Maximizing Profitability Part 4

In my last blog I introduced you to Throughput Accounting (TA) to demonstrate why selecting improvement projects that increase Throughput rather than those that focus on cost reductions is really the key to profit enhancement. Today, I want to talk about the Theory of Constraints five focusing steps and how TOC will help you select the right area on which to focus your improvement efforts. These five steps will form the framework for significant and sustainable improvement in your company. These five steps form our Process of On-Going Improvement (POOGI):

• Step 1: Identify the system constraint.
• Step 2: Decide how to exploit the constraint.
• Step 3: Subordinate everything else to the above decision.
• Step 4: If necessary, elevate the constraint.
• Step 5: Return to Step 1, but don't let inertia become the constraint.

Let’s look at each of these in more detail so that they make sense to you from an improvement perspective.

1. Identify the system constraint: Since the goal of a typical “for-profit” company is to make more money now and in the future, and since we learned in my last blog that focusing on Throughput is the best way to make more money, we need to identify the resource or policy in our system that is preventing our company from producing and shipping more goods or services. It is important to understand that the constraint is not always physical. In fact, the majority of the time the constraint is a policy or procedure that limits our ability to improve our throughput.
2. Decide how to exploit the system constraint: The key here is to make sure that the constraint’s time is never wasted doing things that it shouldn’t be doing and is never starved for work. Remember, every minute lost at the constraint is a missed opportunity to increase throughput. Focus everything you do on reducing the cycle time of the constraint and improving the flow of product (or service) through the constraint.
3. Subordinate everything else to the above decision: This step is typically the most difficult of all for most companies to accomplish. By definition, if a process step is not a constraint, it is faster than a constraint and therefore has more capacity to produce than a constraint does. But why would you want a non-constraint to process or produce at a faster rate than a constraint? If you did, you would only serve to increase inventory within the system which needlessly ties up cash. Subordinating means to produce at the same rate as the constraint…. nothing more and nothing less.
4. If necessary, elevate the system constraint: One of the terms everyone is familiar with is takt time which is really the throughput rate required to meet customer requirements. But what if, after all the improvements you’ve made in Steps 1-3, you still aren’t supplying enough to meet market requirements? In this step, you may have to spend some money to either purchase a new piece of equipment or even hire additional labor. Whatever it takes to meet the market demand. This is what elevating the constraint means. Doing whatever it takes to meet the demands of the market.
5. Return to Step 1, but don’t let inertia become the constraint: After completing Steps 1-4 you should see significant reductions in the cycle time of the constraint, so you must prepare for a new one to occur. That is, after you essentially “break” your current constraint another will appear to take its place. This new constraint will require the same improvement cycle that you just went through and the cycle of improvement continues. In this step I said “but don’t let inertia become the constraint.” What does that mean? Quite simply, during the first four steps of this process, you may have developed and implemented policies or procedures to accommodate your constraint. It is highly likely that these policies and procedures may no longer apply, so get rid of them.

OK, so that’s our Process of On-Going Improvement (POOGI) introduced by Goldratt back in the 80’s. Think back to my previous blog on the piping system and the simple 4-step process and try to imagine our POOGI and how it might apply to your company. In my next blog I’m going to get into the nuts and bolts of how to integrate Lean, Six Sigma and the Theory of Constraints which is what I call The Ultimate Improvement Cycle (UIC).