TOC's role in IT success


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TOC's role in IT success

  1. 1. Research PapersTheory of Constraintsrole in the success of IT withspecial reference to ERP by Kuldeep Singh Malik
  2. 2. Theory of Constraints role in the success of ITwith special reference to ERPIT has its main weapon as Enterprise Resource Planning:ERP is a packaged business software system that enables a company to manage the efficient and effective use ofresources by providing a total, integrated solution for the organizations information-processing needs” [Sumner Mary(2000)]. This software facilitates the integration of all the functional information flows across the organization into asingle package with a common database. Therefore, it allows easy and immediate access to information regardinginventory, product or customer data, and prior history information [Shehab, E., Sharp, M., Subramanian, L. andSpedding, T. (2004.)]. ERP initially covered all routine transactions within an organization only. However, it was laterexpanded to cover external customers and suppliers [Turban, E., Leidner, D., Mclean, E. and Wetherbe, J. (2006)]. MostERP systems now have the functionality and the capability to facilitate the flow of information across all businessprocesses internally and externally. Furthermore, ERP systems have the capability to “reach beyond their owncorporate walls to better connect with suppliers, distributors and customers to engage in e-business” [Nah, F.and Lau, J.(2001)].Today, many public and private organizations worldwide are implementing ERP systems in place of thefunctional legacy systems that are not anymore well-compatible with modern business environment. However, theprocess of moving from functional applications to an ERP system is difficult and challenging [Kroenke, D. (2008)].Theswitch to ERP system is expensive and it requires development of new procedures, training and converting data [Zhang,Z (2005)].1. A Literature Review on ERP:More than 60 percent of Fortune 500companies had adopted of ERP system [G.Stewart, M. Milford, T.Jewels, T. Hunter, and B. Hunter (August 2000)]. The relation between ERP and competitive advantage aswell as different managerial and organizational process enhancing the competitive position has not beenwell covered by the ERP literature. And, ERP system can yield at most a temporary competitive advantage asothers are also installing these enterprise-wide systems [Steven J. Balderstone and Victoria J.Mabinsearch(1999)].Nearly all literature on ERP is focused on ERP project and ERP implementation. Little attention hadbeen paid on the post implementation phase of ERP projects. IT cannot by itself influence the productivityof a company.. The main efficiency factor lies in the way people use these technologies. ERP is one of themajor motives of firms attaining a competitive advantage [Sumner Mary (2000)]. Those organizations thatcan customize their ERP systems with the new ideas to match specific strategic and decision-making needswill be more difficult to imitate. ERP systems may support the extended value chain of the organization,allowing them to link and share data with its suppliers and customers to improve business operationsthrough business process innovations [Zhang, Z., Lee, M., Huang, P., Zhang L. and Huang, X. (2005)].It is alsosuggested to better adapt business process to human factors by explicitly taking into account concepts likethe role, competence and knowledge of human resources [Millman, G.J. (2004)].2. IT alone can be problematic:Enterprise systems create both the difficulties and advantages. For instance, especially ERP takes lengthimplementation process that creates troubles. ERP has been credited with providing competitive advantagein some environments, the ERP market is maturing. ERP systems have drawback of being large, complicated,and expensive [Shehab, E., Sharp, M.,Subramanian, L. and Spedding, T. (2004.)].It focuses leads to techno-functional issues leading to project failures. The classification of functional requirements and codedevelopment with respect to changes in the business are common problems. The implementation cycletimes and the inherent problems towards planning the code development draw managerial attentionAccording to [Somers T.M. and Nelson K.G. (2004)], the Critical success factors in ERP implementation is BPRthat drives technology choice is an enabling factor that can give to ERP success. ERP implementationrequires an enormous time commitment from an organizations information technology department oroutside professionals. According to [Smith,D. (2000)], Many ERP implementation shave failed as a result oflacking clear plans. It is noted that for successful ERP implementation, one of the most critical successfactors is Re-engineering the business process, called as BPR. Organizations should be willing to changetheir businesses to fit the software in order to reduce the degree of customization [Murray, M., & Coffin, G.Vector Consulting Group
  3. 3. Theory of Constraints role in the success of ITwith special reference to ERP(2001)]. ERP systems tended to create changes in many business processes, and as noted by [Shang, S. andSeddon, P. (2002)] putting ERP in place requires new procedures, employee training, and both managerialand technical support. Many organizations have made unnecessary, complex customization toERP softwarebecause the people making the changes do not fully understand the organizations business practices[Sumner Mary (2000)]. It is noted by [Sumner Mary(2000)] that BPR should continue with new ideas andupdates to take full advantage of the ERP system when the system is in use.3. The Theory of Constraints:The Theory of Constraints (the TOC) is a developed by Eliyahu M. Goldratt. It claims that each system has atleast one constraint, challenging current state of businesses practices Thus, if the organization is viewed as achain, then the place to focus our improvement efforts must be at the point of greatest weakness – theweakest link, limiting factor or constraint. It is this aspect that lies at the heart of the Theory of Constraintsapproach called the Five Focusing Steps, first described by [Goldratt,E.M. (2000)] and shown below:1. Identify the constraint:This is the starting point, the area of greatest weakness, the area of maximum focus. The constraint mightbe physical, a machine, the size of the building, the number of people etc. It might be a policy such as anovertime ban, only allowing one shift etc. Sometimes a policy constraint creates a physical constraint andthen the organization suffers from a bottleneck. It can lie at any point on the revenue chain, internal to theorganization, within the supply base, in the market, or in the link between the market and the organization.Indeed there are few market constraints but many marketing constraints within organizations. The problemseems to be that many companies operate without knowing where the constraint is.2. Exploit the constraint:Once the constraint has been properly identified, and assuming it is physical the next step is to maximizethe performance of the constraint. This is about making sure that the performance of the chain isdemonstrating its full capability before any major spend is undertaken.3. Subordinate to the constraint:This is the tough call for any companies. This demands that all decisions are linked to the performance ofthe constraint and the relationship between whatever, and wherever, it is and the three necessaryconditions for success. The performance of all the other links in the revenue chain must support theperformance of the weakest link; their performance is only linked to their contribution to that of theconstraint.4. Elevate the constraint:This is the time to increase the capability of the revenue chain as a whole, by increasing the capacity of thephysical constraint, or changing the policies. This step is only undertaken once control has been achievedthroughout the whole of the revenue chain through subordination.5. Prevent inertia – go back to step 1:If the constraint has been addressed by elevation then there is the certainty that there is a new constraintwhich means the process must be completed once more, and this ensures a process of on-goingimprovement.4. TOC -based IT solutions work well.The new technology has to be implemented into an existing system of policies, behaviors, measurementsand other assorted rules and regulations. The key dimension of any technology is that it should diminish alimitation within the operational aspects of any organization. The new technology has to be implementedVector Consulting Group
  4. 4. Theory of Constraints role in the success of ITwith special reference to ERPinto an existing system of policies, behaviors, measurements and other assorted rules and regulations(Goldratt,E.M. (2000) .ERP with TOC provides fast, direct and whole-companywide performanceimprovements, wherein the notion of the constraint is linked to the focus and leverage offered bythroughout accounting [Somers T.M. and Nelson K.G.( 2004)]. It is suggested by [Dr Ted Hutchin (2001)] thatthe notion that the organization should be viewed as a chain and the importance of the constraint alsoneed to be recognized. There are typically three key areas of focus of ERP-TOC, namely, manufacturing,project management and distribution. Firstly, in the manufacturing area, the application of approaches suchas Drum – Buffer – Rope, have been well researched and the results clearly achieved. The whole of therevenue chain from supply to customer is made possible with ERP. There is a conflict between controllingcosts and protecting sales [Turban, E., Leidner,D., Mclean, E. and Wetherbe, J.(2006)].Secondly, in theproject management focus area of ERP-TOC, its capability of data integration presents robust system. DuringERP project life cycle, in the pre-implementation stage, TOC helps in the right selection of an ERP system.During the project implementation stage of an ERP system, TOC helps in management, makes theimplementation smooth and fast. During middle of an implementation, it provides a set of policies,procedures and measurements that give new focus, direction and momentum to the process; it can changeemployees behavior towards resistance to the change by showing the value of ERP via TOC.5. IT with TOC – How do both workIT with TOC determines and monitors the bottleneck resource, set and manage the Buffers, time the releaseof work to maintain a smooth flow to the bottleneck and maximum throughput for the plant, and analyzeresources and buffers for performance improvement. It is about attitude, approach, and process than aboutsoftware .It helps reinforce new procedures, disciplines, and measurements that are taking the place of theold ways of doing things. Once the drum is identified and the“rope” put in place to time the launching ofwork into the plant, the most critical ongoing concern is to keep the right amount of buffer in front of theCCR to ensure maximum throughput and a smooth flow of work. ERP-TOC helps in scheduling work incounterintuitive environment. Typical scheduling logic and practice, including priority calculations, work ona no-later-thandate basis, tied to due date for completion of the entire production process. Scheduling forall other work centres is tied directly to scheduling for the CCR and is not aimed at increasing utilization onthese subordinate resources. The concept of “buffer penetration” is unique to ERP-TOC and is a keymanagement tool. Management reports display appropriate priorities and highlight potential problems tokeep operations moving according to TOC principles.˜ The TOC body of knowledge as it applies to manufacturing has areas both of synergy and contrast with Lean and ERP. Managers are positioned to realize the most effective performance improvements when they understand the fundamental assumptions behind the differences.˜ TOC often gives management the vehicle to transform a stalled or failed ERP implementation into a success, both in terms of acceptance of the system and a generous return on the investment made in the system.˜ While the manufacturing application of TOC has some counter-points in Lean, the TOC body of knowledge as it applies to Throughput Accounting, Marketing, Supply Chain Management, Project Management, Sales, Strategy & Tactics, and People Skills have no real equivalent in Lean, ERP or "Best Practices." These powerful applications provide even the most successful Lean companies with rich opportunities for substantial further improvement.˜ Similarly the TOC Thinking Processes, with their powerful analytical, planning and communication applications and their ability to generate outside-the-box, win/winsolutions have no equivalent in Lean, ERP or "Best Practices.".Vector Consulting Group
  5. 5. Theory of Constraints role in the success of ITwith special reference to ERP6. Case based evidences:After ERP-TOC implementation, the service days taken by the US Navy helicopter service division to service54helicopters in a year, reduced to 133 days from previous average of 190-200 days ,this means a 1000hours/direct labour reduction and a dip in overtime from between 15 –18% to 5%..It is noted from this casethat ERP-TOC is a successful technique focused on improving planning cycle time, simultaneously. Inanother case, ITT Night Vision, a manufacturer of night vision devices (NVDs) for the United States.,Developed an enabling SAP APO model based on the Theory of Constraints, found that there was animproved planning cycle times from 10 days to 2 or 3 days, Improved capacity utilization by 20%, reducedfinished goods inventory by 19%, improved product-mix planning through better understanding of coproduct sales.7. ConclusionsEnterprise systems have been instrumental in advancing efficiency in organizations throughout the world bygiving access to inventory, product and customer data towards attaining a competitive advantage. However,putting ERP in place requires new procedures, training and converting data, adapt business process tohuman factors in the context of the role, competence and knowledge of human resources. It renders ERPsystem being complicated, and expensive. One of the most critical success factors is Re-engineeringbusiness process, which should continue with new ideas and updates. Here, ERP systems criticalshortcoming is its failure to respond to changes in the rules, procedures, measurements, and even in thebelief systems. If ERP is used in combination with TOC, the three key areas are focused, namelymanufacturing, project management and distribution. TOC helps an ERP system throughout the project lifecycle in effective implementation. On the basis of results of ERP-TOC, it can be concluded that TOC can helpERP to succeed.References:Akkermans, H., Bogert, P., Yucesan, E.,and Wassenhove, L. (2003) the impact of ERP on supply chain management :Exploratory findings from a European Delphi study, European Journal of Operational Research, Vol. 146, No. 2, pp. 284– 301.Sumner Mary (2000). “Risk factors inenterprise-wide/ERP projects”, Journal of Information Technology, 15, pp 317-327.Dr Ted Hutchin (2001), “EnterpriseResource Planning – Creating Real Bottom-Line Impact”,G. Stewart, M. Milford, T. Jewels, T. Hunter, and B. Hunter (August 2000), “Organizational readiness for ERPimplementation,” Proceeding of the Americas Conference on Information Systems, pp.966-971.Goldratt, E.M. (2000), “Necessary But Not Sufficient”, North River Press Great Barrington MAKroenke, D. (2008), “Experiencing MIS”, Prentice Hall.Mabert, V.M., Soni, A. andVenkataramanan, M.A. (2000) Enterprise resource planning survey of manufacturingfirms, Production and Inventory Management Journal, Vol. 41, No. 20,pp.52–58.Millman, G.J. (2004) What did you get from ERP and what can you get? Financial Executive, May, pp.38–42.Murray, M., & Coffin, G. (2001). A case study analysis of factors for success in ERP system implementations,Proceedings of the Seventh Americas Conference on Information Systems, Boston, 1012–1018.Vector Consulting Group
  6. 6. Theory of Constraints role in the success of ITwith special reference to ERPNah, F. and Lau, J. 2001. Critical factors for successful implementation of enterprise systems. Business ProcessManagement Journal, 7 (3): 285-296.Olson, D.L., Chae, B. and Sheu, C. (2005) Issues in multinational ERP implementation, Int. J. Services and OperationsManagement, Vol. 1, No. 1,pp.7–21.Shang, S. and Seddon, P. (2002) Assessing and Managing the Benefits of Enterprise Systems: the Business ManagersPerspective, Information Systems Journal,20(12): pp. 271-299.Shehab, E., Sharp, M., Subramanian, L.and Spedding, T. (2004.) Enterprise resource planning: An integrative review.Business Process Management Journal, 10 (4): 359-386.Smith, D. (2000), “The Measurement Nightmare”; St Lucie Press Boca Raton USASomers T.M. and Nelson K.G.( 2004). “Taxonomy of players and activities across the ERP project life cycle, Informationand Management, 41(3):257–278.Steven J. Balderstone and Victoria J. Mabinsearch (1999), “The World of the Theory of Constraints: A Review of theInternational Literature” (The CRC Press Series on Constraints Management), CRC Press; 1 edition.Turban, E., Leidner, D., Mclean, E. and Wetherbe. (2006). Information Technology for Management: transformingorganizations in the digital age.5th edition, John Willy & Sons.Zhang, Z., Lee, M., Huang, P., Zhang L.and Huang, X. 2005. A framework of ERP systems implementation success inChina : An empirical study. International Journal of Production Economics. Kuldeep Singh Malik is Head of Research at Vector Consulting Group. Vector Consulting Group ( is the leader of ‘Theory of Constraints’ consulting in India. Vector has been working closely with some of the well known retail chains, FMCG, fashion products, custom manufacturing industry and auto after market companies to improve their overall profitability through supply chain effectiveness. Kuldeep Singh Malik can be reached at kuldeep@vectorconsulting.inVector Consulting Group