1 THEORY OF CONSTRAINTS Presented by Rajeev Athavale
What is TOC? Putting more money in your pocket now, and even more money in your pockets in the future HOW??? By exploring the idea that every business system has a weakest link By turning the weakest link into a leverage point for increased throughput by applying a rigorous "cause and effect" approach 2
Theory of Constraints There is and always will be limiting factors that work to prevent the achievement of success If you don’t learn to manage these limiting factors they will most definitely manage your ability to succeed Understanding those limiting factors and learning how to deal with them offers a path to breakthrough solutions that will greatly increase your probability of success. The inverse is that if you don’t learn to manage them some limiting factors also have the ability to bring you to your knees 3
TOC IS ABOUT ANSWERING THREE FUNDAMENTAL QUESTIONS 4
WHAT TO CHANGE? TO WHAT TO CHANGE TO? HOW TO CAUSE CHANGE? 5 Three Questions
TOC is About Paradigm Shift Paradigms are sets of concepts, patterns or assumptions to which those in a particular group (culture or professional community) are committed to and which form the basis of all their decisions Paradigms are frame of references we use to “see” the world and make decisions. Paradigms let through data that match our “expectations” and block data that don’t. What may be impossible to do with one paradigm may be easy to do with another In TOC we define “Paradigms” simply as sets of assumptions we believe are valid. We go through a ‘paradigm shift’ when we realize one or more of our assumptions are (no longer) valid 6
The Problem with “Paradigms” PARADIGMS are necessary for helping us achieve both Survival & Growth but…. Paradigm Problem 1 – Limiting Paradigms Sometimes “Paradigms” (the rules in our Rule Book) can limit or even block us from seeing & solving the right problems or solving them in the best way for the system as a whole i.e. some paradigms can cause “Bad” decisions when we don’t take the time to “think it through” Paradigm Problem 2 – Conflicting Paradigms Some of our “Paradigms” are in conflict / inconsistent with other paradigms i.e. some paradigms can make our decisions / behaviors “Unpredictable” / “Irrational” (making decisions depend more on where we open our “rulebook” than on situation itself…) 7
Limiting & Enabling Paradigms Constraints Limiting Paradigm - Most “constraints” are “Out-of-my Control” – blame them for gaps and focus on “in-my-control” stuff Enabling Paradigm - Most “Constraints” are “In-my-Control or Influence” – find ways to EXPLOIT or ELEVATE Complexity Limiting Paradigm - Complexity is inherent - Simplify it by Breaking up into simpler parts and optimize each part Enabling Paradigm – Assume Inherent Simplicity, find it and focus all efforts on finding it and capitalizing on it Conflicts Limiting Paradigm – For me to win, you must lose – Find compromises or even win / lose solutions Enabling Paradigm – Win / win is ALWAYS possible – just find for it 8
Limiting & Enabling Paradigms Uncertainty Limiting Paradigm - Assume inherent Certainty - Look for “Formulas” to calculate Optima Enabling Paradigm - Find “Good Enough” & use Feedback to Improve & Sustain Bad Behavior Limiting Paradigm - Some people are just Inherently BAD – get rid of bad people Enabling Paradigm – People are Inherently GOOD – get rid of Bad Assumptions 9
TOC is About… Focusing Improving the Flow Weakest Link Inherent Simplicity Finding WIN-WIN-WIN --- Always Making an ever flourishing Company 10
What is TOC? Theory of Constraints provides a set of holistic processes and rules, all based on a systems approach, that exploits the inherent simplicity within complex systems through focusing on the few “leverage points” as a way to synchronize the parts to achieve ongoing improvement in the performance of the system as a whole
TOC Knowledge in the Areas of: Operation Project management Distribution & Supply Chain Finance & Measurements Sales Marketing Managing People Thinking Processes
The Evolution of TOC – 30 years TOC & Business Strategy - Viable Vision TOC & Technology – Necessary but not Sufficient The TOC Holistic Approach – 8 Video Sessions TOC Evolution over last 30 years Project Management – Critical Chain Distribution, Marketing, Management Skills – It’s Not Luck The Thinking Processes – Jonah Program Production, Throughput Accounting – OPT, The Goal, The Race, The Haystack Syndrome 1975 1985 1990 1995 2000 2005
What is TOC? THEORY OF CONSTRAINTS After more than 30 years of Development and Evolution… Five Focusing Steps Thinking Processes Throughput Accounting TOC Generic Solutions Six N&S questions on Technology UDE Evaporating Cloud Current Reality Tree Core Conflict Cloud Future Reality Tree Negative Branch Reservations Pre-requisite Tree Transition Tree Strategy & Tactics Throughput (T): The rate at which the system generates money through Sales (SR - VC) Investment (I): The money tied up in the organization Operating Expenses (OE): All the money spent by the system to convert investment into throughput Net Profit (NP) = T – OE Return on Investment (ROI) = NP/I Identify the System’s Constraint Decide how to Exploit the Constraint Subordinate everything to the above decisions Elevate the System Constraint If in the previous steps a constraint has been broken, Go back to step 1. What is the power of the technology? What limitation does it diminish? What old rules helped accommodate the limitation? What are the new rules that should be used now? In light of the change in rules, what changes are required to the technology? How to cause the change (the new win/win business model)? Operation – Drum-Buffer-Rope Finance – Throughput Acct. Projects – Critical Chain Logistics – Pull Replenishment Marketing – “UnRefusable Offer Sales – “Buy-in” Process People – “Empowerment” Strategy – “S&T”
The report published by Steven J. Balderstone and Victoria J. Mabin shows the following data where TOC was used: Lead Times: Mean reduction 69% Due Date Performance: Mean improvement 60% Inventory levels: Mean reduction 50% Revenue / Throughput: Mean increase 68% 15 What are the Results Achieved by Implementing TOC?
TOC is based on Inherent Simplicity System B System A TOC is a body of knowledge about systems and systems behaviour. TOC is driven from the concept of Inherent Simplicity: Everything within a system is connected by cause and effect relationships - there are no complex systems in reality
TOC is based on 3 basic assumptions X X X X Basic Assumption 1: Everything within a system is connected by cause and effect relationships. Identification of the causes leads us to converge onto an apparent core problem / contradiction / conflict CONVERGENCE
TOC is based on 3 basic assumptions 2 metres 1.5 metres Basic Assumption 2: All contradictions can be resolved without compromise - our level of understanding and our assumptions hold the contradiction in place. A compromise is not usually a win-win solution. NO CONFLICT BETWEEN LOCAL AND GLOBAL
TOC is based on 3 basic assumptions Basic Assumption 3: There is no resistance to improvement - people do not embrace change because we have not brought them to see the win for them. RESPECT
What is unique about TOC? Summary Search for a logical reasoning The use of Cause & Effect relationships to structure our thinking, record our analysis and understand the suggested solution for any problem (based on Convergence) 2. Resolve conflicts A strong belief that there should be no conceptual conflict within our reality – hence – striving to find a win-win solution to any perceived “no solution situation”(Local & Global) 3. Seek for collaboration and contribution The use of TOC logical tools logic to communicate to ourselves and thereafter to the team with the view of working together to achieve the desired improvement (based on Respect)
Management Managing Systems: The Leader of a system sees their role as to ever improve the performance of the system under their responsibility Key Words:
Ever Improve The Managerial Challenge Improve the performance of the system TARGET LEVEL TARGET LEVEL There is a strong belief that the system can perform better up to the Target Level The GAP PERFORMANCE CURRENT LEVEL TIME THE PAST TODAY THE FUTURE
Continuous Improvement - The Plan TARGET LEVEL CURRENT LEVEL THE PAST TODAY THE FUTURE The GAP There is always a plan! If we keep on doing what we have been doing we will continue to get what we are getting!!! Improved performance Improved performance is a result of implementing a new idea (“solution”) onto the existing system Current System Proposed Solution
Continuous Improvement - Reviewing the Plan TARGET LEVEL CURRENT LEVEL THE PAST TODAY THE FUTURE The GAP It can be that there are procedures and policies that are in conflict with the new solution and hence prevent getting the benefits of the new solution We need to know: Which parts of the system are “erroneous” and have to be replaced The new parts must be introduced to replace the erroneous parts All the other parts of the system stay as they are! Improved Performance Current System Stay Current System Stopped/Replaced Proposed Solution New
Improving with TOC TOC provides the way to identify and provide what is missing in the pursuit of a significant improvement of any system Problem Solution Implementation POOGI WHAT to change? Pinpoint the core problem WHAT to change TO? Construct simple practical solutions HOW to cause the change? Induce the proper people to make the change (to invent such solutions) What creates POOGI? Institute a process that facilitates continuous improvement
28 Better Service / Product? Global Solutions? Survival? WHAT IS THE GOAL? Larger Market Share? Knowledge Base? High Quality? Lower Cost? Customer Satisfaction
Finding the Focal Point Before a business can properly focus, one necessary condition is that they answer the following question: What is the Goal of a for profit enterprise?
30 The Goal To make more money now as well as in the future What is the GOAL? Provide satisfaction to the market now as well as in the future What are the necessary conditions? Provide secure & satisfying environment to employees ...
The Goal? To make money now and in the future!
The Goal (continued) Some would argue that the goal of their company is to... To satisfy customersnow and in the future! Or to.. Provide a secure and satisfying jobs for employees now and in the future!
The Goal (continued) TOC recognizes that only the “owners” of a company can choose THE goal. However, once chosen, the other 2 become conditions necessary to achieving the goal.
The Goal (continued) That is… If your goal is to satisfy customers, it is absolutely necessary that you make money and that you provide security and satisfaction to employees... Likewise, if your goal is to provide secure and satisfying jobs, you also have to make money and satisfy your customers...…or you won’t be in business in the future!
The Goal (continued) The choice is yours, choose any of the three as the goal of your organization! For the duration of this presentation, we will assume that the goal is: To make money now and in the future!
Measuring Progress Once the Goal is identified, the next crucial need for success in achieving the goal is to identify which measurements will be used to judge success
37 Measurements Tell me how you measure me and I’ll tell you how I’ll behave! Tell me how you'll measure me, and I'll tell you what damned stupid things I'll do to make the measurement look good If the measurements are absurd, my behavior will also be absurd! If my Performance Measurements are not clear, even I will not know how will I behave!
What measurements should we use? Conventional Wisdom Net profit? Efficiency? Utilization? Return On Investment? Cash Flow?
What measurements should we use? (continued) Generally Accepted Performance Measures Net Profit Return on Investment/Equity/Assets Cash Flow TOC does not question the validity of these 3 measures; they are vital and must be satisfied. However, TOC does question their usefulness as Operational Measures.
What measurements should we use? (continued) For the average worker it is almost impossible to see the effect that any of their actions has on Net Profit (NP) or ROI. As a result we have created measures like efficiency and utilization because we believe they are linked to NP and ROI. But are they?
41 Utilization Suppose more material is released for the purpose of improving the Utilization of a certain resource. Further suppose that this resource can produce faster than the pace setter resource. This “improvement” in utilization will not increase shipments but will increase your investment in inventory. Does that improve net profit and/or ROI?
42 Efficiency In a similar fashion, suppose you spend money to “improve” the Efficiency of a non-bottleneck resource. You will not increase shipments, you will probably increase WIP, and (depending on the nature of the expenditure) you will either increase your investment or operating expenses. Does that improve NP and/or ROI?
What measurements should we use? (continued) TOC Operational Measures Throughput Inventory & Investment Operating Expense
44 How do we Measure the Goal? NET PROFIT ABSOLUTE ROI RELATIVE CASH FLOW SURVIVAL
45 NET PROFIT ROI Bottom line MEASURES CASH FLOW BRIDGE? BR I DGE? Cost? OPERATINGDECISIONS
Theory of Constraints What is blocking you from getting more ofyour Goal?
48 The Current State of Affairs You want/need this You’re getting more of this. BUT... OR... This.
49 Cost World Thinking Has Paid Off for Many…Until Now... CostWorld Exploited Exploiting CostWorld ??? Cut Waste Identify Waste
50 What Now?Continue to Cut? Cut Protective Capacity? Cut Waste Identify Waste
51 Enterprises are paid to create wealth, not control costs. But that obvious fact is not reflected in traditional measurement Peter F Drucker
52 THE COST CONCEPT MUST BE REPLACED BY GLOBAL OPERATIONAL MEASURES THROUGHPUT OPERATING EXPENSES INVENTORY The rate at which the system generates money through sales All the money the system invests in purchasing things the system intends to sell All the money the system spends in turning inventory into throughput
53 Throughput (T) Production people believe that it is production Even Finance people believe it! It is money entering from outside rather re-allocation of money within the system - Income produced through sales per unit time T=Sales Price – TVC i.e. Truly Variable Costs such as Raw Material Price etc. Only the money generated by your system get counted; i.e., raw materials and purchased services (like heat treating) don’t count Building to stock does not generate throughput
54 Inventory (I) Inventory in the form of raw materials, work in process (WIP), and finished goods (FG) Investment in machinery, buildings, etc. (if owned) Things we buy with the intent to sell Record at purchase price * days held ($-Days) Is Inventory an asset or a liability? To the extent that it protects against lost sales it is an asset To the extent that too much (especially WIP and FG) ties up cash and retards responsiveness to market preferences (causing lost sales) it is a liability
55 Operating Expense (OE) All the money the system spends to turn inventory into throughput All expenses are lumped together and usually considered as one big expense All employee labor expenses are almost always Operating Expense (direct, indirect, sick, operating, etc.)
57 Chain Analogy View a company as a chain, a physical chain One link, the Marketing Department, Another link, Bidding Department Procurement Department Manufacturing Department Packaging Department Shipping Department ...
59 Conventional Wisdom This is analogous to saying the primary measurement of success in managing the chain is the weight of the chain i.e. cost An improvement to any link in the chain is considered to be an improvement to the chain System wide or "global" improvement is believed to be the sum of all the "local" improvements made within each link
60 ToC Wisdom What determines the strength of the Chain? What happens if one of the links drops the ball?
61 ToC Wisdom Most improvements to most links do NOT improve the chain System wide, or "global" improvement, then is NOT the sum of the local improvements The way to improve the organization is, definitely not through inducing many local improvements Thus a company should focus on "chain strength" (not link weight) by working to strengthen the weakest link – the constraint!
63 There is a weakest link 100 Can we ever balance the capacity? Weakest Link
64 Where Do We Stand? In order to control cost, managers must manage according to “Cost World” while in order to protect the throughput they must manage according to “Throughput World” Can they manage both at the same time? We actually do it!?
65 Do we really manage it? At the beginning of the month, we control cost, tight fist on overtime, optimal batch sizes At the end of the month, forget it, do everything to ship, do overtime. Ship! “End of the month Syndrome” At the beginning of the month, these companies are managed according to the cost world, at the end of the month according to throughput world
66 Fewer and fewer of these companies survive today Why? The compromises that were acceptable yesterday are intolerable today Ten years ago we shipped 80% on time and everything was okay. Today we ship 95% on time and clients still bitch and moan Ten years ago we shipped the best quality we could produce, today if we ship that same quality, our clients will ship it back Protecting throughput has become much harder The margins that enabled us to live with compromises are no longer there
67 How can we manage? There is no acceptable compromise between the cost world and throughput world Managers must “FOCUS” What is focusing? - Pareto? Focus on 20% of the problems and you will reap 80% of the benefits This is true for independent variables So many of this 20% improvements could be local and may not contribute to improving the organization In the chain, linkages are important and the variables are dependent The Pareto principle is not applicable
68 “It is not enough to do your best; you must know what to do, and THEN do your best.” -- Deming
69 So, How Can we Find out on What to Focus? Look at the chain analogy The answer is hidden there!
70 Dr. Eliyahu Goldratt Speech ToC Success Stories
71 Bibliography & References Dr. Goldratt’s Books www.goldratt.com; www.goldratt-toc.com http://toc-goldratt.com PDI Website Dr. James Holt’s Website http://www.toc.co.uk/tocworld/TOC/tochome.html www.focusedperformance.com www.ciras.iastate.edu www.thedecalogue.com http://www.vancouver.wsu.edu/ http://www.dbrmfg.co.nz/ http://www.advanced-projects.com/ youtube.com