constraint management and its relation to process ......constraint management principles 1. every...

Constraint ManagementConstraint Managementand its relation toand its relation to

Process ImprovementProcess ImprovementProcess ImprovementProcess Improvement

An Introduction An Introduction

11

Who AM I?Who AM I? Goal Systems International (Senior Partner)

Author of several books…

Bill Dettmer

22

Who AM I?Who AM I? Goal Systems International (Senior Partner)

Author of several books

Bill Dettmer

33

What we’re going to talk about…What we’re going to talk about…

Systems thinking and principles of constraint management

…over the next hour

y g p p g( :20 minutes)

How to determine system success ( :25 minutes)

• Linking local decisions to global outcomes

Applying systems thinking and constraint management to: pp y g y g g( :20 minutes)

• Production/supply chain processes• Project managementj g• Policy determination

Q & A ( :25 minutes)

44

Q & A ( :25 minutes)

Traditional AssumptionsTraditional Assumptions“As we advance deeper into the knowledge economy, the basic assumptions underlying much of what is taught and practiced in

the name of management are hopelessly out of date... most of our assumptions about business, technology and organization are at

least 50 years old. They have outlived their time.

55Excerpted from an article by Peter Drucker (Forbes, Oct. 5, 1998)




“A lt hi t hi d ti i li i“As a result, we are preaching, teaching and practicing policiesthat are increasingly at odds with reality and therefore

counterproductive...





“A lt hi t hi d ti i li i“As a result, we are preaching, teaching and practicing policiesthat are increasingly at odds with reality and therefore

counterproductive...

“These assumptions that determine what we pay attention to and what we ignore are usually held subconsciously by the scholars, the writers, the teachers, the practitioners in the field. Thus, theythe writers, the teachers, the practitioners in the field. Thus, they

are rarely analyzed, rarely studied...rarely challenged—indeed rarely even made explicit.”


The Importance of Operating on the Basis The Importance of Operating on the Basis ofof ValidValid Assumptions...Assumptions...of of ValidValid Assumptions...Assumptions...

…you risk kissing the WRONG END of the dog!

88

One person’s “improvement” isOne person’s “improvement” isanother person’s another person’s changechange

“There is a rumor going around that change is coming.I want you to make sure that it

DOESN’T get into THIS building!”

“There is a rumor going around that change is coming.I want you to make sure that it

DOESN’T get into THIS building!”

99

DOESN T get into THIS building!DOESN T get into THIS building!

1010

If you’re not prepared to climb onto the steamroller...

be prepared to become part of the road !

1111

…be prepared to become part of the road !

Analysis …Analysis … The accepted approach to management has always

been analytical, or reductionist

• Breaks down the organization into components or “silos”

• Measures / standardizes each component’s internal processes

• Overall system performance is the sum of the performance of its individual parts

THIS is the underlying assumption behindall process improvement methodologies…

and was effective for some time

1212

… versus … versus SynthesisSynthesis Systems have increased in complexity

• Horizontal integrationOff h t i t• Off-shore outsourcing, etc.

Companies have traded off system control for cost saving• E g contaminated pet foodE.g., contaminated pet food

Analysis (reductionism)-based performance has reached a point of diminishing returns

Th i d l l f ff t d ll ff t th• The same or increased levels of effort produce smaller effects on the bottom line Sometimes with negative effects!

A new approach to management, based on synthesis• A “whole system” approach

1313

Complex SystemsComplex SystemsInteractionsInteractionsREAL systems can be

Government / Regulatory Agencies

CustomersEducational Systems

REAL systems can be VERY complicated…

Production

SalesPublic

RelationsFINANCE/CONTROLLER

End Users

Admin./ HR

Technical Support

Info. Tech.

Purchas-

CONTROLLER

Engineer-ing

Legal

QC/QA

ing

Project Mgt.Market-

ing Economic Environment

Social IssuesCompetitors

International Political Situation

1414

Social IssuesCompetitors

What is the What is the Systems Approach?Systems Approach?Based on THREE concepts…Based on THREE concepts…pp

Holistic thinking (No part of the system is “an island”)

1515



The whole is not the sum of its parts• Interactions—interdependencies—among components are as

i t t i t t th th f f thimportant, or more important, than the performance of the components themselves

The hole s stem can’t be managed effecti el b s boptimi ing• The whole system can’t be managed effectively by suboptimizing

1616

Independence versus Independence versus InterInterdependencedependence

“A system in an inseparable whole It is not the sum of its parts It isA system in an inseparable whole. It is not the sum of its parts. It is not greater than the sum of its parts. There is nothing to sum. There are no parts. The system is a new and different and unique contribution of its members and the world.contribution of its members and the world.

To search backwards in time for the parts is to deny the self-transforming nature of systems. A system is knowable only as itself. It g y y yis irreducible. We can’t disentangle the effects of so many relationships. The connections never end. They are impossible to understand by analysis [reductionism].”

―Margaret J. Wheatley and Myron Kellner-Rogers

1717



The whole is not the sum of its parts• Interactions—interdependencies—among components are as

i t t i t t th th f f thimportant, or more important, than the performance of the components themselves

• The whole system can’t be managed effectively by suboptimizing

Avoiding Suboptimization• Not all components are “created equal”p q• Some may accept inefficiencies so that more critical components

can succeed

1818

W. Edwards DemingW. Edwards DemingThe Dangers of SuboptimizationThe Dangers of Suboptimization

“Optimization is a process of orchestrating the efforts of all “Optimization is a process of orchestrating the efforts of all components toward achievement of the stated aim. Optimization is components toward achievement of the stated aim. Optimization is management’s job. Everybody wins with optimization.management’s job. Everybody wins with optimization.

“Anything “Anything less than optimizationless than optimization of the whole system of the whole system will bring will bring eventual losseventual loss to every component of the system. Any group should to every component of the system. Any group should ha e a its aim optimi ation o er time of the larger s stem the gro pha e a its aim optimi ation o er time of the larger s stem the gro phave a its aim optimization over time of the larger system the group have a its aim optimization over time of the larger system the group operates in.operates in.

“The obligation of any component is to contribute its best to the“The obligation of any component is to contribute its best to theThe obligation of any component is to contribute its best to the The obligation of any component is to contribute its best to the system, system, not to maximize its own production, profit, or sales, nor any not to maximize its own production, profit, or sales, nor any other competitive measure. Some components may operate at a loss other competitive measure. Some components may operate at a loss to themselves in order to optimize the whole systemto themselves in order to optimize the whole system, including the , including the components that take a loss.”components that take a loss.”

1919Deming, W.E., The New Economics for Industry, Government, Education (1993), pp. 53, 100

Constraint TheoryConstraint Theory

A t ti i h l tA t ti i h l tA way to optimize whole systemsA way to optimize whole systems

2020

The Concept of System ConstraintsThe Concept of System Constraints

Systems are analogous to CHAINS Every chain has ONE weakest link

• A part that limits what the whole chain can do

2121

A part that limits what the whole chain can do

Weakest Link…An OpportunityWeakest Link…An OpportunityWeakest Link…An OpportunityWeakest Link…An OpportunityIf the weakest link (constraint) limits the If the weakest link (constraint) limits the

system’s potential the most…system’s potential the most…

th if it b i d it h ld l idth if it b i d it h ld l id…then if it can be improved, it should also provide…then if it can be improved, it should also providethe best opportunity to MAXIMIZEthe best opportunity to MAXIMIZE

system performancesystem performance

2222

system performancesystem performance

The “Archimedes Point”The “Archimedes Point”

“Give me a lever long enough and a place to stand,“Give me a lever long enough and a place to stand,and I can move the world.”and I can move the world.”

2323The WEAKEST LINK (system constraint)is ALSO the system’s Archimedes point…

The Systems ApproachThe Systems ApproachConstraint theoryConstraint theoryConstraint theory…Constraint theory…

…recognizes the …recognizes the “Archimedes point”“Archimedes point” concept and concept and thethe dependenciesdependencies that allow its performance to bethat allow its performance to bethe the dependenciesdependencies that allow its performance to be that allow its performance to be

maximized through wholemaximized through whole--system system optimizationoptimization

Some parts of the system are MORE INFLUENTIAL on results than others

ALL s stem parts DEPEND on one another to a greater or ALL system parts DEPEND on one another to a greater or lesser degree

Maximum SYSTEM performance requires p qOPTIMIZATION—the deliberate sacrifice of “efficiency everywhere” to achieve the best overall system results

2424

Constraint TheoryConstraint TheoryConstraintConstraint

TheorySuccessful application of…

Constraintrequires effective ConstraintManagement

…requires effective…

System-L l Primary Collateral

…the effective

…which in turn requires…

ThinkingProcess

C i

LevelMeasures

Principlesy

CM ToolsCollateralCM Tools

LEAN

JIT

Assumptions Throughput

Inventory /

application of…

ConstraintManagement

Model(Strategy)

Drum-Buffer-Rope/

JITConcurrentEngineeringCellular Mfg.Poka-YokeKaizen

FiveFocusing

Steps

yInvestmentOperatingExpense

We’ll examine each of the first two (and part of the third) in a

little more detail…

pSimplified-DBR

Critical ChainProject Mgt.

Supply ChainManagement

SIX SIGMA(DMAIC)

SPC

5-S

DOE

2525

QFDETC.

Constraint Management PrinciplesConstraint Management Principles

1 Every system has:1. Every system has:• A goal• A set of necessary conditions• A set of necessary conditions

2. All systems are constrained in some way• The system constraint never disappears ; it

merely “migrates” somewhere else

2626

System ImprovementSystem ImprovementConstraint ManagementConstraint ManagementConstraint ManagementConstraint Management

System(External factors)

Process

Process Process

Process

Process

Process

ProcessProcess

Focus is on IDENTIFYING the process that is the SYSTEM CONSTRAINT (whether it’s

2727

inside the system or outside)…

System ImprovementSystem ImprovementConstraint ManagementConstraint ManagementConstraint ManagementConstraint Management

Process “D”

Operation OperationOperation

1 2 3

Operation OperationOperation

6 5 4

…and on improving the constraining operationwithin the constraining process first

2828

Constraint Management PrinciplesConstraint Management Principles

1. Every system has a goal and a set of necessary conditions2 All t t i d i2. All systems are constrained in some way

3. Organizations live or die as integrated systems• NOT as a collection of discrete, independent

processes

4. Systems are analogous to chains• The performance of a system is limited by very few

“links” (constraints) at any given time, usually only ( ) y g y yone

2929

Breaking ConstraintsBreaking ConstraintsHow much improvement?How much improvement?pp

Where is the weakest link?

What happens if we TRIPLEthe strength of that link?

3030


Does the strength of the entire chain triple?

If not what is the weakest link NOW?If not, what is the weakest link NOW?

3131


It’s HERE…

All real systems are finite,and therefore limited in some way.

3232

y

When one constraint is broken, some otherfactor assumes the role of system constraint

The System ChainThe System Chain(Expanded)(Expanded)

ExternalService

(Expanded)(Expanded)

Marketing & Sales

Supplier #1

Distribution#1 #2 #3 #4 #5 #6 #7

CUSTOMER

Supplier #2

Production

3333The chain really extends from the market demand, through the entire

organization chain, to the external customer who pays for our products

The “Big Picture”…The “Big Picture”…System

(External factors)

SYSTEMSYSTEMPERFORMANCE

Each time a system constraint is identified and broken, overall

3434

is identified and broken, overall system performance increases (to the level of the next system

constraint)


(External factors)



3535


constraint)


(External factors)



3636


constraint)


(External factors)



3737


constraint)


(External factors)



3838


constraint)

Continuous ImprovementContinuous Improvement

Value At some finite time,a point of diminishing returnsp g

is reached…

Time (cycles, iterations)

3939

Time (cycles, iterations)

Why Isn’t “CI Everywhere” EffectiveWhy Isn’t “CI Everywhere” Effectivein the Long Term?in the Long Term?gg

Everything is improved The concept of

an ArchimedesImprovement

dpeverywhere

simultaneously.

an Archimedespoint is ignored.

resources andattention are limited.

If… …and… …and…

4040


Insufficient resources/ attention are applied to the

system constraint.

…then…



dpeverywhere

simultaneously.




4141


System improvement takesmuch longer and is more

difficult to detect…then…

difficult to detect.

If Insufficient resources/ attention are applied to the

system constraint.

…then…

If…



dpeverywhere

simultaneously.




4242

Red Curve and Green CurveRed Curve and Green Curve-Repeated application of the Five Focusing Steps-Successive constraints broken

$$$Improvement

-Cost reductions (efficiency target)-Single iteration of Continuous Improvement (inertia)

Ti

4343

Time

Constraint Management PrinciplesConstraint Management Principles1. Every system has a goal and a set of necessary conditions2. All systems are constrained in some way3 Organizations live or die as integrated systems3. Organizations live or die as integrated systems4. Systems are analogous to chains

5 The system optimum IS NOT the sum of the local5. The system optimum IS NOT the sum of the local optima• Most significant problems lie in the linkages, NOT the links

F i l l ffi i i i t d ti t• Focusing on local efficiencies is counter-productive to achieving the organization’s goal

6 All t bj t t th h f6. All systems are subject to the phenomenon of cause and effect

4444

Applying ConstraintApplying ConstraintApplying Constraint Applying Constraint ManagementManagementgg

How to “operationalize” the principlesHow to “operationalize” the principles

4545

The Constraint Management Approach to The Constraint Management Approach to ImprovingImproving SystemSystem PerformancePerformanceImproving Improving SystemSystem PerformancePerformance

Determine the SYSTEM BOUNDARY• Plant? Division? Company?

Define the GOAL of the systemDefine the GOAL of the system

“To make more money, now and in the future…”

Establish the necessary conditions that must be satisfied to achieve the goalg

Apply Five Focusing Steps to improve system performance

4646

performance

The Five Focusing StepsThe Five Focusing Stepsfor System Improvementfor System Improvementy py p

1. IDENTIFY the system constrainty

2. Decide how to EXPLOIT the system constraint

3. SUBORDINATE everything else to the decision in Step-2

4. ELEVATE the system constraint

5. Go back to Step-1• But BEWARE of “inertia”

4747

Ramifications of the Five Focusing StepsRamifications of the Five Focusing Steps

Only a very few key nodes of our systems need continual close attentionco t ua c ose atte t o

Most of the data we collect is “noise”, rather than “signal”signal

Nearly all the internal components of our system h ld b t d t h i ifi tshould be expected to have significant excess

capacity—and this is NOT BAD!

Measuring and striving for local efficiencies ANYWHERE EXCEPT the constraint sub-optimizes the whole system

4848

y

Types of ConstraintsTypes of Constraints

MATERIAL VENDOR /SUPPLIER

RESOURCE FINANCIALRESOURCE FINANCIAL

MARKET KNOWLEDGE/COMPETENCECOMPETENCE

POLICY4949

POLICY

Types of ConstraintsTypes of Constraints

MATERIAL VENDOR /SUPPLIER

RESOURCE FINANCIALRESOURCE FINANCIAL

MARKET KNOWLEDGE/COMPETENCECOMPETENCE

POLICYWe’ll return to

S f

5050

POLICY THIS factor alittle later

Any questions so farAny questions so farbefore we move on?before we move on?

5151

How to DetermineHow to DetermineHow to DetermineHow to DetermineSystemSystem SuccessSuccess

…and tie local decisions to …and tie local decisions to global system successglobal system success

5252

Evaluating Operating DecisionsEvaluating Operating DecisionsThe Traditional ApproachThe Traditional Approachpppp

In competitive business, things do NOT stand stillE t l ( titi ) i t l l• External (competitive) environment always evolves

• Internal improvements are required to remain competitive

“ ” “The only constant is change…”

Change creates the need for continual decisionsg• WHAT to change?• What to change TO?• HOW to cause the change?• HOW to cause the change?

Desirability of decisions usually measured financially

5353

Evaluating Operating DecisionsEvaluating Operating DecisionsThe Traditional ApproachThe Traditional Approach

Financial standard for most decisions is profit

pppp

Financial standard for most decisions is profit• A decision that produces higher profit is GOOD• A decision that produces lower profit (or a loss) is BAD

Three key financial measures to evaluate the “rightness” or “wrongness” of a decision…g g• Net Profit (NP)• Cash Flow (CF)• Return on Investment (ROI)• Return on Investment (ROI)

5454

Evaluating Operating DecisionsEvaluating Operating DecisionsThe Traditional ApproachThe Traditional Approach

NP and ROI are VERY difficult concepts to apply to

pppp

p pp yday-to-day decisions

• Effects of a decision on NP CF and ROI not easily• Effects of a decision on NP, CF and ROI not easily quantifiable in financial terms

Ho to determine the global (compan ide) financial• How to determine the global (company-wide) financial impact of local (departmental) decisions?

Constraint theory provides a “bridge” between local operating decisions and global financial well-being...

5555

Evaluating Operating DecisionsEvaluating Operating DecisionsThe Constraint Management ApproachThe Constraint Management Approach

THROUGHPUT (T)

The Constraint Management ApproachThe Constraint Management Approach

THROUGHPUT (T)

INVENTORY / INVESTMENT (I)

OPERATING EXPENSE (OE)

These metrics are predicated on the assumption that the organization’s goal is to...

make more money, NOW and IN THE FUTURE

5656

Throughput (T)Throughput (T)

Definition: The rate at which an organization generates money (usually through sales of product or service) Newmoney (usually through sales of product or service). New money coming into (and retained by) the system.

Difference between revenues and variable costs

Add d l Added value

Assessed at unit, product, and organizational levels

5757

Investment and Inventory (I)Investment and Inventory (I)

Definition: The money tied up (not easily liquidated) within the organization enabling it to function.

Capital assets• Facilities• Equipment• Equipment

Raw materials acquired for conversion and subsequent sale (generation of Throughput)

5858

Operating Expense (OE)Operating Expense (OE)

Definition: The money the organization spends to generate Throughput. The money flowing out of the system.

N ll t t i f h d (fi d ) Normally, most categories of overhead (fixed expenses)• Including direct and indirect labor

Expenditures required just toopen the doors for business

5959

Why T, I and OE are ImportantWhy T, I and OE are Important

Increase sales? Speed up delivery to clients?

Reduce fixed expenses (overhead)?

Will the decision…?

Speed up delivery to clients? Reduce backlogs? Shorten production time? Shorten time between order and

If so, “OE” decreases(and Net Profit improves)

Reduce the need for materials?payment? Shorten time between delivery and

payment? Increase revenue volume in the same

Reduce the need for materials? Reduce the need for equipment? Shorten production time? Reduce the need to hold finished Increase revenue volume in the same

time period? Liberate excess capacity? Make better use of the constraint?

goods?

If so, “I” decreases(and ROI improves)

If so, “T” increases(and Net Profit improves)

6060

Relation of T, I and OERelation of T, I and OEto Traditional Business Measures of Meritto Traditional Business Measures of Merit

Net Profit = T — OE T = Sales Revenue (total) — Variable Costs (total)

Return On Investment = T — OEI

The profit from any decision is… T&OEThe ROI from any decision is… T&OE

I I Cash Flow = T&OE& I

t (t = time)t (t = time)

The CF from any decision is… T&OE& It

6161

What Should Our Priorities Be?What Should Our Priorities Be?

TRADITIONAL JAPANESE CONSTRAINTTRADITIONALMANAGEMENT

1 OE

JAPANESEMANAGEMENT

(“JIT”)

1 I

CONSTRAINTMANAGEMENT

1 T1. OE 1. I 1. T

2. I 2. T 2. I

3. T 3. OE 3. OE

6262

Why Does Constraint ManagementWhy Does Constraint ManagementEmphasizeEmphasize Increasing Throughput?Increasing Throughput?Emphasize Emphasize Increasing Throughput?Increasing Throughput?

8(UpperTheoretical

Limit)Limit)

$ Sales Revenue

T

(LowerVariable Cost

OE I

Fixed Costs(Operating Expense)

Inventory/Investment

Throughput(Marginal

Contributionto Profit)

0(LowerTheoretical

Limit)

6363


8(UpperTheoretical

Limit)

y = potential inventory reductionz = potential variable cost reduction

x = potential fixed cost reductionLimit)

Practical Limit

$ Sales Revenue

z(Lower

Variable Cost

x y



Throughput(Marginal


0(LowerTheoretical

Limit)

6464


8(UpperTheoretical

Limit)

ay = potential inventory reductionz = potential variable cost reduction

x = potential fixed cost reduction

a = potential throughput ($$) increase

Limit)

Practical Limit

$ Sales Revenue

z(Lower

Variable Cost

x y



Throughput(Marginal


0(LowerTheoretical

Limit)

6565


x = potential fixed cost reduction

8(UpperTheoretical

Limit)

a

y = potential inventory reductionz = potential variable cost reductiona = potential throughput ($$) increase

Practical Limit

$ Sales Revenue

xz

0(LowerTheoretical

Variable Cost

x y



Throughput(Marginal


0Limit)

To increase beyond the practical limit

6666

To increase beyond the practical limit,additional expenditures of OE and I are required

(ELEVATION)

Are We in Business to Are We in Business to SaveSave Money,Money,or toor to MakeMake Money?Money?or to or to MakeMake Money?Money?

Can we cut costsTOO MUCH?TOO MUCH?

How do we know hwhen

“enough is enough?”

6767

Constraint Management Financial StrategyConstraint Management Financial Strategy

Primary focus on increasing “T”

Allow “I” to seek its natural level (usually less than before)

Capitalize on opportunities to reduce “OE”• But ENSURE that capacity to generate “T” is not compromised

• Don’t waste time or endanger future “T” by actively searchingo as e e o e da ge u u e by act e y sea c gfor reductions in “OE” today

We call this Throughput-Based Decision Support

6868

We call this Throughput-Based Decision Support

Th “PTh “P Q” E lQ” E lThe “PThe “P--Q” ExampleQ” Example

Applying the Five Focusing Steps and Applying the Five Focusing Steps and pp y g g ppp y g g pThroughputThroughput--Based Decision SupportBased Decision Support

6969

A Small ProblemA Small Problem**Physical Physical Layout

Work Flow Fixed Expense:$6 000 per week$6,000 per week

7070* Goldratt, E.M., The Haystack Syndrome (1990)

Questions for the Small ProblemQuestions for the Small Problem

If you could supply all of your current customers, how much money per week could you make?

How much money per week are you prepared to commit to How much money per week are you prepared to commit to returning to the corporation each week?

If you had to choose, which product would you prefer to produce?

7171

Net Profit ComputationNet Profit Computation

Net Profit = TP+Q – OE $90 $100

T = SRP+Q – VCP+Q- $45 - $40

$45 $60$45 $60

x100 x50If you could supply all of your current customers (no internal constraint), how much money per week could you make?

$4,500 $3,000ANS: $1,500

week could you make?

$7,500

-$6,000

Which is the “better” product?

ANS: “Q”

7272

$1,500

Are We Constrained?Are We Constrained?There is ALWAYS a system constraint. The real question is “Where IS it?”

IDENTIFY the system constraintD id h EXPLOIT h i Decide how to EXPLOIT the constraint

SUBORDINATE everything else ELEVATE the constraint ELEVATE the constraint Repeat, but beware of INERTIA

When we’re searching for an INTERNAL CAPACITY constraint, we can CALCULATE…

7373

How Much of Each Resource’s Time is Required to How Much of Each Resource’s Time is Required to Produce ONE Unit of Product?Produce ONE Unit of Product?

Physical Layout

Work Flow Fixed Expense:$6,000 per week

7474

Do We Have an Internal Constraint?Do We Have an Internal Constraint?How Heavily is Our Capacity Loaded?How Heavily is Our Capacity Loaded?

:15 min :15 min :15 min :10 min:15 min :15 min :15 min :10 min

1,500 1,500 1,500 1,000

:10 min :30 min :05 min :05 min

500 1 500 250 250500 1,500 250 250

Total Time Required: 2,000 3,000 1,750 1,250M hi A il bl 1 1 1 1Machines Available: 1 1 1 1

Minutes Available: 2,400 2,400 2,400 2,400PURE LOAD: 83% 125% 73% 52%

7575

What Should We Do?What Should We Do?

If we’re INTERNALLY constrained, we must ask “What is the BEST USE of our constrained capacity?”

IDENTIFY the system constraint

capacity?”

IDENTIFY the system constraint

Decide how to EXPLOIT the constraintDecide how to EXPLOIT the constraint

In other words, how do we best EXPLOIT the capacity we have?

7676

Exploiting the ConstraintExploiting the Constraint

We can’t make all of “P” and all of “Q”

What are the options?

• Make all of “P” and as much of “Q” as possible in the time remaining

• Make all of “Q” and as much of “P” as possible in the time remaining

Which should we do? Why?

7777

Traditional ResponsesTraditional Responses“Conventional Wisdom”“Conventional Wisdom”

PRODUCTION: Make “Q ” because product costs are PRODUCTION: Make Q, because product costs are lower ($40 vs. $45)

SALES M k “Q ” b lli i ( d i i ) SALES: Make “Q,” because selling price (and commission) is higher ($100 vs. $90)

FINANCE: Make “Q,” because marginal contribution to Net Profit is higher ($60 vs. $45)

7878

But Is “Q” Really Better?But Is “Q” Really Better?

$100$90 $

- $40

$

- $45

$60

$

$45 $

:30

$ 5

:15 :30

$2.00/min

:15

$3.00/min

7979

$2. /min$3. /min

But Is “Q” Really Better?But Is “Q” Really Better?

:30 min

50

:15 min

100 501,500

100900

50

$3 000

60

$2 700 $3,000$2,700

$5,700$5,700

- $6,000

8080

<-$300>

Let’s Try It the Other Way...Let’s Try It the Other Way...

$100$90 $

- $40

$

- $45

Noneof this

changesif

$60

$

$45

if wemake “P”

thepriority $

:30

$ 5

:15

priorityproduct...

:30

$2.00/min

:15

$3.00/min

8181

$2. /min$3. /min

Is “Q” Really Better?Is “Q” Really Better?

:30 min

50

:15 min

100 50900

1001,500

30

$1 800

100

$4 500 $1,800$4,500

$6,300$6,300

- $6,000

8282

$300

The Five Focusing StepsThe Five Focusing Steps

IDENTIFY the constraint

• “B” (by demand / capacity calculation)

Decide how to EXPLOIT the constraintDecide how to EXPLOIT the constraint• PRODUCTION: Make “P” first, THEN “Q”

SUBORDINATE hi l SUBORDINATE everything else• SALES: Push the right product (“P”)• CEO: Reward based on increasing total “T,” not local g ,

optima

8383

The Fallacy of Allocating Fixed CostsThe Fallacy of Allocating Fixed CostsIn the “P - Q” example...

Operating Expense (overhead): $6 000 per weekOperating Expense (overhead): $6,000 per weekTotal units of “P” and “Q”: 150 units per weekAllocation of fixed costs: $40 per unit

“ “QVariable Cost (raw material): $45 $40Allocated fixed cost per unit: +$40 +$40F ll ll t d t it $85 $80

“P” “Q”

Fully allocated cost per unit: $85 $80

Selling price: $90 $100Fully allocated cost per unit: -$85 -$ 80Fully allocated cost per unit: $85 $ 80Profit margin per unit: $ 5 $ 20

8484

Scenario #2Scenario #2A foreign customer wants 100 “P” and 50 “Q,” in addition to the domestic order for “P” and “Q” we’re already trying to fill. But the foreign customer wants a 15% price break to offset overseas transportation coststransportation costs.

Requested selling price: $76.50 $85.00“P” (foreign) “Q” (foreign)

Requested selling price: $76.50 $85.00Fully allocated cost: -$85.00 -$80.00Profit margin: <-$8.50> $ 5.00

Would a traditional cost-oriented organization take or refuse this order?

Would a “Throughput”-oriented organization take or refuse this order?

8585

Scenario #2Scenario #2ObstaclesObstacles

We STILL have a constraint (“B”)

W ’t k ll f “Q” (d ti ) h l f “P” d We can’t even make all of “Q” (domestic), much less any of “P” and “Q” (foreign)

We’ve EXPLOITED the “B” resource all we can

All we can do now is to ELEVATE our capacityp y• And this COSTS MORE!

Options to increase (Elevate) capacity:Options to increase (Elevate) capacity:• Buy another “B” machine ($100,000 investment and hire an additional

operator at $400 per week)• Add shifts (at $400 per week, per machine)

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dd s s (a $ 00 pe ee , pe ac e)

Comparative AnalysisComparative Analysis

$90 $100 $76.50 $85

-$45 -$40 -$45 -$40

$45 $60 $31.50 $45

:15 min :30 min :15 min :30 min

$3.00/ $2.00/min min

$2.10/ $1.50/min min

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#1 #3 #2 #4

Resource Loading Resource Loading -- “P “P -- Q”Q”Domestic and ForeignDomestic and Foreign

1 500 1 500 1 500 1 5001,500 1,500 1,500 1,500

500 1 500 250 250500 1,500 250 250

1,500 1,500 1,500 1,500, , , ,

500 1,500 250 250

TOTAL TIME REQ.: 4,000 6,000 3,500 3,5002,400 min/per shift: 2 3 2 2

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AVAILABLE TIME: 4,800 7,200 4,800 4,800PURE LOAD: 83% 83% 73% 73%

REAL Increased Profit PotentialREAL Increased Profit Potential

100 $45 $4,500

50 $60 $3,000

100 $31.50 $3,150

50 $45 $2,250

Total Contribution (All P and Q): $12,900Less original weekly OE: - $6,000Less additional shifts (5 @ $400 each): - $2,000

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( @ )TOTAL NET PROFIT / WEEK: $ 4,900

Net Result of the DecisionNet Result of the DecisionCost-Oriented

Company

“Throughput”-OrientedCompany

Order REFUSEDNP = ─$300 / week

Order ACCEPTEDNP = $4,900 / week

INCREASED INCOME FACTOR (company Net Profit): $4,900 = 18 3x$5,500–$300 = 18.3x

Opportunity cost to the cost-oriented company:

$300

Opportunity cost to the cost oriented company:$4,900 per week

$58,800 per quarter$235,200 per year

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$ , p y

“P “P -- Q” ProblemQ” ProblemLessons LearnedLessons Learned

Throughput is the key local measure of success in advancing toward the system’s goal

Maximum Throughput can’t be predicted without knowing where the system constraint is

Five Focusing Steps help identify / break constraints

Using Throughput-Based Decision Support for operational decisions canUsing Throughput Based Decision Support for operational decisions can provide a competitive advantage over companies that DON’T use it

Improving the constraint produces immediate benefitsp g p• Improving non-constraints doesn’t• But DEGRADING non-constraints might not hurt, either

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Any questions so farAny questions so farbefore we move on?before we move on?

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Constraint ManagementConstraint Management

ToolsTools

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Constraint Management ToolsConstraint Management Tools

The Logical Thinking Processg g• Graphical cause-and-effect to identify/resolve system constraints

Critical Chain Project Management (CCPM)• Shorter durations, higher delivery due-date reliability

“Drum-Buffer-Rope” (DBR) production control• And supply chain management

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Policy ConstraintsPolicy Constraints

Underlie almost all other kinds

A conscious decision on how business will or will not be done

Maybe discretionary or imposedW d id• We decide

• The law requires…

An unconscious acceptance of historical practices “This is the way we’ve always done it…” or “We don’t do things that way ”

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“We don’t do things that way.” Thinking “inside the box”

Examples of Policy ConstraintsExamples of Policy Constraints “We will not approve new projects if their projected Internal

Rate of Return is less than 20% in three years.” • Reason given for not pursuing new technology developmentReason given for not pursuing new technology development

“If we can’t manufacture a component for less than we can buy it we will outsource that component ”buy it, we will outsource that component. • International Harvester policy in the 3 years before bankruptcy

“W l i ” “We are a metal-stamping company.”• Reason given for not investing in laser-cutting technology

f

“We strive for efficiency everywhere.”

And the most common one of all…

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In other words, in MOST cases…We DO IT TO OURSELVES!We DO IT TO OURSELVES!

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How do we…How do we…

Identify and manage constraints that are:• Not physical (not visible)?Not physical (not visible)?

• Not easily measurable?

• Apply to more than just manufacturing systems?

• Pervade the organization (complex interdependency)?

Analyze complex system interactions?

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The Logical Thinking ProcessThe Logical Thinking Process

Current Reality TreeRoot Causes of Deviations (UDE)

Intermediate Objectives MapStandard of Required Performance

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Evaporating CloudResolve Conflict in Change

Future Reality TreeDesign and Test Change Plan

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Prerequisite TreePlan Change Implementation

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Critical Chain Project ManagementCritical Chain Project ManagementOutcomesOutcomesOutcomesOutcomes

Improve delivery due-date reliability• PERT/CPM: Average 15% on time

CCPM A 80 85% ti• CCPM: Average 80-85% on time

Shorten overall project durations Shorten overall project durations• 40-60% of estimated durations using PERT/CPM

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“Critical Chain”“Critical Chain”Project Scheduling and Resource AllocationProject Scheduling and Resource Allocationj gj g

Avoids multi-tasking Project Delivery

Project Buffer

Eliminates resource contentions

Improves reliability of

Project Buffer

Improves reliability of delivery date projections• Provides a project “delivery”

buffer at the end

Feeding Buffer

buffer at the end• Smaller “assembly” buffers• No “pad” for individual

activitiesFeeding Buffer

CCPM track record: 85% of all projects completed on time or early

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Integrating the ToolsIntegrating the ToolsThe Thinking Process and CCPMThe Thinking Process and CCPMgg

The Prerequisite Tree as an input toCritical Chain Project Management

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Critical Chain Project Management

“Drum“Drum--BufferBuffer--Rope” Production ControlRope” Production Control

Designed to…

Increase manufacturing flow rate Eliminate backlogsg Eliminate stock-outs Ensure promised delivery dates Deliver sooner than competitors Minimize work-in-process inventory

E bl k t d d Enable make-to-demand

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“Drum“Drum--BufferBuffer--Rope”Rope”Production SchedulingProduction Scheduling

“DRUM” : The maximum PACE of the most restricted (capacity-constrained) resource

“BUFFER” : A means to PROTECT the CCR and the Shipping Dock from “starvation”BUFFER : A means to PROTECT the CCR and the Shipping Dock from starvation•TIME, not inventory

“ROPE” : A communication mechanism to guarantee material release does not

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exceed the PACE of the CCR•Similar to kanban

Some Typical TOC/DBR PoliciesSome Typical TOC/DBR Policies(Counter(Counter--Intuitive!)Intuitive!)(( ))

Small minimum process batches• The minimum number to be produced by the capacity-constrained resource p y p y

(CCR) before a set-up change will be allowed• NOT likely to be “ONE,” but not very large runs, either

S ll f b h Small transfer batches• ONE, if possible

Earliest Due Date (EDD) priority• Build TO ORDER FIRST—ALWAYS, even if it means breaking a set-up• Build to stock ONLY WHEN ABSOLUTELY NECESSARY

Daily production scheduling

107107 Non-CCRs enjoy IDLE TIME

CCCompatibilityCompatibility

Are Constraint Management and Six Sigma Are Constraint Management and Six Sigma t ll l i ?t ll l i ?mutually exclusive?mutually exclusive?

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Compatibility?Compatibility?

Six Sigma was designed to minimize costsg g

Constraint Management was designed to increase income (revenue)

BOTH have a common objective: BOTH have a common objective:

fMaximize company profitability

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The DilemmaThe Dilemma

Minimize Practicecosts Six Sigma

Maximizeprofitability

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Minimize Practicecosts Six Sigma

Maximizeprofitability

Maximizeincome

PracticeConstraint

ManagementManagement

Assumption: Six Sigma and Constraint Managementare NOT compatible

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p


Minimize PracticePracticecosts Six SigmaSix Sigma

U C t i tMaximizeprofitability

Use ConstraintManagement to target

Six Sigma efforts

Maximizeincome

PracticeConstraint

Management

PracticeConstraint

ManagementManagementManagement

Assumption: Six Sigma and Constraint Managementare NOT compatible

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p

The SolutionThe SolutionUse constraint management to target six sigma effortsUse constraint management to target six sigma effortsg g gg g g

Model the ENTIRE system (logical thinking process) Create a long-term system (company) strategyg y ( p y) gy

• Determine where the system constraint is NOW• Determine where it will be in the FUTURE

Apply the Five Focusing Steps (constraint managementApply the Five Focusing Steps (constraint management principles)• Measure system improvement by “T” increases, NOT cost

reductionsreductions Use Six Sigma process (DMAIC) to break the system

constraintD t i h th t i t SHIFTS Determine when the constraint SHIFTS

Re-apply Six Sigma to the NEW system constraint Re-assess/refine/replace the strategy

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Re assess/refine/replace the strategy

System Improvement Current Reality TreeSystem Improvement Current Reality Tree

I have the desire toimprove my system

I have the authorityto change my system

I have sufficient knowledgef t ( t it)

“If…” “…and…” “…and…”

improve my system.[MOTIVATION]

to change my system.[INFLUENCE]

of my system (or access to it).[SUBJECT MATTER

KNOWLEDGE]

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I am empowered to“…then…” I am empowered toimprove my system.

[POTENTIAL]



I have sufficient knowledgef t ( t it) improve my system.

[MOTIVATION]to change my system.

[INFLUENCE]of my system (or access to it).

[SUBJECT MATTERKNOWLEDGE]

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I am empowered to I have the will /

“…then…”

I am empowered toimprove my system.

[POTENTIAL]

a e t e /determination to act.[SELF-DISCIPLINE]

I acceptresponsibility



I have sufficient knowledgef t ( t it)

“If…” “…and…”

responsibilityfor action.

[ACCOUNTABILITY]




KNOWLEDGE]

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I am empowered toI have, and know how to I have the will /

“If…” “…and…” “…and…”


[POTENTIAL]

use, tools / proceduresto improve the system.

[METHODOLOGY]





I have sufficient knowledgef t ( t it) responsibility

for action.[ACCOUNTABILITY]




KNOWLEDGE]

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My system improves.[DESIRED EFFECT]“…then…”

I have, and know how to I have the will / I am empowered touse, tools / proceduresto improve the system.

[METHODOLOGY]



[POTENTIAL]




I have sufficient knowledgef t ( t it) responsibility

for action.[ACCOUNTABILITY]




KNOWLEDGE]

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My system improves.[DESIRED EFFECT]

“If…”

Positive Reinforcing

I have, and know how to I have the will / I am (MORE AND MORE)

Reinforcing Loop

use, tools / proceduresto improve the system.

[METHODOLOGY]


empowered to improvemy system.

[POTENTIAL]




I have (MORE AND MORE)sufficient knowledge

“…then…”

responsibilityfor action.

[ACCOUNTABILITY]



sufficient knowledgeof my system (or access to it).

[SUBJECT MATTERKNOWLEDGE]

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Questions ?Questions ?Questions…?Questions…?

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“Well, so much for trying to work for change from within the system…”

For “homework”….For “homework”….1. Think about your system at Sigma-Aldrich. Where does

the system constraint lie?

2. How did you determine where it lies?

3. What might you be able to do to relieve or break that constraint?constraint?

4. If you’re able to break that constraint, what other part of y , pthe system will be next to emerge as the new constraint?

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GoalGoalSystemsSystemsSystemsSystems

InternationalInternational

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“Constructing and CommunicatingCommon Sense”

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constraint management and its relation to process ......constraint management principles 1. every...

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