Achieving quantum increase in performance through Theory of Constraints <ul><li>Batliboi Ltd </li></ul>© Goldratt India
Agenda <ul><li>Fundamental beliefs </li></ul><ul><li>Organizational Goal </li></ul><ul><li>Conventional measurements for t...
Fundamental Beliefs / Paradigms  <ul><li>Traditional Belief/Paradigm </li></ul><ul><li>Inherent Constraints </li></ul><ul>...
The Goal? <ul><li>What is the Goal of your organization? </li></ul>© Goldratt India
The Goal? <ul><li>Some organizations state that their Goal is to be a World Class Quality Company.  Stated differently the...
The Goal? <ul><li>Many other organizations say that their Goal  is to keep their employees happy now and in future. </li><...
The Goal? <ul><li>A few organizations declare that their Goal is to make money now and in future! </li></ul>© Goldratt India
The Goal? <ul><li>Is there any conflict between the three Goals stated or a hierarchy of Goals? </li></ul>© Goldratt India
The Goal? <ul><li>For example let us choose that our Goal is to delight customers now and in future. </li></ul><ul><li>In ...
The Goal? <ul><li>Now let us decide that our Goal is to keep our employees happy now and in future. </li></ul><ul><li>In o...
The Goal? <ul><li>Now if we decide that our Goal is to make money now and in future, is it really possible to achieve it w...
The Goal? <ul><li>In reality there is no conflict between the three different Goals. </li></ul><ul><li>Choose any of the t...
Measures for the Goal-Making Money <ul><li>Generally accepted measures are </li></ul><ul><li>Profit </li></ul><ul><li>Retu...
Current situation <ul><li>Only 23 out of 3000 (0.8%) companies actively trading on the Bombay Stock Exchange have increase...
Five levels of financial health Making more and more money <ul><li>Unable to meet financial commitments </li></ul><ul><li>...
What measurements  should we use? <ul><li>For the average employee, seeing the effect that any given action has on Net Pro...
What measurements  should we use? <ul><li>New Operational Measures </li></ul><ul><li>Throughput (“T”) </li></ul><ul><li>In...
© Goldratt India Flow of money -  - OE RM I + S Cash in  bank
Throughput (“T”) <ul><li>The rate at which  Contribution Rupees  are coming into organization. </li></ul><ul><li>Only Rupe...
Investment (“I”) <ul><li>All the money currently tied up inside the system. </li></ul><ul><li>All the inventory in raw mat...
Operating Expense (“OE”) <ul><li>All the  money  that system spends on converting inventory into throughput. </li></ul><ul...
Financial Links <ul><li>Is there any link between the new Operational Measures “T”, “I”, & “OE”, and conventional measures...
Financial Links <ul><li>If we increase T keeping I & OE constant, P=(T-OE) improves, ROI= NP/I improves, and so does the c...
Financial Links <ul><li>Improving Throughput, Investment and Operating Expense have a positive co-relation with improving ...
Constraint for making money <ul><li>What is that limits your organization to achieving more of its Goal - to make more and...
Theory of Constraints (TOC) <ul><li>The core idea in the Theory of Constraints is that every real system such as a profit-...
Theory of Constraints (TOC) <ul><li>Constraints are neither good nor bad. </li></ul><ul><li>They are facts of life. </li><...
Theory of Constraints (TOC) <ul><li>There is really no choice in the matter. </li></ul><ul><li>Either you manage the const...
Organization as a chain <ul><li>An organization can be compared to a chain. </li></ul><ul><li>The activities that constitu...
Organization as a chain <ul><li>The output of the organization is achieved through the  synchronized  efforts of various f...
Organization as a chain <ul><li>Should we improve all functions or all links? </li></ul><ul><li>Or should we strengthen th...
Organization as a chain <ul><li>The global improvement is not the sum total of all the local improvements. </li></ul><ul><...
How does TOC help companies <ul><li>Focusing improvement efforts where it will have the greatest immediate impact on  the ...
A process of on going improvement (POOGI) <ul><li>1.  Identify the constraint. </li></ul><ul><li>2.  Exploit the constrain...
POOGI: Step 1 <ul><li>Identify the Constraint. </li></ul><ul><li>The constraint can be internal or external to your organi...
POOGI: Step 2 <ul><li>Exploit the Constraint. </li></ul><ul><li>Get the most possible out of the existing capacity of the ...
POOGI: Step 3 <ul><li>Subordinate all decisions to exploiting the </li></ul><ul><li>constraint. </li></ul><ul><li>All poli...
POOGI: Step 4 <ul><li>Elevate the constraint. </li></ul><ul><li>If more capacity is required after steps 2 &3 to meet the ...
POOGI: Step 5 <ul><li>Avoid Inertia. </li></ul><ul><li>If in a previous step the constraint is broken, go back to Step 1. ...
POOGI: Step 5 <ul><li>Avoid Inertia. </li></ul><ul><li>The long term strategic application of TOC does not call for contin...
<ul><li>Summary </li></ul><ul><li>Stopping existing wrong actions is priority # 1 </li></ul><ul><li>Start new right action...
<ul><li>This is not the End.  </li></ul><ul><li>It is not even the beginning of the End.  </li></ul><ul><li>It is perhaps ...
Upcoming SlideShare
Loading in …5
×

Achieving quantum increase_in_performance_through_toc_

1,140 views

Published on

Published in: Business, Technology
0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
1,140
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
0
Comments
0
Likes
2
Embeds 0
No embeds

No notes for slide
  • Overview of the Theory of Constraints Every organization has more than one link. The performance of the organization like the strength of a chain is governed by the performance of the weakest link. Often organizations, struggling to improve their performance, try to improve every area thereby either getting very little improvement or some times none at all in case the weakest link is missed. Most organization do not know where is their weakest link thus jeopardizing their entire time and effort! Five focusing steps Identify the constraint Exploit the constraint-make the most of what you have. Do not waste the constraint. Subordinate all other functions, departments, measurements to take out the most out of the constraint. Elevate-strengthen the weakest link. Go back to 1-identify the new constraint in case the constraint has changed. Identifying Organizational Constraint. Identifying organizational constraint is not at all rocket science. The following step by step approach will identify the constraint of a “For Profit” organization. The organization has a constraint in the market if it has a very large (~ 50%) market share of the world market. Most organizations other than Microsoft, Intel or some niche players are unlikely to have this constraint. An organization has a constraint in market if it delivers consistently (&gt;99%+) On Time in Full (OTIF). OTIF is rather a very tough measurement to achieve. If an organization has orders for 10 items, its OTIF measurement will be zero if it misses the delivery of even one item by just one day. Most organizations do not have OTIF even close to 50%. An organization will have a constraint in operations if it is not achieving OTIF &gt; 99% though it gets input materials on time. In case any of its equipment has an Overall Equipment Effectiveness (OEE) is more than &gt;95% on 24X7 basis, then that equipment is the constraint. Otherwise its operational policies are responsible in generating an artificial constraint in making one of its equipment as the constraint. When an organization is having OTIF &lt; 99%, and it is unable to get its input materials on time due to organization’s inability to pay the vendors on time, the organization is having the most difficult situation- CASH CONSTRAINT. Cash shortage is not the same as cash constraint though cash shortage will land the organization into cash constraint in due course of time. Managing Cash Constraint: An organization in cash constraint situation is in the most difficult situation as its very existence is threatened if it is not able to overcome this constraint within relatively very short period of time (weeks). Theory Of Constraints does offer solutions to overcome this constraint. In most cases it is possible to come out within 15-20 weeks.
  • Achieving quantum increase_in_performance_through_toc_

    1. 1. Achieving quantum increase in performance through Theory of Constraints <ul><li>Batliboi Ltd </li></ul>© Goldratt India
    2. 2. Agenda <ul><li>Fundamental beliefs </li></ul><ul><li>Organizational Goal </li></ul><ul><li>Conventional measurements for the Goal </li></ul><ul><li>Five levels of Goal achievement </li></ul><ul><li>New operational measurements </li></ul><ul><li>Concept of Constraint </li></ul><ul><li>Process Of On Going Improvement -Five focusing steps </li></ul><ul><li>Implemented case studies from India </li></ul><ul><li>Next steps for tomorrow </li></ul><ul><ul><li>Stopping some existing practices </li></ul></ul><ul><ul><li>Starting some new actions </li></ul></ul><ul><li>Summary </li></ul>
    3. 3. Fundamental Beliefs / Paradigms <ul><li>Traditional Belief/Paradigm </li></ul><ul><li>Inherent Constraints </li></ul><ul><li>Inherent Complexity </li></ul><ul><li>Inherent Conflict </li></ul><ul><li>Inherent Certainty & Optima </li></ul><ul><li>Inherent Bad People </li></ul><ul><li>TOC Belief/Paradigm </li></ul><ul><li>Inherent Potential </li></ul><ul><li>Inherent Simplicity </li></ul><ul><li>Inherent Win/win </li></ul><ul><li>Inherent Uncertainty & “Good Enough” </li></ul><ul><li>Inherent Good People with Bad assumptions </li></ul>
    4. 4. The Goal? <ul><li>What is the Goal of your organization? </li></ul>© Goldratt India
    5. 5. The Goal? <ul><li>Some organizations state that their Goal is to be a World Class Quality Company. Stated differently they would like to delight their customers now as well as in future. </li></ul>© Goldratt India The Goal?
    6. 6. The Goal? <ul><li>Many other organizations say that their Goal is to keep their employees happy now and in future. </li></ul>© Goldratt India The Goal?
    7. 7. The Goal? <ul><li>A few organizations declare that their Goal is to make money now and in future! </li></ul>© Goldratt India
    8. 8. The Goal? <ul><li>Is there any conflict between the three Goals stated or a hierarchy of Goals? </li></ul>© Goldratt India
    9. 9. The Goal? <ul><li>For example let us choose that our Goal is to delight customers now and in future. </li></ul><ul><li>In order to achieve our chosen Goal i.e. to delight our customers now and in future, it is absolutely necessary to keep our employees happy now and in future. </li></ul><ul><li>Similarly it is imperative to make money now and in future in order to continue to keep our employees happy. </li></ul>© Goldratt India
    10. 10. The Goal? <ul><li>Now let us decide that our Goal is to keep our employees happy now and in future. </li></ul><ul><li>In order to achieve our chosen Goal, it is absolutely necessary to make money now and in future. </li></ul><ul><li>It is impossible to make money now and in future unless we continue to delight our customers now and in future. </li></ul>© Goldratt India
    11. 11. The Goal? <ul><li>Now if we decide that our Goal is to make money now and in future, is it really possible to achieve it without delighting our customers now and in future! </li></ul><ul><li>And can we satisfy our customers without keeping our employees happy now and in future! </li></ul>© Goldratt India
    12. 12. The Goal? <ul><li>In reality there is no conflict between the three different Goals. </li></ul><ul><li>Choose any of the three Goals, the other two become the necessary conditions for achieving the chosen Goal! </li></ul><ul><li>For the purpose of this presentation we will assume that the Goal is making money now and in future. </li></ul>© Goldratt India
    13. 13. Measures for the Goal-Making Money <ul><li>Generally accepted measures are </li></ul><ul><li>Profit </li></ul><ul><li>Return on investment </li></ul><ul><li>Cash flow </li></ul><ul><li>We do not question the validity of these measures. However we do question the usefulness of these measures as operational measures! </li></ul>© Goldratt India
    14. 14. Current situation <ul><li>Only 23 out of 3000 (0.8%) companies actively trading on the Bombay Stock Exchange have increased their profits continuously in the last 10 years (The Economic Times 24 th September 2005) </li></ul><ul><li>And the Goal of the organization is to make more and more money </li></ul><ul><li>Hence as per our agreed definition of Goal, 99.2% organizations are not achieving their Goal! </li></ul>© Goldratt India
    15. 15. Five levels of financial health Making more and more money <ul><li>Unable to meet financial commitments </li></ul><ul><li>Meeting financial commitments but not making profits </li></ul><ul><li>Meeting financial commitments, not making losses, but profits fluctuating </li></ul><ul><li>Profits increasing continuously period after period </li></ul><ul><li>Return On Investment (ROI) / Return On Capital Employed (ROCE) increasing continuously </li></ul>© Goldratt India
    16. 16. What measurements should we use? <ul><li>For the average employee, seeing the effect that any given action has on Net Profit (NP) or Return On Investment (ROI) is almost impossible. </li></ul><ul><li>As a result we have created local measures like efficiency & utilization because we believe that they are linked to NP or ROI. </li></ul><ul><li>We do know that 99%+ organizations are not achieving their Goal. </li></ul>© Goldratt India
    17. 17. What measurements should we use? <ul><li>New Operational Measures </li></ul><ul><li>Throughput (“T”) </li></ul><ul><li>Investment (“I”) </li></ul><ul><li>Operating Expense (“OE”) </li></ul>© Goldratt India
    18. 18. © Goldratt India Flow of money - - OE RM I + S Cash in bank
    19. 19. Throughput (“T”) <ul><li>The rate at which Contribution Rupees are coming into organization. </li></ul><ul><li>Only Rupees generated by the system are counted; e.g., Rupees spent on purchasing raw material or services do not count as they are passed on to your suppliers. </li></ul><ul><li>T=(Net sales-all truly variable costs) </li></ul>© Goldratt India
    20. 20. Investment (“I”) <ul><li>All the money currently tied up inside the system. </li></ul><ul><li>All the inventory in raw material, WIP, or in Finished Goods. </li></ul><ul><li>Money blocked in plant and machinery. </li></ul><ul><li>Receivables are also part of “I”. </li></ul>© Goldratt India
    21. 21. Operating Expense (“OE”) <ul><li>All the money that system spends on converting inventory into throughput. </li></ul><ul><li>All the expenses are clubbed together as “OE” and are thought as fixed. </li></ul><ul><li>All employee expenses are part of “OE”. </li></ul>© Goldratt India
    22. 22. Financial Links <ul><li>Is there any link between the new Operational Measures “T”, “I”, & “OE”, and conventional measures as “P”, “ROI”, & “Cash Flow”? </li></ul><ul><li>P = T- OE </li></ul><ul><li>ROI = P/ I = (T-OE)/I </li></ul><ul><li>What happens to P, ROI & cash flow when we improve either “T”, “I” or “OE”, keeping other two as constant? </li></ul>© Goldratt India
    23. 23. Financial Links <ul><li>If we increase T keeping I & OE constant, P=(T-OE) improves, ROI= NP/I improves, and so does the cash flow. </li></ul><ul><li>If we decrease I, keeping T & OE constant, P improves due to reduced carrying cost, ROI improves, and of course cash flow improves. </li></ul><ul><li>When we reduce OE keeping T, and I constant, P, ROI, and cash flow improve. </li></ul>© Goldratt India
    24. 24. Financial Links <ul><li>Improving Throughput, Investment and Operating Expense have a positive co-relation with improving P, ROI, and cash flow. </li></ul><ul><li>Throughput, Investment and Operating Expense are valuable operational measures that can guide our day to day actions to making money now and in future. </li></ul>© Goldratt India
    25. 25. Constraint for making money <ul><li>What is that limits your organization to achieving more of its Goal - to make more and more money? </li></ul>© Goldratt India
    26. 26. Theory of Constraints (TOC) <ul><li>The core idea in the Theory of Constraints is that every real system such as a profit-making enterprise must have at least one constraint that limits the system to achieving its Goal. </li></ul><ul><li>Every ‘for profit organization’ will have a constraint in Supply, Operations, or Market. Current constraint may shift, but there cannot be any situation when there is no constraint. Had it been so, its profit would have been infinite! </li></ul>© Goldratt India
    27. 27. Theory of Constraints (TOC) <ul><li>Constraints are neither good nor bad. </li></ul><ul><li>They are facts of life. </li></ul>© Goldratt India
    28. 28. Theory of Constraints (TOC) <ul><li>There is really no choice in the matter. </li></ul><ul><li>Either you manage the constraints or the constraints will manage you. </li></ul><ul><li>The constraints will determine the output of the system whether they are acknowledged and managed or not. </li></ul>© Goldratt India
    29. 29. Organization as a chain <ul><li>An organization can be compared to a chain. </li></ul><ul><li>The activities that constitute a business are ‘chain’ of dependent events. </li></ul><ul><li>For example we do not dispatch components unless they are packed, and we do not pack parts until they are manufactured. </li></ul>© Goldratt India
    30. 30. Organization as a chain <ul><li>The output of the organization is achieved through the synchronized efforts of various functions. </li></ul><ul><li>The output is limited by the weakest area. </li></ul><ul><li>The strength of the chain is determined by the strength of the weakest link. </li></ul><ul><li>What should be done to improve the output of an organization? </li></ul>© Goldratt India
    31. 31. Organization as a chain <ul><li>Should we improve all functions or all links? </li></ul><ul><li>Or should we strengthen the weakest function or the weakest link? </li></ul><ul><li>It is common sense that unless we improve the weakest link, the organizational output or chain strength would not increase at all. </li></ul><ul><li>Is it possible that overall organizational effectiveness is reduced by improving performance in one department ? </li></ul>© Goldratt India
    32. 32. Organization as a chain <ul><li>The global improvement is not the sum total of all the local improvements. </li></ul><ul><li>Often organizations spread their energies thin in all areas in order to improve the output. </li></ul><ul><li>In the TOC world optimizing a sub-system would sub-optimize the whole system. </li></ul>© Goldratt India
    33. 33. How does TOC help companies <ul><li>Focusing improvement efforts where it will have the greatest immediate impact on the bottom line. </li></ul><ul><li>Providing a reliable process that insures Follow Through </li></ul>© Goldratt India
    34. 34. A process of on going improvement (POOGI) <ul><li>1. Identify the constraint. </li></ul><ul><li>2. Exploit the constraint </li></ul><ul><li>3. Subordinate all policies, decisions and procedures to exploiting the constraint. </li></ul><ul><li>4. Elevate the constraint. If we need still more output from the constraint, elevate it. </li></ul><ul><li>5. Avoid inertia. If in a previous step constraint shifts, start the cycle once again. </li></ul>© Goldratt India
    35. 35. POOGI: Step 1 <ul><li>Identify the Constraint. </li></ul><ul><li>The constraint can be internal or external to your organization. Internal constraint is preferable. </li></ul><ul><li>The constraint can be tangible or intangible. For example it could be an equipment or a policy. </li></ul><ul><li>Invariably (> 95%) the constraint is a policy. </li></ul>© Goldratt India
    36. 36. POOGI: Step 2 <ul><li>Exploit the Constraint. </li></ul><ul><li>Get the most possible out of the existing capacity of the constraint. </li></ul><ul><li>Utilization at the constraint is critical. </li></ul>© Goldratt India
    37. 37. POOGI: Step 3 <ul><li>Subordinate all decisions to exploiting the </li></ul><ul><li>constraint. </li></ul><ul><li>All policies and measurements must be designed to get the most out of the constraint. </li></ul><ul><li>Utilization and efficiency at the non-constraint resources must not be measured . However this does not imply that there are no measurements for non-constraint resources. </li></ul><ul><li>This step is often missed, and thereby the majority of financial benefits of TOC is lost. This is the toughest step. </li></ul>© Goldratt India
    38. 38. POOGI: Step 4 <ul><li>Elevate the constraint. </li></ul><ul><li>If more capacity is required after steps 2 &3 to meet the market requirements, increase it through capital investment, outsourcing, or off-load the constraint by defining alternative routings, processes or design. Capital investment should not be the first option. </li></ul><ul><li>Often times, Exploitation and Subordination are sufficient to reach the needed output. Do not increase the investment too soon. </li></ul>© Goldratt India
    39. 39. POOGI: Step 5 <ul><li>Avoid Inertia. </li></ul><ul><li>If in a previous step the constraint is broken, go back to Step 1. Do not let inertia be the system constraint. </li></ul><ul><li>Often times when a new constraint is identified, it is necessary to change the policies you have just made! </li></ul>© Goldratt India
    40. 40. POOGI: Step 5 <ul><li>Avoid Inertia. </li></ul><ul><li>The long term strategic application of TOC does not call for continuous removal of all constraints. </li></ul><ul><li>Rather, the idea is to choose where the constraint should be in order to best exploit the market opportunities, and then keep it there! </li></ul>© Goldratt India
    41. 41. <ul><li>Summary </li></ul><ul><li>Stopping existing wrong actions is priority # 1 </li></ul><ul><li>Start new right actions only after stopping wrong actions! </li></ul>© Goldratt India
    42. 42. <ul><li>This is not the End. </li></ul><ul><li>It is not even the beginning of the End. </li></ul><ul><li>It is perhaps the End of the beginning! </li></ul><ul><li>THANK YOU! </li></ul>© Goldratt India

    ×