Saturday, August 28, 2010

Focus and Leverage Part 8

In Part 7, I introduced my visual representation of the Ultimate Improvement Cycle (UIC) and told you that we would now go through each step and explain how you can use it to enhance Throughput (TP), while simultaneously reducing Operating Expense (OE) and Inventory (I). I will be referring to this graphic throughout the next several postings, so you may want to print it out to facilitate your understanding of it.

Step 1 can best be characterized in one word…Identify. As I state in my book, all of Step 1 is a series of activities aimed at identifying rather than taking action on. What we are attempting to do in this first step is collecting information that will become the basis for our well conceived action plan for improvement. So as you go through Step 1, I know there will be an irresistible urge to make changes, but don’t do it. The success of the UIC is dependent upon the development of a coherent plan and avoiding the “fire, ready, aim” scenario that has become one of the primary causes of failure of many improvement initiatives. Resist this urge…..

In Step 1, I have combined identification of the value stream from the Lean cycle, identification of performance metrics from Six Sigma and identification of the current and next constraint from the Theory of Constraints. The primary tool you will be using is the Value Stream Map (VSM). The flow and inventory analysis is completed by simply reviewing the completed current state VSM for location and volume of inventory within the system. The performance metrics analysis is done by meeting with all departments and leaders to determine what metrics are tracked at all levels of the organization. If your company is like many others, you will be surprised by the number of performance metrics tracked. I also recommend that you determine how the metrics are communicated throughput the organization.

Identifying the current and next constraint is the most important activity in Step 1 simply because the constraint will become the focal point for most of your improvement activities. One of the easiest ways to locate the constraint is by walking the process with your team during the development of the current state VSM. As you walk this process, you will be identifying both the location and volume of raw material, work-in-process (WIP) and finished goods inventory. Typically the location that has the highest level of inventory will be the current constraint and the step with the next highest level will be the next constraint, but not always. Look also for policies and procedures that have been implemented that might be policy constraints. Take your time and do it right because it will be worth it in the end. Remember the operative word here is to simply identify and not take action yet.

I want to finish this posting with a discussion on Performance Metrics simply because of the importance of metrics. Performance metrics are intended to serve three very important functions or roles as follows:

1. First and foremost, performance metrics should stimulate the right behaviors.

2. Performance metrics should reinforce and support the overall goals and objectives of the company.

3. The measures should be able to asses, evaluate and provide feedback as to the status of people departments, products, and the total company.

The right behaviors of people and departments are critical to the achievement of the overall goal of the company, but many times the metrics chosen encourage and stimulate the opposite behaviors. In order to be effective, performance metrics must demonstrate the following criteria:

1. The metric must be objective, precisely defined and quantifiable.

2. The metric must be well within the control of the people or departments being measured.

3. The metric must be translatable to everyone within the organization. That is, each operator, supervisor, manager and engineer must understand how his or her actions impact the metric.

4. The metric must exist as a hierarchy so that every level of the organization knows precisely how their work is tied to the goals of the company. For example, if one of the high level metrics is on-time delivery, then the lower level metric might be cycle time or schedule compliance at individual work stations. Or if the higher level metric is PPM, then the lower level metric might be the defect rate at an individual work station.

5. The metric should be challenging, yet attainable.

6. The metric should lend themselves to trend and statistical analysis and, as such, should not be “yes or no” in terms of compliance.

This blog entry was all about Step 1a of the UIC. In my next blog we’ll move to Step 1b and then continue on until we’ve achieve one complete revolution of the UIC. I encourage questions about each blog entry, so if you have any, please submit them for everyone to see. See you next time!

Bob Sproull B/S

Saturday, August 21, 2010

Focus and Leverage Part 7

Hello again everyone. I apologize for taking so long to post this blog, but a new grandson came into my life and I had to go meet him. In Part 6 I asked everyone to think about what this improvement methodology might look like. The figure below is a visual of what this integrated methodology looks like and over the next few entries, we’ll walk through how it all works.

This integration weaves together the DNA of Lean and Six Sigma with the focusing power of TOC to deliver a powerful and compelling improvement methodology. All of the strategies, principles, tools, techniques and methods contained within all three methodologies are synergistically blended and time-released to yield improvements that far exceed those obtained from doing these three initiatives in isolation from each other.

The UIC is not simply a collection of tools and techniques, but rather a viable manufacturing strategy that focuses resources on the area that will generate the highest return on investment. The UIC is all about focusing on and leveraging the operation or policy that is constraining the organization and keeping it from realizing its full financial improvement potential.

In the figure below I have laid out the tools and actions you will use and perform at each step of the UIC. As you can see, there are no new or exotic tools being introduced. Instead, in creating the UIC, one of my objectives was to keep things simple.  Please keep in mind that there are other tools available that can be used to drive this improvement engine.  My point here was to list some of the more common ones.

The UIC accomplishes five primary objectives that serve as a springboard to maximize revenue and profits as follows:

1. It guarantees that you are focusing on the correct area of the process or system to maximize throughput and minimize operating expense and inventory.

2. It provides a roadmap for improvement to ensure a systematic, structured and orderly approach to improvement to maximize the utilization of your improvement resources.

3. It integrates the best of Lean, Six Sigma and TOC strategies to maximize your organization’s full improvement potential.

4. It ensures that the necessary, up-front planning is completed in advance of changes to the process or organization so as to avoid the “fire, ready, aim” mindset.

5. It facilitates the synergy and involvement of the entire organization needed to maximize your full return on investment.

In the next few entries we will discuss, in more depth, each step required to achieve these five primary objectives. Please, if you have any questions, post them for all to see and I will be happy to answer all of them.  Thanks everyone. B/S

Bob Sproull

Saturday, August 14, 2010

Focus and Leverage Part 6

Hello again everyone. In my last entry I explained the basic concept of the TOC Process of On-Going Improvement (POOGI) using the five focusing steps. In Part 6 I want to talk about how to best combine Lean, Six Sigma and TOC to achieve breakthrough profits. The major difference between Lean, Six Sigma and TOC improvement initiatives is simply a matter of focus and leverage. While Lean and Six Sigma implement improvements and measure reductions in inventory (I) and operating expense (OE) as well as increases in throughput (TP), TOC focuses up front on TP and looks for ways to achieve higher and higher levels. The only way to increase TP is to focus on the operation that is limiting it, the constraint. We then use Lean to reduce waste and Six Sigma to reduce variation, but we do so only in the constraint. Let’s look at all three improvement initiatives as if they were stand-alone.

In the figure below we see the classic Lean improvement cycle. You begin by defining value throughout the entire value chain. You then make value flow without interruption, pull to customer demand and then relentlessly pursue perfection. There is no question that a Lean implementation will result in an improved process, but will it result in significant and rapid bottom line improvement?

Now let’s look at the Six Sigma improvement cycle in the figure below. In Step 1 you define problems and customer requirements and set goals. In Step 2, you measure/collect data to validate and further refine problems. Steps 3, 4, and 5 complete the now classic DMAIC cycle of improvement. There is no question that Six Sigma creates a much better process, but how long does a typical Six Sigma project take to complete and have you impacted the bottom line significantly and quickly?

Finally, let’s look at the TOC improvement cycle that I presented in my last blog posting. The figure below lists the five steps, Identify, Exploit, Subordinate, and Elevate. The cyclic arrow indicates that at the completion of the elevate step, you should return to step 1. In my opinion, the TOC cycle of improvement requires the use of improvement tools and techniques that exist within both Lean and Six Sigma.  But having said that, both Lean and Six Sigma need the focusing power of TOC to be successful.  The three of them form a symbiosis of sorts in order to be effective.

So, if you were to combine the best of all three improvement initiatives into a single improvement process, what might this amalgamation look like? Logic would tell you that you would have an improvement process that reduces waste (i.e. through Lean) and variation (i.e. through Six Sigma), but the improvement effort would be focused (i.e. through TOC) on the operation that is constraining throughput. So think about what this improvement methodology might look like and in my next posting I’ll show you my version of this integration and then we’ll begin discussing how it works.

Bob Sproull

Friday, August 13, 2010

Focus and Leverage Part 5

In my last blog I introduced you to Throughput Accounting (TA) to demonstrate why selecting improvement projects that increase throughput rather than those that focus on cost reductions is really the key to profit enhancement. Today, I want to talk about the Theory of Constraints five focusing steps and how TOC will help you select the right are of focus. These five steps will form the framework for significant and sustainable improvement in your company. These five steps form our Process of On-Going Improvement (POOGI):

1. Identify the system constraint.

2. Decide how to exploit the constraint

3. Subordinate everything else to the above decision

4. If necessary, elevate the constraint

5. Return to Step 1, but don't let inertia become the constraint.

Let’s look at each of these in more detail so that they make sense to you from an improvement perspective.

1. Identify the system constraint: Since the goal of a typical “for-profit” company is to make more money now and in the future, and since we learned in my last blog that focusing on Throughput is the best way to make more money, we need to identify the resource or policy in our system that is preventing our company from producing and shipping more goods or services. It is important to understand that the constraint is not always physical. In fact, the majority of the time the constraint is a policy or procedure that limits our ability to improve our throughput.

2. Decide how to exploit the system constraint: The key here is to make sure that the constraint’s time is never wasted doing things that it shouldn’t be doing and is never starved for work. Remember, every minute lost at the constraint is a missed opportunity to increase throughput. Focus everything you do on reducing the cycle time of the constraint and improving the flow of product (or service) through the constraint.

3. Subordinate everything else to the above decision: This step is typically the most difficult of all for most companies to accomplish. By definition, if a process step is not a constraint, it is faster than a constraint and therefore has more capacity to produce than a constraint does. But why would you want a non-constraint to process or produce at a faster rate than a constraint? If you did, you would only serve to increase inventory within the system which needlessly ties up cash. Subordinating means to produce at the same rate as the constraint…. nothing more and nothing less.

4. If necessary, elevate the system constraint: One of the terms everyone is familiar with is takt time which is really the throughput rate required to meet customer requirements. But what if, after all the improvements you’ve made in Steps 1-3, you still aren’t supplying enough to meet market requirements? In this step, you may have to spend some money to either purchase a new piece of equipment or even hire additional labor. Whatever it takes to meet the market demand. This is what elevating the constraint means. Doing whatever it takes to meet the demands of the market.

5. Return to Step 1, but don’t let inertia become the constraint: After completing Steps 1-4 you should see significant reductions in the cycle time of the constraint, so you must prepare for a new one to occur. That is, after you essentially “break” your current constraint another will appear to take its place. This new constraint will require the same improvement cycle that you just went through and the cycle of improvement continues. In this step I said “but don’t let inertia become the constraint.” What does that mean? Quite simply, during the first four steps of this process, you may have developed and implemented policies or procedures to accommodate your constraint. It is highly likely that these policies and procedures may no longer apply, so get rid of them.

OK, so that’s our Process of On-Going Improvement (POOGI) introduced by Goldratt back in the 80’s. Think back to my previous blog on the piping system and 4-step process and try to imagine our POOGI and how it might apply to your company. In my next blog I’m going to get into the nuts and bolts of how to integrate Lean, Six Sigma and the Theory of Constraints which is what I call The Ultimate Improvement Cycle (UIC).

Bob Sproull

Monday, August 9, 2010

Focus and Leverage Part 4

In my last blog I finished by saying that going after cost reductions is not the best way to make more money for your company. So if cost reduction isn’t the best way to make more money, then what is? In order to demonstrate this to you, I need to introduce you to a different brand of accounting called Throughput Accounting (TA). TA was developed by Dr Eli Goldratt, the creator of the Theory of Constraints, to simplify financial decisions. I know this will seem like a lot of new terms, but as you will see, they really are simple….. at least much simpler than a traditional cost accounting report. If you can learn these simple terms now, and apply them in your company, you will be well on your way to making more money for your company than you ever dreamed possible.
In order to judge whether an organization is moving toward its goal of making more money, three basic questions need to be answered:

1.  How much money is generated by your company?

2.  How much money is invested by your company?

3.  How much money do you have to spend to operate your company?

Traditional cost accounting, as many of you have experienced, is not only difficult to understand, but it’s all about what you did last month. Goldratt recognized the need to have real-time financial data and created his own version of accounting. He developed the following three financial measurements:

Throughput (TP): The rate at which the system generates “new” money primarily through sales of its products. TP represents all money coming into a company minus what it pays to suppliers and vendors. The actual equation for TP is, TP = P – TVC where P is the price/unit of product and TVC is the totally variable costs associated with the sale of the product. TVC is typically the cost of raw materials, but could also include things like sales commissions, etc. things that vary for each unit of product sold.

Investment or Inventory (I): The money the system invests in items it plans to sell. This includes both work-in-process and finished goods inventory.

Operating Expense (OE): The money spent on turning investment (inventory) into TP, including labor costs, supplies, overhead, etc. basically any expense that is not in the TVC category.

The important point here is that TP is not considered TP until new money enters the company by producing and shipping product to its customers. Anything produced that is not shipped is simply inventory, which costs the company money and ties up needed cash. Accordingly Goldratt defined Net Profit (NP) and Return on Investment (ROI) as follows:

                                      NP = TP – OE and ROI = (TP – OE) ÷ I

So with these three simple measurements, TP, I, and OE, Goldratt reasoned that organizations are able to determine the impact of their actions and decisions on the company’s bottom line NP and ROI in real time.

Ok, so why do I say that focusing on TP is so important? If you consider inventory reduction, it is a one-time improvement that frees up cash, but after the initial reduction, there’s really nothing left to harvest. OE has a functional or practical lower limit and once it is reached, nothing more can be harvested without having a negative impact on the organization. That is, companies that typically focus on OE many times engage in layoffs which if cut too deep will negatively impact the performance of the company. What about TP? Theoretically it has no upper limit! As long as you have the sales and you can reduce the cycle time of the constraint, TP continues to increase. Yes, TP has a practical upper limit, but the potential is there to continue growing profits.

The figure below represents a graphic of what I just explained. Look at the potential of all three profit components. OE, the target of most improvement projects, is actually the smallest component, followed by Inventory which is slightly higher, but is limited at zero. TP, on the other hand, is much larger than either I or OE. The point here is, if you want to drive profitability higher and higher, you must focus your improvement efforts on the process that is limiting your ability to do so….the constraint to drive throughput higher and higher. As we have seen, TA is much simpler to understand, allows for faster decisions (using real time data), and decisions that are linked directly to your company’s bottom line.

TA is used to make real time decisions. Is it obvious to you that the best decisions are those that result in increasing TP while decreasing OE and I? Keep in mind that I’m not suggesting that traditional cost accounting should be discarded, but if you’re trying to determine where to focus your improvement efforts, use TA. In my next blog, I’ll introduce TOC’s five focusing steps and how the Theory of Constraints process of on-going improvement (POOGI) actually works. This will set the stage for future discussions on why integrating TOC with Lean and Six Sigma is the best strategy of all for improvement.

Bob Sproull

Thursday, August 5, 2010

Focus and Leverage Part 3

In the last blog one of the things I wanted to demonstrate is where to focus your improvement efforts.  But before I do this, I want to explain to those of you that don’t have much experience with or exposure to TOC, some of the basic concepts of TOC. One of the best ways to demonstrate these concepts is through the use of simple graphics.

The figure above a simple piping system used to transport water. As you can see, the pipes have different diameters. Notice the question in the box? How would you answer this question? If you wanted to increase the flow of water through this process, what would you do and where would you focus your efforts? If you said you would increase the diameter of Section C, you would be right. You would focus your efforts on Section C to improve the throughput of this piping system because Section C is constraining the flow.

Ok, so let’s assume most of you got this correct. Would focusing on any other section increase the flow of water? The correct answer is, no it wouldn’t. Now let’s look at the figure below. This is a 4-step manufacturing process with each of the step’s processing times listed. Using the piping analogy we just discussed, which step prevents more parts from being produced? Or another way of saying this is which step is preventing us from achieving more throughput? If you answered Step C, you were correct. Because Step C requires 3 minutes to process the product, this process cannot produce product any faster than 20 parts per hour (i.e. 60 minutes in an hour divided by 3 minutes per part). If you reduced the processing time of Step B from 2 minutes to 1 minute, have you increased the throughput of this

process? The answer is no, you’re still limited by Step C at 3 minutes per part. So like the piping system, you would have to focus your improvement efforts on Step C to improve the throughput of the process.

So why am I so worried about improving throughput? In my next blog, I’m going to explain why focusing your improvement efforts on increasing throughput rather than the typical cost reduction is the best way to make more money.

Bob Sproull

Tuesday, August 3, 2010

Focus and Leverage Part 2

Last time I said that over the next few months I was going to demonstrate exactly how TOC can work for you and how to turn all of those training $’s you spent into profits that will be sustainable. Before we get into the solution, let’s take a look at the problem of why the bottom line isn’t improving fast enough to suit you or your leadership. If you’re like many companies, there seems to be a rush to run out and start improvement projects without really considering the bottom line impact of the projects selected. Many companies even develop a performance metric that measures the number of on-going projects and attempt to drive the number higher and higher. Instead of developing a strategically focused and manageable plan, many companies try to “solve world hunger” instead of focusing on the areas of greatest payback. Many Lean initiatives attempt to drive waste out of the entire value chain while Six Sigma initiatives attempt to do the same thing with variation. There’s nothing wrong with either of these strategies if they are focused on the right area.

The real problem with failed Lean and Six Sigma initiatives is really two-fold, too many projects and focusing on cost reduction. Many companies simply have too many on-going projects that drain valuable resources needed for the day-to-day issues facing them. Knowing what to do next can really be confusing to managers who have reached their saturation point and are not able to distinguish which projects are vital or important and which ones are not. The economic reality that supersedes and overrides everything else is that companies have always wanted the most improvement for the least amount of investment. Attacking all processes and problems simultaneously, as part of an enterprise-wide Lean-Six Sigma initiative, quite simply overloads the organization and does not deliver an acceptable ROI. In fact, according to the Lean Enterprise Institute annual surveys, the failure rates of LSS initiatives are hovering around fifty percent. With failure rates this high is it any wonder why companies abandon the initiatives and back-slide to their old ways?

Earlier I said that focusing projects on cost reduction was one of the reasons that many Lean-Six Sigma initiatives are failing. Across-the board cost cutting initiatives are pretty much standard for many businesses. Companies spend inordinate amounts of money on external consultants and in-house training programs and then focus on ways to reduce costs. Focusing soley on cost reduction is a mistake. So if this misguided focus isn’t right, then what is the right approach? In my next blog, I’ll demonstrate why this focus is misguided, but more importantly where the right focus should be.

Based upon my experiences in a variety of organizations and industries, the disappointing results coming from Lean and Six Sigma are directly linked to failing to adequately answer three questions: What to change? What to change to? and How to cause the change to happen? Take a look at your own company. Are your projects focused on cost reduction? Do you have an army of green belts and black belts? Do you have so many projects that they are bogging down your company? Are your Six Sigma projects typically taking 3-6 months to complete? Are they providing you with real bottom line impact or are they a mirage? In the next blog we’ll begin to address how we can take advantage of the LSS training that’s already been provided to accelerate your company’s profits and where to focus your efforts..

Bob Sproull

Sunday, August 1, 2010

Focus and Leverage

How's your improvement effort working for you?  If you're like many companies, you've invested lots of money in training, but you're not seeing much hit the bottom line.  Like any other investment you expected a fast and acceptable ROI, but it isn't happening.  Maybe your investment was in Six Sigma and you've trained hundreds of people to become green belts and black belts?  Maybe you've invested a large sum on money training people on Lean Manufacturing?  Or maybe you've gone the Lean Six Sigma route?  So why aren't you seeing an acceptable return on investment?  You know improvements are happening because you see the improvement reports, but you're just not seeing the return on investment that you expected.

I too experienced this dilemma, so I decided to analyze the results of failed and successful improvement initiatives.  What I found changed my approach forever.  What I discovered was that it was all about focus and leverage.  By knowing where to focus my improvement efforts transformed me.  In doing so, I discovered something called The Theory of Constraints (TOC).  TOC teaches us that within a company there are leverage points that truly control the rate of money generated by a company.  Sometimes these leverage points are physical bottlenecks, but sometimes they are policies that prevent us from realizing our true profit potential.  Over the course of the next few months, I'm going to demonstrate exactly how TOC can work for you.  I'm going to show you how to use the power of TOC to truly jump-start you improvement efforts.  Better yet, I'm going to help you turn all of those training $'s (or whatever currency you use) into immediate profits and then show you how to sustain your efforts over the long haul.

Bob Sproull