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Introduction to the Theory of Constraints of E. Goldratt

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TOC intro

  1. 1. 1<br />THEORY OF CONSTRAINTS<br />Presented by <br />Rajeev Athavale<br />
  2. 2. What is TOC?<br />Putting more money in your pocket now, and even more money in your pockets in the future<br />HOW???<br />By exploring the idea that every business system has a weakest link<br />By turning the weakest link into a leverage point for increased throughput by applying a rigorous "cause and effect" approach<br />2<br />
  3. 3. Theory of Constraints<br />There is and always will be limiting factors that work to prevent the achievement of success<br />If you don’t learn to manage these limiting factors they will most definitely manage your ability to succeed<br />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<br />3<br />
  5. 5. WHAT TO CHANGE?<br />TO WHAT TO CHANGE TO?<br />HOW TO CAUSE CHANGE? <br />5<br />Three Questions<br />
  6. 6. TOC is About Paradigm Shift<br />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<br />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<br />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<br />6<br />
  7. 7. The Problem with “Paradigms”<br />PARADIGMS are necessary for helping us achieve both Survival & Growth but….<br />Paradigm Problem 1 – Limiting Paradigms<br />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”<br />Paradigm Problem 2 – Conflicting Paradigms<br />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…)<br />7<br />
  8. 8. Limiting & Enabling Paradigms<br />Constraints<br />Limiting Paradigm - Most “constraints” are “Out-of-my Control” – blame them for gaps and focus on “in-my-control” stuff<br />Enabling Paradigm - Most “Constraints” are “In-my-Control or Influence” – find ways to EXPLOIT or ELEVATE<br />Complexity<br />Limiting Paradigm - Complexity is inherent - Simplify it by Breaking up into simpler parts and optimize each part<br />Enabling Paradigm – Assume Inherent Simplicity, find it and focus all efforts on finding it and capitalizing on it<br />Conflicts<br />Limiting Paradigm – For me to win, you must lose – Find compromises or even win / lose solutions<br />Enabling Paradigm – Win / win is ALWAYS possible – just find for it<br />8<br />
  9. 9. Limiting & Enabling Paradigms<br />Uncertainty<br />Limiting Paradigm - Assume inherent Certainty - Look for “Formulas” to calculate Optima<br />Enabling Paradigm - Find “Good Enough” & use Feedback to Improve & Sustain<br />Bad Behavior<br />Limiting Paradigm - Some people are just Inherently BAD – get rid of bad people<br />Enabling Paradigm – People are Inherently GOOD – get rid of Bad Assumptions<br />9<br />
  10. 10. TOC is About…<br />Focusing<br />Improving the Flow<br />Weakest Link <br />Inherent Simplicity<br />Finding WIN-WIN-WIN --- Always<br />Making an ever flourishing Company<br />10<br />
  11. 11. What is TOC?<br />Theory of Constraints<br />provides a set of holistic processes and rules,<br />all based on a systems approach,<br />that exploits the inherent simplicity within <br />complex systems<br />through focusing on the few “leverage points”<br />as a way to synchronize the parts<br />to achieve ongoing improvement in the<br /> performance of the system as a whole<br />
  12. 12. TOC Knowledge in the Areas of:<br />Operation<br />Project management<br />Distribution & Supply Chain<br /> Finance & Measurements<br />Sales<br /> Marketing<br />Managing People<br />Thinking Processes<br />
  13. 13. The Evolution of TOC – 30 years<br /> TOC & Business Strategy <br /> - Viable Vision<br />TOC & Technology<br />– Necessary but not Sufficient <br />The TOC Holistic Approach <br />– 8 Video Sessions<br />TOC Evolution over last 30 years<br />Project Management <br />– Critical Chain<br />Distribution, Marketing, Management Skills<br /> – It’s Not Luck<br />The Thinking Processes<br /> – Jonah Program<br />Production, Throughput Accounting <br />– OPT, The Goal, The Race, The Haystack Syndrome<br />1975 1985 1990 1995 2000 2005<br />
  14. 14. What is TOC?<br />THEORY OF CONSTRAINTS<br />After more than 30 years of Development and Evolution…<br />Five Focusing Steps<br /> Thinking Processes<br /> Throughput Accounting<br /> TOC Generic Solutions<br />Six N&S questions on Technology<br />UDE Evaporating Cloud <br />Current Reality Tree <br />Core Conflict Cloud <br />Future Reality Tree <br />Negative Branch Reservations<br />Pre-requisite Tree <br />Transition Tree <br />Strategy & Tactics <br />Throughput (T): The rate at which the system generates money through Sales (SR - VC)<br />Investment (I): The money tied up in the organization<br />Operating Expenses (OE): All the money spent by the system to convert investment into throughput<br />Net Profit (NP) = T – OE<br />Return on Investment (ROI) = NP/I<br />Identify the System’s Constraint<br />Decide how to Exploit the Constraint<br />Subordinate everything to the above decisions<br />Elevate the System Constraint<br />If in the previous steps a constraint has been broken, Go back to step 1.<br />What is the power of the technology?<br />What limitation does it diminish?<br />What old rules helped accommodate the limitation?<br />What are the new rules that should be used now?<br />In light of the change in rules, what changes are required to the technology?<br />How to cause the change (the new win/win business model)?<br />Operation – Drum-Buffer-Rope<br />Finance – Throughput Acct.<br />Projects – Critical Chain<br />Logistics – Pull Replenishment<br />Marketing – “UnRefusable Offer<br />Sales – “Buy-in” Process<br />People – “Empowerment”<br />Strategy – “S&T”<br />
  15. 15. The report published by Steven J. Balderstone and Victoria J. Mabin shows the following data where TOC was used:<br />Lead Times: Mean reduction 69%<br />Due Date Performance: Mean improvement 60%<br />Inventory levels: Mean reduction 50%<br />Revenue / Throughput: Mean increase 68%<br />15<br />What are the Results Achieved by Implementing TOC?<br />
  16. 16. TOC is based on Inherent Simplicity<br />System B<br />System A<br />TOC is a body of knowledge about systems and systems behaviour.<br />TOC is driven from the concept of Inherent Simplicity:<br />Everything within a system is connected by cause and effect relationships - there are no complex systems in reality<br />
  17. 17. TOC is based on 3 basic assumptions<br />X<br />X<br />X<br />X<br />Basic Assumption 1: <br />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<br />CONVERGENCE<br />
  18. 18. TOC is based on 3 basic assumptions<br />2 metres<br />1.5 metres<br />Basic Assumption 2:<br />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.<br />NO CONFLICT BETWEEN LOCAL AND GLOBAL<br />
  19. 19. TOC is based on 3 basic assumptions<br />Basic Assumption 3:<br />There is no resistance to improvement - people do not embrace change because we have not brought them to see the win for them.<br />RESPECT<br />
  20. 20. What is unique about TOC? Summary<br />Search for a logical reasoning<br />The use of Cause & Effect relationships to structure our thinking, record our analysis and understand the suggested solution for any problem (based on Convergence)<br />2. Resolve conflicts<br />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)<br />3. Seek for collaboration and contribution<br />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)<br />
  21. 21. Management<br />Managing Systems:<br />The Leader of a system sees their role as to ever improve the performance of the system under their responsibility<br />Key Words:<br /><ul><li> Area of responsibility
  22. 22. Performance measurement
  23. 23. Improvement
  24. 24. Continuous – POOGI*</li></ul>*: Process Of Ongoing Improvement<br />
  25. 25. Ever Improve <br />The Managerial Challenge<br />Improve the performance of the system<br />TARGET LEVEL<br />TARGET LEVEL<br />There is a strong belief that the system can perform better up to the Target Level <br />The GAP<br />PERFORMANCE <br />CURRENT LEVEL<br />TIME<br />THE PAST<br />TODAY<br />THE FUTURE<br />
  26. 26. Continuous Improvement - The Plan<br />TARGET LEVEL<br />CURRENT LEVEL<br />THE PAST<br />TODAY<br />THE FUTURE<br />The GAP<br />There is always a plan!<br />If we keep on doing what we have been doing we will continue to get what we are getting!!!<br />Improved performance<br />Improved performance is a result of implementing a new idea (“solution”) onto the existing system<br />Current System<br />Proposed Solution<br />
  27. 27. Continuous Improvement - Reviewing the Plan<br />TARGET LEVEL<br />CURRENT LEVEL<br />THE PAST<br />TODAY<br />THE FUTURE<br />The GAP<br />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<br />We need to know:<br />Which parts of the system are “erroneous” and have to be replaced<br />The new parts must be introduced to replace the erroneous parts<br />All the other parts of the system stay as they are!<br />Improved Performance<br />Current System<br />Stay<br />Current System<br />Stopped/Replaced<br />Proposed Solution<br />New<br />
  28. 28. Improving with TOC<br />TOC provides the way to identify and provide what is missing in the pursuit of a significant improvement of any system <br />Problem<br />Solution<br />Implementation<br />POOGI<br />WHAT to change?<br />Pinpoint the core problem<br />WHAT to change TO?<br />Construct simple practical solutions<br />HOW to cause the change? <br />Induce the proper people to make the change <br />(to invent such solutions)<br />What creates POOGI?<br />Institute a process that facilitates continuous improvement<br />
  29. 29. WHAT IS THE GOAL?<br />26<br />
  30. 30. 27<br />A Dialogue<br />Alex Jonah<br />Click Here<br />
  31. 31. 28<br />Better Service / <br />Product?<br />Global Solutions?<br />Survival?<br />WHAT IS THE GOAL?<br />Larger Market <br />Share?<br />Knowledge <br />Base?<br />High Quality?<br />Lower Cost?<br />Customer <br />Satisfaction<br />
  32. 32. Finding the Focal Point<br />Before a business can properly focus, one necessary condition is that they answer the following question:<br />What is the Goal of a for profit enterprise?<br />
  33. 33. 30<br />The Goal<br />To make more money <br />now as well as in the<br /> future<br />What is the GOAL?<br />Provide satisfaction to <br />the market now as well<br /> as in the future<br />What are the <br />necessary conditions?<br />Provide secure &<br />satisfying environment<br />to employees ...<br />
  34. 34. The Goal?<br />To make money now and in the future!<br />
  35. 35. The Goal (continued)<br /> Some would argue that the goal of their company is to...<br />To satisfy customersnow and in the future!<br /> Or to..<br />Provide a secure and satisfying jobs for employees now and in the future!<br />
  36. 36. The Goal (continued)<br />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.<br />
  37. 37. The Goal (continued)<br />That is…<br />If your goal is to satisfy customers, it is absolutely necessary that you make money and that you provide security and satisfaction to employees...<br />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!<br />
  38. 38. The Goal (continued)<br /> The choice is yours, choose any of the three as the goal of your organization! <br /> For the duration of this presentation, we will assume that the goal is:<br />To make money now and in the future!<br />
  39. 39. Measuring Progress<br /> 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<br />
  40. 40. 37<br />Measurements<br />Tell me how you measure me and I’ll tell you how I’ll behave!<br />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<br />If the measurements are absurd, my behavior will also be absurd!<br />If my Performance Measurements are not clear, even I will not know how will I behave!<br />
  41. 41. What measurements should we use? <br />Conventional Wisdom<br />Net profit?<br />Efficiency?<br />Utilization?<br />Return On Investment?<br />Cash Flow?<br />
  42. 42. What measurements should we use? (continued)<br />Generally Accepted Performance Measures<br />Net Profit<br />Return on Investment/Equity/Assets<br />Cash Flow<br /> 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.<br />
  43. 43. What measurements should we use? (continued)<br />For the average worker it is almost impossible to see the effect that any of their actions has on Net Profit (NP) or ROI. <br />As a result we have created measures like efficiency and utilization because we believe they are linked to NP and ROI.<br />But are they?<br />
  44. 44. 41<br />Utilization<br />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?<br />
  45. 45. 42<br />Efficiency<br />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? <br />
  46. 46. What measurements should we use? (continued)<br />TOC Operational Measures<br />Throughput<br />Inventory & Investment<br />Operating Expense<br />
  47. 47. 44<br />How do we Measure the Goal?<br />NET PROFIT<br />ABSOLUTE<br />ROI<br />RELATIVE<br />CASH FLOW<br />SURVIVAL<br />
  48. 48. 45<br />NET PROFIT<br />ROI<br />Bottom line MEASURES<br />CASH FLOW<br />BRIDGE?<br />BR I<br />DGE?<br />Cost?<br />OPERATINGDECISIONS<br />
  50. 50. Theory of Constraints<br />What is blocking you from getting more ofyour Goal?<br />
  51. 51. 48<br />The Current State of Affairs<br />You want/need this<br /> You’re getting more of this.<br />BUT...<br />OR...<br />This.<br />
  52. 52. 49<br />Cost World Thinking Has Paid Off for Many…Until Now...<br />CostWorld Exploited<br />Exploiting CostWorld<br />???<br />Cut Waste<br />Identify Waste<br />
  53. 53. 50<br />What Now?Continue to Cut?<br />Cut Protective Capacity?<br />Cut Waste<br />Identify Waste<br />
  54. 54. 51<br />Enterprises are paid to create wealth, not control costs. But that obvious fact is not reflected in traditional measurement <br />Peter F Drucker<br />
  55. 55. 52<br />THE COST CONCEPT MUST BE REPLACED BY GLOBAL OPERATIONAL MEASURES<br />THROUGHPUT<br />OPERATING<br />EXPENSES<br />INVENTORY<br />The rate at which the system generates money through sales<br />All the money the system invests in purchasing things the system intends to sell<br />All the money the system spends in turning inventory into throughput<br />
  56. 56. 53<br />Throughput (T)<br />Production people believe that it is production<br />Even Finance people believe it!<br />It is money entering from outside rather re-allocation of money within the system - Income produced through sales per unit time<br />T=Sales Price – TVC i.e. Truly Variable Costs such as Raw Material Price etc.<br />Only the money generated by your system get counted; i.e., raw materials and purchased services (like heat treating) don’t count<br />Building to stock does not generate throughput<br />
  57. 57. 54<br />Inventory (I)<br />Inventory in the form of raw materials, work in process (WIP), and finished goods (FG)<br />Investment in machinery, buildings, etc. (if owned) <br />Things we buy with the intent to sell<br />Record at purchase price * days held ($-Days)<br />Is Inventory an asset or a liability?<br />To the extent that it protects against lost sales it is an asset<br />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<br />
  58. 58. 55<br />Operating Expense (OE)<br />All the money the system spends to turn inventory into throughput<br />All expenses are lumped together and usually considered as one big expense<br />All employee labor expenses are almost always Operating Expense (direct, indirect, sick, operating, etc.)<br />
  59. 59. THE WEAKEST LINK<br />CHAIN ANALOGY<br />56<br />
  60. 60. 57<br />Chain Analogy<br />View a company as a chain, a physical chain<br />One link, the Marketing Department,<br />Another link, Bidding Department<br />Procurement Department<br />Manufacturing Department<br />Packaging Department<br />Shipping Department ...<br />
  61. 61. 58<br />Chain Analogy<br />Marketing<br />Bidding<br />Procurement<br />Marketing<br />Manufacturing<br />Bidding<br />Packaging<br />Procurement<br />Shipping<br />Manufacturing<br />Minimize Costs Everywhere<br />Packaging<br />Shipping<br />Global Improvement = <br />Sum(Local Improvements)<br />Cost World<br />
  62. 62. 59<br />Conventional Wisdom<br />This is analogous to saying the primary measurement of success in managing the chain is the weight of the chain i.e. cost<br />An improvement to any link in the chain is considered to be an improvement to the chain<br /> System wide or "global" improvement is believed to be the sum of all the "local" improvements made within each link<br />
  63. 63. 60<br />ToC Wisdom<br />What determines the strength of the Chain?<br />What happens if one of the links drops the ball?<br />
  64. 64. 61<br />ToC Wisdom<br />Most improvements to most links do NOT improve the chain<br />System wide, or "global" improvement, then is NOT the sum of the local improvements<br />The way to improve the organization is, definitely not through inducing many local improvements<br />Thus a company should focus on "chain strength" (not link weight) by working to strengthen the weakest link – the constraint! <br />
  65. 65. 62<br />Cost World versus Throughput World<br />
  66. 66. 63<br />There is a weakest link<br />100<br />Can we ever balance the capacity?<br />Weakest Link<br />
  67. 67. 64<br />Where Do We Stand?<br />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”<br />Can they manage both at the same time?<br />We actually do it!?<br />
  68. 68. 65<br />Do we really manage it?<br />At the beginning of the month, we control cost, tight fist on overtime, optimal batch sizes<br />At the end of the month, forget it, do everything to ship, do overtime. Ship! “End of the month Syndrome”<br />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<br />
  69. 69. 66<br />Fewer and fewer of these companies survive today<br />Why?<br />The compromises that were acceptable yesterday are intolerable today<br />Ten years ago we shipped 80% on time and everything was okay. Today we ship 95% on time and clients still bitch and moan<br />Ten years ago we shipped the best quality we could produce, today if we ship that same quality, our clients will ship it back<br />Protecting throughput has become much harder<br />The margins that enabled us to live with compromises are no longer there<br />
  70. 70. 67<br />How can we manage?<br />There is no acceptable compromise between the cost world and throughput world<br />Managers must “FOCUS”<br />What is focusing? - Pareto?<br />Focus on 20% of the problems and you will reap 80% of the benefits<br />This is true for independent variables<br />So many of this 20% improvements could be local and may not contribute to improving the organization<br />In the chain, linkages are important and the variables are dependent<br />The Pareto principle is not applicable<br />
  71. 71. 68<br />“It is not enough to do your best; <br />you must know what to do, <br />and THEN do your best.” -- Deming<br />
  72. 72. 69<br />So, How Can we Find out on What to Focus?<br />Look at the chain analogy<br />The answer is hidden there!<br />
  73. 73. 70<br />Dr. Eliyahu Goldratt<br />Speech<br />ToC Success Stories<br />
  74. 74. 71<br />Bibliography & References<br />Dr. Goldratt’s Books<br />;<br /><br />PDI Website<br />Dr. James Holt’s Website<br /><br /><br /><br /><br /><br /><br /><br /><br />