Eliyahu Goldratt authored a book with Jeff Cox entitled "The Goal: A Process of Ongoing Improvement", first published in 1984, that has become the gold standard for process improvement across a number of different industries. It has made such a profound impact on the way we view continuous improvement that it is required reading and/or the subject of corporate training for management at Amazon, Delta Air Lines, and hundreds of other businesses and universities.
I have seen the significant financial, operational, and service level improvements realized through the implementation of Theory of Constraints (TOC) in manufacturing and service businesses, both large and small. It is not hard to do, but requires focus, an interest in relearning what is important to the success of your business.
"That sounds great! Sign me up!", you say... Let's dig in.
So, the big question here is "What is the goal?"... Well, the answer is simple yet nuanced: The goal is to make money (the simple part) by increasing throughput while simultaneously reducing inventory and operating expense. How do you do it? Here's where the nuance comes into play: 1/ Find the bottleneck, 2/ get more from the bottleneck’s current resources, 3/ redirect existing resources towards the bottleneck, and 4/ don’t produce more than it can or you’ll build up inventory. Then, 5/ increase resources for the bottleneck ONLY once you’ve squeezed the most you can out of it, 6/ find the new bottleneck and return to step 1, and lastly 7/ consider increasing resources to other areas to match the bottleneck’s improvement.
The point here is the focus on continuous improvement because, once you have addressed the biggest constraint in a system, the original NEXT biggest constraint now becomes the NEW biggest constraint.
Clear as mud, right? It's actually pretty intuitive once you see it in practice and can wrap your brain around it. Let's start by putting some definitions behind the terms we are using (heads up - the Inventory definition definitely deserves a second read, because it's not what people typically think of when they hear the term):
Throughput: The rate at which the system generates money through sales. In other words, money coming in to the organization.
Inventory: All of the money invested in the system towards purchasing things it intends to sell. Think of this as the cost of your traditional inventory, or money currently in the system.
Operational Expense: All of the money the system spends to turn inventory into throughput.
Bottleneck: Any resource whose capacity is less than or equal to the demand placed upon it. Conversely, a non-bottleneck is any resource whose capacity is greater than the demand placed on it. It's important to note that the capacity of your system will match the capacity of your bottleneck (the weakest link in the chain determines the breaking strength.
Ok, so with these definitions, a restatement of the goal seems pretty obvious: Make money by increasing revenue while simultaneously reducing cost. As my daughter would say, "Duh, Dad." As you might infer, it doesn't take 300+ pages to help the reader understand this basic concept.
The magic begins with the challenging of pretty widely accepted assumptions. For example, having everyone in a manufacturing facility working 100% of the time is not necessarily a good thing, but rather a likely indication of an inefficient operation. The author asserts that having everyone work all the time will necessarily result in increased inventory throughout the system, which runs counter to one of the mechanisms of achieving the goal: reducing inventory. Put in another way, doing work and making money are not always the same thing, and not all work leads to making money.
This is not an intuitive concept... Try explaining this to a supervisor on the factory floor who is predisposed to the belief that employees who aren't busy are wasting company money. However, try asking them the following question: "Which is more important to the company - high levels of activity by each employee or the overall rate a widget is produced in your system?" The latter option is critical to throughput (and is the correct answer, but the way), while the former is an incorrect assumption of what it takes to achieve the latter.
The application of TOC begins with the determination of the goal of the "system", which is anything and everything over which you or your organization can exercise control or have the authority to change. Then, a metric needs to be identified to measure throughput. Once the goal and corresponding metric is defined, one continues with these Five Focusing Steps which our outlined in the book:
IDENTIFY the system’s constraint, or bottleneck. This is typically the point in the system that has the most inventory piled up in front of it.
Decide how to EXPLOIT the system’s constraint. The bottleneck has to be running at 100% of its capacity, all the time. Some options to explore before the knee-jerk responses of purchasing equipment or hiring people are to 1/ place a QA step in front of the bottleneck to make sure the bottleneck is only processing good parts, 2/ take pressure off the bottleneck by reassigning work to non-bottlenecks as able, 3/ ensure the bottleneck is always in operation and not shut down by employee breaks, and 4/ only having the bottleneck work on what will increase throughput today. Since the throughput rate of the bottleneck is, by definition, the throughput rate of the system, every minute the bottleneck is not operating at maximum throughput rate costs money. Also, every hour lost at the bottleneck is lost forever - it cannot be recovered elsewhere in the system.
SUBORDINATE everything else to the above decisions. The key here is to ensure that all of the processing steps in front of the bottleneck are operating with excess capacity in order to handle production variability while still ensuring that the bottleneck is being "fed" at 100% of its capacity. This also results in matching your inventory input rate to that of the bottleneck, which has the effect of increasing throughput and reducing inventory.
ELEVATE the system’s constraint (this is typically the first step taken when proceeding intuitively). Look at resources that can be applied to increase the capacity of the bottleneck. Does it need people? equipment? tools? new technology? This is the most challenging step in the process as it requires expenditure, and its improvements typically take a long time to register results. Accordingly, ensure that the Exploit and Subordinate steps are fully exhausted before you Elevate.
If (at any point) in the previous steps a constraint has been broken, go back to step 1, but do not allow inertia to cause a system constraint. It is important to take a minute to verify that your goal remains the same and that your metric is still valid.
Remember, the intent of applying the above Focusing Steps is not to make the bottleneck the most efficient part of your operation, but simply to elevate its performance so it is no longer the bottleneck in the system. In doing so, you will effectively create another bottleneck which you will tackle using the same approach, again and again.
The Theory of Constraints is an invaluable tool for improving efficiency of a system, and thereby enhancing throughput. While its implementation can be a little tricky, the adoption of these concepts with a commitment towards true continuous improvement will only serve to better the performance of your organization.
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