Maximizing Profitability Part 14

In my last blog I told you not to just jump right into the UIC and begin the improvement process. In this blog posting I’m going to give you 10 prerequisite beliefs that your organization must embrace before your organization will be able to successfully implement and navigate through the Ultimate Improvement Cycle:

1. Believing that leveraging the constraint and focusing your resources on the constraint is the key to improved profitability. Because of this, the constraint can never sit idle.

2. Believing that it is imperative to subordinate all non-constraints to the constraint. If you violate this key belief, your throughput will not improve and your WIP will grow to unacceptable levels thus draining cash from your coffers.

3. Believing that improving your process is a never-ending cycle. You must be ready to re-focus your resources when the constraint moves and it will move eventually.

4. Believing that involving and empowering your total workforce is critical to success. Your work force has the answers if you will first listen to what they have to say and then engage them to design the solution.

5. Believing that abandoning outdated performance metrics like efficiency and utilization, reward or incentive programs, and variances is essential to moving forward. As Goldratt says in his book, The Goal, “Show me how you measure me and I’ll show you how I’ll behave.” These outdated metrics and practices are archaic tools from the past….so let them go.

6. Believing that excessive waste is in your process and that it must be removed. Studies have confirmed that typical processes have less than 10% value-added work meaning that waste accounts for 90% of the available time.

7. Believing that excessive variation is in your process and that it must be reduced. One of the keys to growth in profitability is consistent and reliable processes. Processes are full of variation and uncertainty and unless and until variation is reduced, moving forward will be difficult.

8. Believing that problems and conflicts must be addressed and solved. You can no longer afford to hide problems with inventory. When problems arise, you must stop the process and take the time to solve them. By solving them, I’m talking about finding and eliminating the root cause(s).

9. Believing that constraints can be internal, external, physical or policy or any combination of the four. In the real world, over 90% of all constraints are policy related. Policies and procedures must be scrutinized, changed and sometimes thrown in the garbage and replaced with policies that make sense.

10. Believing that the organization is a chain of dependent functions and that systems thinking must replace individual thinking. It is no longer acceptable to focus on improving single steps in the process if it isn’t the weakest link. This focus on local optima must be replaced with system optimization.

If your entire operation is able to accept the prerequisite beliefs of constraint focus and leverage, then you have taken the first step, but it must include everyone….and every department. Your entire organization must become focused on the leveraging power of the constraining operation. If you can’t do that, then there simply is no need to continue. Unless and until all functional groups within your organization are singing from the same sheet of music, you simply will not make any progress.

Of all the TOC focusing steps, subordination will be the most difficult one to apply. It simply means that every decision made and every action taken by the entire organization must be done so based on its impact on the constraining resource. And when I say the entire organization, I mean everyone!

Accounting must provide real time decision-making information to the organization and not hold onto financial measures that are based on what happened last month. Accounting must also eliminate outdated performance metrics like utilization and efficiency in non-constraint operations because they mean absolutely nothing. Purchasing must order parts and materials based upon the rate of consumption at the constraint and stop ordering in large quantities or only on the basis of lowest cost to satisfy another outdated performance metric, purchase price variance. Sales and Marketing must understand that unless and until the current constraint is broken, they must not make hollow promises on delivery dates in order to obtain more orders to supplement their sales commissions. Engineering must respond quickly to the needs of production to assure timely delivery and updates to specifications. Maintenance must always prioritize their work based upon the needs of the constraining operation including preventive and reactive maintenance activities. If there is an inspection station that impacts the constraint throughput, then inspectors (if they exist) must always provide timely and accurate inspections so as to never cause delays that negatively impact the flow of materials into and out of the constraint. Finally, Production Control must stop scheduling the plant on forecasts that we know are wrong using the outdated algorithms contained within the MRP system.

As you identify the constraint and subordinate the rest of the organization to the constraint, there will be idle time at the non-constraints. If you are like many organizations that use total system efficiency and utilization as key performance metrics, then you will see both of them predictably decline. You are normally trying to drive efficiencies and utilizations higher and higher at each of the individual operations under the mistaken assumption that the total efficiency of the system is sum of the individual efficiencies. In a TOC environment the only efficiencies or utilizations that really matter are those measured in the constraint operation. You may even be using work piece incentives in an effort to get your operators to produce more and I’m sure many of you are using variances as a key performance metric. Efficiencies, utilizations, incentives and variances are all counterproductive!

Believe me, no matter how good you think your processes are, they are full of waste and variation. You must accept the premise that every process contains both excessive amounts of waste and variation that are waiting to be identified, removed, and reduced. Your job will be to locate, reduce and hopefully eliminate the major sources of both. Variation corrupts a process, rendering it inconsistent and unpredictable. Without consistency and control you will not be able to plan and deliver products to your customers in the time frame you have promised. Waste drives up both operating expense and inventory, so improvements in both of these go directly to the bottom line as you improve the throughput of your process and more specifically your constraining operation. Yes, you will observe waste in your non-constraint operations, but for now focus your resources only on the constraint!

If your organization has truly accepted these ten prerequisite beliefs and all that goes with them, then you are ready to begin this exiting journey that has no destination. But simply saying you believe something can be hollow and empty. It is your day-to-day actions that matter most. Review these ten prerequisite beliefs as a group on a regular basis and hold people and yourself accountable to them. Post them for everyone to see. Utilizing the Ultimate Improvement Cycle and true acceptance of and employment of these ten beliefs will set the stage for levels of success you never believed were possible!