Healthcare Case Study Part 4

This is my final posting in this series of posts which includes the final results of this team's efforts.

This team did an excellent job of analyzing this important process and was able to remove much of the waste contained within it. But the real improvement came in the overall potential time to complete this procedure, which should have a significantly positive impact on damage to patient’s heart muscles when their recommendations are implemented, and this was the overriding premise and objective of this event.  Figure 10 is the final future state map for the Door to Balloon time and as you can see, the number of steps in the process was dramatically reduced!

                                    Figure 10 Final Future State Map

The following is a summary of before and after for this PVSA. The highlighted numbers in Figure 11 represents a summary of the actual cycle time reduction for Door to Balloon time, as well as reductions in the number of decision points and total steps in this process, which was a total of 27 steps. Another key element of this effort was a 31% improvement in the number of value-added steps.

Figure 11 Improvement Results Summary

Although a reduction in Door to Balloon (D2B) time of 13 minutes might not seem like much of an improvement to some of you, you must consider how much less damage to a patient’s heart muscle might be avoided. In the healthcare field for procedures such as Door to Balloon time, every minute counts.  As you have just observed, by combining Lean and Six Sigma with the Theory of Constraints, significant improvements were realized.  This hospital used what they had learned in this study to also streamline their surgical unit and were able to perform much needed surgeries on many more patients.

In my next series of posts, I'll begin a new subject.  Hope you enjoyed this series!

Bob Sproull

Healthcare Case Study Part 3

 

Continuing on with my healthcare case study.  The time data that had been collected was broken down into three separate phases of the D2B process: Door to EKG, EKG to Table and Table to Balloon. This was extremely helpful for the team in their efforts to identify the system constraint. As you can see in Figure 4 from my last posting, the EKG to Table Phase, with a mean value of 36.7 minutes, is clearly that part of the process requiring the most time and was designated by the team to be the system constraint. Table to Balloon time, at 21.2 minutes on average, also consumed a significant amount of time, while Door to EKG only required 4.75 minutes to complete. It is important to remember that this metric (D2B Time) was developed to capture median times rather than mean times, so hospitals are judged (and reimbursed) by a median time and are reported as such. The difference between the median and mean times for EKG to Table (i.e. median = 32 minutes and mean = 36.7 minutes) indicates that the data might be somewhat skewed and not perfectly normally distributed. This, of course, means that there are outliers that must be investigated for cause.

                                                Figure 5 Interference Diagram

After collecting and analyzing this data, the team was instructed to create two Interference Diagrams (IDs), one for Phase 2 (EKG to Table) and one for Phase 3 (Table to Balloon). You may recall from an earlier chapter that the purpose of the ID is to identify any barriers or obstacles (i.e. interferences) that stand in the way of achieving a goal or objective. In the cases for Phase 2 and 3, the goal was identified as reducing the time required to complete each phase. Figure 5 is the Interference Diagram created by this team for EKG to Table.

The following photo (Figure 6) was of the Interference Diagram created for the EKG to Table phase and is presented here only to depict what an Interference Diagram looks like for those of you who may never have used one before. The post-it notes contain a description of the interference with an estimate of how much time the interference might negatively impact the goal of reducing cycle time.  The Interference Diagram can then be used to develop and improvement plan on how to reduce the EKG to Table phase time.

Figure 6 Photo of ID

The team then used their fact-finding “walks” (i.e. observations and conversations) and the Interference Diagrams to create a SIPOC as demonstrated in Figure 7.  The team next developed a current state process map (Figure 8) and then completed a value assessment (Figure 9) of each step with green being seen as an acceptable process step with no improvement required.  Yellow indicates that the step in its current state needs improvement. Red indicates that the step is not adding value and needs to be either removed or improved dramatically!

                                        Figure 7 SIPOC Diagram

                                    Figure 8 Current State Process Map

Figure 9 is the Current State Map after completion of the standard value analysis, and as can be seen, the number of total red steps that exist was quite high.   The team next developed a future state map that reduced the number of decision points, swim lanes and hand-offs. This effort resulted in a dramatic reduction in the number of non-value-added (i.e. red) steps (i.e. 27 to 3).

                                    Figure 9 Current State Map after assessment 

In my next post, we will complete this case study.

Healthcare Case Study Part 2

 

Continuing on with my healthcare case study.  There was also a review of the basics of both Lean and Six sigma and how to combine these three methodologies into a single methodology. Figure 2 is a basic look at how these methods can be used together to generate improvements to any process or system being studied.  Remember, the Theory of Constraints identifies the focal point for improvement, while Lean works to reduce waste and Six Sigma reduces and controls the variation within the process.

Figure 2 Integrated TOC, Lean and Six Sigma

For whatever reason, the agency who developed this universal metric used the median rather than the mean. The current median standard for Door to Balloon (D2B) time had been set at 90 minutes, and this hospital was actually doing quite well against this standard with a median score of 66 minutes. However, because this hospital was anticipating the standard would be changing to 60 minutes in the future, they decided to be proactive by putting together a team of subject matter experts to look for ways to achieve this future target, before it was mandated to do so. In addition to this new time benefitting the patient (i.e. much less heart muscle damage), there was also a financial incentive for the hospital, in that reimbursement rates for Medicare and Medicaid patients are tied to completing the D2B time below the standard median time.

Figure 3 represents the first part of the D2B Time referred to as Door to Doc Time whereby the patient enters the emergency department and is eventually seen by a doctor for diagnosis.

Figure 3 D2Doc Time

After completing the training session, the team was instructed to “Walk the Gemba” by going to both the Emergency Department and Cardiology Department to observe what happens during this process and to have conversations with employees from both departments about problems they might encounter. This was a fact-finding mission aimed at understanding how patients are managed through this treatment process. The team collected many observations during this walk, most of which would be used to construct their Current State Process Map, which will be displayed shortly. Figure 4 is a high-level summary of part of their Gemba walk for Door to Doctor.

                                                Figure 4 High Level D2B Time

In my next post, we will continue with this Healthcare Case Study. 

Healthcare Case Study Part 1

 Introduction

 In this series of blog posts, we’re going discuss a case study from the healthcare field. We will discuss a Process Value Stream Analysis (PVSA) project at a hospital located in the Mid-Western part of the United States. The focus of this PVSA was on this facility’s Emergency and Cardiology Departments, where they wanted to improve one of their key performance metrics, Door to Balloon (D2B) Time. For those of you (like me before I started this engagement) who don’t have a clue as to what D2B Time is, let me fill you in. Door to Balloon Time is a time measurement in Emergency Cardiac Care (ECC), specifically in the treatment of ST Segment Elevation Myocardial Infarction (or simply, a STEMI heart attack).

 

The interval starts with the patient’s arrival in the Emergency Department and ends when a catheter guide wire crosses the culprit lesion in the Cardiac Cath lab. In everyday language, this just means that a balloon is inflated inside one of the heart’s primary blood vessels to allow unimpeded blood flow through the heart. The clock starts ticking either as a walk-in to the Emergency Department or in the field where a patient is being attended to by medical personnel. This metric is enormously important to patients simply because the longer this procedure is delayed, the more damage occurs to the heart muscle due to a lack of oxygen to the heart muscle. It’s damaged because the cause of this problem is typically due to a blockage within the heart that prevents oxygen from being supplied to the heart, and without proper amounts of oxygen, muscle damage results. The inflated balloon “unclogs” the blood vessel. Graphically, door to balloon might look like Figure 1.

Figure 1

I started this event with a training session for the team members focusing on how to use an integrated Theory of Constraints, Lean Six Sigma improvement methodology. I have seen a lot of Process Value Stream Analyses (PVSAs) where waste is identified throughout the process, and then the team works to either reduce it or eliminate all of it. It has been my experience that when attempting to reduce the time it takes to process something through a process, such as this one, by attacking the entire process for waste reduction, teams frequently miss the opportunity to reduce the cycle time much more quickly than they otherwise could have. This is where the Theory of Constraints (TOC) and its Five Focusing Steps offers a much quicker solution to this type of project. Just to review, TOC’s Five Focusing Steps, first introduced by the late Dr. Eli Goldratt.  These five steps are:

•       Identify the system constraint—In a physical process with numerous processing steps, the constraint is the step with the smallest amount of capacity. Or another way of stating this is the step with the longest processing time.

 

•           Decide how to exploit the system constraint—Once the constraint has been identified, this step instructs you to focus your efforts on it and use improvement tools of Lean and Six Sigma to reduce waste and variation, but focus your efforts mostly on the constraint. This does not mean that you can ignore non-constraints, but your primary focus should be on the constraint.

 

•       Subordinate everything else to the constraint—In layman’s terms this simply means don’t over-produce on non-constraints, and never let the constraint be starved. In a process like the Door to Balloon time, it would make no sense to push patients into this process, since they would be forced to wait excessively. But of course, the hospital cannot predict when patients with heart attacks will show up needing medical attention. But by constantly trying to reduce the constraint’s time, the wait time should be continuously reduced.

 

•            If necessary, elevate the constraint—This simply means that if you have done everything you can to increase the capacity of the constraint in Step 2, and it’s still not enough to satisfy the demand placed on it, then you might have to spend money by hiring additional people, purchasing additional equipment, etc. That is, anything that would reduce the time in the constraint.

 

•           Return to Step 1, but don’t let inertia create a new constraint—Once the constraint’s required capacity has been achieved, the system constraint could move to a new location within the process. When this happens, it is necessary to move your improvement efforts to the new constraint if further improvement is needed. What is thing about inertia? What Goldratt meant by that was to make sure things you have put in place to break the original constraint (e.g. procedures, policies, etc.) are not limiting the throughput of the process. If necessary, you may need to remove them.

 

In my next post, I will continue with this case study.

My First Experience With TOC Part 10

So far the story of my first experience using the Theory of Constraints has been all about how my team worked to avoid closure of our manufacturing facility, but there's more to tell.  One of our key suppliers to our manufacturing plant showed up unannounced at our front door and wanted to have a meeting with me.  I could tell that he was very nervous when he entered my office, but I had no clue as to why.  The first thing he wanted to do was take a tour of our facility just so he could see the general layout and to be able to ask pertinent questions.  I asked him why he had come to our facility and he answered by saying that he'd like to wait until after we had finished our tour.  I reluctantly agreed, so we walked to our receiving department and began our walk-through.

The first question our supplier asked was, "Why do you have such a small amount of raw material inventory in your racks?"  My reply was to briefly explain the Theory of Constraints replenishment methodology.  He then asked me how often we had stock-outs and when I explained that we rarely have stock-outs of any kind because we replenish what we use on a regular basis, he pulled out his note pad and recorded what I had explained.  We continued our walk-through of my facility and when we arrived at our processing area, he once again asked me why we had such low levels of in-process inventory.  I then gave him a brief explanation of TOC's scheduling method, Drum Buffer Rope.  Once again he pulled out his note pad and recorded what I had explained.  We then went to our shipping area and he was amazed at how small our finished product inventory level was, especially since our in-process inventory was so small.

He then began asking me a series of questions relative to the performance metrics that we se to track our performance. He was especially interested in the metric we use to track our delivery performance. I recommended that we go to our break room because that was our primary location for our charts and graphs of our metrics so that our work force could see how we were performing.  He was amazed that our on-time delivery metric average was above 99.7 %.  He asked me how that was possible since we didn't carry much inventory anywhere in our plant.  I just smiled at him and told him we probably needed to go to my office so I could explain our operational methods to him.

When we arrived at my office, I asked him if his company was using the Theory of Constraints as part of his improvement effort.  He answered by saying that his company is not using TOC, but that he would like to hear more about it.  I went to my blackboard and drew my piping diagram.  I asked him to tell me which part of this diagram controls how much water exits this piping system.  After studying the diagram he correctly answered my question.  And with that, I went on to explain other parts of TOC including Drum Buffer Rope, TOC's replenishment method, and a host of other TOC related subjects. When our discussion was completed, I asked him why he had come to my plant.  He responded by telling me that his board of directors had indicated that they were considering closing his manufacturing plant and that they had given him three months to make his plant profitable.  I then explained that I had been given a similar mandate by my company's CEO and if he interested, I would help him turn the corner.  He smiled and told me that he was very interested in receiving my help.

To make a long story short, we worked together and within 2 months, his company was now generating an acceptable profit level.  He and I became good friends and like my facility, his facility became the model for all of the other facilities in his company's portfolio.    As it turned out, other suppliers to my facility requested our assistance in transforming their companies into more profitable ones. By helping them turn their companies around in terms of profits, my interest now turned to consulting and within my last year, I went to work for a very reputable consulting firm and the rest shall we say is history. 

In my next series of posts, I'll introduce a new subject to my readers.

Bob Sproull

My First Experience With TOC Part 9

 

As I drove back to my plant I had a vision of an offer that I wanted to make to the Corvette Plant Manager.  If he would give us exclusive business for specific fiberglass parts, I would offer him 100% on-time delivery or the order would be free.  I also decided that our quality levels we would offer would be based upon a running average that must be greater than 98% compliance to specs.  I knew we had excess capacity because of all the throughput improvements we had made, so I was confident in our ability to assure flawless delivery of parts.  And since we had a very well defined SPC initiative in place, I felt confident that we could meet the quality requirements as well.

My next thought was about the price of our products that we would offer.  I decided that we would match our competitor’s price minus 10%.  Since we had excess capacity in our fiberglass process, I knew that as long as we covered the totally variable costs which were quite low, nearly all of what we charged would flow directly to the bottom line.  I knew this because we would not be adding any additional operating expenses beyond what we already had.  The beauty of Throughput Accounting is how easy it is to make real time financial decisions.  Since we had set the Corvette Plant Manager's visit for the day after tomorrow, I had plenty of time to create my mafia offer.

Right on schedule the Corvette Plant Manager showed up on our doorstep.  Because we had done multiple 5S events he was quite impressed with not only the cleanliness of our plant, but also with how organized it was.  He told me that the last time he was in my plant there was inventory everywhere, but since we had applied TOC to our facility, there were no longer any large piles of WIP like before.  We had also done a lot of work with visual buffer management and Drum Buffer Rope concepts and techniques, so that we knew at a glance the status of all of our orders.  He was clearly impressed!  What amazed him the most was how little our raw material and finished goods inventories we had at our site.  But the one thing that impressed him the mo,st or should I say the biggest difference to him, was the obvious uptick in the morale of our workforce.

When he had seen enough of our improvements, he simply said, “Let’s go to your office and talk.”  He told me how impressed he was with all of the changes since his last visit here, but that he wasn’t sure if we could do business.  He told me that he thought it would take a while for me to generate an offer that would turn heads at Corvette.  With that, I handed him my single page mafia offer which told him that we would generate a specific SKU at 100% on time delivery, at best cost minus 10% with a greater than or equal to quality level of 98% or the entire order would be free!  He asked me if this was a real offer or simply one to make me laugh.  I assured him that it was genuine and that if he was in agreement, that my accountant could contact his accountant that day and we could deliver our first shipment within one week.  He was flabbergasted to say the least and said that in all of his years he had never seen an offer like this and that he simply couldn’t refuse it!

The following week we delivered our first order and after a lengthy inspection, it was deemed 100% compliant.  A week passed by with the same results every time.  And then a month and six months with the same results each time.  In fact, the only quality issues we experienced in that time period were labeling issues.  Our plant’s revenue and profitability skyrocketed as did our orders from Corvette and BMW and even the Chrysler Viper body and quarter panels were added to our mix of products.  It was an exciting time for our plant and our plant which had been scheduled to shut down when I assumed the leadership of it ended up becoming the model for the entire corporation.

In my next posting, I will complete this series of posts on my first experience with the Theory of Constraints.  I hope you have enjoyed this series of posts so far and hope you have learned about the power of TOC in terms of continuous improvement.

My First Experience With TOC Part 8

 

The final episode in our effort to avoid closure is about one of our other customers (the GM Corvette facility) which was situated within 2 miles from our plant.  Even though we were in close proximity, we really didn’t produce much for them and when I arrived there I wondered why.  I decided that it was time to make an unscheduled visit to see if I could get to the bottom of this.  As I drove that short distance to the Corvette facility, I kept imagining to myself why they didn’t use us as a major supplier.  I knew we had experienced quality problems in the past, so I thought maybe that was the major reason.

When I pulled into the Corvette plant’s parking lot there was a line of these sleek vehicles parked in a line in most of the executive’s parking slots.  I got out of my car and started walking past each one, but their allure made me stop and admire each one.  I had always wanted a Corvette but could never afford to buy one.  I had never even driven one before.  As I continued stopping and looking at each one, I heard a voice behind me say, “You like these?”  I responded immediately without looking back, “You bet I do!”  He then floored me and asked, “Would you like to drive one?”  I immediately turned and looked him in the eye and smiled.  He said, “I’m serious, would you like to drive one?”  Knowing he was serious, I said, “Sure, but who are you?”  He said, “I’m the plant manager here in Bowling Green.”  I told him that I was actually coming to meet him and chat a bit about my plant’s lack of business with Corvette.  He said, “Let’s chat while we drive,” and with that he opened the driver’s side door for me and then walked around to the passenger side and crawled in.

The Corvette facility had a mile-long test track built around it so off we went.  The ride was fast and smooth and the handling was excellent.  I was driving about 65 mph when he said, “Do you always drive this slow?”  With that I punched it and soon we were at 110 mph and it felt so good and natural.  He eventually asked me what I wanted to talk with him about?  So there we were traveling at 100+ miles per hour talking shop.  I had trouble concentrating going at these speeds, but he seemed perfectly comfortable as though he had all of his business meetings like this.  I got right to the point and asked him what my plant had to do in order to do more business with his plant.  He went on to explain parts of the sorted history between the two facilities.  It seems as though even though we were the closest of all supplier plants, we were unable to ship anything on time.  And when we did, our quality wasn’t always stellar.

As I was driving and listening to him, I was thinking about what kind of an offer I would have to make to him that he simply couldn’t refuse?  “It would have to include a guaranteed on-time delivery provision,” I thought.  “It would also have to include a provision for a high enough quality level that would differentiate us from his other suppliers,” I continued.  I didn’t know it at the time, back then, but what I was considering was something we call a mafia offer these days.  He told me that he would love to do business with us again if we could show him that our facility was capable of being a reliable supplier.  With that, I invited him to come visit our plant to which he agreed.

TO BE CONTINUED

My First Experience With TOC Part 7

 

Just for the record, the first month that I took over this failing facility we lost about $600,000, but within two and a half months we were making roughly $500,000 per month.  It was such a joy to see this wonderful team of people doing so well. I was so proud of every single employee, for it was them that made it all happen!!  One of the things the management team learned and something I insisted upon that all improvement ideas would be considered on their merit as long as they didn’t violate company rules, safety policies or customer requirements.  I can honestly say that 95% of all of the solutions came directly from the shop floor workers…..the true subject matter experts.  Since that fateful turn-around, I have successfully used this basic idea….what I call active listening.  It worked for me then as a GM and it continues to work for me as a consultant.  Let’s continue our saga as I will continue to share both good and not so good experiences.

I want to share some experiences that were not so successful, but that we were able to learn from and do them right in the future.  This first experience has to do with a part’s availability problem and what we thought we were doing correctly, but obviously weren’t.  Like most companies who manufacture parts, we purchased numerous SKU’s that were needed to fabricate our products.  So, to make sure we had enough of each part, we used the Min/Max system to replenish our supplies.  For those of you not familiar with the Min/Max system, there are several “rules” as follows:

1. Determine the minimum and maximum levels for each SKU.
2. When re-ordering, never exceed the maximum level for any SKU.
3. Never re-order until you go below the minimum level defined for that SKU.
4. Total part inventory is held at the lowest level of distribution (usually at point of use).

Parts are inventoried once or twice a week and order placed, as required (i.e. when less than the minimum target).

We religiously followed these rules, but it seemed as though no matter how diligent we were, we still had stock-outs.  And when we did, we “stupidly” raised our maximum re-order quantity.  I say stupidly because all we were doing was needlessly tying up excessive amounts of cash on parts we didn’t need.  In the first several months I think our part’s inventory increased something like 40%, yet we still suffered from stock-outs.  What could we possibly be doing wrong?

The assumptions driving the five rules of the Min/Max system are based in cost world thinking.   This thinking believes that in order to save money and minimize the cash you tie up in inventory you must minimize the amount of money you spend for these items by never buying more than the maximum amount and not spending any money until it’s absolutely necessary (i.e. Order parts only when they reach the minimum level).  As I said, we scrutinized our purchases and lived by these rules, but at the end of the day, we still had numerous stock-outs which was beginning to impact our on-time delivery gains and we simply couldn’t let that happen.

One day, one of our hourly supply guys (Jimmie) said he wanted to talk to me about an idea he had to reduce these stock-outs and asked for a one-on-one meeting with me in my office.  I asked him why he wanted this kind of meeting and he told me that everyone thought his idea was silly and that he didn’t want his co-workers to know he had suggested it.  I smiled and invited him into my office and shut the door.  He asked me if he could use my board to draw while he talked and of course I obliged.  Jimmie and I talked for over two hours and I was convinced that his idea would work because it was all based upon common sense.

Jimmie suggested that we go away from the Min/Max system and replace it with a system that is completely based upon part’s usage.  What he really pushed for was ordering more frequently based upon what we had used.  He told me that he got the idea from watching canned goods at a grocery store where he observed as one can is purchased, a replacement can is ordered using their bar code system and they rarely seem to have stock-outs.

He further explained that the grocery store keeps a minimum amount of stock in their stock room to replenish what was used that day, but they frequently re-order 2-3 times per week to replenish their stock room.  I thought the idea was fantastic and asked Jimmie if he would lead the effort.  He was hesitant at first, but then agreed to do so.  We tried it and over the course of the next six months we reduced our total inventory by nearly 50 percent while virtually eliminating stock-outs.  It wasn’t all smooth sailing, but as we ran into problems, Jimmie always found a way to fix it.  What I didn’t know was that Jimmie had worked for a grocery store as a stock boy, but had obviously paid attention to his surroundings.  I later promoted Jimmie to the new job title of Logistics Manager.  It was such a proud day for Jimmie.

TO BE CONTINUED

My First Experience With TOC Part 6

 

Our team went against the company culture when we decided to use Throughput Accounting, but believe me it worked.  And because of the simplicity of the definitions for each, we were able to teach our workforce how to use them as well.  Before you ask, yes, we had to continue using Cost Accounting to satisfy GAAP reporting requirements, but for daily decision-making, we found Throughput Accounting to be vastly superior to Cost Accounting.  Let’s continue the saga of our plant in Kentucky and as I said earlier, some of our experiences were positive and some were very negative.  We celebrated our positives and learned from our negatives.

One of the pleasures of being a part of a turn-around is seeing the transformation of the systems, people, product and customer.  On this last point, the customer, I want to relate an event that took place about five months after we began our transformation.  This event was a visit we had from one of the purchasing executives from BMW in Germany.  Since we had improved so rapidly, he decided to pay us a visit to see first-hand just what we had done to improve our quality and delivery.

I mentioned earlier in the explanation of our problems with our fiberglass hardtops that there were 48 measurement points to determine how well the hard top mounted to the vehicle.  We greeted the executive team that had accompanied the purchasing executive, exchanging pleasantries and getting to know each other until he announced that he was going to our manufacturing area and that he would randomly select a completed hard top and have it mounted on their Z3.  He further stated that his quality manager would inspect all 48 control points for conformance to specs.  The quality manager took his time, inspected each point and concluded that all points met BMW’s specs.  The purchasing executive’s eyebrows rose in disbelief and with a very heavy German accent said, “Mr. Sproull, the measurements are only part of what we expect.”  He then said, “Mr. Sproull, you will drive me on the Interstate at a high rate of speed and I will listen for air entering into the vehicle.”

He and I drove to the Interstate and he instructed me to accelerate until he told me to stop, which I did.  His ear was pressed close to the hardtop mounting area as he listened for the slightest sound of air passing under the hardtop.  At 65 mph there was no sound, so he instructed me to accelerate again up to 75mph, but still no air entering the vehicle.  He had a very disappointed look on his face so, on my own, I continued to accelerate to 90 mph, then 100 mph and finally to 105 mph.  He looked at me with a fearful look on his face and instructed me to return to our facility.  We had passed his functionality test with flying colors!!

When we returned, he explained that he wanted to mount a black hardtop on his vehicle so that he could compare our paint job to his.  Painting at our facility was something we now took pride in, but not so in the beginning.  When I had arrived at the Kentucky plant I saw first-hand just how bad our paint jobs were.  We had a very old paint booth which was apparently full of dust particles that ended up on the surface of our vehicles.  I put together a team of maintenance mechanics and explained that we needed to figure out a way to keep our paint booth free of particles and that I needed some good ideas.  I also explained that we couldn’t go out and purchase a new paint booth.  To make a long story short, one of the maintenance mechanics had a side business for lawn sprinklers.  He had this bright idea that if we mounted such a system in the paint booth, we could actually clean the air between paintings by emitting a fine mist of water.  We tried it and it worked like a champ!

Back to our story.  The purchasing executive randomly selected a completed black top and we mounted it on his vehicle.  We parked it in a highly lighted area and he scrutinized it for a good 30 minutes.  When he was finished, he summoned me to the vehicle, looked me in the eye and said, “Mr. Sproull, we have a serious problem!”  I asked him what the problem was and he told me that our paint job did not match the paint job on his vehicle.  I was shocked because I knew our painting was the best in the industry.  When I asked him, what was wrong with our hardtop’s paint job, he sneered at me and said absolutely nothing!  The problem was with his own vehicle.  There was an enormous amount of orange peel on his vehicle’s surface.  My response to him was, “Would you like us to add orange peel to our hardtop’s surface?”  He looked at me and simply said, “I don’t find any humor in that remark!”

Yes, this day was one of our great days for our plant.  All of the hard work and dedication of our employees had paid off as the purchasing executive from Germany told us that he wished all of his suppliers were as good as we were.  I asked him to speak to my employees and let them know his feelings which he did.  That day was clearly a turning point for our plant both in our reputation and the morale of our workforce.  They had pride for the first time in years and I’ve always believed that “people who feel good about themselves….produce great results.” 

TO BE CONTINUED 

My First Experience With TOC Part 5

 

One of the other key things I learned by reading The Goal was the whole idea of Throughput Accounting (TA).  I had never been introduced to TA so it was an eye-opening experience for me.  Actually, I had never been responsible for a company’s financials before and had difficulty understanding some of the “rules” of cost accounting.  I was being held accountable to traditional cost accounting and quite frankly some of the rules made no sense at all to me so I was questioning things.  For example, how could excess inventory be viewed as an asset?  Isn’t inventory tying up cash?  And as I explained earlier, running all process steps to the maximum capacity only served to drive Work-In-Process (WIP) inventory higher.  And since we had discovered that there was a direct correlation between having excess WIP and elongated cycle times, it made no sense to do so.  But those were the rules of engagement that I was being judged on.

When I read The Goal, I had an epiphany of sorts.  Goldratt introduced the world to a new way of looking at profitability through a completely different financial spectrum.  While Cost Accounting preaches their sermon of profitability through saving money, Goldratt argued that rather than focusing on saving money, companies should be focused on trying to make money, and as I would soon discover, the two approaches are drastically different!

One of the principle lessons within The Goal is that the goal of for-profit companies is to make money now and in the future.  Goldratt analogized that just like a chain having a weakest link, so too does a company have a weakest link.  And this weakest link controls how much money a company will ultimately make.  Goldratt also explained that attempts to strengthen any other part of the chain (or company) will do nothing to drive profitability higher.  From an organizational perspective, this simply means that every decision or action taken must be considered based upon its impact on the goal of making money.  If the action or decision doesn’t get you closer to your goal of making money, then don’t take that action.  Goldratt further explained that if you want to know if you’re moving in the right direction in terms of profitability, you should ask yourself three simple questions:

• Does your action or decision result in more Throughput (T)?
• Does your action or decision result in more Inventory ( I )?
• Does your action or decision result in more Operating Expense (OE)?

If you answered yes to the first question, then it’s a good action or decision.  If you answered yes to either question two or three, then it might not be a good thing to do.  The optimum conditions for maximizing profitability are to have T increasing while I and OE are decreasing.  Notice I used the word “optimum” in terms of maximizing profitability.  It is certainly plausible to have OE increasing to drive T higher, it just won’t result in optimum profitability.  Let’s take a look at the definitions of these three components of profitability.

• Throughput (T): The rate that the organization generates new money primarily through sales.   Goldratt provided this formula for T:

 Throughput (T) = Revenue (R) $’s minus Totally Variable Costs (TVC) or,

                                                T = R - TVC

 

TVC includes things that vary with the sale of a single unit of product such as the cost of raw materials, sales commissions, shipping costs, etc.

• Inventory ( I ): The money that an organization invests in items that it intends to sell. This category would include inventory of all kinds.

• Operating Expense (OE): The money an organization spends to turn ( I ) into (T) which includes ALL labor costs, office supplies, employee benefits, utility bills, etc

Goldratt further expanded his Throughput Accounting (TA) definitions still further by defining net profit, return on investment, productivity and inventory turns and he based them all on the three simple measures T, I and OE.  So, with these simple definitions, our team was able to not only take actions and make decisions, but we were sure they would positively impact our bottom line.  Here are Goldratt’s other definitions:

• Net Profit (NP) equals Throughput minus Operating Expense or NP – T – OE
• Return on Investment (ROI) equals T minus OE divided by I or ROI = T-OE/I
• Productivity (P) equals T divided by OE or T/OE
• Inventory Turns (IT) equals T divided by I or T/I

TO BE CONTINUED