This article: Introduction Theory of Constraints (TOC)
|TOC: The unlimited organization|
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Introduction Theory of Constraints
The unlimited organization
Recently, more and more attention is given to TOC-strategy: What should change within a company, and how should that be communicated. Important TOC-tools in this field are the strategy and tactics tree, and the logical maps. By structuring causes and effects, hidden constraints and thus business-opportunities can be found! This way, the TOC can very well be applied to give focus to other improvement initiatives like Lean and Six Sigma.
Theory of Constraints (introduction article)
TOC pampers the weakest chain
By Dr Jaap van Ede, business journalist and editor-in-chief business-improvement.eu.
The first version of this article was published in the Dutch specialist journal PT Industrial Management. Since then, this article was regularly updated.
At first sight, the plea of Dr Eliyahu Goldratt for a “Viable Vision” on the website of the Goldratt Group reminds me a bit of Dr Phil McGraw. After all, also this popular psychologist and television host claims that he can find simple solutions for complex problems. It would however be a pity if companies would dismiss the TOC as being unrealistic. That is because this ‘bottleneck theory’ really does cut ice.
The good news: this can be turned into advantage. It is sufficient to control a number of critical points! So, the more complex a supply chain is, the more simple it is to manage it. If causes and effects are mapped, then it will often turn out that only one or two things have a leverage function. By exploiting these bottlenecks maximally, and by subordinating the other business processes to them, the efficiency of the supply chain as a whole can be improved dramatically.
The common roots of the TOC and Lean
In his article Standing on the Shoulders of Giants Goldratt explains that he learned a lot from the founders of Lean manufacturing, Henry Ford en Taiichi Ohno from Toyota. These 'giants' laid the foundation that made the development of the TOC possible.
When those opportuninies are found, other improvement methods like Lean can be used to elaborate them. This is the approach in Goldratt's last book, Isn't it Obvious?. The solutions in this book for a retail chain are all typically Lean: Demand driven replenishment, the use of mini-markets in warehouses, and even 'go see' how the suppliers operate.
Goldratt believed so strongly in his own Theory of Contraints (TOC) that during the last years he challenged companies to let his consultants examine if a “Viable Vision” is possible.
Goldratt’s response to an economic crisis
In a video message of 9 minutes Eli Goldratt points out that the economic crisis of 2009 shows that companies have not been able to “immunize” themselves against dramatic changes. Their predominant panic reaction: cost savings, freeze investments, and laying off workers. The same approach is seen during the current crisis.
Not the right track, thinks Goldratt. This becomes even more obvious from other video presentations by him. Cost reduction works only temporarily, with a limit of having a turnover of zero! In addition, cutting expenses and reducing the work force will lead to instability, and will put pressure on the relation with the business partners.
The holy grail of an ever flourishing company, which is both growing ánd stable, therefore seems to be further away today then ever before. To accomplish an ever flourishing state, throughput and sales should continuously increase at a much higher rate then the operating expenses. But, how to reach that goal in a market where consumers are hesitating to buy your products?
Unfortunately, Goldratt can’t give an appropriate answer in a few minutes. Undoubtedly he would recommend a combination of mapping causes and effects, and implementing the TOC as discussed on this page.
Dr Eliyahu Goldratt was originally a physicist and philosopher. At the end of the seventies he developed a new scheduling approach, because the existing methods only led to 'local optima'. Although intermediate products were produced as efficient as possible, this was done in large batches. That only creates large amounts of stock, argues Goldratt, because there is always a next step in the supply chain, which might not have enough capacity.
Therefore, Goldratt focused on creating a maximum throughput in the whole production chain. That maximum is determined by the weakest link, the bottleneck. The schedule for this constraining step should be leading. All the other work should be subordinated to the bottleneck, to exploit it maximally.
Goldratt specified this idea by developing scheduling software, named Opt. Later this software package was sold to the Scheduling Technology Group (STG).
After that, Goldratt concentrated on giving advice, and founded the Avraham Goldratt Institute (AGI) in the eighties.
The Viable Vision offer was among others meant to stimulate companies to bring their TOC-applications to an higher level. Often, relieving a bottleneck in a production chain is their final step. After that, you should however continue with the constraint which is then limiting your profit the most. And that bottleneck cannot only be a machine, but also your marketing strategy or even the way you replenish your distributors.Thanks to the better logistics due to the TOC, it becomes for example possible to switch to just-in-time delivery or vendor-managed inventory.
Case Fleetguard Filters
Automotive supplier tackles the market as constraint
For the Indian joint-venture Fleetguard Filters Pvt Ltd, part of the American Cummins Filtration Group, their biggest bottleneck turned out to be the market!
Fleetguard makes among others heavy-duty filters and coolants, which are purchased by automotive companies like Tata Motors and John Deere. The economic recession, which is hitting the automotive sector hard since the end of 2008, was not an issue in 2006. At that moment there was however another reason why Fleetguard wished to become less dependent on the OEM-ers: Their growth rate restricted the growth rate of Fleetguard.
Therefore in 2006 a TOC program was launched, named Samanvay, which is Indian for symbiosis (with the consumers). The goal: increasing profit, by realizing growth on the after market. The whole story can be read in the Indian journal Autocar Professional (issue may 2008).
Spare parts are bought from Fleetguard by distributors, who resell those parts to retailers. What do the distributors wish? A high return on investment. For that, the availability of spare parts should be high, without the need to keep big amounts in stock. By gratifying that wish, Fleetguard was able to substantially increase their after market sales.During the last two years, a special kind of Vendor Managed Inventory system was built. Sales data from distributors are now automatically transmitted to Fleetguard. Then, their stock is replenished from a distribution centre. A buffer management system takes care that distributors who are relatively short of stock, will be replenished first. A distributor who orders only one item, but whose stock buffer is in red, can therefore take precedence over all the others!. When a certain part is not available for over a day, Fleetguard pays a penalty, so the article says. This way, they won a lot of goodwill.
Bottleneck: This is the weakest, thus throughput limiting, link in the chain from raw materials to a sold product. This bottleneck can be a certain machine that is failure-sensitive or expensive, but it can also be the amount of orders, or even the way how your products are marketed.
Drum-buffer-rope principle: The production rate at the bottleneck is the drum, all other processes should follow that rhytm. To do that, the timing of all non-constraining activities is connected to the bottleneck with a rope.
Ever flourishing company: This is defined as a company which is able to combine sustainable growth with stability. To achieve that, sales should continuously increase much faster then the operational costs.
Strategy and tactics tree
According to Goldratt, strategy is not a single statement. It is needed to develop an hierarchical framework, with goals and connected sub-goals. This is the strategy tree. The fulfillment of strategies on a lower level is a condition for the fulfillment of ‘higher’ strategies. The higher in the tree, the less specific and thus more general the nature of the strategies become.
A strategy and tactics tree is built from blocks, that have two layers: a strategy on top, and a matching tactic beneath it. So, on all levels, the why and the how are connected in the tree!. Completely on top is the mission of the company, the top-strategy. After that, the strategy branches to sub-strategies and matching sub-tactics, sub-sub-strategies and sub-sub-tactics and so on.
This logical elaboration shows the scientific background of Goldratt. For one Strategy on level x (Sx) there is exactly one matching Tactic (Tx), though there can be alternatives. The fulfillment of one or more Strategies on level x is a condition for fulfilling Strategies and Tactics one level higher (Sx-1, Tx-1). So, Tactics at the level x can be seen as more detailed descriptions of the Tactics al level x-1.
A strategy and tactics tree is also be useful to communicate about intended changes in an organization. When people see why change is needed, then they are much more willing to cooperate.In december 2007, I asked Goldratt if a strategy and tactics tree is comprehensible for everyone within an organization. ‘That is a good question’, he reacted. ‘Only a few years ago I didn’t know the answer myself. By now, I am convinced that everybody understands the logic, if the tree is explained well.’
It is important that the changes yield benefit quickly. As an example, Goldratt names the control of the amount of work-in-progress during project management. ‘This can be compared by leading elephants to a door. The quickest way to do that, is to form a row of elephants. With projects that is no different! When you start too many projects, most projects will finish late, because all the time your employees have to skip from one subject to another. So, working on less projects is both easier and faster. Only after one week , your employees will experience that themselves.’
Case Vitatron: TOC for project management
Software-department sets the pace for developing pacemakers
TOC is not only suitable for production and supply chains. Since 2003, Vitatron applies the bottleneck theory to project management. ‘The development time of our pace makers was thereby reduced with more then 50%’, says Menno Graaf, project planner TOC at Vitatron. 'In addition, the projects are now finished as scheduled. In the beginning our marketing department needed time to get used to that!’
Until 2001, Menno Graaf worked for Lucent Technologies. This was the first company which applied TOC for project management on a large scale. ‘At that time I was responsible for the rollout in Europe. But when Lucent was beginning to feel the pain of the recession in the Telecom-sector, I started to look for another job. It fitted well, when I found out that Vitatron wished to get going with TOC in their R&D department. They asked me to carry the load, which I accepted.’
^ During the development of pace-makers, the software group sets the pace
Projects resemble production processes, because there are several consecutive steps needed to complete them. However, there are differences as well. ‘With project management the bottleneck is more or less deliberately chosen. In addition, we don’t want to elevate the constraint. In our case that could be easily done by hiring extra software-developers.’
In the beginning, it was thought that it was relatively hard to use the TOC for project management. Now it seems that there is more interest in this subject then for ‘ordinary’ TOC. ‘Maybe that is because there are also other methods for improving production chains. TOC is the only method which addresses project management as well.’
The production of the pacemakers is outsourced to Medtronic, the parent company of Vitatron. ‘To improve their operations, they use primarily Lean manufacturing and Six Sigma. As a consequence their production processes are quite efficient, but I am convinced that further improvement is possible if they start using the TOC. Unfortunately I am only a small cog in the huge Medtronic-group, so it’s not easy for me to convince the senior management. It’s a pity that we therefore can’t qualify for a Viable Vision project of Goldratt Consulting. To qualify it is needed that the TOC can be applied to a complete company, with its surroundings.’