By Rudolf Burkhard; winner of the 1999 PricewaterhouseCoopers award for the best article on shareholder value add
Summary:
Executives are under too much pressure to spend time looking for and developing new and better solutions to running their business. They are aware of the need to manage their business as a system but on the whole do not do so, because they are lacking the tools to do so. Goldratt’s five focusing steps are a way to solve this missing capability by focusing on the very few constraints any (business) system can have. Policies (the way things are done) are key constraints to better profits and improved SVA and many need to be changed. Some examples show how policies from the past are blocking businesses from earning much better SVAs.
Examples of Policies that Damage Profitability
6. Efficiency – We must use our Resources Efficiently
Using resources efficiently is a doctrine everywhere. Management wants to see everyone and every machine working all of the time producing. Not only management, as soon as a person has nothing to do for a while he becomes extremely nervous. He wonders whether he will be the next one out the door. So we all make sure that we are all always busy (or look busy) – no matter what!
Let us see what this causes in a multi-project environment. An environment where many projects are worked on at the same time and where the workers are usually working on more than one project at the same time. Should all the employees in such an environment be working as hard as they can all of the time?
Every project environment has a resource (or set of resources) that is overloaded. These people are the constraint of this project system. The other people are definitely not the constraint. However these other people have a need to look busy and their managers must be able to report the high efficiency. What usually happens?
The constraint resource is continually complaining and asking for more capacity. It is working overtime. It has a mountain of work waiting to be done, with no clear priorities on what should be worked on first (every project manager’s project is the first priority). The constraint resource multitasks between many tasks and projects (depending on where the squeakiest wheel is) – losing time every time he re-starts on a task. It is a vicious circle. These constraint resources are blamed for the poor performance of the organisation. I would not be surprised to find a lot of frustration here – and a high level of manpower turnover.
What about the other resources? They are looking for enough work to keep themselves busy, to be ‘efficient’. What does this do? It loads even more work into the system so that the constraint resource gets an even bigger backlog. The vicious circle gets much worse. Projects are delayed, SVA is lost.
What is the solution? Identify the constraint. Decide how to exploit the constraint. Subordinate everything else to the constraint. Etc. We already know who the constraint is – so how do we exploit his (her, their) capacity? We make sure that the constraint resource works on one task at a time, to the end – never interrupting a task. Will this help? Of course it will, but the priority project (yes you need to set priorities) gets done first and much sooner, and all the rest also finish sooner. What about subordination? Easy, the constraint resource dictates the rate at which new projects are introduced into the environment. Management’s job is to prioritise the projects.
Technorati Tags: Accounting, Continual Improvement, Cost, Cost Accounting, Costing, Goldratt, Key Performance Indicator, KPI, Shareholder Value Add, Strategy and Tactics, SVA, Theory of Constraints, TOC, Efficiency
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