constraint management and lean

8/9/2019 Constraint Management and Lean

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CONNECTIVITY INNOVATION/

PRODUCTIVITY CULTURE EVOLUTION

H o w C O N S T R A I N T SM A N A G E M E N T

E n h a n c e s L e an a n d Six S ism aBy Robert E. SpectorR o be r t S p e c t o r i s a m a n a g e rin the S upply Ch a in S(r(i l(?g\'P r a c l i c t ' a l DetoitleC 'o ns i i l fi ng L L P (j nti i s uCertified Enterprise Lean/SheSigma (EIJSS) liiack iieilPractitioner.

Lean and Six Sigma are two of the most effective business-improvementtechniques available today. However, many companies still struggle toharness one or both disciplines to achieve the desired results. Onesolution is to combine lean/Six Sigma with a third business-improvem ent approach con straints m anagem ent. By bringing con-straints management into the equation, companies can identify where tofocus the lean and Six Sigma efforts for maximum success.


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ompLinJL-s that have embraced lean andSix Sij^ma have had some impressiveinitial results. However, these popularbusiness-improvement disciplines havenot always worked tor everyoneevenwhen they have been eomhined. Anumher of companies have either notaehie\ed the touted henclits or. afterinitial suecess, have seen their improvement efforts grind toa halt.

Recently, a few leading companies have used anotherbusiness improvement approach, namely constraints man-agement, to focus their lean and Si\ Sigma efforts andamplify their results. Constraints management looks at thebus i ness as eha i ns of dejK'ndent events and focusesim|)rovement efforts on the weak links in the chains. Onthe lace of it, the inclusion of yet another sophisticatedbusiness process might seem to lead to excessive complexi-ty. But in practice, this new layered approach actually cansiniplily management's job by pro\iding a focusing mecha-nism for improvement initiati\cs.

This art icle wil l diseuss the bene f i t s of the new.ipproach, heginning witb a refresber on lean and Six Sigmain an effort to clarify how tbe application of constraintsmaiKigeiTient tccbniques can belp to jum|i-start stalled leanand Six Sigma implementations. To aid understanding, werefer to tbe example of an automotive parts plant (real butunnamed). Tbis company had a relatively straightforwardproduction process in which steel rolls were received, cutand shaped, plated, assembled, painted, and then shippedto the eustomer. Market demand on the parts plant calls for30 parts an hour. Before the new blended proeess disci-plines were apphed, tbe stamping area bad a throughput of3S parts per hour. The plating and painting operations han-dled ten and 40 parts an hour, respectively, with finalassembly running at 20 parts bourly. Unfortunately, theplant frequently suffered from missed due dates, poor qual-ity, shortages of the right parts (with plenty of the wrongparts), and low morale. Piles of work-in-process (WIP) wereseen everywhere in the plant. And, expediting was thenorm.

We will look later at how the new business disciplinesmade a difference to tbis plant's operations, (fixbibit I, onpage 44, depicts tbe main activities at tbe plant, omittinginspection areas for simplicity.) First, tbougb, it's helpful torevisit some of the fundamentals.A Closer Look at Leanl.eaTi focuses on the elimination of waste, defined as any-tbing unnecessary to produce a product or service. Sevenwastes are particular targets: excessive motion, waitingtime, overproduction, unneeessary processing time, defects,excessive inventor\', and unneeessar\ 'transportation.

'1 be lean approacb is a natural outgrowth of just-in-time

practices and the Toyota Production System. Tbe term wascoined by James Womaek after his groundbreaking study ofautomot ive manufac tur ing de ta i led in tbe book. TheMachine that Changed theWorld. In the 1950s, lean manu-facturing was pioneered and first applied effectively byToyota, and today tbe automaker is tbe global leader inimplementing organization-wide lean.

Lean aims to eliminate waste in ever\' area of tbe busi-ness, including customer relations, product design, sup|>!iernetworks, and factorv' management. Tbe objectives are touse less human eflort, less inventory, less spaee, and lesstime to produce high-quality products as efficiently andeconomicalH' as possihle while being bigbly responsive tocustomer demand. Lean is direetly opposed to traditionalmanufacturing approacbes tbat are ebaracterized by eco-nomie order quantities, bigb-capacity utilization, and bighinventories. In lean terms, bigb inventories diminisb acom|iany"s competitive advantage: instead, it sbouki striveto produce only wbat it knows it can sell.

rbe lean implementation approach is as follows:1. Define value Irom the end eustomer's perspective.Value is defined h\ customer needs and expectations.2. Identify the entire vakie stream for each service, prod-uct, or product family and eliminate waste. A value streamconsists of all the aetions required to bring a producttbrougb manufacturing and assembly. 'Tools sucb as value-stream mapping are used to determine w hich actions do notadd value and, thus, can be eliminated.^. Make the remaining value-creating steps flow. Here

tbe locus is on maximizing value by producing only what'sneeded in tbe sbortest t ime possible witb ibe l ewestresoLirces.4. Pull to customer demand. Everything is produced atthe rate of customer demand only.5. Pursue perfection. Empower employees with wastee l iminat ion tools and crea te a cu l t u re of c o n t i n u o u simprovement.

Revisit ing Six SigmaSix Sigma was pi onee red byMotorola Corp. in tbe mid-198()s to improve manu-facturing yields. 'Tbedisc ipl ine evolvedfrom the qual i typrograms of tbe1980s (cos t ofqual i ty , zerodefects, and totalqua l i t y manage -ment) ut i l izing tbceollective knovvlcdgeof management gurusVV. Edwards Deniing, J.M.


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C o n s t r a i n t s

Juran, Philip Crosby, and otbers. Its primary goal is tbeelimination of variation in products and service processes tosueb a degree tbat si.\ sigmas of variation (99.9997 pereentyield) will fit witbin tbc specification limits defined by cu s-tomers. Tbe Six Sigma performance target is virtually defeet-free processes and products: _-i.4 or fewer defective parts perone million opportunities. Defects may be related to anyaspect of customer satisfaction: bigb product quality, sched-ule adherence, or cost minimization, for instance.'

The Six Sigma discipline includes tbe use of statisticaltools and tecbniques tohelp analyze and reduce variation sotbc process can become more predictable and reliable.Once tbe process is under control, tools sucb as root-causeanalysis can then he used to belp reduce tbe average pro-eessing time. Here's an example of a typical Six Sigma pro-ject: reducing tbe variability of response times at a call cen-ter tbat has an average cus tomer response t ime ol 20seconds. The calls are being answered in as little as 10 sec-onds and as long as 90 seeondsa wait time tbat (|uicklyleads to irritated eustomers.

Th e SixSigma drive for defec t r educ t ion , p roces simprovement, and customer satisfaction is based on theccjnccpt that e\erything is a process and all processes haveinherent variability. Data isused tounderstand tbe variabili-ty and drive process-improvemen t decisions. Six Sigma com-prises ibe following key tbemes: Customer-centric: Stakeboldcr value is the starting pointfor all Six Sigma improvements. Process-focused: Mastering business processes is a wayto build competitive advantage in delivering value to cus-

tomers. Data- and fact-driven: Decisions are based on establisbeddala and facts.

Standardized and repeatable: Custom ers value consistentbusiness |iro(_'(.'ss(.'s tbat dL-li\(.'r world-class levels ol quality. Collaboration without boundaries: SixSigma expandsopportunities for collaboration as people learn bov\' tbeirroles fit into tbe "big picture" and as tbey recog-nize and measure the interdependence of ail

activities in aprocess. Drive for perfection, tolerance for failure:Understanil that no company has ever achieved

great results viithout some mistakes along theway.

the key competitive elements of speed and quality. Forexample, on a call center projeet. SixSigma would helpidentify a customer requirement to answer calls within 19seeonds and then enable 95 percen t oi the calls to banswered in no less than 1 S seeonds and no more than 25seconds. Meanwhile, lean v\()uld help reduce the length andvolume of the ealls, and help reduce the need for full-timestaff and facilities. Or, on a supply chain project. Six Sigmacould help identify the root causes of variation in scheduleand production processes, while lean would contribute tolower manufacturing cycle times and inxcntory to meet mar-ket demand.

To further illustrate how lean/Six Sigma ean be appliedeoncurrently, let's take a look at tbe automotive parts com-pany example. Hxbibit 1 sbows tbe old process w ith m arketdemand of 30 parts an bour. The auto parts plant was operat-ing in a "push" fashionorders were |)usbed througb tbeplant. But lean prescribes theuse of a demand-pull systemwith orders being pulled tbrougb tbe plant aeeording to afinal-assembly scbedule that is syncbroni/ed to customerdemand. In our example, tbe set-up time for tbe stampingpress was measured in days and was bighly unpredictable. Byapplying lean reduction techniques, set-up can be reducedfirst to a few bours and eventually to less tban 10 min utes .

To enable tbc kiinbaii logistics systemto pull materialtbrougb tbc system to tbe customerbotb lean and SiSigma toois can belp dri\e variation out of tbe proeess andeliminate nonvalue-added activities.Hxbibit 2 shows the new process after applieation ofIcan/Si\ Sigma. (Market demand is still .^0 parts an hour.)

Set-up reduction techniques bavc been applied at the pressoperations to eut set-up times. Ibese tecbniques can alsodramatically increase effective capacity as weff as the abilityto reduce batcb sizes. Six Sigma problem-solving techniquesbave belped to increase tbe quality at tbe plating operation(previously experiencing a lot of rcworkt so tbat its efiecti\'cyield is sligbtly more tban market demand of .-^0 parts

EXHIBIT 1

RawMaterials

Auto Parts Production Before Lean/Six Sigmaoperat ion 1 Operat ion 2 Operat ion 3 Operat ion4

Plating Painting10 Parts/hour

' Stamping -35 Parts/hour

FinalAssembly Ship4 0 Parts/h our 2 0 P arts/h our

The Emergence of Lean/Six SigmaIn the past five years, companies have begun to realize tbatusing eitber lean orSix Sigma exclusively bas serious limita-tions. SixSigma will help eliminate defects and variationand, thus, increase the reliability of processes. But, it wilinot address tbe question of how tooptimize process How,and it does not address the competitive element of speed.Lean, for Its part, will help reduce complexity, but it doesnot address reliability as Six Sigma does.By com bining tbese complem entary ap proac bes intowbat is now called lean/Six Sigma, companies can address

bourly. Lean concepts have been implemented at all opera-Lions to help reduce waste, andpreventive maintenance isnow being done to avoid macbine and too! breakdownswhich has resulted in a significant boost in final-assemblythroughput. Finally, a pull scheduling system has beenimplemented tbat pulls product tbrough tbe system at thrate of market demand.Dramatic improvements bave been made. Ibe proeess is

now predietable and under eonlrol. Inventory, particularlyWIP inventory, bas been slasbed by more ihan 70 percen


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Cyele time bas been balvcd, and cListomer service levels arenow up 95 percent.Problems with ImplementationVet wbile tbere bave been examples oi dramatic results, leanmanufacturing programs at many manufacturing companiesbave bad trouble staying on track, according to a recent arti-cle by the AUC Advisory Group. "Many lean programs are introuble," says Ralph Hio, research director ofARC's leanmanufacturing practice.- In tbe Lean Enterprise Institute'sreeent survey, _^6 percent of lean practitioners viewed tbeircompanies' "backsliding to tbe old ways ofworking" as amajor obstacle.

The same phenomenon bas been observed witb compa-nies tbat have implemented Six Sigma. Even those that bavebad great initial results with their implementations are nowencountering difficulty maintaining their programs' momen-tum. In some cases, tbe programs have actually ground to ahalt.Why is this happeningr Part ol the problem is ibat many of

could save money on a particular component hy purebasingtbe part from China. Although the raw-material cost savingswere real, they eam e at a huge price. Ibe new delivery timeswere long and unreliableas long as six weeksyet cyclelime was a key competitive factor in the company's market-place. Ihe hand-aid measure: large warehouses full of com-ponent inventory'. The company came close to going out ofbusiness.

This was n classic case (li local improveiTients quieklyeompromising the entire system. Companies that bavebegun enterprise-wide lean/Six Sigma effortswitb manyimprovement projects running at tbe same timeare verysusceptible to this type of problem.So how can managers understand the effects of local ini-tiatives on the whole eompany'r The answer is to eombinelean/Six Sigma witb tbe systems locus of constraints man-agement.

A Refresher on Constraints ManagementConstraints m;inagement (C'M) is based on tbe Tbeory oftbc compan ies ibat ba \e effectively im plem ented lean and/or C^onstraints (.leveloped by Eli Cioldratt, an Israeli physicist.-^Six Sigma bave too many such projects. Managers have beenbeard complaining tbat tbat tbeyVe reacbed a point of satura-tion where they don't know which projects are "important";ind whieh aren't. Ihis problem can arise from tbe cureassumptions behind these disciplines. Lean's central assumji-tionthat v\aste reduction will automatically result in a risein business performanceis not valid inall circumstances;nor is tbe Six Sigma assumption that reducing variabilitye\'erywbere will automatically lead to anoverall systemsim[irovement.It isdilheult to argue against tbe underlying philosophyol improvement. The eeonomic reality, bowever, is tbatcompanies seek tbe most improvement lor the least invest-ment. Trying to improve all ot a company's individualprocesses a( tbe same time requires tremendou.s lime com-mi tments bymany people throughout the company. In

EXHIBIT 2

Auto Parts Production After Lean/Six SigmaRawIvlaterials

Operation 1Stamping

50 Parts/hour

Operation 2* Plating -30 Parts/hour

Operation 3PaintingParts /hour

Operation 4FinalAssembly

35 Parts/hour

truth, wringing variation out of processes and eliminatingwasle everywhere does not necessarily lead to deereasedspending or increased throughput. How do managers deter-mine which projects are important and wbicb aren'tr Ifeverytbing is a priority, then notbing is a priority.I bere is also the eommun issue of viewing these improve-ment projects only in terms of local optimization withoutlooking at the "big picture." In one notable ease, a manufac-

turer's purchasing de|-)artment launched an initiative to lowerthe cost ol raw materials. The conclusion: The com|iaiiy

CM looks at companies as systems. A system can be definedgenerally as a collection of interrelated, interdependent com-ponents orprocesses (hat act inconcert to turn inputs intodefined outputs inpursuit of a particular goal. Likening sys-tems toehains, CM defines the weakest link as tbe con-straintthe system's limiting factor. (See Exbibit 3.)A common tbeme in tbe success stories ofCM imple-menta t ions is bow t|uickly results are a t ta ined. That ' sbecause tbe focus on constraints is, de facto, a focus on the

areas where there's the most potential for improvement.Ibere are essentially two different types of constraints:physical and policy. A physical constraint is usually a capaci-ty-constrained resource, such as a machine or person. It canalso be tbemarket itself: excess capacity can result ifdernaiul dries up. A policy constraint, wbich is the dominanttype of constraint, can beany business rule tbat eonflictswith the goal of making more money. Anexample: tbeprescribed use of large hatchsizes in order to be "efiieient" but at tbeexpense of longer lead times.f^binking of a business as amoney-making

maebinewilh money entering tbe macbineand money captured insidebelps explaintbe value of tbe CM approaeb. The moneyprodueed hy tbe machine iscalled "tbrough-put," tiefined as "the rate the maehine generates moneythrougb sales." Note the word "sales"; if something is pro-dueed but is not sold, it s nol tbroughput. Nor is throughputthe same as gross revenue. Some revenue generated by themaehine isprodueed by vendors, and this revenue elementsimply flows through the machine. So throughput equalsgross revenue minus all variahle expenses (raw materialeosts, sales commissions, and so forth).rbe money captured in tbe macbine is called "inventory.'(In ibis case it ineludes not only tbe materials and parts

Ship


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Constraints

made hut also ail assets, including buildings andequip-ment.) And, tbemoney the maehine uses toturn inventoryinto throughput is called "operating expense." I his defini-tion ineludes all direct and indirect labor and ail overhead.Consider these as the unavoidable costs of doing business.Tbey are sbort-term, nonvariable eosts; over tbenext finan-cial period, it doesn't matter bow many units are soldtheemployees must still he paid.

Tbruughput, inventory, and operating expense can beeasily tied to the bottom-line financial measures ofnet profitand return on investment (ROI).C ons t ra i n t s management a rgues t ba t the grea t e s timprovements eome Irom addressing issues at the weakestlinks in tbe cbain. Improvements at noneonstraints bave\ery little positive impaet on tbe overall system and can evenbe detrimental. Tbe CM approaeh consists of tbc following: Key focusing step s: This refers toColdratt's five origi-nal 'processes ol ongoing improvement": 1) identilying tbe

eonstraint, 2) exploiting the constraint, 3) sub-ordinating ever\tbing else totbe c(jnstraint, 4)elevating tbe eonstraint, and S) repeating tbesteps. Tbese steps apply whether tbe system ismanufacturing, distribution, sales, or projectmanagement.

The thinking processes (TP): Tbese arethe methods toenable tbe foeused improve-ment of any system. Tbe purpose of tbe TP isto help answer the three questions essential toaeh i ev i ng foeused i mprovement : Wha t tochange? What tochange to? How toeause thechange? Throughput accounting (TA): Ibis is theCM al te rna t ive to cost -based managementaccounting. TA isnot costing, and it does notallocate eosts toproduets and services. Ratber

ment, managers should take into aeeount its impact on aithree measures-tbrougbput (making money tbrough sales),inventory (all assets), and operating expense.The CM position is tbat the emphasis should first be oninereasing tbrougbput , tben on reducing inventory, andfinally on reducing operating expense. fJyapplying a CM

framework to lean/Six Sigma efforts, companies can moreeasily avoid the prohlems incurred by placing too mucb priority on reducing operating expeiise.Consider tbemany examples of businesses that havefocused excessively on eliminating waste witb tbe ohjeetiveof eutting costs, while not applying at least as much effort tosel l ing more. Kxeess capacityusually in tbe form ofpeopleis viewed aswaste. Ibis viewpoint ean lead to several long-lasting problems. First, cutting capacity tomatcbexisting demand leaves little room for increases in demand.Once capacity bas been reduced, it's not easy toincrease itagain. It takes time and money tofind and hire skilled work-

EXHIBIT3

Snapshot of the Three Busines s-Improvem ent D isciplines

GuidingPrincipleMethodology

FocusPrimaryObjectives

Reduce Variation /Defects1 . Define2. Measure3. Analyze4 . Improve5. Control

ProblemReliability,Predictability

Eliminate Waste

1 . Define Value2. Identify the EntireValue Stream3. Make Value Flow4. Pull to CustomerDemand5. Pursue PerfectionProcessSimplification

Constraints ManagementManage Constraints

1 . Identify Constraint2. Exploit Constraint3. Subordinate Processes4 . Elevate Constraint5 . Go Back to Step 1

SystemFocus on WhatMatters Most

tban focusing on costs, it focuses on profit maximization bymanaging eonstraints.

Application-specific solutions: Tbis includes supplyehain andoperations acti\ities and projeet managementoperations.Combining CM with Lean/Six SigmaCompanies that have effectively implemented lean and SixSigma bave driven mueb of the waste and variation out oftbeir processes. Tbe easy gains bave been acbieved. So bowdo tbeir managers deeide wbicb lean/Six Sigma improve-ment initiatives to launcb nexlr

First, tbey bave tokeep in mind tbe ultimate goal ol anyimprovement initiative: to increase sbarebolder value byiinproving net profit and H(.)l. Constraints management pro-vides a framework for measuring tbe imjJaet of a local Initia-tive on tbose bottom-line measures. Kor example, wbenthroughput is increasedwitbout ad\erse!y affecting tbeC^M deiinitions ol inventor)' or operating expense tben netprofits and HOI arc simultaneously increased. Wben decid-ing wbetber to iinderlake a loeal lean/Six Sigma impro\e-

ers. A second problem is the effect ofsuch moves on moraleand on future improvement efforts. Just how are workersexpeeted tocooperate with any future lean/Six Sigma effortsif they know they are improving themselves out ofa job? Bytbat point, any bope of continuous impro\'ement initiativeshas been dashed.To determine where tbe focus sbouid be tor improve

ment initiatives, it's important torememher tbat a system ofdependent events is governed bya very small number ofconstraints. The 80/20 rule states tbat 20 percent of tbe ini-tiatives will yield 80 pereent of tbe results. O nc e you realizetha t const ra int s govern tbe sys t em ' s pe r formance , itbecomes clear tbat only a lew things can he done that wilhave a significant impact. In fact, tbe 80/20 rule becomestbe 99/1 rule.A process is needed tomanage tbe system to confirmtbat tbe constraint is thecenter of attention. The followingare tbe five ioeusing steps ot eonstraint management:J. Identify the system cowstraint.Wbat andube re is tb

limiting tactor? A ie\ iev\ ot tbe company's symptoms ean(|uickly lead to adiagnosis ot tbe constraint. For example, in


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a plant that can't make enougb products tomeet demand,the eonstraint can be a capacity-constrained macbine orwork center.2. Decide ho w to exploit the constraint. Once tbe locationot tbe constraint bas been idcnlilied, managers sbouid tr\' tomaximize itsperformance. For example, if a machine is

capaeity-constrained, all sources of wasted and idle timesbouid be eliminated.3. Subordinate everything else to the constraint. It's vital todetermine tbat tbc nonconstrained resources iire workingsolely to suppo rt tbe constra int. Kor example, vviib a capacity-eonstrained macbine, allotber resources would produce attbe same rale as tbis macbine and run no fajiter.4. Elevate the constraint. Managers bave to take w bateveraction is necessary to eliminate the constraint. Additionalcapital investment is eonsidered at this point. Breaking acapacity constraint could take tbe form of additional equip-menL or people.5. Return to step one, hut beware of inertia. At some point,tbe eonstraini is broken and moves somewbere else. It'sessential to reeognize the location of tbe new constraint andto redirect efforts ratber tban continuing to focus on tbe oldbroken constraint. For example, production capacity migbtbe raised to tbe point tbat tbe market is now the constraint,

and efforts sbouid tben be focused on improving sales andmarketing.Hollowing tbfse five steps belps facilitate tbe develop-ment of a process of continuous improvement. This has to

Seagate*s AchievementsT he wo r ld 's lead ing prov ide r ofha rd d i sk d r i ves , Seaga teTechno logy LLC , has adop tedboth constraints management and SixS i g m a . The c o m p a n y has 4 2 , 0 0 0employees worldwide; in f iscal 2004, itsh ipped more than 79 m i l l i on d r i ves ,generating revenues of $6.22 bi l l ion andnet income of $529 mi l l ion .

In 1998, Seagate launched Six Sigmaas a global init iative. The discipline hasproved to be a resounding success, pro-duc ing $1.2 b i l l ion in savings to datewi th 8 ,000 employees cer t i f ied in SixSigma and 4,700 completed Six Sigmaprojects In all. However, there were somedrawbaci


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constraint management and lean

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