what is the theory of constraints? a basic · pdf filewhat is the theory of constraints? a...

1© 2014 TOCICO. All rights reserved.

TOCICO 2014 Conference

What Is theTheory of Constraints?

A Basic WorkshopPresented By: Christoph Lenhartz, MBA, TOCICO certified, JonahGeneral Manager Europe, Middle East & Africa, Pinnacle StrategiesPast Chairman of the Board of TOCICODate: June 8, 2014



Topics

3 Generic Solutions

1 Origins and “History” of TOC

2 Basic Concepts and Principles



Theory of Constraints

• Management philosophy• Systems thinking• Body of knowledge• Tool box• Process of continuous

improvement• Change management

Eli Goldratt (1947-2011)at the TOCICO Regional Conference in Tacoma, WA 2006



The Goal: Introduction

» I view science as nothing more than an understanding of the way the world is and why it works that way. At any given time our scientific knowledge is simply the current state of the art of our understanding. I do not believe in absolute truths. I fear such beliefs because they block the search for better understanding. Whenever we think we have final answers progress, science, and better understanding ceases. Understanding of our world is not something to be pursued for its own sake, however. Knowledge should be pursued, I believe, to make our world better — to make life more fulfilling.* «

Eliyahu M. Goldratt (1947-2011)*Introduction to the first edition, 1984



A Systems View

• Any organization is a system (yes, yours as well)− Goal maximize− Necessary Conditions satisfy

• A system is subject to cause-effect relationships• A system is more than the sum of its parts

− The success of the system is not the sum of successes of the parts.

• It is essential to study, understandand exploit these relationships

B

D

A

C

E



Traditional vs. TOC Focus

Which system is more complex1? A or B?

System A System B

1Modified from Goldratt, 1999, Satellite program, Session 6 Sales.



The Constraint Limits Performance

» There really is no choice in the matter.Either YOU manage the constraints

or THEY manage you.The constraints will determine the output of the system

whetherthey are acknowledged and managed

or not. «

Source: Noreen, Smith, and Mackey, The Theory of Constraints and its Implications for Management Accounting



The Four Pillars of TOC

INHERENTSIMPLICITY

NEVER SAYI KNOW

REA

LITY

ISSI

MPL

EA

ND

HA

RM

ON

IOU

S

DO

N’T

AC

CEP

TC

ON

FLIC

TSA

SG

IVEN

THER

EIS

ALW

AYS

AW

IN-W

INSO

LUTI

ON

THE

HIG

HER

THE

BA

SETH

EH

IGH

ERTH

EJU

MP

PEOPLE AREGOOD

EVERY CONFLICTCAN BE RESOLVED



The Traditional Approach

A cent plus a cent… makes a fortuneThe realist

Global improvement = ∑ Local improvements



The Systems Approach

20 25 10 12 16Leverage Point

Give me a leverage point and a leverand I can move the world.

Archimedes

Global improvement ∑ Local improvements



1978: The Origines1

• Chicken house production• Application of principles from

physics to the management of production systems (“many-bodied problem”)

• Finite capacity planning• OPT software: (Optimized

Production Timetable/ Technology)

1de Wet 2007



TOC in One Word

FOCUS

Doing what should be done Not doing what should not be done



The Five Focusing Steps

1. IDENTIFY the system constraint2. DECIDE how to

exploit the constraint.3. SUBORDINATE everything else

to the above decision.4. ELEVATE the constraint.5. Warning!!! If in the previous steps a

constraint has been broken, go backto step 1, but do not allow INERTIAto cause a system’s constraint.



FOCUS + Assumptions = TOC Derivatives

» We simply need to look at reality and think logically and precisely about what we see.

The key ingredient is to have the courage to face inconsistencies between what we see and deduce and the way things are done.

This challenging of basic assumptions is essential to breakthroughs… «

Goldratt and Cox. 1984, The Goal: Introduction



Generic Applications

• Operations (production, logistics, distribution)− Drum-Buffer-Rope (MTA, MTO)

− Replenishment/Supply Chain

• Project Management (Critical Chain)− Single projects

− Multiprojects (project portfolios)

• Finance & measures (Throughput accounting)− Performance measurement & management

− Decision making

• Change management

• Marketing and sales

• Strategy

• General approach to problem analysis to and solution (Thinking Processes)15



Traditional Rules & Effects

President

VP-Human resourcesVP-DistributionVP-Operations VP-MarketingVP-R&D VP-Sales VP-Finance/

accounting

DivisionsDepartments

People


People


People


People


People


People


People

“SYSTEM A” PERSPECTIVE/ASSUMPTION: If each person / department / division works as efficiently as possible in their area / specialty, then the organization will be as efficient as possible at achieving its goal. Policies, measures and behaviors focus on local improvements everywhere.

ACTION: Measure local efficiencies. Focus on making everyone everywhere as efficient as possible. Keep busy! Find work.



Operations



Operations Core Conflict

A The operations manager manages

well.

B Constantly fight to reduce waste.

D Use efficiencies as prime measurement.

C Constantly fight to increase flow.

D’ Don’t use efficiencies as a measurement.

Objective

Requirements Prerequisites

& XOR

Goldratt,1999. Session 1 Operations.



Breakthrough Injection: Flow

Use efficiency measures at constraint and flows measure at non-constraints.

Use 5 focusing steps & a holistic scheduling / control system (DBR / BM, SDBR / BM, CC / BM, distribution / BM,

etc.) & throughput accounting

A The operations manager manages

well.

B Constantly fight to reduce waste.

C Constantly fight to increase flow.

Goldratt,1999. Session 1 Operations.



To What to Change? TOC Production Solutions

• Five Focusing Steps (5FS)

• Drum Buffer Rope (DBR) scheduling

• Simplified DBR scheduling (S-DBR)

• Buffer Management (BM) for prioritizing execution

• BM for prioritizing improvement efforts

• Throughput Accounting

For a definition of each solution see: TOCICO Dictionary 2012. 2nd Ed.



To What to Change? – Example

OperationsR&D Distribution Human Resources Marketing Sales Finance/

accounting Consumers

The constraint determines actual output

WC 1 12u/dayGreen

WC 212u/dayWhite

WC 312u/day

Blue

WC 48 u/day

Red

WC 612u/dayBlack

FinishedGoods

RawMat.

WC 512u/dayYellow

Where?



To What to Change?Global Rules of Flow (2009)

1. Improving flow (or equivalently lead time) is a primary objective of operations.

2. This primary objective should be translated into a practical mechanism that guides the operation when not to produce (to prevent overproduction).

3. Local efficiencies must be abolished.4. A focusing process to balance flow must be in

place.



Finance / Measures



Finance/Measures Core Conflict

A Manage well (according to measures).

B Controlcosts.

D Judge according to local impact.

C Protect throughput.

D’ Do not judge according to local impact.

Goldratt,1999. Session 2 Finance and Measurements.



To What to Change?Rules for Daily Decision Making

1. What is the impact on Throughput (T)?T = Selling price - Truly variable costs = SP - TVC

2. What is the impact on Investment (I, formally Inventory)?3. What is the impact on Operating Expenses (OE)?

• Net profit = T – OE • Return on Investment = Net Profit / Investment• Productivity = T / OE • Throughput Dollar Days and Inventory Dollar Days



Breakthrough Injection:Throughput Accounting

Use throughput accounting to link local decisions to global financial

results. Use holistic applications (drum buffer rope, simplified drum buffer rope, critical chain, distribution /

replenishment and buffer management) and measures that also causally link local actions to global results (e.g.

throughput and inventory dollar days).

A Manage well (according to measures).

B Controlcosts.


Goldratt,1999. Session 2 Finance and Measurements.



Projects



Project Management Core Conflict

A We meet our original

commitment.

B Do whatever it takes to meet the

endangered original commitment.

D Compensate for early

mis-estimations / mis-commitments.

D’ Do not compensate for early

mis-estimations / mis-commitments.

C Do not jeopardize any other original commitment.

Goldratt,1999. Session 3 Project Management Engineering



Breakthrough Injection: Critical Chain Project Management

A We meet our original

commitment.

B Do whatever it takes to meet the

endangered original commitment.

C Do not jeopardize any other original

commitments.

Goldratt,1999. Session 3 Project Management Engineering

Use critical chain project management / buffer management

(CCPM / BM) and throughput accounting (TA).



Distribution / Supply Chain



The Supply Chain Challenge

» As long asthe end consumerhas not bought,nobody has sold! «

Eliyahu M. Goldratt (1947-2011)



Distribution Core Conflict

AManage well.

B Controlcosts.


D Hold less inventory.

D’ Hold moreinventory.

Goldratt,1999. Session 4 Distribution and supply chain.



Breakthrough Injection:Distribution / Replenishment

Goldratt,1999. Session 4 Distribution and supply chain.

AManage well.

B Controlcosts.


Have the right inventory at the right place at the right

time.



Marketing and Sales



Marketing and Sales

MarketingSpread corn to attract many ducks.

SalesShoot the ducks – one by one.

Marketing’s task:Entice the market to buyour products or services

Sales’ task:Close the deal.



Marketing Core Conflict

A Marketing arrives at good

pricing decisions.

B The company has enough

sales volume.

D Marketing acts upon the clients’

perception of value.

C The company has reasonable product

profit margins.

D’ Marketing acts upon the supplier’s perception of value.

Modified from Goldratt,1999. Session 5 Marketing.



Breakthrough Injection:Unrefusable Offer/Market Segmentation

Modified from Goldratt,1999. Session 5 Marketing.

A Marketing arrives at good

pricing decisions.

B The company has enough

sales volume.

C The company covers its OE

and Investment

In total the company must cover operating

expense and investment. Segment and prioritize the

markets. Maintain a presence in all market

segments. Ensure markets are selected such

that all markets should not suffer a downturn at the

same time. Move to the more lucrative

markets in good times.



Sales



Sales Core Conflict

A We bring the buyer to see the product as the

best value.

B Sales person shows value to the

buyer.

D Sales person presents the

product.

C Sales person doesn’t cause the buyer to object.

D’ Sales person doesn’t present

the product.

Cox, et al., 2012, p. 159,



Breakthrough Injection:Unrefusable Offer/Buy-in Processes

Goldratt,1999. Session 6 Sales.

A We bring the buyer to see the product as the

best value.

B Sales person shows value to

the buyer.

C Sales person doesn’t cause the buyer to object.

Create an unrefusable(mafia) offer (URO):

A combined marketing and sales initiative that

addresses the customer's core problem and creates a win-win solution for the

supplier & customer.The buy-in processes are

designed to overcome resistance to change.



Managing People — Respect

» I smile and start to count on my fingers: One, people are good. Two, every conflict can be removed. Three, every situation, no matter how complex it initially looks, is exceedingly simple. Four, every situation can be substantially improved; even the sky is not the limit. Five, every person can reach a full life. Six, there is always a win-win solution. Shall I continue to count? «

Goldratt: The Choice



Managing People Core Conflict

A What is the lowest common objective both

needs are trying to satisfy?

B What system need is

jeopardized by the fire?

D Lieutenant breaks the rule (check if by doing so the corresponding need

will be met).

D’ What rule prevents the lieutenant from putting

out the fire?

C What system need is protected

by the rule?

B SYSTEM NEED

C SYSTEM NEED

A COMMON OBJECTIVE

D THE ACTION

D’ THE SYSTEM RULE

Lieutenant’s lack of authorityThe reason for the rule

Lieutenant’s responsibility

Goldratt,1999. Session 7 Managing people - Respect.



Breakthrough Injection: Respect and Empowerment

Goldratt,1999. Session 7 Managing people - Respect.

A Common objective of both

needs

B Meet the system need in jeopardy.

C Protect other system need.

Employee empowerment by aligning responsibility

& authority, respect for others.

Implement the Engines of Harmony.



Strategy



Strategy Core Conflict

A Top management put the company on

a process of ongoing improvement.

BInduce people

to improve.

DDo not lay off

people.

C Convert local improvements

into bottom line results.

D’ Lay off people in the departments

that have improved the most.

Goldratt,1999. Session 8 Strategy.



Breakthrough Injection:Strategy and Tactics Tree

Goldratt,1999. Session 8 Strategy.

A Top management put the company on

a process of ongoing improvement.

BInduce people

to improve.

C Convert local improvements

into bottom line results.

Construct a strategy and tactics tree (S&T) based on a decisive competitive edge; focusing on both

organization stability and exponential growth.

The S&T tree synchronizes actions

within and across functions to the

organization goal.



OperationsR&D Distribution Human Resources Marketing Sales Finance/

accounting Consumers

Strategy & Tactics Tree

Decisive Competitive Edge

Build Capitalize Sustain

Synchronized ActionsPresent Future

Breakthrough Injection: Strategy and Tactics Tree



One Last Word…



Questions & Answers



References

Cox III, James F., Lynn H. Boyd, Timothy T. Sullivan, Richard A. Reid, and Brad Cartier, 2012, The Theory of Constraints International Certification Organization Dictionary, Second Edition . New York: McGraw-Hill Publisher. URL = http://www.tocico.org/?page=dictionary

de Wet, Phillip. 2007. The physicist and the amazingly stupid business people. Maverick, Volume 2 Issue 4, February 22, pp. 56-58, 70, 72.Fry, Timothy D., James F. Cox, and John H. Blackstone, “An Analysis and Discussion of the OPT Software and Its Use,” Production and Operations Management Journal, Vol. 1, No.2, Spring 1992, pp. 229-242.Goldratt, E. M. 1988. “Computerized shop floor scheduling,” International Journal of Production Research 26(3):443–455. Goldratt, E. M. 1990. The Haystack Syndrome. Sifting Information out of the Data Ocean. Croton-on-Hudson, NY: North River Press.Goldratt, E. M. 1994. It’s not Luck. Great Barrington, MA: North River Press.Goldratt, E. M. 1997. Critical Chain. Great Barrington, MA: North River Press.Goldratt, E. M. 1999. Goldratt Satellite Program Sessions 1–8. (Video series: 8 DVDs) Broadcast from Brummen, The Netherlands: Goldratt Satellite Program. Session 8: Strategy & Tactics.Goldratt, E. M. 2008. The Choice. Great Barrington, MA: North River Press.Goldratt, E. M. 2009a. Isn’t it Obvious? Great Barrington, MA: North River Press.Goldratt, E. M. 2009b. Standing on the Shoulders of Giants. The Manufacturer, June. Goldratt, E. M. 2011. Never say: I Know. Chicago, ILL: TOCICO International Conference. Presented by Lisa Scheinkopf. Goldratt, E. M. and Cox, J. 1984. The Goal: Excellence in Manufacturing. Croton-on-Hudson, NY: North River Press.Goldratt, E. M. and Fox, R. E.1986. The Race. Croton-on-Hudson, NY: North River Press.For a comprehensive listing of Goldratt’s works, visit : http://www.tocico.org/?page=goldratt_bibliog



Acknowledgements

TOC is not and has never been a journey of single persons.This presentation is an updated version of a similar presentation given at the 2013 TOCICO International Conference that was initially developed by James F. Cox III and Christoph LenhartzSeveral TOC experts have provided valuable insights to this earlier version.



About the Presenter

Christoph Lenhartz, MBA, Jonah, TOCICO-certified, Certified Consultant(bdvb) is a Board Member and Past Chairman of TOCICO.In over 20 years he has acquired a wide-ranging, international experience in industry, as a successful entrepreneur and also a leader of management consulting teams in high complexity TOC implementations. He has lead strategic, business transformation, supply chain management and IT projects and his expertise also includes post-merger integration of supply chain operations for major international groups.As one of the leading TOC and management experts in Europe he is the General Manager Europe, Middle East and Africa for Pinnacle Strategies, a pioneer in operational excellence consulting based on TOC principles.He has published articles on TOC and management topics in journals such as “Quality Progress” and has translated and written TOC-books in German. He is an appreciated speaker and teacher of TOC and related topics.Christoph holds an MBA from Clemson University (USA), he graduated from the University Essen (Germany) as a Diplom-Kaufmann and has pursued post-graduate studies at Washington State University (USA).

what is the theory of constraints? a basic · pdf filewhat is the theory of constraints? a...

Documents