achieving quantum increase in performance through toc

8/3/2019 Achieving Quantum Increase in Performance Through TOC

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Goldratt India

Achieving quantum increase

in performance throughTheory of Constraints

Batliboi Ltd


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Agenda

Fundamental beliefs Organizational Goal

Conventional measurements for the Goal

Five levels of Goal achievement

New operational measurements

Concept of Constraint

Process Of On Going Improvement -Five focusing steps

Implemented case studies from India

Next steps for tomorrow

Stopping some existing practices Starting some new actions

Summary


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Fundamental Beliefs / Paradigms

Traditional Belief/Paradigm1. Inherent Constraints

2. Inherent Complexity

3. Inherent Conflict

4. Inherent Certainty &

Optima

5. Inherent Bad People

TOC Belief/Paradigm

1. Inherent Potential

2. Inherent Simplicity

3. Inherent Win/win

4. Inherent Uncertainty &

Good Enough

5. Inherent Good People

with Bad assumptions


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The Goal?

What is the Goal of your organization?


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The Goal?

The Goal?

Some organizations state that their Goal is to be a

World Class Quality Company. Stateddifferently they would like to delight their

customers now as well as in future.


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The Goal?

The Goal?

Many other organizations say that their Goalis to keep their employees happy now and in

future.


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The Goal?

A few organizations declare that their Goal

is to make money now and in future!


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The Goal?

Is there any conflict between the three Goalsstated or a hierarchy of Goals?


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The Goal?

For example let us choose that our Goal is to

delight customers now and in future.

In order to achieve our chosen Goal i.e. todelight our customers now and in future, it is

absolutely necessary to keep our employees

happy now and in future.

Similarly it is imperative to make money now

and in future in order to continue to keep our

employees happy.


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The Goal?

Now let us decide that our Goal is to keep our

employees happy now and in future.

In order to achieve our chosen Goal, it isabsolutely necessary to make money now and

in future.

It is impossible to make money now and infuture unless we continue to delight our

customers now and in future.


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The Goal?

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 customersnow and in future!

And can we satisfy our customers without

keeping our employees happy now and in

future!


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The Goal?

In reality there is no conflict between the three

different Goals.

Choose any of the three Goals, the other twobecome the necessary conditions for achieving

the chosen Goal!

For the purpose of this presentation we willassume that the Goal is making money now

and in future.


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Measures for the Goal-Making

MoneyGenerally accepted measures are Profit

Return on investment Cash flow

We do not question the validity of these

measures. However we do question theusefulness of these measures as operationalmeasures!


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Current situation

Only 23 out of 3000 (0.8%) companies activelytrading on the Bombay Stock Exchange haveincreased their profits continuously in the last 10years (The Economic Times 24th September2005)

And the Goal of the organization is to makemore and more money

Hence as per our agreed definition of Goal,99.2% organizations are not achieving theirGoal!

Goldratt India


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Five levels of financial health

Making more and more money1. Unable to meet financial commitments

2. Meeting financial commitments but not making

profits3. Meeting financial commitments, not making

losses, but profits fluctuating

4. Profits increasing continuously period after

period5. Return On Investment (ROI) / Return On Capital

Employed (ROCE) increasing continuously

Goldratt India


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What measurements

should we use? For the average employee, seeing the effect that

any given action has on Net Profit (NP) or

Return On Investment (ROI) is almostimpossible.

As a result we have created local measures like

efficiency & utilization because we believe that

they are linked to NP or ROI.

We do know that 99%+ organizations are not

achieving their Goal.


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What measurements

should we use?

New Operational Measures

Throughput (T) Investment (I)

Operating Expense (OE)


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Flow of money

--

OE

RM

I

+ S

Cash in

bank


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Throughput (T)

The rate at which Contribution Rupees are

coming into organization.

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.

T=(Net sales-all truly variable costs)


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Investment (I)

All the money currently tied up inside the

system.

All the inventory in raw material, WIP, or inFinished Goods.

Money blocked in plant and machinery.

Receivables are also part of I.


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Operating Expense (OE)

All the money that system spends on converting

inventory into throughput.

All the expenses are clubbed together as OEand are thought as fixed.

All employee expenses are part of OE.


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Financial Links

Is there any link between the new Operational

Measures T, I, & OE, and conventional

measures as P, ROI, & Cash Flow? P = T- OE

ROI = P/ I = (T-OE)/I

What happens to P, ROI & cash flow when weimprove either T, I or OE, keeping other

two as constant?


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Financial Links

If we increase T keeping I & OE constant,

P=(T-OE) improves, ROI= NP/I improves, and

so does the cash flow.

If we decrease I, keeping T & OE constant, P

improves due to reduced carrying cost, ROI

improves, and of course cash flow improves.

When we reduce OE keeping T, and I constant,P, ROI, and cash flow improve.


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Financial Links

Improving Throughput, Investment and

Operating Expense have a positive co-relation

with improving P, ROI, and cash flow. Throughput, Investment and Operating Expense

are valuable operational measures that can

guide our day to day actions to making money

now and in future.


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Constraint for making money

What is that limits your organization toachieving more of its Goal - to make more and

more money?


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Theory of Constraints (TOC)

The core idea in the Theory of Constraints isthat every real system such as a profit-making

enterprise must have at least one constraint thatlimits the system to achieving its Goal.

Every for profit organization will have aconstraint in Supply, Operations, or Market.Current constraint may shift, but there cannotbe any situation when there is no constraint.Had it been so, its profit would have been

infinite!


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Constraints are neither good nor bad.

They are facts of life.


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There is really no choice in the matter.

Either you manage the constraints or the

constraints will manage you.

The constraints will determine the output of the

system whether they are acknowledged andmanaged or not.


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Organization as a chain

An organization can be compared to a chain.

The activities that constitute a business are

chain ofdependent events. For example we do not dispatch components

unless they are packed, and we do not pack

parts until they are manufactured.


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The output of the organization is achieved

through the synchronized efforts of various

functions.

The output is limited by the weakest area.

The strength of the chain is determined by the

strength of the weakest link. What should be done to improve the output of

an organization?


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Should we improve all functions or all links? Or should we strengthen the weakest function

or the weakest link?

It is common sense that unless we improve theweakest link, the organizational output or chain

strength would not increase at all.

Is it possible that overall organizationaleffectiveness is reduced by improving

performance in one department ?


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The global improvement is not the sum total of

all the local improvements.

Often organizations spread their energies thin inall areas in order to improve the output.

In the TOC world optimizing a sub-system

would sub-optimize the whole system.


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How does TOC help

companies

1. Focusing improvement efforts where it will

have the greatest immediate impact on thebottom line.

2. Providing a reliable process that insures

Follow Through


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A process of on going

improvement (POOGI)1. Identify the constraint.2. Exploit the constraint

3. Subordinate all policies, decisions andprocedures to exploiting the constraint.

4. Elevate the constraint. If we need still more

output from the constraint, elevate it.5. Avoid inertia. If in a previous step constraint

shifts, start the cycle once again.


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POOGI: Step 1

Identify the Constraint.

The constraint can be internal or external to

your organization. Internal constraint ispreferable.

The constraint can be tangible or intangible.

For example it could be an equipment or apolicy.

Invariably (> 95%) the constraint is a policy.


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POOGI: Step 2

Exploit the Constraint.

Get the most possible out of the existing

capacity of the constraint. Utilization at the constraint is critical.


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POOGI: Step 3Subordinate all decisions to exploiting the

constraint. All policies and measurements must be

designed to get the most out of the constraint.

Utilization and efficiency at the non-constraintresources must not be measured. However thisdoes not imply that there are no measurementsfor non-constraint resources.

This step is often missed, and thereby themajority of financial benefits of TOC is lost.This is the toughest step.


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POOGI: Step 4

Elevate the constraint.

If more capacity is required after steps 2 &3 tomeet the market requirements, increase itthrough capital investment, outsourcing, or off-load the constraint by defining alternativeroutings, processes or design. Capital

investment should not be the first option. Often times, Exploitation and Subordination are

sufficient to reach the needed output. Do notincrease the investment too soon.


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POOGI: Step 5

Avoid Inertia.

If in a previous step the constraint is broken, go

back to Step 1. Do not let inertia be the systemconstraint.

Often times when a new constraint is identified,

it is necessary to change the policies you havejust made!


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POOGI: Step 5

Avoid Inertia.

The long term strategic application of TOC

does not call for continuous removal of allconstraints.

Rather, the idea is to choose where the

constraint should be in order to best exploit themarket opportunities, and then keep it there!


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Summary

Stopping existing wrong actions ispriority # 1

Start new right actions only afterstopping wrong actions!


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This is not the End.

It is not even the beginning of the End.

It is perhaps the End of the beginning!

THANK YOU!

achieving quantum increase in performance through toc

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