The Interference Diagram Part 1

In this series of posts, I'm going to present a problem-solving tool that hasn't gotten a lot of attention.  When faced with solving a problem selecting the correct tool to solve the problem can make a world of difference.  Suppose the problem you are faced with is to figure out how to insert a nail into a specific location.  Obviously, the best tool that comes to mind is a hammer.  Suppose your problem was to figure out how best to cut a piece of wood – the immediate response is a saw.  Each of these tools is well suited to solve the existing problem.  But what if you tried to use the saw to hammer a nail?  The saw is a tool, but it’s the wrong tool to solve the problem.  Conversely, the hammer is not a good tool choice to saw a piece of wood.  It is possible that each tool, even though used incorrectly, might eventually solve the problem.  However, the results achieved and the time required would be unacceptable.  So, selection of the proper tool to solve the problem is paramount.  What if a single tool existed that could be used to solve multiple problems?  That the benefit of the tool could be applied to many different problems?  Such a tool does exist for solving business, production, manufacturing and other issues.  It’s called an Interference Diagram.

Enter the Interference Diagram (ID)

The Interference Diagram (ID) is a thinking tool that offers the ability to define those interferences, or obstacles, that block, or hinder your ability to achieve a specific goal or outcome.  It is often far easier to define what we want, and much more difficult to define why we can’t have it.  The ID can be used at many different levels to understand why things don’t happen.  It’s a tool used to verbally surface the “interferences” that stop us from achieving a specific goal or outcome.  The ID can be used as a stand alone tool, or it can be used in conjunction with other tools.  Its uses are multiple.  As a stand alone tool it can provide a discrete analysis to understand the obstacles that prevent accomplishment of the goal. In a broader application it can also be used to supplement other systems thinking tools, such as Goldratts System Thinking tools and the Five Focusing Steps.  Used as either a stand alone, or in combination with thinking tools, the end results can be dynamic.

 Concept and Structure

The concept and structure of an Interference Diagram is simple.  The figure below displays the structure.  First, in the center of a white board, or piece of paper write down what you want more of, or what your goal is.  A succinct, precise statement is always easier to work with.  Long drawn out statements that turn into paragraphs will slow down your thinking.  Avoid the tendency to write in  that fashion.  Keep it simple and to the point.

Next, when you consider what you want more of – the goal you’ve written down, think to yourself “What stops me from getting more of what I want?” The answer to this question becomes the interference that you write on the diagram.  Ask the same question again and write down your next response.  Continue to list your interferences until you are satisfied that your list is fairly complete, or at least sufficient to move on.  There is no specific number of interferences that need to be noted, you just want to surface the major interferences as to why you can’t achieve what you want more of. Don’t be shy about listing the interferences – it is important to list them all –even if they are things you know you can do nothing about.  If you use the ID to conduct an analysis where time is an important factor, then it is important to quantify your interferences with time.  In other words, how much does this particular interference take away from what you want?  Not all ID’s will require the time element, but most will.  Remember also to keep the time element constant, i.e., minutes, hours, days, or whatever measure you use. When you quantify the interference with a proper time, it will significantly increase the level of impact to determine how important the interference really is.  Without a known time all of the interferences look the same and it’s difficult to distinguish the important few from the trivial many.

In my next post, I will present an actual example of how to construct an Interference Diagram.

Bob Sproull

Another New Book Part 14

This post is, once again, taken from my newest book, Theory of Constraints, Lean, and Six Sigma Improvement Methodology – Making the Case for Integration. Specifically, the material for this series is taken from Chapter 5 entitled, A Better Way to Measure a System’s Success. As I explained in my last post, readers that are totally familiar with the Theory of Constraints might find this series a bit basic, but I’m writing this series for those who are not totally familiar with the Theory of Constraints.

In this post, we will now review the primary components of Throughput Accounting, starting with Throughput.  Throughput at your company is achieved by processing parts, selling and delivering then to customers, and receiving payment for all goods you sold. Again, inventory is not throughput!

Inventory or Investment ( I ) is primarily the amount of WIP and Finished Goods inventory, but it also includes all purchased parts for sales or the equipment, buildings and other assets required to produce parts, if you’re a manufacturer.  The real key to reducing “I” is to stop the practice of pushing orders through your processes and replace it with pulling orders through your processes. Use the concept of nothing comes into your process until something exits the constraint (synchronizing flow).  Too much WIP at one time leads to extending the productive cycle time of every part, causing late deliveries of parts and unhappy customers.

Operating Expense is all the money the system spends in order to turn inventory into throughput including all labor costs.  The key for your Company to reduce labor costs is by improving Throughput at a much faster rate by removing waste and variation within the constraint.  In doing so, this will reduce the dependence on overtime to play catch-up and reduce overall $’s spent on overtime.  It will also improve the morale of the workforce because you have eliminated the fear of layoffs.  Think about it, if you can generate additional Throughput with the same OE, you will return much more to your company’s bottom line.

So, there’s your comparison of these two distinctly different accounting methods.  It should be clear to you that if you continue using traditional Cost Accounting to make your key decisions, like product mix, your company could be missing an opportunity to make more money.  And since the goal of most companies is to make money now, and in the future, doesn’t it make sense to use Throughput Accounting to make your real time financial decisions?

[1] John Arthur Ricketts, Reaching the Goal – How Managers Improve a Services Business Using Goldratt’s Theory of Constraints, 2008, IBM Press

In my next post, we will begin a completely new subject.

Bob Sproull

Another New Book Part 13

This post is, once again, taken from my newest book, Theory of Constraints, Lean, and Six Sigma Improvement Methodology – Making the Case for Integration. Specifically, the material for this series is taken from Chapter 5 entitled, A Better Way to Measure a System’s Success. As I explained in my last post, readers that are totally familiar with the Theory of Constraints might find this series a bit basic, but I’m writing this series for those who are not totally familiar with the Theory of Constraints.

Let’s now look at this same company using Throughput Accounting (TA) and see if the results tell us the same things or not as described in the table below.  TA provides an entirely different perspective when looking at this business and its potential product mix.

TA ranks product profitability according to Throughput on the constraint per minute (T/CU/t).  In addition, it does not allocate Operating Expense (OE) to products.  So, based upon this, Product A yields $4 per minute on the constraint, Product B yields $4.17, and Product C yields $4.44.  TA says the priority should be to produce as much of Product C as capacity will allow, then Product B, then Product A (the exact opposite priority of CA).  Because Step 2 is the system constraint, producing 100 units of Product C, 100 of Product B, and 20 of Product A is all that can be done.  With this product mix from Throughput Accounting, instead of a $250 loss when using Cost Accounting, this business generates a net profit of $200.  The only difference being the product mix!

[1] Effective use of Throughput Accounting requires different information than from Cost Accounting, so new report formats must be implemented.  For example, a Throughput Accounting earnings statement shows T, I, and OE relative to the constraint, while conventional Cost Accounting reports are oblivious to the constraint.  Just as CA and TA rank product profitability differently, they may also rank customer profitability quite differently.  Several Throughput Accounting outcomes are noteworthy:

•       Financial measures reverse management priorities from OE, T and I (for Cost Accounting) to T, I, and OE (for Throughput Accounting).

•       Performance measures for Throughput Accounting are not distorted by cost allocations for Cost Accounting.

•       Constraint measures eliminate conflict between local measures (machine utilization or operator efficiency) and global measures (performance of the business).

•       Control measures remove the incentive to build excess inventory and replace it with the incentive to deliver products on time.

In my next post, we will review the primary components of Throughput Accounting, starting with Throughput.  As you will see, Throughput at your Company is achieved by processing parts, selling or delivering them to customers and receiving payment for all goods you sold.

Another New Book Part 12

This post is, once again, taken from my newest book, Theory of Constraints, Lean, and Six Sigma Improvement Methodology – Making the Case for Integration. Specifically, the material for this series is taken from Chapter 5 entitled, A Better Way to Measure a System’s Success. As I explained in my last post, readers that are totally familiar with the Theory of Constraints might find this series a bit basic, but I’m writing this series for those who are not totally familiar with the Theory of Constraints.

TA is used to identify constraints, monitor performance, control production, and determine the impact of decisions.  The table below is a manufacturing situation consisting of just three parts with each part requiring the same three steps.  Each product requires a different number of minutes per step, but the total time required for each part is the same.  Labor costs per minute are the same across all steps.

Part A has the highest price and the lowest raw material cost per part while part C has the lowest price and highest raw material cost per part.  Because the same workers will be used to produce any product mix, the best mix would seem to be to produce as much of part A as demanded, then B, then C.  Following this priority, the factory will produce 100 units of A, 75 of B, and none of C.  Note that Step 2 limits enterprise production regardless of whether it’s actually recognized as the constraint.  Operating expense includes rent, energy and labor.  Let’s look at an example comparing CA to TA’s product mix decision as laid out in the table below.

When CA allocates operating expense to products based on their raw material costs, the resulting product costs confirm the expected priority:  Product A has a lower product cost than Product B. Unfortunately, with this product mix, this business generates a net loss of $250.  Because Part A appears to be profitable while Part B generates a loss, it’s tempting to conclude that producing none of B would stop the loss.  However, the Operating Expense covered by Product B would then have to be covered entirely by Product A, which would yield an even larger loss.  If additional work was started, in an effort to keep the workers at Steps 1 and 3 fully utilized (i.e. to maximize efficiency), work-in-process inventory would grow.  The inevitable conclusion, using Cost Accounting, this business is not profitable!

Bob Sproull