winter weather
event and how “forecasting” played a role in a rather inadequate response to it
by local and state government officials.So in today’s posting I will now discuss the other two components of
TLS, Lean and Six Sigma.
Much has been written
about Lean over the past several years, but its basic philosophy is centered on
a whole-systems approach that focuses on the existence and removal of
non-value-added (NVA) activities within a process or system. These NVA
activities are characterized as waste in the Lean vernacular. As an
improvement initiative, Lean teaches you to recognize that waste is present
within every process and that we should take extreme actions to either
eliminate it or significantly reduce it.
The entire premise for
doing this action is to facilitate a flow of value through the entire process.
If this is true, then it begs the question—What is value? There have been many
attempts to define value, but the best definition is based on the customer
value and not the producer value. In
its simplest terms, value, is whatever the customer feels good about paying
for. Customers know what they want, when they want it and how much it is
reasonable to pay for it—so in the long run, value clarifies itself.
Lean has become recognized
as one of the most effective business improvement strategies used in the world
today, but if this is so, then why are so many Lean implementations failing at
such an alarming rate? In this case, failure implies the inability to not only
achieve, but also sustain, the needed effort.
Like Lean, much has been written
about Six-Sigma methods and the now infamous acronym DMAIC. Whereas Lean is
attempting to remove non-value-added and wasteful activities, Six Sigma is attempting
to remove unnecessary and unwanted variation. Six Sigma uses the road map Define,
Measure, Analyze, Improve and Control (DMAIC) to seek out sources of
variation, and through various statistically based tools and techniques,
attempts to limit (control) variation to the lowest possible level. The
professed power of Six Sigma lies in the disciplined structure and use of the
tools and techniques.
However, this supposed power sometimes ends up being a detriment
to some companies because in many instances they will experience enormous
information overload, coupled with a failure to launch the information into
viable solutions. In essence, these companies are suffering from analysis
paralysis. Like Lean, many Six Sigma initiatives have failed to deliver true
quantifiable bottom line improvements and, therefore, have been abandoned. Six
Sigma can be difficult to employ. It is heavily dependent on mathematics
(statistics) and formula derivatives that quite frankly most people do not
enjoy or involve themselves with. At
times is seems as if you need to call Merlin the magician just to get started.
There is also popular hybrid of
Lean and Six Sigma known as Lean-Sigma which, as the name suggests, is a merger
of the two initiatives. The primary assumption of Lean-Sigma is that
eliminating or reducing waste and variation in the system will lead to major
cost reductions. It seems to make perfect sense that if each initiative
delivers its own separate improvement, then combining output from both of them
should optimize the process and result in a double-dip reduction in cost. However,
in the final analysis, the primary functions of Lean and Six Sigma are aimed at
cost savings. Saving money is indeed a strategy, but it’s just not an effective
strategy for making money. The overall issue is not with either one of these
methodologies, but rather the belief that the way to increase profitability is
through cost reduction. Cost reductions have implied mathematical limits, and
once those limits are encountered, the improvement effort stops or slows down
significantly. Consider this—have you ever heard of a company that has actually
saved themselves into prosperity? If cost reduction is not the answer, then
what is the best route to profitability?
In my next posting we'll dive deeper into this integrated methodology and discuss why these three improvement methods work so well together.
This week in Atlanta and
suburban areas we had a winter storm and although we only received 2 or 3
inches of snow, the city has been virtually shut down.If you’ve been watching the national news,
you probably have seen the massive traffic jams and hear stories about how many
children had to spend the night in their schools because the roads were
impassable with lots of ice.There was
one story about a father who was worried about his 5 year old daughter who actually
walked 6 miles to his daughters school to spend the night with her.There were stories of heroism and people
taking in complete strangers because they were stranded.Everything that you saw and heard about this “snow
event” were absolutely true!All of this
over 3 inches of snow!
In the aftermath of this
winter storm, the finger pointing and blame game erupted over the forecast being
wrong.On Monday the National Weather
Service had issued a winter weather advisory for areas mostly south of
Atlanta.On Tuesday the forecast had
changed to a winter weather warning, but still mostly South of Atlanta.But when this snow event actually hit
Atlanta, the location of the snow and ice suddenly changed as both North and
South Atlanta we hit with an accumulation of up to 3 inches.
Yesterday the Mayor of
Atlanta and the Governor of Georgia both held separate news conferences to
explain the obvious lack of preparation for this winter storm, trying to
explain their way out of criticism.When
asked why they hadn’t “pre-treated” the roads with salt to make sure the roads
around Atlanta were passable, both the Mayor and the Governor pointed the
finger at the weather forecasters!I
laughed to myself and continued listening as one-by-one both fielded questions
about the lack of preparation.Excuse
after excuse came from both the Mayor and Governor, but the central theme of
their rebuttals was that the forecast was wrong.
One of the things that I
have written about on this blog is how, if you rely on forecasts to plan what
happens in your company, there is a high probability that you will be wrong. Yet
companies continue to use software with sophisticated algorithms to plan their
production and order their raw materials. According to Hop and Spearman in their
breakthrough book, Factory Physics, the
first of forecasting, for those of you who don’t know, is that forecasts are always wrong!The second law of forecasting tells us that, detailed forecasts are worse than aggregate
forecasts.The third law of
forecasts is, the further into the
future, the less reliable the forecast.They also tell us that, “no matter how
qualified the expert or how sophisticated the model, perfect prediction of the
future is simply not possible; hence the first law.” And finally, Hopp and Spearman tell us that, “Since
our estimate is likely to be approximate at best, we should strive to make
decisions as robust as possible with respect to errors in the forecast.” So with all this in mind, is it any wonder that,
if the Mayor and Governor both followed a forecast to plan and execute their respective actions, then it should come as no
surprise that huge mistakes were made in preparing for this winter event.
My belief is that we should
always plan for the worst, but hope for the best.If both the Mayor and Governor had followed
this simple plan, then the state and local roads would have been pre-treated
and much of the chaos would not have occurred.Both the Mayor and Governor found themselves in a reactive mode instead
of being proactive.There’s lessons for
all of us to learn from this “amazing” snow event!
I have had several requests to write a blog on the integration of
the Theory of Constraints, Lean and Six Sigma.In our book, Epiphanized,
Bruce Nelson prepared an excellent piece of writing in Appendix 1, so I thought
what better than to post much of what Bruce wrote in our book.The next several postings then will be
excerpts from Appendix 1 of Epiphanized.
Appendix 1:Theory of Constraints
(TOC), Lean and Six Sigma (TLS)
Over the past century there have been abundant attempts to improve
the quality of both products and services throughout the world and many
different people have contributed to this improvement movement and the body of
knowledge associated with it. If you take a moment and look back through the
years, the list of improvement ideas and acronyms would fill several pages. If
it is true that the past helps predict the future, then there will be many more
new ideas come into existence.
Currently, three principal improvement methodologies—the Theory
of Constraints (TOC), Lean, and Six Sigma—appear to dominate the subject matter
of the improvement world, and each brings its own unique perspective to the
improvement playing field. Each also has its own following of zealots and
believers. And each proclaims that their single method is the way forward,
providing the light and the truth, so to speak. It’s almost as if each
methodology is a religious experience of sorts. But does it really have to be
this way? Is there a benefit in keeping these methods separate and apart from
each other? Does each methodology have to exist in isolation from the others?
Let’s look at each methodology in a bit more detail to see if we can answer
Theory of Constraints (TOC)
In the early 1980’s Dr. Eliyahu
Goldratt introduced the world to a new way of looking at profitability through
his now famous Theory of Constraints (TOC), which was presented in his book The
Goal. In principle, Goldratt’s argued that instead of trying to save
money through cost reductions, companies would be much more profitable if
they focused instead on making money. But aren’t the two ideas
synonymous? The answer is—absolutely not! These two ideas represent very
different and divergent approaches. Saving money is not the same as making
money. And the management strategy you choose to employ to make money is very
different than the one you employ to save money.
Goldratt’s emphasis is
that the goal of for-profit companies is to make money now and in the future.
Goldratt analogized this concept using a chain. He stated that the weakest link
in a chain controls the overall strength of the chain, and that any attempt to
strengthen any link other than the weakest one will do nothing to improve the
total strength of the chain. Organizationally this means that every action or
decision taken by the organization must be judged by its impact on the
organization’s overall goal of making money. If the decision does not get you
closer to that goal, then the decision is probably ineffective.
Goldratt defined a system
constraint as anything that limits the system from achieving higher
performance relative to its goal. So if the goal of the organization is to make
money, then the systems constraint must be identified first. Goldratt
explained that in order to determine whether an organization is moving toward
its goal and not away from it, three simple questions must be asked and
1. How much money does your organization
2. How much money does your organization
3. How much money does your organization
spend to make it operate?
From his research Goldratt
developed his own simplified system of accounting that he referred to as
Throughput Accounting (TA). The basis for Goldratt’s accounting system were
three financially based, performance metrics:
This is the rate that the organization generates “new” money primarily through
sales. Goldratt further defined T as the money collected through the sale of a
unit of product minus what it pays to its suppliers and others—or Totally Variable
Costs (TVC). Therefore, T = Selling price minus Totally Variable Costs, or T =
SP – TVC. The bulk of the TVC would be raw materials, but could include any
sales commissions and shipping costs associated with products.
The money an organization invests in items that it intends to sell. This
category would include inventory, both raw materials and finished goods.
Operating Expense (OE):
All the money an organization spends to operate, including labor costs, office
supplies, employee benefits, phone bill, and electric bill and so on. All the
money spent to support the organization. What distinguishes Goldratt’s
definition of throughput from the traditional definition is that throughput is
not considered to be valuable until money exchanges hands between the
organization and its customers. At any point in time before the sale the
product is still considered Inventory, even in a finished goods status.
Basically, any product that is produced and not sold to a customer is simply
termed Inventory or Investment and it has a cost associated with it. This is a
major departure from the traditional definition of throughput, and its overall
implications are far reaching.
Goldratt expanded his TA definitions still
further by defining net profit and return on investment as follows:
• Net Profit (NP) = Throughput
minus Operating Expense or NP = T – OE
• Return on Investment (ROI) =
(Throughput minus Operating Expense divided by Investment or ROI = (T – OE)/I. With these three simple measurements (T, I and
OE), organizations are able to determine the immediate impact of their actions
and decisions on the financial performance of their organization. Does it make
sense that the superlative actions upon the system are those that increase T,
while simultaneously reducing I and OE? You might wonder why a discussion of
TOC started first with a financial definition. The relevance should become
The Theory of Constraints
operates under what Goldratt refers to as his Five Focusing Steps:
Step 1: Identify the
system constraint. The constraint is commonly considered anything within a system
that limits the system from achieving higher performance relative to its goal.
Step 2: Decide how to
exploit the System Constraint. Exploitation implies getting more from what you already have. It
requires that you understand why you are currently getting what you are getting,
and what steps are necessary to maximize the throughput of the constraint. How
do you get more from this constraining operation?
Step 3: Subordinate
everything else to the System Constraint. The subordination implies that all other
non-constraint processes activate to the same level as the constraint. It
seems contrary to popular belief, but sometimes in order to go faster, you have
to go slower.
Step 4: If necessary,
elevate the system constraint. Elevation implies more constraint capacity or resources, if the
market demand on the system still exceeds current capacity. At this point, it
may be required to spend some money to increase throughput—but only during Step
4 and not during Step 2.
Step 5: Return to step 1. When the constraint has
rolled (moved) to a new location in the system, then go back to Step 1 and
follow the sequence again.
So, you may be wondering why
these Five Focusing Steps are important to someone who uses Lean, Six Sigma or
the hybrid, Lean-Sigma. The facts are simple— without the understanding of the global
system focus provided by TOC, many of the Lean and Six Sigma initiatives will
fail to deliver significant bottom line improvement. The fundamental key to
impacting the bottom line is directly proportional to the company’s ability to
drive throughput to higher levels while at the same time reducing Inventory and
Operating Expense. The concept here is driving the system to make money, rather
than saving money. Think about it, if your financial model is based upon how
much cost you can remove from a process (reducing OE) then, your ROI has a
mathematical limit. Likewise, if your focus is only on reducing Inventory, it
too has a functional and mathematical lower limit. Throughput, on the other
hand, is devoid of a theoretical upper limit. Ponder, just for a moment, the
overall impact of simultaneously increasing T while reducing OE and I. The
crucial focus of increasing T is what drives NP and ROI!
In my nest posting we’ll discuss
the other two components of this trilogy…Lean and Six Sigma and then talk about
why they work so well together.
In his book The Goal, Eliyahu Goldratt
effectively used a story written in a novel format to walk the reader through
the steps necessary to move a manufacturing organization from the traditional
manufacturing concepts to a facility managed using the concepts of Drum
Buffer-Rope (DBR). This nontraditional approach through logical thinking is
masterminded by a character named Jonah. Jonah is able to help Alex Rogo
understand the invalid thinking and assumptions being used to manage his plant
and the negative consequences associated with that type of thinking. By helping
Alex focus his thinking on how the plant is being managed, Jonah helps Alex
logically discover a new and better way. And Drum-Buffer-Rope (DBR) is the
centerpiece of this process. In this
posting I will “borrow” heavily from Appendix 6 from Epiphanized as written by Bruce Nelson.
The intent of this posting is not how to
implement DBR, but more the understanding of why system’s thinking is so
important in any improvement effort and why it is so important to view your
organization as a system rather than isolated parts when selecting the focus of
your improvement efforts.
The thinking behind DBR is really quite
simple, but mostly just logical. Thinking logically is nothing new, but it is
not the way most people think. The fundamental view of DBR is to focus on the system as a whole rather than only a
single segment of the system—at least until you have clearly identified the
constraint. This idea of looking at the global system is a major shift
in the way systems have previously been viewed and managed. Prior to global-systems
thinking, the pervasive point of view was (and still is) that any systems
improvement, at any location, would improve the overall system. The idea being
that the sum total of several isolated improvements would somehow equal an
improvement to the overall system. But such is not the case. The effects of
employing the “shotgun” approach to systems management can cause a series of
devastating systemic effects.
A system can be defined as a sequence
of steps or processes that are linked together to produce something as
an end result. With that definition in mind, it’s easy to understand how
virtually everything can be linked to some kind of a
system. Engineering organizations have systems, banks have systems and grocery
stores have systems. Almost anything you can think of is the product of a
system. By design, a system can be as small and unique as two processes linked
together, where the output of one process becomes the input for the next
process. Or systems can be very complex, with many processes linked together,
maybe even hundreds or more. Just because a system is complex does not mean it
can’t be improved—it just means it’s complex, and that’s OK. Even in a system
as simple as two linked processes, one of those two processes will constrain
the other. It’s just the nature of how things work. If a systems constraint did
not exist, then the system should, at least theoretically, be able to produce
at infinite capacity. But infinite capacity is not a level that is ever
achieved from a system. All systems are restricted, at some point in
time, by some type of output limitation. This limitation is usually determined
by the presence of some kind of system-capacity limit. No matter how good the
system is, there is still only so much it can do. Sooner or later whatever kind
of system is being analyzed, it is will reach its maximum system capacity and
be unable to produce more. If higher system outputs are required beyond the
current capacity, then the system must be changed.
For years, if not decades, people
and organizations have dedicated considerable time and effort to remove
variation from systems. The utopian goal is to remove as much variation as
possible from the system. No matter how much planning is employed, no matter
how much effort is extended, variation will still exist! If you were asked how
long it takes you to get to work every day, your response might be something
like, “about thirty minutes.” The instant you answer with the word about,
you have introduced variation into the system. You know that historically
speaking, some days you get to work in twenty-five minutes and yet others days
it can take thirty-five or forty minutes. In your “get to work” system, things
can happen that will either speed up the process or slow it down.
Variation exists in everything, especially
within a system. You understand that some processes will produce at a faster or
slower rate than others, and this is the premise behind variation. Because of variation, the output from a system will not be linear, but
rather it will operate within a range that changes. This variable range is
known as statistical fluctuation and it exists in every system. It’s
important to understand that you cannot make variation go away. The theory and
practice of Six Sigma has pioneered the race to variation reduction. But even
with the most valiant efforts of time and money, not all variation can be
removed. You can reduce the amount and severity of variation, but it will still
exist. Once you understand that variation is a constant variable in any system,
it’s easier to understand that at some point you will reach the minimum
variation that is controllable in the system and any efforts to reduce variation
beyond that point are fruitless. Perhaps, instead of spending so much time and
effort on techniques to remove variation, the focus should really be on techniques
to manage variation.
When viewing a system through the
eyes of DBR, it becomes quickly apparent that improving every step in the
process is not required, nor will the sum total of all of those discrete
system improvements equal an improved overall system. When conducting a full
systems analysis, with the intent of implementing DBR, an important
consideration to know and understand is the location of the system
constraint, or slowest operation. In Goldratt’s Five Focusing Steps, this
is Step 1—Find the constraint. Once you know where the slowest operation
resides, you now have the information necessary to know where to focus your
attention within the system. Why is it important to understand where the
slowest operation is? Because this is the location that controls and
determines the output for your entire system. In essence, the entire system
will produce no faster than the slowest operation can produce. (The system can
produce less, but it won’t produce more.).
With the constraining operation
identified, you have collectively quarantined the “drum” beat for your system.
Knowing the drumbeat is of strategic importance to implement and gain any system improvements. The drum provides
you with the necessary information of knowing where to focus your improvement
Historically, many organizations
can and do conduct many improvement projects on a yearly basis. The mantra
seems to be that every organization and every process should strive for
improvement. The thought is that each organization is improving at some level
of frequency to make the whole system better. However, the sum of many efforts
does not always equal what is good for the whole. The problem with this type of
thinking is it is a totally unfocused shotgun approach to solve the
problem. In effect, it presents an improvement policy that states: if I select
a wide enough range, then I should hit the target, or at least come close to
the target. When you take the shotgun approach you might hit everything a
little bit, but miss the full impact required to make real change and
improvements. If your shotgun approach includes trying to improve non-constraints,
and most do, then the system as a whole gains nothing! The improvement of non-constraints
in isolation of the entire system, without a comprehensive analysis, is just a
way of dealing with symptoms and not the real issue (constraint).
Without the ability and the
accurate information necessary to focus on the real issues, the disease goes
merrily on. Improvement of non-constraints is a noble gesture, but one that
yields little, if any, real improvements. Every process within a system does
not need to be improved at the same time! Some system processes are more important
than others. Without knowing where your constraint resides, your efforts to
improve will be unfocused and consequently worthless, serving only to consume
large amounts of money, resources, and time.
So there you have it…..the
concept of system’s improvement versus uncontrolled localized improvement. We can’t emphasize enough just how important
it is to view the entire system when trying to decide where improvements should
be focused. I want to thank Bruce for
his valuable insights.
In the past week I have
received several emails from readers of this blog asking me why it is so
difficult to make lasting changes, so I thought in this posting I would address
this concern.It’s pretty clear that
improvement requires that something change, but that not every change results
in an improvement.One thing is for
certain though, if we don’t change, then our competition will surpass us.Most companies have concluded then that
change is absolutely necessary in today’s competitive world.As I’ve written about in several other
postings, there are three basic questions that must be answered:
1. What should I change?
2. What should I change to?
3. How do I cause the change to happen?
For those who are regular
readers of this blog, I have written about the Theory of Constraints Thinking
Processes (TP’s).And although this will
not be the subject of this posting, they are worth mentioning.The TP’s are used to first, identify all of
the negative symptoms or undesirable effects (UDE’s) that exist within any
organization and then link them through cause and effect logic until the one or
two core problems are identified and surfaced.In doing so, we can then devise solutions to these one or two problems
and in so doing, most, if not all, of the negative symptoms we see will
disappear.That’s how it’s supposed to
work in theory.And while I’ve been
quite successful in using the TP’s over the years, overcoming resistance to
change is where many improvement initiatives fail.
In the Theory of Constraints
body of knowledge, there are a series of questions that must be answered that
are based upon the psychology of change.These questions, or variations of them, are what people intuitively ask
when a change is proposed to them.Being
able to overcome the natural resistance to change is paramount to a successful
improvement initiative.Those questions,
or variations of them, are as follows:
1. Have we really identified the right problem
to be addressed?How do we know we have
identified the right problem?
2. Ok, we have identified the right problem, but
what about the solution?
3. Do I think that the basic direction of the
proposed solution is correct?
4. Do I believe that this solution will work
and, by the way, what’s in it for me?
5. What if something goes wrong with the
solution and creates new problems for me?Have we thought through the potential impact of this solution and
possible negative side-effects?
6. Can our organization really implement this
solution effectively and will it truly deliver something we view as being positive
7. Will leadership support and commit to this
change?Without the support and
commitment of our leaders, it simply will not work!
Unless we address and answer
these questions effectively and consider input from both the people being asked
to implement the change and the people who will be impacted by the change, we
won’t have the necessary buy-in and the change will probably fail.I’m not talking about leadership buy-in here,
but rather the subject matter experts….the people who produce the products or
deliver the service for our company.In
other words, the entire work force must be committed to its success and support
the impending change.
One thing that has been
successful for me is something I have written about before referred to as active listening.Active listening is a simple concept whereby
we assemble a group of subject matter experts (SME’s), explain the problem to
be solved and then solicit improvement ideas from them.The SME’s, the people doing the work, have a
much better understanding of what’s truly happening in their current reality,
so by giving them a chance to solve the problem, using their ideas,
automatically creates the necessary buy-in to commit to and support the
solution to the problem.Where this
sometimes falls short is the reluctance of senior leadership to accept and
implement the SME’s improvement ideas.My belief is that as long as their ideas don’t violate safety rules or
company policy, then the improvement ideas should be implemented as stated.
If you’ve never really tried
active listening, you might be in for a real surprise as to just how effective
it can be.
I received an email from a reader that told me the link I had originally posted did not take him to the blog as a reader, so I'm re-posting F & L Part 295. Sorry for the confusion.
I have received several requests to update and post my blog index, so here it is:
Post # Subject Discussed
Each of the following postings can be reached by
searching for the number designation below.For example:1 is Focus and
Leverage or 2 is Focus and Leverage Part 2 and so forth.The link to the first blog posting is:http://focusandleverage.blogspot.com/
to TOC – Lean – Six Sigma
Improvement Initiatives Fail
Basic Concepts of TOC
Process of On-Going Improvement (POOGI)
3 Cycles of Improvement
TOC, Lean and Six Sigma Graphically
1a Performance Metrics
Steps 1b and 1c Reducing Waste and Variation
a Constraint’s Improvement Plan
number was skipped
1b and 1c Reducing Waste and Variation plus an intro to DBR
Final Steps of UIC
do I start the UIC?
10 Prerequisite Beliefs
Lean, Six Sigma and TOC
Logical Thinking Processes
of Legitimate Reservation
Current Reality Trees
Diagrams Basic Principles
to Future Reality Trees
Future Reality Trees
Management Negative Behaviors
Path Management (CPM)
Chain Project Management (CCPM)
Projects In CCPM
Posting on CCPM
to the TOC Parts Replenishment Model versus the Min/Max System
TOC Parts Replenishment Model
with Joe Dager from Business901
Ohno and Goldratt Commonality
43.Dedication to Dr.
44.How processing time, cycle time, throughput and WIP are
46.Batch and queue production system and the fallacy of a balanced
47.Why an unbalanced line is better.
48.What prevents me from making more money now and more money in
49.More on the 10 Prerequisite Beliefs
50.Motivating a work force to actively participate in improvement
51.Re-Introducing the Intermediate Objectives Map
52.Introducing Be Fast or Be Gone: Racing the Clock
53.Parkinson’s Law, The Student Syndrome, Cherry Picking and
54.Overcoming the four negative behaviors in Project Management
55.Intro to combining theInterference Diagram
(ID) and the IO Map