Theory of Constraints - Organization Development Network of WNY
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In this presentation you will be presented an overview of the Theory of Constraints body of knowledge, from its core principle in believing that an organization’s best opportunity for improvement is to focus on its constraints through to what Eli Goldratt presented as his latest work in 2011 shortly before his death.

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Theory of Constraints - Organization Development Network of WNY Theory of Constraints - Organization Development Network of WNY Presentation Transcript

  • An OverviewHow TOC is being used as both a HolisticApproach to Business Improvement, andTargeted Process ImprovementsRocco Surace, CPA,ABV,CVA, CFF JonahGAINES KRINER ELLIOTT, LLP100 Corporate Parkway, Suite 200, Amherst, NY 14226Tel: 716/250-6600 Email: rsurace@gkecpa.comPresentation
  • What is the purpose of the presentation?What will we learn that we do not knowbefore the presentation?What will we be able to do that we couldnot do before the presentation?What will be the ROI on our time spentattending the presentation?
  • The Theory Of ConstraintsBasic Assumptions/ConceptsEvery organization has a goalThe global organization is more than thesum of its partsThe performance of an organization islimited by very few critical variablesEven the most complex organization issubject to cause and effect relationships
  • The goal of an organization is the purpose forwhich it was created.If we want to know how an organization isdoing, we measure its rate of progress towardthat goal.What is the goal of a for-profit organization?To make more money now and in the future?Is that the only thing that‟s important?
  • The Second Concept of TOCThe global organization is more than the sum of its partsThe TOC Basic Assumptions/Concepts There is synergy between the parts of the organization. Every product is the result of synchronized efforts ofvarious resources within the organization. There are many dependencies among the resources.An Organization as a ChainCost = ? Sum of all parts 1+1 2EngineeringPurchasing Production Test Shipping A/RSalesThroughput = ? 1+1 > 2
  • The Third Concept of TOC If the performance of an organization isdependent on the synchronization of manyresources within the organization And there are many partial dependenciesbetween the resources And each resource has a certain finite capacityThe performance of an organization is limited by veryfew critical variables
  • The Third Concept of TOCConclusionsThenIt is NOT possible to utilize the vast majority ofthe resources to their full potential and stillmaintain an acceptable performance of theorganizationHenceOnly very few resources, perhaps only one,can be utilized to almost their fullcapability/capacity
  • The Fourth Concept of TOCEven the most complex organization issubject to cause & effect relationshipsand thus Inherent Simplicity
  • For every real-life system there are very fewelements governing the entire system.GOVERNING ELEMENT = CONSTRAINT = LEVERAGE POINTThe throughput of a goal-oriented systemis governed by very few elements.Inherent Simplicity
  • The Theory of ConstraintsThese two sides combine to create a powerful process ofon-going improvement. The Thinking Processes defineand build the connections of the system, the LogisticalApplications are often the lever(s) to apply.The Thinking Process Strategic Problem SolvingJonah Program an 4x4 Tactical Problem SolvingTactical Tools MarketingMarketing Jonah Program Management SkillsEvaporating CloudsThe Logistical Applications OperationsDrum-Buffer-Rope DistributionReplenishment Project ManagementCritical Chain FinanceThroughput Accounting
  • Constraint:“Anything that prevents a system from achievinga higher performance relative to its goal.”Improvement:“An action resulting in better performance relative to the goal.”Choopchicks:• We must manage and controlthe elements of cost• We must absorb overhead• A company is a system ofdepartments• If we know our product costs,we can better compete• Cost of errors = Scrap andreturns• Must have a system to trackproblems• Variability can be eliminated• The more we produce, theless it will cost
  • LeadTimes70%CycleTimes65%InventoryLevels 49%44%On-Time Delivery,Availability63%73%Revenue,ThroughputCombinedFinancialSource: The World of Theory of Constraints, Vicky Mabin & Steven Balderstone, St. Lucie Press, 1999
  • No matter what the subject matter,accelerated improvement involvescontinuously addressing three questions:How tocause thechange?
  • What to change? Due dates are often missed There is too much overtime Original plans have a very limited life Priorities are constantly shuffled It is difficult to respond to urgent customerrequirements There are frequent resource shortages There is too much expediting Lead times are too long Inventory levels (WIP, RM) are too high Current systems do not provide for adequate safetystock and times when needed
  • The Core Activities Used to Improve OperationsWhat to change to: Industry Standard Lead Times are determined for each major product family Choking the Release - Orders are released to the floor at the appropriate timebefore their committed due-date (a factor of Standard Lead Time) The shop floor is governed by a simple, yet robust, priority system Maximize the Throughput (TP) of Capacity Constrained Resources (CCR’s) Implement Load Control - Due-date commitments are given according to firstavailable slot on the designated CCR The sales force are trained to call operations before giving the commitment toclient. Operations is organized to give the answer in less than a minute.) Implement POOGI - Compile the appropriate performance data from the first 6steps, analyze the results, identify and implement qualified improvement actions Allow Sales & Operations to relyon each other Enable an increase in sales Enable an increase in profitabilityThen We Will Significantly reduce lead time Enable High reliable due dateperformance
  • OPERATIONAL FLOW300020001200150020001000
  • What to change?The erroneous assumption:A local impact is equal to theimpact on the organization.What to change to? Performancemeasurements T, I, OEHow to cause the change? Re-assessment ofinvestment, products andservices Resolution of conflictingmeasurements
  • The purpose of measurements is to motivate the parts to dowhat is good for the organization as a whole.MTO Measurement – Throughput Dollar Days:Total of product throughput X’s number of days from duedate of order to shipment.Target: Zero TDD – to measure on time performanceMeasurements should support &subordinate to the constraintMTS Measurement – Inventory Dollar Days:Total of all products in inventory X’s number of days itstays in warehouse.Target: Reduce IDD – to increase inventory velocity
  • Throughput - the rate at which the system generates “goal units”Investment - all the money tied up in the organizationOperating Expenses - all the money the system spends turninginventory into throughput.Throughput = Sales – less – Variable CostsNet Profit = Throughput – less – Operating ExpensesROI = Net Profit / divided by / InvestmentInvestment Payback =Throughput – less – Operating ExpenseInvestment
  • What to change?The erroneous assumption: In order for the project tofinish on time we have to strive to finish every taskon time.What to change to?Focus on the projects as a whole. Stagger the projects Concentrate the safety buffers Use buffer management to set prioritiesHow to cause the change? Consensus on Critical Chain Mechanism to enable Buffer management
  •  Dr. Goldratt defines the Critical Chain as thelongest chain of tasks that consider both taskdependencies and resource dependencies. Critical Path is defined as the longest chain oftasks based upon task dependencies. The difference is subtle but important. Critical Chain recognizes that a delay inresource availability can delay a schedule justas easy as a delay in dependent tasks.Critical Chain Project Management
  • Maintenance Center, Albany, GAMatcom Video© Realization Technologies, Inc.
  • FBPBCCCritical Chain Project Management
  • What to change?The erroneous assumption: thecloser the inventory to theclient, the better the servicelevel.What to change to?Pull Vs. PushHow to cause the change?Measurements: Throughput Dollar Day Inventory Dollar DayGKE
  • From Forecast to ReplenishmentCONSUMPTION INFORMATIONREPLENISHMENT OF GOODS
  • What to change to?The perception of value is determined by the benefitsexpected from acquiring the product/service.How to cause the change?Building Un-Refusable Offers.What is your decisive competitive edge?Remember – Henry Ford was rightWhat to change?The erroneous assumption: Theperception of value of a product ora service is based on the efforts ofthe supplier to design, produce,distribute, market etc.
  • What to change?The erroneous assumption: The first step in the sales processis to introduce your product or service.What to change to?Overcoming each layer of resistance in turn.How to cause the change?Preparation of the buy-in process
  •  Has the right problem been identified? Is this solution leading us in the rightdirection? Will the solution really solve the problem? What could go wrong with the solution?Are there negative side-effects? Is the solution implementable? Are we really up for this?
  • What to change?The erroneous assumption: A sustainable strategy isto maximize net profit by improving the servicelevel, quality and cost of your products andservices while reducing the operating expense.What to change to?Create decisive dominant edge.How to cause the change?Immunizing the future of the company.
  • Production• From local efficiency,cost driven mode ofoperation• To system flow,throughput drivenmode of operationProjects• From protectingsingle tasks,resources, and/orindividual projects• To maximizing theglobal output ofcompleted projectsSupply Chain,Distribution, Retail• From buying andselling based onforecasts andbatches• To synchronizingreplenishment basedon actual demandSales & Marketing•From taking orders basedon product features &price•To securing win-winbusiness deals based ona decisive competitiveedgeThinking Processes•From acting onextrapolation, correlationand compromise•To cause-effect scientificthinking, assumingconflicts are not facts oflifeHolistic•From local improvementswhich can take years toreturn the investment•To system improvementsthat generate substantialresults now and into thefuture.
  • “The more complex the problem, the simplerthe solution must be”“Common sense is not common at all”“As long as you cannot verbalize your intuition,the only thing you will communicate is yourown confusion”
  • Tools to thinkwith…
  • Where is theConstraint?Why is it aConstraint?STEP 1How toIDENTIFY theConstraint orOpportunitySTEP 2How to EXPLOITConstraint orOpportunitySTEP 3How to SUB-ORDINATEto the Constraint orOpportunitySTEP 5How toMEASURE&RE-FOCUSSTEP 4When to ELEVATESystem Constraint5 Step Process& associatedtools to managePhysicalConstraintsSTEP 1WHYCHANGE?STEP 2WHAT TOCHANGE?STEP 3WHAT TOCHANGE TO?STEP 5HOW TOMEASURE & RE-FOCUSSTEP 4HOW TOCAUSE &IMPLEMENTTHE CHANGE?5 Step Process& associatedtools to identify& remove PolicyConstraintsSTEP 0Define the Goal,Strategic Objectives &KPI’sWhat is the Goal ofthe System?Theory Of Constraints“The best solutions start with the right questions…”How to manage the Constraint?
  • 2013 John L Thompson, Global Focus LLC
  • WHY CHANGE?Step 0: Agree on the Goal / Objective & Metrics as it relates to the company as a wholeStep 1: Part A: Agree on The Opportunity / The Undesirable Effects & ComplaintsWHAT TO CHANGE?Step 1: Part B: Agree on the Core problem that if addressed, will make all the others goawayWHAT TO CHANGE TO?Step 2: Agree on the direction of the solution to remove the core problemStep 3: Introduce the solution and agree on requirements that will solve all the problemsand achieve the Goal & ObjectivesStep 4: Ensure that all significant Negative side-effects have been surfaced & addressed.HOW TO CAUSE THE CHANGE?Step 5: Ensure that all Obstacles (Yes Buts) to implementation have been surfaced &addressed.HOW TO MEASURE & RE-FOCUS?Step 6: Agree on Measurement & Reward for all key stakeholders for a successfulimplementationWELL NOW WHAT?Step 7: Unverbalized Fear. Something was missed, probably a key player…Go back toStep 1The Ongoing Process - POOGI -
  • 1Become anEver FlourishingCompany2:1ReliabilityComp. edge2:2RapidComp. edgeBase Growth Enhanced GrowthReliable Rapid Response S&T3:199%DDPBuild3:3ExpandClientBase3:2ReliabilitySellingCapitalize3:4LoadControlSustain3:5CapacityElevation3:6LT1/4Build3:7RR LoadControlSustain3:9ExpandRR clientbase3:8RRSellingCapitalize
  • Sales generated by the Reliability offer are increasingly growing. The knowledge to effectively capitalize on the Reliability competitive edge (inselecting market sectors, prioritizing prospects, designing offers and sellingthem) exists. The changes required in the marketing and sales approach require time andthere is no time to lose. The improvements implemented in production increasedDDP, reduced LT and exposed capacity. Delaying the capitalization of theseimprovements (converting them to bottom line results) may erode the company’sconfidence in the solution.From the outset of the VV project the Company aligns its marketing and salesapproach to fully take advantage of the Reliability offer.(The sales and marketing core team makes sure a test launch will be doneproperly and promptly – step 5:23:2; only when 99% DDP is demonstrated is thegreen light given to roll out the offer). The required changes in the Company’s approach to capitalize onremarkably better service (the reliability offer) is different in nature fromthe changes the company did in the past (new products or new markets). Leaving the positive impact of remarkably better reliability to the naturalreaction of the client will slow down capitalization of the reliabilitydecisive competitive edge.NecessaryassumptionsStrategyParallelassumptionsTacticReliability SellingSufficientassumptionHaving a competitive edge that is service based is a paradigm shift for salesand marketing that are used to competing ontechnology/design/product/price.3:2
  • The introduction by Dr. Eli Goldratt in 2002 of a “new” TOC-based Thinking Process called a “Strategic & Tactics” Tree(S&T) is being viewed by more and more executives andmanagers who have been exposed to it, as one of themost important breakthroughs in ensuring that holisticbusiness or organization strategies are defined, properlyvalidated, communicated and implemented to achievingharmony within organizations. The S&T, they believe, canfor the first time provide them with a practical process andlogical structure for defining and communicating all thenecessary and sufficient changes as well as the sequenceof implementation of these changes to achieve more goalunits for the organization – not just What to change, butmore importantly, What not to change and especially HowTo implement the changes and Why.Dr. Alan Barnard
  • Any strategic plan is only as valid as the assumptions on which it isbased.Therefore, it is the responsibility of managers at every level in theorganization to: not only contribute to defining and communicating the Strategyand Tactic for each proposed change, but also to define and communicate the logic of the proposedchange – why the proposed change is really necessary to achieve the higher levelobjective and ultimately the goal of the company, why they claim it is possible to achieve the objective (Strategy) of thechange (especially considering it has probably never been achievedbefore), why they claim their proposed change (Tactic) is the best or even theonly way of achieving the Strategy of the change and finally, what advice/warning they would give to their subordinates to ensure thesufficiency of the implementation of the proposed change.
  • Each S&T entity in the S&T is therefore simply a proposed changethat should answer:1. Why the change is needed? (Necessary Assumption)2. What is the specific measurable objective of the change?(Strategy)3. Why we claim the Strategy is possible and what specificrequirements, potential negative branches or obstacles must beconsidered when selecting from the alternative ways (tactic) forachieving the Strategy? (Parallel Assumptions linking Strategy withTactic)4. How to best achieve the objective of the change (Tactic) e.g.what changes should be made to processes, policy ormeasurement?5. What advice/warning should be given to subordinates, which, ifignored, will likely jeopardize the sufficiency of the steps they wouldtake to implement this tactic or which is likely to be ignored(without the warning)? (Sufficiency Assumption)
  • Sales generated by the Reliability offer are increasingly growing. The knowledge to effectively capitalize on the Reliability competitive edge (inselecting market sectors, prioritizing prospects, designing offers and sellingthem) exists. The changes required in the marketing and sales approach require time andthere is no time to lose. The improvements implemented in production increasedDDP, reduced LT and exposed capacity. Delaying the capitalization of theseimprovements (converting them to bottom line results) may erode the company’sconfidence in the solution.From the outset of the VV project the Company aligns its marketing and salesapproach to fully take advantage of the Reliability offer.(The sales and marketing core team makes sure a test launch will be doneproperly and promptly – step 5:23:2; only when 99% DDP is demonstrated is thegreen light given to roll out the offer). The required changes in the Company’s approach to capitalize onremarkably better service (the reliability offer) is different in nature fromthe changes the company did in the past (new products or new markets). Leaving the positive impact of remarkably better reliability to the naturalreaction of the client will slow down capitalization of the reliabilitydecisive competitive edge.NecessaryassumptionsStrategyParallelassumptionsTacticReliability SellingSufficientassumptionHaving a competitive edge that is service based is a paradigm shift for salesand marketing that are used to competing ontechnology/design/product/price.3:2
  • Learning and Thinking ToolsTo prepare children for life.
  • RussiaTOC for Education, Inc.ColombiaUnited KingdomSerbiaPhilippinesMexicoCosta Rica Ecuador Israel MalaysiaNetherlandsSingapore South Africa Taiwan Trinidad & Tobago UkraineUnited States Venezuela
  • Moscow Region Scouts 1,000 Scouts trained within Moscowregion, including 10 towns Ages 8 – 15 (girls and boys) Facilitator training conducted inTheological University Featured in Russian Federation Magazine
  •  Resolving team conflicts, Behavioural modelling and modification Learning camping and survival skills i.e.knot tying, safety, first aid, ecologicalissues Planning scouting expeditions Mentoring and peer mediation Leadership skills (for senior Scouts) Setting and achieving goals (i.e. How to attain a badge)
  •  Over 35,000 year one teachers trained in TOCin 8,000 schools Taught to over 1.5 million students throughnational curriculumPhilippines Endorsed by director of national capitol region,Philippines department of education whosupervisors the education of 8 million children. Over 5,000 teachers trained
  • Serbia TOCFE accredited by the Ministry of Education aspart of the teachers professional developmentprogramUSA - Florida TOCFE trial conducted to improve English Reading TestScores (FCAT) % students increasing their scores grew from 61% in to91% showing gains in the following academic year. TOCFE was one of the major factors contributing toimprovement.
  • Mexico TOC program to ‘construct effective solutionsin learning’ receives ‘best practice’ recognitionfrom Department of Quality and Innovation,Mexico. State of Nuevo Leon launches program to trainevery Civics teacher in TOC by end of. ‘The TOC tools constitute a didactic strategy that leadsus to establish communication and empathy. Theyhelp everyone to develop their abilities and skills needsin all fields of life.’Jose Martinez, Secretary of EducationNuevo Leon, Mexico
  • Run away/Don’t runawayGrade 7 boy - USA
  • 23/04/2013 50BeckyAged 5 yearsEnglandGOALOBSTACLESSTEPS
  • People & StrategyWhere should we begin?
  •  Management Attention NOT Bad Management Rather, precious little timeto accomplish many things MULTITASKING52
  • In 2011 Eli shared what he has researched and verifiedthe past few years. The number one constraint in mostorganizations is Management Attention. It is not a competency issue. Rather it is based in the dayafter day conflict that management faces: keeping theirfocus on current operations with all its daily distractions andmulti-tasking that comes with it vs. focusing on the longterm success of the organization. Eli‟s suggested answer is in how to go aboutproperly channeling managementattention. Bad multitasking is both a killer of quality and capacity,especially at the management level. Do you measure andmonitor management capacity?
  • Eli has now shared what he callsThe Engines of Disharmony What are the core causes of disharmony in an organization? As an individual what is my contribution to this disharmony? What is the contribution of management?Eli‟s belief is that the higher the management position themore they are not aware of what the engines ofdisharmony are. What are the inherent conflicts that exist in the environment? How much useless inertia is in place, where capacity is beingwasted on stuff that does not matter?And one of the most recurring engines is the significantgaps that exist in what people are responsible for andwhat authority they have to carry out those responsibilities.
  • June 8, 2009. A letter from Eli Goldratt…Every manager, especially a top manager of a large engineering basedcompany, is well aware of the impact of increasing the motivation,initiative, synchronization, willingness to collaborate and communicationamong his people. All those “soft” issues are actually the hardest, mostimportant ingredients that determine the capabilities of the company.Unfortunately, the prevailing approach to improving these issuesrevolves around dealing directly with the people. Let‟s take motivationas an example. As long as we think that the way to increase a person‟smotivation is to talk with him, don‟t we actually assume that the causefor his lack of sufficient motivation resides with the person himself?From my experience, I‟m convinced that the root cause for insufficientmotivation (or communication, or synchronization etc.) is the existenceof engines of disharmony. One type of these engines of disharmony isthe existence of conflicts. Of course, putting a person under a conflictdoesn‟t contribute much to his motivation. Critical Chain removes threeof those conflicts* and therefore every time that CCPM is implementedthe result is not just better performance but also a considerable increasein motivation and collaboration. See, for example, the quote from themost popular book on CCPM in Japan.
  • June 8, 2009. A letter from Eli Goldratt…Although there are multiple cases documenting "several hundred millionyen profit increase in a few months", many of them don‟t regard makingmoney itself as the success. Actually, many readers„ comments arealong the following lines: “Of course I am surprised and happy with thedramatic profit increase in such a short time. But far more important forme is people‟s personal and professional growth. Widely spreadingteam work, motivation increasing across the company: I have alwayswanted our company to be like this! ”(CCPM, by Yuji Kishira)Unfortunately, not only in every organization is there likely to be manymore conflicts, but there are other (not less powerful) types of engines ofdisharmony.*3 conflicts removed by CCPMEstimation turned into commitmentPriority achieved by pressureProject progress measured by ratio of efforts
  • 1. What is my contribution? Many people don‟t really know(cannot clearly verbalize) how what they are doing is essential tothe organization. Would you be motivated if you were in thatposition?2. What is my peer’s contribution? Most people don‟t reallyknow how what many of their colleagues are doing is essential, or atleast contributes to the organization. Would you be collaborative ifyou where in that position?3. Conflicts. People are operating under conflicts.4. Inertia. Many people are required to also do tasks for which thereason no longer exists. People‟s intuition is always strong enough tofeel it, but not always is it strong enough to convincingly explain it totheir superiors.5. Gaps between responsibility and authority. You, likeany other manager, know firsthand how frustrating it is to havesomething you are responsible for accomplishing, but you do nothave the authority for some of the actions that must be taken.
  • The experience gained in removing(even partially) those types of engines ofdisharmony is more than enough torealize that if we systematically removethe above engines, we are bound to getthe desired culture change. The hugepositive ramifications are obvious.Moreover, such effort will augment andexpedite the initiative to change theprime operational measurement andinstitute the right procedures.
  • Let’s Turn The Engines of DisharmonyintoThe Engines of Harmony What is my contribution What is my peer’s contribution Conflicts Inertia Gaps between responsibility and authority
  • Identify a specific case from personal or professional lifethat fits the criteria – your good and well intendedsolution was rejected. Describe the situation with just 4sentences: CONSIDERING YOUR IDEADescribe the Environment which triggered your proposed change. Why didyou want the change?What did you want the change to be?Who resisted the change?How do you feel about it/them now? ... And they about you?
  • The Engines of Disharmony
  • “It is not the strongest of the speciesthat survives, nor the most intelligent,it is the one that is most adaptable tochange.”