Another improvement project is done. Fanfares! Your director congratulated himself to everyone - quick picture, Quick "well done" email. You are super proud of yourself – you deserved it! All targets improved by 25%, a fair chunk of Lean principles implemented, all your decisions have been based on hard data – you WON!
However, three months later, the site where you executed the latest project did not make any more money. You are checking all KPI's from the department which you improved – all targets on point! Everything looks the same as you left. So what the hell is going on…???
Sounds familiar?
In all your honesty, how many of your projects have enormously impacted your organisation's bottom line? Yes – you improved the cycle time of one of the operations, you save a lot of time, and achievable targets are much higher now… but - without pretense - do you see any actual difference in crucial KPIs? Can you despatch more products? Do you make more profit? Did your sales or market share go up?
Let's talk about one of the most significant and common misconceptions within all the projects/Continuous Improvement/Operations activities and the ultimate solution – Theory Of Constraints (TOC).
The journey starts from the GOAL and "STABILITY."
We could try to use turgid words here about why your company exists. Still, in most cases – as the TOC literature points out – the goal of the usual profit-making organisation is to make more money now, and in the future.
Of course, we cannot measure all companies by the same yardstick – making money purpose is not universal (think about schools, governments or charities – money there is a necessary condition to serve the purpose, but not the goal itself). However, in order to use any TOC tool (or any CI tool, to be fair), your organisation MUST HAVE an explicit, verbalised and well agreed upon ONE GOAL and MEASUREMENT in place which supports it.
Many companies are struggling with defining the goal and measuring it. The same companies are often fighting with instability and chaos as well. What do I mean by that? Instability = very high uncertainty with the business outcome (for example, delivery to clients). If you work in one of these companies and do nothing, be sure that your business will stop operating soon.
OK. So you have your goal established with all the boundary conditions necessary to achieve it. Your job as a manager and a leader is to help to move the company closer to its goal.
A Chain is only as strong as its weakest link
Let's look closer at the simple, usual profit-making organisation example.
As you see above, most businesses can be defined as a linked sequence of processes that transform input into saleable output (subject to dependency and variation). TOC practices often refer to the analogy between such a system and a chain. To achieve your goal (make more money now and in the future), you need to manage an entire company – a chain – where each link (an action, process) and resource (strength of each link) is closely connected.
So we have the goal, and we know how to do it, right?
If we know what we strive for and the way to do it, it means that our system should be infinitely successful and constantly achieve an infinite amount of whatever our goal is (in this case – limitless profits). How come this is not the case in our reality?
The core idea of the TOC is that every system MUST HAVE at least one CONSTRAINT, which is, nota bene, the reason why your system cannot perform so well as you would like to.
With this knowledge, what is the best way to improve your processes and your 'chain'? Do you concentrate on enhancing the strongest link? Maybe the biggest? Or perhaps the best way is to apply all efforts to the whole chain and all processes?
If constraint determines the system's output and limits whatever you strive to, the only way to improve is to control the constraint. You must manage constraints, or they will manage you (whether you know about it and control it or not).
EXAMPLE
Let's go back to our simple profit-making organisation example for a moment. Imagine, you are the director, and your team presents KPIs from the last month to you.
As you probably noticed – your Production department is struggling to maintain the target. What is your next step? Where do you send your resources to help? Where is your weakest link?
Most of the people would say – Production. Any other department performs well.
Are you sure? Have you got all the data required to make the correct decision? Let's add another piece of information:
How about now? A lot of people would send all the help available to production still.
Let's add some numbers to it:
As you see above, improving your production department (where most managers would start) will not change anything! Your constraint is in the Packing department, and even if your Production team does 500% of the target, your next step of the process can handle only 30pcs/hour. As long as your production department produces more than 30pcs per hour, your actual problem is in Packing Department (please bear in mind we simplify it to show the concept here).
The strength of the chain (and your process) is determined by its weakest link! The weakest link is your constraint. You need to identify it and then concentrate efforts on strengthening this single link - it is useless to improve any other link if your constraint has not been strengthened.
What is the Constraint?
The most straightforward definition of constraint is being incapable of performing all the required work.
At the beginning of TOC, the constraint was considered as a physical thing, a resource with the least capacity relative to demand. Today we need to think about constraint more broadly, as the most limiting factor, an obstacle to achieving the system's goal (this still could be a machine, but it could also be a policy, market demand, management attention, etc.). Remember, constraint exists in the context of its goal only! No chain is infinitely strong, and even the strongest chains have the weakest links that determine the strength of your company - your organisation will ALWAYS be constrained!
However, Theory of Constraints has so much more to offer than fighting "bottlenecks" only (as most people think).
It was originally developed by Dr Eliyahu Goldratt as a manufacturing scheduling method. Over the years, Goldratt expanded TOC into a methodology that contains a wide range of concepts, principles, solutions, tools and approaches that strive to ensure any change undertaken will benefit the system as a whole.
5 PILLARS OF TOC
To understand TOC as a pragmatic approach, you need to be familiar with 5 Pillars/beliefs that guide all TOC thinking and solutions. Goldratt initially offered the First four pillars in the book "Choice". The fifth one has been introduced in the unfinished book "Science of Management". Each pillar speaks for an attitude that helps confront challenges and reach breakthroughs that support you when you feel stuck (for example, with a very complex issue or situation where nothing can be done to improve).
Inherent Simplicity
The more complex the problem, the simpler the solution must be.
"The key for thinking like a true scientist is the acceptance that any real-life situation, no matter how complex it initially looks, is actually, once understood, embarrassingly simple."
Dr. E. Goldratt (“The Choice”, 2009)
Goldratt famous Simplicity exercise – which system is more complex?
There are two ways of looking at complexity –description approach (in this case, much more complex is system A);
2nd one – influence approach (much more complex is system B – to manage/cause the impact on the entire system, you need to touch only 1 bottom point in system A, and 4 points in system B).
Based on Isaac Newton Principia – Natura valde simplex est et Sibi Consona – Nature is very simple and harmonious with itself - it means to understand the cause & effect relationship of the observed result. We should always look for deeper causes ("grand unified theory") that can explain the nature of our multiple observed effects. Once we get the main root cause governing the system, we are able to bring out desired change to the entire system by touching minimum points.
Inherent Harmony - Every Conflict can be removed
There are no conflicting facts in nature – there are only wrong interpretations/assumptions.
This pillar is about how to create harmony when two differing ideas meet. Very often, two different parties share a common goal but believe other actions are required to achieve it (according to their needs). In order to understand and clarify the whole situation, we need to define everyone's goals, needs, actions, underlying assumptions and challenge the wrong assumptions. (more about coming soon).
Inherent goodness Of People - People are Good
"People are GOOD/NOT stupid, even when they do Bad/stupid things."
"The system of finding causality to a problem works on auto mode."
Dr D. Kahneman "Thinking Fast and Slow"
Dr Kahneman explained in his book that our thinking process is biased – if two incidents happened in sequence, we associate the first event as the cause of the second one. It works similar with the environment and people – the person related to this incident will be more likely perceived as the cause of it.
This pillar is an assumption which implies a complete avoidance of blaming and labelling people. It forces us to ask why this action was taken (instead of who did this). It makes us dive deeper until we find a systematic problem issue.
Inherent Potential - Never say "I know."
The bigger the base, the bigger the jump.
No matter how much you improved the system and the situation, your organisation still has a lot of room to be significantly better (even if your process is "industry-leading/best in class"). Even if your company is an undisputed leader, you need to remember that others aspire to meet your standards or exceed them. You must constantly innovate and improve. None of the processes, even the best ones, should be treated as fixed and must be continuously challenged.
Inherent Variability
Variability is part of the process, and reacting to noise will increase it.
TOC TOOLS
POOGI (Process Of Ongoing Improvement)
POOGI (5 Focusing Steps) improves entire systems by finding and increasing the constraint capacity. These five steps are:
1. IDENTIFY the system's constraint
2. EXPLOIT the constraint
3. SUBORDINATE everything else to the constraint
4. ELEVATE the constraint
5. PREVENT INERTIA from becoming the constraint (and go back to step 1)
DBR/SDBR (Drum Buffer Rope/ Simplify Drum Buffer Rope)
It is a solution to managing the production environment and scheduling process focused on increasing the flow and throughput. It allows us to control the whole system by synchronising production (bottleneck – the drum) with customer requirements (through the rope). The buffers are used to protect the system's throughput from variability and lower levels of the WIP (Work In Progress).
Throughput Accounting
Throughput Accounting is a modern management accounting technique where, according to CIMA Official, the primary goal is to maximise throughput while simultaneously maintaining or decreasing inventory and operating costs. It provides simplified financial metrics (Throughput, Inventory & Operational Expense) over cost allocation methods which equip all managers' with better knowledge for decision-making and enterprise profitability improvement.
CCPM – Critical Chain Project Management
Project Management method with a set of tools and techniques that work together to improve scheduling and managing a project or a programme. It considers task dependencies and limited resources availability. CCPM, similar to other TOC tools, uses the concept of different buffers (feeding, resource, capacity and project buffers).
Demand-Pull Replenishment
It is a distribution solution of TOC that combines time buffering management with a demand-based replenishment tool to improve stock availability with much less inventory investment (the goal here are sales and the constraint – shelf space).
Sales & Marketing
Used when a constraint is in the market (external constraint). The two main TOC tools here are:
Un-refusable Offer (Mafia Offer) – offer so good that customer cannot refuse it (based on a deep understanding of the customer needs, their industry and addressing their core problems)
The Layers of Resistance – a framework to create buy-in for new ideas and selling the offer
Thinking Processes
Thinking Processes provides a powerful, logical framework for navigating complexity and helping us uncover a few simple, main root causes of the problems that affect the entire system. It provides a logical answer to 3 main questions:
What to change?
What to change to?
How to cause the change?
SUMMARY
In a nutshell, Theory Of Constraints is a focused, holistic method of analysing, managing and continuously improving the entire organisation by applying the principles and processes of hard sciences. It uses analytical tools based on logic and common sense, and it answers two critical questions (verbalised by Dr Alan Barnard):
How much better can your organisation do, and what factors limit the system from achieving more?
What is the simplest, cheapest and fastest way to achieve that?
It tells you precisely what should be done and, what is even more important – what should not. Maybe not as famous as other methods, TOC is an incredible approach that can bring tremendous value and, in my opinion, is a key element which is missing in different approaches like Lean or Agile.
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