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

My First Experience With TOC Part 4

 

In my last post I stated that I had prepared a brief presentation of my own for when the corporate people arrived. Here's what happened next.

The very first slide said it all.  It was a plot of weekly on-time delivery and I think it shocked them.  When I had arrived, the plant’s on-time delivery was just under sixty percent while the efficiencies were around eighty-five percent, which was still too low for our “corporate experts.”  When they saw it, they didn’t believe it because even though the efficiency had dropped to around sixty-five percent, our on-time delivery now stood at eighty-eight percent which was still not good enough for me.  Actually, the most current week which had not yet been plotted now stood at ninety four percent!!

I asked the “experts” if they would like to see how it was possible to improve on-time delivery, while at the same time reduce our process efficiencies.  I went through my traditional drawings of the piping system and simple four-step process and explained the concept of a physical constraint.  But for those of you who haven’t read about the concept of a system constraint, here are the two drawings I used.

In this first drawing I asked the corporate “experts” the question in the box just beneath the drawing of the simple piping system.  They answered the question correctly in that it would be necessary to increase the diameter of Section C to increase the volume of water delivered.  I also asked them if increasing the diameter of any other section would increase the flow of water through this system and again, they answered correctly by saying no, only Section C.  This exercise was intended to implant the concept of the system constraint firmly in their minds.  I then inserted a second drawing of a simple four-step process for manufacturing something.

I repeated the same questions I had asked about the piping system and they answered each one correctly.  I then asked them to tell me what would happen if we were to run every process step as fast as we could in order to increase efficiency like they wanted?  One of the "brighter" corporate folks got a smile on his face and said that, if you did, you would end up with two piles of inventory…..one in front of Step 2 and an even larger one in front of Step 4.  When I asked him to explain, he said that because of the differences in capacities it would be a natural effect.  Since Step 1 could produce at double the rate of Step 2 the WIP in front of Step 2 would build up at a rate of one extra part per minute.  The pile of WIP in front of Step 4 would be even bigger.

I then asked this same man to tell me the rate at which I should run the current process and he correctly stated one part every 5 minutes to match the rate of the constraint.  Everyone had just experienced that concept of slowing down, in order to speed up and that attempting to drive efficiencies upward could have a negative impact on on-time delivery.  And with that, the team from corporate packed up and went home.

TO BE CONTINUED

My First Experience With TOC Part 3

 

Earlier I talked about what we called a Herbie Hunt.  For those of you who have never read The Goal, Herbie was an over-weight boy scout with an overloaded backpack who controlled the pace of a boy scout’s overnight hike.  The troop finally figured out that if they could reduce the weight of Herbie’s back pack, the troop could increase the amount of distance covered on their hike.  This was how the authors of The Goal, Eliyahu Goldratt and Jeff Cox, chose to introduce the concept of the constraint.  Let’s continue now with the story-line of this plant’s transformation.

One of the first constraint’s our team discovered was when it was time to mount the hardtop on the chassis of a BMW Z3.  Along the hardtop mounting surface there were 48 control points that had to be within the specification limits provided by BMW.  To our amazement, 36 of these points failed to conform to the specification limits.  Many of the points were above the spec limits and could be repaired, but many times they were below the limits and had to be scrapped.  In fact, approximately 20% of all of the tops fell into this category which caused deep financial pain for our plant.  I also discovered that the hardtop was 4 months late going to market.

We formed a team of hourly employees and our one, lone Engineer to solve this problem which turned out to be an alignment issue within our bonding process.  The team determined the root cause of the mismatch in surfaces, implemented an SPC initiative and the scrap level fell to almost zero which immediately improved our on-time delivery metric and the customer’s perception of our quality, plus our profit levels.  We celebrated this success with a pizza party which brought our two competing camps of employees that I mentioned earlier much closer together.  In addition, the morale of the work force as a whole jettisoned upward.

One of the problems I haven’t mentioned much so far was the quality of materials being received from our suppliers.  I remember on at least two occasions scrapping an entire batch of resin used in our hardtop molding process.  We also had supplier delivery issues from the standpoint of on-time delivery.  Part of this was due to our inability to pay our bills on time and part of it was due to the poor processes that some of our suppliers had.  As some of you might have guessed, the previous leadership, in an attempt to improve profitability, chose the lowest cost suppliers which in some cases had the poorest quality and on-time delivery rates.

One of our hourly employees suggested that we have a Supplier Appreciation Day and invite all of our suppliers into our plant.  He reasoned that if they could see how their products were used and talk about the problems we were seeing with their products, there would be an immediate improvement in both quality and on-time delivery.  Another employee suggested that we pay all of our bills within thirty days as an incentive for suppliers to improve their delivery performance.  Guess what……both ideas worked!!  Within a matter of weeks, our supplier performance improved dramatically and because we were paying within thirty days, we were able to negotiate significant early pay cost reductions which also helped improve our bottom line.

Earlier, I mentioned that when we subordinated the non-constraint processes to the newly identified system constraint, our efficiencies took a significant negative hit.  I remember our corporate office sending a team down to our plant to determine the cause of our deterioration in efficiencies.  They came unannounced and just sort of showed up at our front door.  I invited them into our conference room and they made a presentation demonstrating on a run chart the sudden decrease in our efficiencies.  I let them finish their presentation and asked them if they had looked at any other performance metrics?  Of course, they hadn’t!  I had anticipated a visit from corporate at some point because of our deterioration in efficiencies, so I had prepared a brief presentation of my own for when they arrived.

TO BE CONTINUED

My First Experience with TOC Part 2

 

That first day I spent all three shifts within the four walls of this factory, out on the production floor introducing myself to the employees and trying to get some sense of the true state of the business.  What I found that first day caused a great deal of anxiety for me personally because they were all looking to me for help save their jobs.  The next morning, in desperation, I visited the local library to find something, anything, on operation’s management to read.  That visit turned out to be a good move for me because in that library I discovered a small, partially hidden, paper-back book that would change the course of history at this plant in Kentucky.  This book would become my blue print for a complete transformation of not only this manufacturing facility, but for me personally and professionally.  The name of this book was The Goal – The Theory of Constraints – A Process of Ongoing Improvement by Eliyahu M. Goldratt and Jeff Cox.

I spent the remainder of my second day in my office and most of the night reading this manufacturing masterpiece.  There were many concepts within this book that I had never heard of before.  I was so excited to get started applying these concepts, but I knew my team had to understand the teachings within this book before we could truly begin our transformation.  I found a local book store and purchased copies of The Goal for all of my direct reports and supervisors to read.  I had the copies over-nighted and when they arrived, I mandated all of my direct reports to read this book in two days.  We had round-table discussions about the key teachings within this book on a daily basis and within a week we were ready to begin.

Back then, the key learning for my management team and myself was what Goldratt and Cox referred to as their Five Focusing steps.  The short-hand version of these five steps were:

·       Step 1: Identify the system constraint.

·       Step 2: Decide how to exploit the system constraint.

·       Step 3: Subordinate everything to the system constraint.

·       Step 4: If necessary, elevate the constraint, but don’t let inertia create a new  constraint.

·       Step 5: Return to Step 1 to identify the new system constraint.

One of the first things I felt we needed to do was to hold a meeting with all of our employees.  In this meeting I let everyone know that we had three months to turn our manufacturing facility around or we would be forced to close its doors.  I let everyone know that their opinions mattered and that it would take everyone participating in our turn-around to avoid closure.  The overall effect of having this meeting was that the two distinctly different camps of employees that had existed, in effect vanished immediately.  The bottom line was that nobody wanted to lose their jobs and the fact that we, as a management team, were willing to listen to their improvement ideas, struck a very positive chord with everyone in this meeting.

One of the first things we did was to establish a morning walk-though, which we referred to as a Herbie Hunt, to search for and find the system constraint.  Because we were losing so much money on the hardtop side of the business, we elected to start on that side of the plant.  Each morning, as a group, we would walk the process until we came upon a backlog of partially finished hardtops.  Once we found this backlog, we then stopped and asked the operator why he or she felt that the process was blocked at their station.  We also asked this same person what they thought should be done to alleviate the backlog.  This technique turned out to have multiple effects.  First, we were able to identify the system constraint and then get ideas on how to exploit it.  In the early going, it was clear that we had to subordinate the rest of the process to the pace of the constraint.  This was difficult because our corporate office tracked our overall efficiency and by asking the non-constraints to slow down, the overall efficiency took a nosedive.  The bottom line was that we needed to reduce the amount of work-in-process inventory.

Perhaps the most important effect of our daily Herbie Hunt was the true involvement of the hourly work force in our improvement effort.  They were amazed that someone was actually listening to them and that we not only solicited their ideas, but we implemented them exactly as stated, as long as no safety or customer rules were violated!  I remember one operator telling me that nobody had ever listened to the workforce before.  And so our improvement effort began….

TO BE CONTINUED

My First Experience With TOC Part 1

Over the years, I’ve written many books about the Theory of Constraints (TOC), but it’s my belief that, by sharing my first experience with TOC, it could help those in charge of manufacturing companies perform at a higher level.   The basic teaching of TOC is all about being able to identify the limiting factor in a system or process that controls the rate of units through it and then focus improvement efforts on it to leverage the potential gains to be made.  I’ve been using this methodology since the 1990’s and in every case, it has provided significant improvements. So, with this basic belief in mind, here’s my story about how I first learned about TOC and how I used it to transform a company.

In the early 1990’s I had been hired by a company that produced fiber glass hard tops on one side of the plant and convertible tops on the other side.  This company employed approximately 250 employees and when I arrived at this site in Kentucky, I found it virtually in shambles.  Apparently it had just missed being unionized by five votes, so the work force was pretty much split down the middle in terms of “camps” with one camp being pro-management, and wanting to turn this plant around, and the other camp, those who had voted to unionize the facility, having a very negative view of leadership. 

From a financial perspective, the facility was on credit hold with some of its key suppliers and overtime within the plant was very high.  Customers were threatening to pull their business because of poor quality and terrible on-time delivery.  Absenteeism was high and morale was in the tank.  Sounds like a fun place to work, doesn’t it?

I had been hired as the new General Manager of this manufacturing facility and on the first day I arrived, the CEO and I had a closed-door meeting.  One of the first things he told me, floored me to say the least.  The CEO explained to me that he wanted me to close the plant!  I was shocked to say the least.  I pushed back hard and told the CEO that if he wanted me to stay at this plant, he needed to give me an opportunity to turn this facility into a profitable one.  After a much-heated discussion, we eventually agreed that I would have three months to turn the facility into a profitable one. After three months, if it wasn’t profitable, then I would close its doors.  I saw this as the largest challenge of my life, because closing this facility would be a failure on my part and I hate failing.  Plus, there were some 250 employees who needed these jobs, so in my mind closing the plant was really not an option.

Prior to accepting this job, my background had been almost exclusively in Quality and Engineering with virtually zero operations management experience.  My mentor from previous assignments, this company’s CEO, had talked me into accepting this job offer and when I asked him why he had chosen me, since I had no previous operations experience, he simply told me that all I needed was my quality ethic and my people skills.  Little did I know that I would need much more than just those two qualities.

There were two operation’s managers currently at this facility.  One had been there for 20 years and the other had just been hired.  Because I had no real operations management experience, I thought I could rely on my two operations managers, but as I found out quite early on, that wasn’t a good thought.  Neither of them could offer any real vision for what we had to do to effectuate a turn-around.  Needless to say, I was starting to panic!

In my next post, I will continue on with my first experience with TOC