Impact of more than one Constraint - 5

Alan Barnard (at the 2006 TOC-ICO conference) asked the question whether the simple Throughput per Constraint Unit rule is valid with 2 (or more) overloaded resources. Alan used Eli Goldratt’s P-Q thought experiment for his discussion. His question is important because it is common to see businesses reduce ‘excess’ capacities to balance (or almost balance) capacities. The practice often results in two) or more concurrent constraints or ‘almost’ constraints. Since 2006 I have observed several factories that wonder why their output collapses below the theoretical capacity of their (almost) balanced lines.

I plan to show that that the Throughput per Constraint Unit rule continues to be valid using the same P-Q thought experiment. I also want to discuss this result in relation to the real World – how should companies manage resource capacities.

I would like readers to follow Eli Goldratt’s recommendation that they solve the problems – before I provide the solution and before my discussion of results. The learning experience will be greater and readers should be better able to discuss and critique my conclusions. If you are familiar with the thought experiment you can jump to the second part of this article.

The key part of the article comes at the end when the solution used in the P-Q thought experiment is discussed in relation to REALITY. The thought experiment should not lead managers to an easy solution. The tool is useful but requires thought and care.

 

Reality

 

As Eli Schragenheim[1] says, “The problem is not mathematical, the problem is the assumption reality is linear.” AND, a second problem is the assumption that “reality is deterministic”.

 

The real World is of course quite different from our thought experiment. In a real situation, customers will not allow their suppliers to dictate what they buy. Customers will not wait to buy Q because we want to make sure all the P demand has fulfilled (the original P-Q experiment). In reality we are unlikely to ever achieve the optimum. This is especially so when you consider that a business does not sell just 2 products, but more likely in the hundreds if not thousands of products. So forget about ever reaching the optimum.

 

BUT, is it still possible to move sales in the direction of better constraint utilisation?

 

In a real example, a business protects their engineering constraint by favouring the sale of standard products requiring no engineering. Their second favourite products are those that require only a small amount of engineering. Their annual sales have always been, and still are, limited by engineering. However, since their sales focus has changed the maximum possible annual sales have increased and, in turn, the business has become more profitable. Added sales are realised without the need for added to operating expenses. All that happened is sales of those items that do not need (much) of the constraint have increased significantly – without creating a new second (interactive) constraint.

 

Another example of using the Throughput per Constraint Unit as a tool to help decide what to sell is the Aramid fibre business (Kevlar®, Twaron®, Technora® are examples of brand names). A wide variety of aramids are produced with different structures and different fibre strengths (different decitex or weight per 10’000meters). Not only do many different varieties exist; aramids are also used in many different applications like sailcloth, ropes, filtration, tires, brakes, protective clothing (bullet proof vests) and more. Prices will vary from application to application and, of course, the price per unit of weight varies according to the decitex of the product. Since the various applications are so different, the sales and marketing organisation is divided into profit centres – each competing for supply. All this would be no problem until the factory is sold out and product must be allocated to customers.

 

A business can allocate fairly – give everyone the same relative amount less than they need; a difficult thing to do since clients catch on quickly and will order more to protect their business. The aramid supplier can also look at his product line and favour those products with the highest Throughput per Constraint Unit. (There is a fair chance that the most favourable or unfavourable products are not those with the highest or lowest margins.) He can also use the situation to target those customers that pay the lowest price in terms of Throughput per Constraint Unit and raise prices in those markets; higher prices tend to reduce demand or the client realises that, higher prices are justified.

 

The sales organisation needs to know the situation in relation to Throughput per Constraint Unit. They cannot switch away from clients and markets or raise prices as easily as I write this, but they can have a tool to help decide what they should do; where they should focus their sales and pricing efforts for greatest benefit.

 

Throughput per Constraint Unit is a tool to help decide what to do. Other considerations are part of the decision – including things like the importance of certain clients. When multiple profit centres are involved the tool can help resolve which of the profit centres should get preferential supply.

 

Eli Schragenheims work to develop a decision support system may well become the tool for business managers to use. (see footnote.)

 

Conclusions

 

1. The simple Throughput per constraint unit does not always work, so be very careful (think carefully) when you believe you should be using it.
2. The 5 focusing steps remain an excellent guide to manage a business. They do not absolve management from some critical thinking about how to approach initiatives to increase sales or to improvement operations.
3. Many companies, by trying to balance capacity for cost reasons, will often leave a lot of money on the table. Judging how much money is left on the table is not an easy task. It is easier to decide to have just one constraint and to decide where the constraint should be. The lost sales, Throughput and profit due to balanced capacity can far outweigh the additional cost for just one constraint or even the additional cost to move the constraint into the market.
4. Throughput and the impact of decisions on Throughput should take precedence over thinking about and taking actions to manage (reduce) inventories and/or cost. (A business is here to make money, not to save cost. If you want to save cost, do not start a business!) BTW – that Throughput should take precedence does not mean inventories and operating expense are unimportant.
5. To think about what to sell (what to favour when selling) is a discussion that involves most of a business. Finance and controlling should lead the discussion. Sales and production are key participants. The managing director should probably also participate – after all some pretty key decisions will be proposed and made during such a discussion. To do this, scenarios must be built based on experience, knowledge and intuition about the constraining elements and the direction and opportunities in market demand. Such scenarios can be built and compared (see Eli Schragenheim’s work with his DSTOC software).
6. So far the sales and operations planning process was not mentioned in the article; but this process, if it exists in the company, is a good place for such discussions. A good place as long as the appropriate participants are present, as S&OP design says they should be.

 

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[1] Below are 3 article titles in relation to Eli Schragenheims thinking and his work in the area. They are found on his blog (https://elischragenheim.com/) that is well worth reading. Look for the following article titles: 1.) The Non-Linear Behavior of the Cost of Capacity; 2.) Is it really an opportunity? and 3.) The TOC Key Decisions Support (DSTOC).

After the portage around one of the waterfalls on the Manicougan River. ca. 1958 

Impact of more than one Constraint -1

Alan Barnard (at the 2006 TOC-ICO conference) asked the question whether the simple Throughput per Constraint Unit rule is valid with 2 (or more) overloaded resources. Alan used Eli Goldratt’s P-Q thought experiment for his discussion. His question is important because it is common to see businesses reduce ‘excess’ capacities to balance (or almost balance) capacities. The practice often results in two) or more concurrent constraints or ‘almost’ constraints. Since 2006 I have observed several factories that wonder why their output collapses below the theoretical capacity of their (almost) balanced lines.

I plan to show that that the Throughput per Constraint Unit rule continues to be valid using the same P-Q thought experiment. I also want to discuss this result in relation to the real World – how should companies manage resource capacities.

I would like readers to follow Eli Goldratt’s recommendation that they solve the problems – before I provide the solution and before my discussion of results. The learning experience will be greater and readers should be better able to discuss and critique my conclusions. If you are familiar with the thought experiment you can jump to the second part of this article.

The key part of the article comes at the end when the solution used in the P-Q thought experiment is discussed in relation to REALITY. The thought experiment should not lead managers to an easy solution. The tool is useful but requires thought and care.

 

The original P-Q Experiment

 

Goldratt frequently used this experiment as part of his presentations. Before introducing the thought experiment he would usually present and discuss his 5 focusing steps listed here:

 

1. Identify the constraint of the system.
2. Decide how to exploit the constraint.
3. Subordinate everything else to the above decision.
4. If you cannot extract any more from the constraint, elevate (expand) it.
5. If during any of the previous steps the constraint is broken (has moved to another location) go back to step 1. BUT do not let your inertia become the systems constraint!

 

The P-Q Company

 

The company is mine. I have hired you to help me maximise my profits from the resources I have.

 

1. I have 4 machines (A, B, C and D). All 4 are required to produce my 2 products P and Q.
2. There are 40 hours of production time available per week (1 shift). (40 hours are 2400 minutes.)
3. Product P sells for 90€ per unit and Q for 100€ per unit.
4. Demand per week is 100 of P and 50 of Q – if my factory can make all 150 units.
5. Raw materials 1 and 2 plus a purchased part are required to produce P (1 of each raw material and purchased part).
6. Raw materials 2 and 3 (no purchased parts) are required to produce Q (1 of each).
7. All raw materials cost 20€ per unit. The purchased part costs 5€/unit.
8. Operating expenses (all costs other than materials and the purchased part) are 6000€ per week.
9. Raw materials and purchased parts are always immediately available.
10. All set-up times are ‘one-touch’ – set-ups take no time at all.
11. All resources are perfect – all work 8 hours per day without any breaks, even my people work 8 hours without fail.
12. Quality is perfect; I experience no losses due to defective parts or products.
13. The graphic below shows the routing (how materials flow through my factory from raw material to finished product). The routing shows the sequence of operations each product goes through and not the layout of the factory. Clearly raw material 2 is required for both P and Q as are the operations on the B and C machines in the middle path.
14. How much money can I make per week?

 

Work it out – the answer can be found using what has been written so far, or you might want to use linear programming. Either way, try to understand why you decided on one or the other option to produce and sell. When you are finished, carry on to the next page.

 

A solution to the problem is demonstrated starting on the next page or in my next post.

Winter in Baie Comeau - Feb. 1954!!!

On Clear days you can see Corporate HQ - 10

Why the 5 Focusing Steps are so Important

Most middle and senior managers do not understand or simply are not interested in how their business system works. They are content to focus on their local department and optimise that – rather than understanding the business as a whole to cause it to maximise results. Even top management (CEOs) often do not understand their business. They condone and even encourage their management teams to optimise their local departments – production, marketing sales, finance etc. Wherever local optimisation is the rule the business concerned will always harm the bottom line significantly. Local optimisation is a massive mistake!

The 5 Focusing Steps are guidelines that, properly used, will cause a management team to always reflect on their (local) decisions. Doe the action or decision taken locally help or damage the business as a whole? As we will see the 5 Focusing Steps are a guide, but they do not replace a deep understanding of the business system.

What follows is my third example of the impact of the exploit and subordinate steps on the bottom line. In this example I have chosen a situation in which there is a constraint only during a part of the year - that could be overcome through inventory management. Just a small policy change would be worth a huge amount.
BTW. If you have any similar examples please share them with me. I will publish them (if there are not too many!) Send your stories to CSSTW@Bluewin.ch - I will credit you with the story.

3rd Example of the 5 Focusing Steps in Action

Year-end Low Inventory Targets

Such targets are policies instituted to demonstrate a well-managed business with low inventories to Wall Street and investment analysts. Factory and business managers are given no choice but to meet these year-end targets no matter the problems it gave the business.

One business always met its targets with the full knowledge that as soon a January starts they would not be able to fulfil market demand. Because they could not deliver everything early in the year they were later forced to lower prices in order to win back the lost business. Year-end inventory targets were extremely damaging to their bottom line. A 1% price reduction cuts a 10% margin by 10% to 9%. Can you imagine that 1% is enough price incentive to win back customers?

Another business, also with a stringent year-end inventory target, sold synthetic yarns to a special industry that created fabrics for the consumer market. The nature of this business was such that during the first quarter of every 2 years out of 3, demand would exceed supply by a considerable amount. Since year-end inventory targets were holy, factory management did not dare to produce for the first quarter. Instead the produced enough for the first quarter but sold the extra amount (above inventory targets) to dealers at very low prices – at least this way their customers would be satisfied – they get the quantities they need from their factory  and not from competitors. 

Calculate for yourself what the cost would be to hold the extra inventory for on average 5 months 2 years out of 3 and say 8 months in years without peak demand. The cost of holding the extra materials is minimal compared to the extra income (Throughput). The extra income is sales less materials cost.

Factory management was most irritated by this because the dealers owned Aston Martins and Ferraris while they (factory management) could only afford Fords!

Clearly, when you read these 2 examples the conclusion has to be that the policy concerned is not a good one. Low inventories are certainly a good idea, but only once you can continue to meet demand despite low stock levels. Corporate management is the problem. What they want is fine, but it should not be requested equally from all factories. A further problem is it is very difficult to get sufficient time with top managers (either because these are too busy or middle managers fear for their careers) to show that the local optimisation of inventory leads (in such cases) to bottom line damage. Such situations often live on for many years damaging the company year after year.

On Clear Days you can see Corporate HQ - 7

Why the 5 Focusing Steps are so Important

Most middle and senior managers do not understand or simply are not interested in how their business system works. They are content to focus on their local department and optimise that – rather than understanding the business as a whole to cause it to maximise results. Even top management (CEOs) often do not understand their business. They condone and even encourage their management teams to optimise their local departments – production, marketing sales, finance etc. Wherever local optimisation is the rule the business concerned will always harm the bottom line significantly. Local optimisation is a massive mistake!

The 5 Focusing Steps are guidelines that, properly used, will cause a management team to always reflect on their (local) decisions. Doe the action or decision taken locally help or damage the business as a whole? As we will see the 5 Focusing Steps are a guide, but they do not replace a deep understanding of the business system.

What follows is a discussion of the impact of the exploit and subordinate steps on the bottom line. If an organisation follows the 5 steps correctly they can easily find 20 - 40% greater Throughput. The impact of the exploit decision and subordination is shown using several cases (materials cost at 35%, 50% and 65% of sales and 10, 20 and 30% positive impact on sales.

Why are the 5 Steps so Important for a Business

The decision to exploit and subordinate to the constraint

Consider a business with an internal constraint. The constraint limits how much can be produced and sold. This business now applies the 5 focusing steps. As a result, without adding any fixed costs, the business finds it can sell 10, 20 and 30% more (gains that can often be easily achieved). The tables below show the impact in 3 different situations – one with 35% material cost; one with 50% material costs and one with 65%. In all 3 cases the businesses earn 5% on sales (profit is 5% of sales).

With low materials cost (35%) the leverage is huge. 

Despite less leverage with higher materials costs the impact is still impressive.

With very high materials (totally variable costs) the leverage declines further but a good impact remains.

From the 3 tables it is clear that following the 5 Steps can have a very significant positive impact on the bottom line. Someone wishing to use the 5 Steps faces the problem that current experience tells managers that such impact is just not possible. They cannot believe that such huge jumps in profitability are possible after their many years of improvement initiatives. The claim insults their capability and their view of themselves as successful managers. The examples below, taken from real life situations, will hopefully demonstrate the possibilities and the pitfalls of not following the 5 steps. (Nevertheless there will always be resistance; much of which in the form of ‘we are different’.)

Elevating or expanding the constraint

After following the 5 Steps in a disciplined way the organisation will know exactly where to expand. The expansion will immediately lead to more sales and Throughput. If in the above first example I have 3 resources machines in my constraint area then a new resource can potentially add 25% to sales and Throughput for a small amount of added costs. It is of course essential to know the cost of such an expansion since you may have to expand the near constraints too or the sales organisation may be unable to increase sales.

The decision how to exploit the constraint and proper subordination has the biggest impact on the bottom line. It’s free! Following the 5 steps correctly and continually is the most rewarding action an organisation can take. It focuses scarce improvement resources at the point of greatest rewards – great for the company and very motivating for the improvement team.

On Clear days you can see Corporate HQ - 6

Why the 5 Focusing Steps are so Important

Most middle and senior managers do not understand or simply are not interested in how their business system works. They are content to focus on their local department and optimise that – rather than understanding the business as a whole to cause it to maximise results. Even top management (CEOs) often do not understand their business. They condone and even encourage their management teams to optimise their local departments – production, marketing sales, finance etc. Wherever local optimisation is the rule the business concerned will always harm the bottom line significantly. Local optimisation is a massive mistake!

The 5 Focusing Steps are guidelines that, properly used, will cause a management team to always reflect on their (local) decisions. Doe the action or decision taken locally help or damage the business as a whole? As we will see the 5 Focusing Steps are a guide, but they do not replace a deep understanding of the business system.

What follows is a description of the 5 focusing steps, how to apply them, why each step is important and a series of examples of common practice that violate the 5-Steps. This sixth post is a short discussion of the fifth (the step with an important warning that is often not heeded) of the 5 steps. This last step is actually simple the first step in the next cycle of improvement.

The 5 Focusing Steps

Step 5: If the constraint has been broken (has moved) go back to step 1. WARNING: Do not let you inertia become the systems constraint!

Clearly the 5 steps are a never-ending improvement cycle since there is no way to ever eliminate constraints. At best they will move to a new location.

The warning is extremely important! We humans develop a new paradigm very quickly as our business simulations show. We can explain the 5 steps in depth and emphasize the 5th step, run the simulation with manager participants and within 30 minutes they will forget the 5th step's warning. While this step makes eminent sense to them it seems managers cannot follow it correctly – it takes time practice and probably at least 2 people that constantly remind each other – of not just of step 5 but all of them.

Sometimes a business will tell me their constraint wanders (or dances) throughout the factory or business. This is simply a phenomenon of too big batches. The operation swallows too much at a time so that the constraint seems to move through the factory. To see the effect in animal life watch an Anaconda snake swallow a pig. The pig is swallowed whole and travels slowly through the snakes digestive system. The huge batch makes the snake lethargic and largely inactive … similar to a constipated factory. 

Factories with wandering constraints have too much WIP and very likely no constraint at all once they choke the release or freeze half their projects (see Production the TOC Way or Critical Chain - both by Eli Goldratt)

On Clear days you can see Corporate HQ - 5

Why the 5 Focusing Steps are so Important

Most middle and senior managers do not understand or simply are not interested in how their business system works. They are content to focus on their local department and optimise that – rather than understanding the business as a whole to cause it to maximise results. Even top management (CEOs) often do not understand their business. They condone and even encourage their management teams to optimise their local departments – production, marketing sales, finance etc. Wherever local optimisation is the rule the business concerned will always harm the bottom line significantly. Local optimisation is a massive mistake!

The 5 Focusing Steps are guidelines that, properly used, will cause a management team to always reflect on their (local) decisions. Doe the action or decision taken locally help or damage the business as a whole? As we will see the 5 Focusing Steps are a guide, but they do not replace a deep understanding of the business system.

What follows is a description of the 5 focusing steps, how to apply them, why each step is important and a series of examples of common practice that violate the 5-Steps. This fifth post is a short discussion of the fourth (probably the step that is taken much too soon much too often) of the 5 steps.

The 5 Focusing Steps

Step 4: Elevate (Expand) the Constraint

Many times an organisation will expand resources of a perceived constraint, without deciding how to exploit the constraint or how to cause the rest of the organisation to subordinate to the decision. This is almost always a mistake. It is a mistake because a good decision how to exploit together with proper subordination yields so much capability (capacity) that the expansion is often shown to have been unnecessary. The first 3 focusing steps minimise investment and by delaying it to the proper time when investment is truly necessary.

Also many times the first 3 steps alone will cause the constraint to move (see step 5). A too early expansion of something would therefore be a waste of money. While the 5 steps are not a Lean process they do prevent financial waste whenever they are properly applied.

So, if the constraint has been properly and fully exploited and subordinated to; and it is still the constraint, then it is time to expand it … but only after full exploitation! Usually this will cause the constraint to move to a new place (unless strategically, the company decides to expand in such a way as to maintain the location of the constraint).

Elevate or expansion does not only mean investment in added resources. It means any expenditures made to increase capacity such as overtime, hiring temporary staff, outsourcing and anything else you may think of.

On Clear days you can see Corporate HQ - 4

Why the 5 Focusing Steps are so Important

Most middle and senior managers do not understand or simply are not interested in how their business system works. They are content to focus on their local department and optimise that – rather than understanding the business as a whole to cause it to maximise results. Even top management (CEOs) often do not understand their business. They condone and even encourage their management teams to optimise their local departments – production, marketing sales, finance etc. Wherever local optimisation is the rule the business concerned will always harm the bottom line significantly. Local optimisation is a massive mistake!

The 5 Focusing Steps are guidelines that properly used will cause a management team to always reflect on their (local) decisions. Is the action or decision taken locally help or damage the business as a whole? As we will see the 5 Focusing Steps are a guide, but they do not replace a deep understanding of the business system.

What follows is a description of the 5 focusing steps, how to apply them, why each step is important and a series of examples of common practice that violate the 5-Steps. This fourth post is a short discussion of the third (probably the most difficult to implement) of the 5 steps.

The 5 Focusing Steps

Step 3; Subordinate Everything Else to the Decision how to Exploit

This is the difficult step. Imagine that sales are asked to sell lower margin products (in preference to higher margin ones). The fact is that our lower margin products consume our constraint (equipment) resource more effectively; that we get many more low margin products per unit of time from our constraint is a good reason to favour these. Sales, if they are measured by price or margins may well resist such subordination.
Similarly production generally loves big batches or efficiency at every resource. At first glance the right way to go, but big batches extend lead-times of those products waiting their turn. Long lead times (due to big batches, compromise quality - quality control sees problems much later. This quality issue tends to cost in other ways too - materials cost increases and capacity is reduced. The focus on efficiency everywhere wastes scarce improvement resources that should focus efforts on the limiting factor – our constraint.
These examples show how difficult it is to get the correct behaviour. Departments and their managers are measured and rewarded by the results of just their department and not by the effect these managers have on the business as a whole. True, some corporations have a bonus system that rewards middle managers by the overall results. This is a first step, but an ineffective one.
Bosses are used to measuring their employees by the results they achieve locally mainly because they do not have the tools to measure impacts their people have on the business as a whole.
Every business has a lot of work to do to give their managers and employees the information necessary to properly subordinate to the constraint. The data is there in ERP systems; it just needs to be transformed into information!
Part of my garden!

On Clear days you can see Corporate HQ - 3

Why the 5 Focusing Steps are so Important

Most middle and senior managers do not understand or simply are not interested in how their business system works. They are content to focus on their local department and optimise that – rather than understanding the business as a whole to cause it to maximise results. Even top management (CEOs) often do not understand their business. They condone and even encourage their management teams to optimise their local departments – production, marketing sales, finance etc. Wherever local optimisation is the rule the business concerned will always harm the bottom line significantly. Local optimisation is a massive mistake!

The 5 Focusing Steps are guidelines that properly used will cause a management team to always reflect on their (local) decisions. Is the action or decision taken locally help or damage the business as a whole? As we will see the 5 Focusing Steps are a guide, but they do not replace a deep understanding of the business system.

What follows is a description of the 5 focusing steps, how to apply them, why each step is important and a series of examples of common practice that violate the 5-Steps. This third post is a short discussion of the second of the 5 steps.

The 5 Focusing Steps

Step 2: Decide how to exploit the constraint.

This is easy to say, but it is not so easy to do. How should I use my constraint to maximise profits (assuming maximum profit is the business goal)? Which of my products have the highest margins? Which of my products consume constraint capacity most effectively? What are the implications of my decisions in the market? What are the implications for the future? Clearly this is not an easy decision for any to make. It is in fact the responsibility of top management to decide!
If management does not take the decision or does not take it correctly the business will suffer. The bottom line will reflect this suffering. Unfortunately business results will not point to the culprit for less than optimal (even poor) results. The culprit is almost always the way we manage our system, our constraint, or could it be anything else? If it is something else let me know at rgb@vistem.eu!
The constraint might be our market. The market may not be buying enough of our products to fill our factories resulting in a less than satisfactory bottom line. Our decision may then be to cause our markets to buy more and more from us (and this must not be done with lower prices since our competitors can easily copy these). Some sort of powerful competitive advantage is essential.
It is important to remember that a policy ‘constraint’ should simply be changed. Deciding how to exploit an inappropriate policy does not make any sense. An inappropriate policy was originally put in place for a good reason. That is why it should be changed but not necessarily be eliminated. Chang such policies, KPIs or just the way work gets done.

On Clear days you can see Corporate HQ - 2

Why the 5 Focusing Steps are so Important

Most middle and senior managers do not understand or simply are not interested in how their business system works. They are content to focus on their local department and optimise that – rather than understanding the business as a whole to cause it to maximise results. Even top management (CEOs) often do not understand their business. They condone and even encourage their management teams to optimise their local departments – production, marketing sales, finance etc. Wherever local optimisation is the rule the business concerned will always harm the bottom line significantly. Local optimisation is a massive mistake!

The 5 Focusing Steps are guidelines that properly used will cause a management team to always reflect on their (local) decisions. Is the action or decision taken locally help or damage the business as a whole? As we will see the 5 Focusing Steps are a guide, but they do not replace a deep understanding of the business system.

What follows is a description of the 5 focusing steps, how to apply them, why each step is important and a series of examples of common practice that violate the 5-Steps. The second step is a discussion of the first of the 5 steps.

The 5 Focusing Steps

Step 1: Identify the Constraint

“We are continually working on eliminating constraints”, is a common claim when we ask for that thing that blocks a businesses performance. The statementalone indicates common practice. Every entity or department focuses on what they call constraints. These constraints originate from the behaviours of other departments around that focus on their own constraints. It is an uncoordinated mess. Everyone is trying his or her best. It is the system that forces every manager to optimise his or her local department.

There can be only 1 (or very few) physical constraint(s) in any system of entities; like a chain can have only one weakest link. Since this is true a business system will have only 1 constraint located in just one of the entities. That is what we must find.
There is something else that people call a constraint. These are the rules by which their business is run. These may be formal policies, guidelines, key performance measures or simply ‘the way we run the business around here’. These have been called policy constraints. The 5 steps are not valid for these ‘policy constraints’ they (the inappropriate parts of policies) must be changed to remove or change the damaging part.
The simplest way to understand how to find a constraint is to look at a production environment with many machines more or less in a sequence between raw materials and finished product. One of these machines has, on average, the smallest capacity. Work in process (WIP) tends to pile up in front of this machine. (Many times materials are released as soon as possible so that huge amounts of (WIP) are present throughout the factory masking the true constraint.) So, the most loaded resource is the constraint of the system as a whole. The constraint does not need to be a bottleneck! The constraint can be the market or sales that are not delivering a sufficient number of orders to keep the factory busy.
The next steps are the guidelines how to manage the business constraint. They are guidelines! They are not a management cookbook! Top and middle management need to develop the thinking and tools to be able to apply the 5 steps correctly.

On Clear days you can see Corporate HQ - 1

Why the 5 Focusing Steps are so Important

Most middle and senior managers do not understand or simply are not interested in how their business system works. They are content to focus on their local department and optimise that – rather than understanding the business as a whole to cause it to maximise results. Even top management (CEOs) often do not understand their business. They condone and even encourage their management teams to optimise their local departments – production, marketing sales, finance etc. Wherever local optimisation is the rule the business concerned will always harm the bottom line significantly. Local optimisation is a massive mistake!

The 5 Focusing Steps are guidelines that properly used will cause a management team to always reflect on their (local) decisions. Is the action or decision taken locally help or damage the business as a whole? As we will see the 5 Focusing Steps are a guide, but they do not replace a deep understanding of the business system.

What follows is a description of the 5 focusing steps, how to apply them, why each step is important and a series of examples of common practice that violate the 5-Steps. The first step is a discussion on the prerequisites to apply the 5 steps correctly.

The 5 Focusing Steps - The Pre-Requisites

Prerequisites to the application of the 5-Steps

1. Definition of the System: The system to be optimised could be our production (because we know that production is holding back our ability to succeed. It could be the business as a whole including our markets. Care should be taken that the system selection will not lead to local optimisation.
2. Definition of the Goal of the system. If we do not know the goal of our business we will not know how to optimise it – there will be many things that can be improved so that our business will have no focus.
3. We need to know how our business can tell it is approaching the goal. Top management may be able to look at the bottom line, but middle management is operating locally. They need a way to know that their decisions and actions are causing the business as a whole to approach the goal more and more.

Strategic Inventory Placement(Pharmaceutical, Agrichemicals…)

In many B-to-B industries suppliers produce the same basic product for several to many customers. The product may be the same, but often the packaging and (or) the labelling will be different. Labelling and packaging is often different from customer to customer, but also within a single customer packaging and labelling might well be different from country to country. Agrichemicals and generic pharmaceuticals are examples.
This variation in packaging causes inventory and availability problems that endanger suppliers’ business since clients can get the same or very similar product from another supplier. Switching does not solve the problem for a client it simply transfers it to another company. Performance is unlikely to improve in any sustainable way.
Suppliers need a solution that makes it possible to guarantee availability, with, at the same time, reducing the amount of stock in the supply chain. A robust effective solution would most probably also take some of the pressure off price.

Are Suppliers & Customers Partners, Competitors or Enemies?

Businesses in a supply chain are really only paid when the final customer, the consumer, has paid for the product – everything else is an advance payment. Every company along the supply chain is competing for that consumer’s dollar. In the B-to-B part of the supply chain a supplier and his customer negotiate price that will, to a large extent, determine profits and return on investment of the B-to-B pair. It is clearly a conflict situation since both the purchasing agent and the salesman concerned are charged with maximizing profit for their company … at least usually. Companies within a supply chain are certainly competitors.
Supply chain collaboration is a buzzword that sounds and real collaboration could be great. Whatever level of cooperation or collaboration is actually achieved, the fact remains that two parties within a chain compete. A level of mistrust is likely to remain.
In many supply chains customers throw orders to their suppliers over a wall– many times as a surprise (in terms of volume or timing). Orders can arrive at really inconvenient times. The supplier may suggest a way to solve the problem – for instance by sharing demand information. A supplier might offer a significant discount for much earlier commitments from clients. Can these proposals work?
Sharing demand information is often problematic because it seems to give away proprietary information that may get into competitors’ hands. On top of that, even if demand forecasts are shared, we all know that these tend to be quite inaccurate. Actual orders are often significantly different. Demand forecasts are inadequate and usually not so useful for suppliers.
A firm order placed well in advance sounds very attractive for a supplier (and for the client if he gets a nice discount). However reality will almost certainly catch up with the client. Close to delivery time he needs a different mix of products. He will request last minute changes to his orders. The supplier loses the discount and gains no stability benefit for his production unit.
Our problem is to find the robust, simple solution to get the best information about near term demand to the supplier’s production unit and to his suppliers. The criteria for such a solution must be something like:

1. Visible, transparent information about current demand for all stocked items (those not made to order).
2. Visibility must be such that all nodes in the supply chain have absolute clarity about the priorities to ensure correct replenishment of stocks in the supply chain.
3. The system must have a simple and dynamic way to adjust target stock levels to current demand as it changes over time.
4. A supply chain must carry stock at the most appropriate strategic locations with the following two targets: a. Minimize stock levels within the supply chain. b. Guarantee near 100% product availability.
5. A monitoring system to provide early warning of an arising capacity problem.
6. The key performance indicators that show the supplier and his customers what their respective performance levels are.

Make for Availability is a process and system that meets the above criteria. If a part of the business is Make to Order, then the two processes can be easily integrated into one mixed mode solution.
In addition to the basic criteria above, the process needs to be able to cope with:

1. Seasonality (Agrichemicals have very seasonal demand).
2. Promotions – especially in retail situations.
3. Sudden peaks in demand – for instance when the supplier gains a new large customer.
4. Sudden loss of a significant account.
5. The need to forecast longer-term demand remains – in order to support decisions about capacity changes.

In today’s business environment the technical challenges to support such a process can easily be overcome.

Selling the Concept

That companies compete for the profit of a supply chain makes the sale (of such a concept) a difficult one. In addition most purchasing personnel and their counterparts from the supplier’s sales organisation do not normally negotiate about inventory, information and availability. They are used to discuss price, product quality, product features and benefits. These people will need to master the core of Make for Availability and the corresponding business offer being made.
Before purchasers and salesmen can even talk about the solution the process must be absolutely clear for a sales or purchasing person to make a coherent offer. The solution may well be a paradigm shift for clients (or suppliers). The process may well indicate that a better location for stocks exists and should be used. There are considerable implications in the way the process must function; who will do what; where will inventories be stored etc. Not too difficult a process to understand, but a purchasing organisation must be in a position to sell the benefits in such a way that will almost certainly gain the clients’ cooperation.

Where should Inventory be located?
Do we need so much?

No New Hires; No Replacements

From time to time corporate management will put such a restriction on a division that is performing poorly. This policy is actually not that unusual in industry. But, does it make sense? Could it be this policy that makes it impossible for the business to survive? The feeling in the targeted business might be that the policy is just the first step before it will be shutdown. If this is the feeling, won’t it cause employees to jump ship in search of greener pastures? Is there a better way?

 

The Goal

A company’s goal is to make money. A corporation that supports a business with insufficient profitability will feel that such a business is draining a lot of energy from management to try and deal with the problem. If the lack of profitability persists there will eventually come an ultimatum – something like, “Please don’t ask for more resources until you have shown proven positive bottom line results.” Fair enough? I think it is fair, although I also believe there is a better way to motivate the business and properly support it when it does hit the resource wall. (When it hits that wall the business cannot produce any more sales and the only remaining hope will be to reduce cost wherever excess exists – a very demoralizing tactic.) The Goal will seem to recede into the distance, impossible to meet it. At this point employees are quite likely to jump ship – especially those with that alternative.

The Approach for Success

The business in trouble needs a way to focus so that it gets the absolute maximum Throughput possible. (Throughput is meant as the money they generate through sales). To do this they have no choice but to find and then exploit their limiting factor to its absolute maximum. This means the limiting factor should work 24/7 and it should produce only the most lucrative products. The rest of the organisation makes sure that not a single minute of the limiting factor (the constraint) is wasted by a work stoppage or through the production of a low value product. What the paragraph above describes the first three steps of the 5 focusing steps for continual improvement.

1. Find the constraint (the limiting factor). The limiting factor is key … if its limiting results, then we must use it well.
   
   Many times a company will believe there are many constraints throughout their production process. This is in reality not possible. The impression of many constraints or constraints that move from one place to another are the result of the way the production process is managed. The policies that control how production is managed are very often the source of ‘many constraints’.
   
   To find the real constraint, operate with smaller batches and look for the operation before which work piles up and must wait. The real constraint is usually immediately after the pile of waiting work. 
2. Now that we know where and what our constraint or limiting factor is, we need to decide how to get the most from the limiting factor. Only if we can get this maximum can we expect our business to maximize its results.
   
   What this means is not only to maximize the output of the limiting factor, but the constraint must also be used effectively – it should produce those items that produce the greatest Throughput (sales less materials cost) with the least amount of constraint effort. That maximizes the result.
   
   There may be products that do not require the constraint resource – they give the highest amount of Throughput of all since they require zero from the limiting factor (as long as Throughput is positive. Decide to maximize sales of these products. 
3. We have decided how we want to exploit (get the maximum from) the limiting factor. How should the rest of the organisation behave?
   
   All of the rest of the organisation, including senior management, should subordinate to the limiting factor – even if this means their efficiency will suffer. If any other resource seeks to optimize his or her efficiency and in doing so hurts the limiting factor then the business as a whole suffers – the bottom line and all employees!
   
   Subordinate starts with management. Management sets targets and Key Performance Indicators for the business and functions within the business. This usually a good thing, but must be done with the decision how to exploit the constraint in mind. Resources (being good people) will seek to reach their targets. If targets and KPIs are set incorrectly they will inadvertently harm business Throughput.
   
   In the discussion of the exploit decision we recommended the production and sale of items that do not require the constraint. This tactic must be monitored carefully since too much of it can cause the constraint to be starved of work … a feeding resource is working on a product that does not pass through the limiting factor. 

These first 3 focusing steps are an excellent framework but they must not be used blindly. The business must continue to think and reflect about the consequences of its actions … focused especially the consequences for the limiting factor.

The advantage of these three steps is the focus on the limiting factor. The 3 steps give a logical framework to the corporate policy “No new hires, no replacements”. They help the business successfully achieve the desired outcome of more profit from existing resources. In fact followed correctly they will by themselves prevent new hires or replacements or investment in equipment until no more Throughput can be wrung from the limiting factor. (These 3 focusing steps should be used in every business in order to prevent unnecessary investment in additional resources until these are truly necessary. The focusing steps should be in continual use.

Many times the decision to exploit and the actions taken to subordinate cause the constraint to move – the business has a new limiting factor. The business must identify the new constraint; decide how to exploit it and how the rest of the organisation should subordinate to it. Care must be taken to do this correctly … the initially identified constraint may not have so much spare capacity.

 

The Value of One Hour

Previously we recommended focus on the limiting factor in order to maximize Throughput. How much is an hour at the limiting factor worth?

Assuming a month has 30 days of 24 hours (our operation runs around the clock) then there is an absolute maximum of 720 hours. Clearly some of these hours are not productive as resources (machines) must be maintained or if they are people there are very few than work 100% of the time during an 8-hour shift. For the purposes of this experiment lets assume 100 hours are currently not productive for one reason or another … so net we are using our resource for 620 hours every 30-day month.

The resource of interest is our limiting factor … it currently is the limiting factor in our production that results in 10 million€ turnover. If materials are 38% of sales, then Throughput is 6.2 million€ and 1 hour of constraint time produces 10000€ Throughput. Every additional hour we are able to utilize our limiting factor produces 10000€ to the bottom line … additional profit! If the business is able to utilize the limiting factor for an additional 50 hours, that means an extra .5 million€ to the bottom line. That is an extra 5% of return on sales.

Utilizing a non-constraint an extra hour has a negative effect on the business unless the constraint can use the extra material. Otherwise utilizing a non-constraint for more than capability of the constraint simply increases work in process and increases lead times (Little’s Law).

It does make sense to utilize a non-constraint for extra hours; if the time is used to produce products that do not have to go through the limiting factor. Such hours are also very valuable since every € of Throughput goes straight to the bottom line.

 

The Limiting Factor can do no More; What Then?

The fourth focusing step is, “Elevate the Constraint” – expand the constraint’s capacity in some way … through overtime, outsourcing, adding resources etc. The step is the correct action if the limiting factor (constraint) truly has been exploited to the maximum and no more subordination steps are possible. Management’s job is to understand where the organisation stands – they should allow an expansion only at the correct time.

The value of elevating the constraint or limiting factor is enormous (as long as the market will actually buy the additional products).

If the constraining resource is 10 people responsible for 10 million€ sales then adding just 1 person should allow the business to grow from 10 to 11 million€ sales. This 1 extra person would generate 1 million€ in sales, and 600’000€ in additional Throughput and profit (of course I assume the rest of the operation can handle the extra 10% load).

An extra employee in any other area adds only cost. The added person cannot add to the bottom line because the limiting factor is running at its capacity. Such an added person adds no value.

The rule, no new hires and no replacements gets seriously in the way at this point – especially if even outsourcing, over-time and the like are not possible. The business is blocked from progress until the capacity of the limiting factor can be increased. Management needs to seriously consider this fact as well as the time it might take to train an additional constraint resource.

A corporation may not want to hire additional people into a poorly performing division. But if this division is now blocked by the limiting factor and the type of resource necessary at the constraint can easily be placed elsewhere; then the question is why not expand the capacity of the limiting factor? It would seem to make eminent sense.

There may be pressure to reduce costs in areas other than the limiting factor. This might be OK as long as the capacity of all other resources remains sufficiently larger than that of the constraint – there needs to be sufficient protective capacity. Also, consider that employees in operations generally represent just a small percentage of the total fixed costs … less than 10% and often much less. Cost in modern businesses lies in overheads. If overhead costs are reduced care must be taken to not take away essential support for proper exploitation of the limiting factor.

 

When to Allow Expansion

The Focusing Steps define when expansion should be allowed … whenever the exploit and subordinate steps are successfully and completely implemented. The limiting factor is at its limit and only an expansion of its capacity will lead to more Throughput (sales less materials cost).

However, people have two ways of thinking … fast and slow (see Daniel Kahneman's book "Thinking Fast and Slow"). We use our intuition and experience to come to conclusions quickly and possibly make a serious mistake. There could still be capability left in the organisation if only we would take the time (slow thinking) to go over all possible options to exploit the limiting factor better and/or subordinate to it better!

A recent experience demonstrated to me again; the truth of fast and slow thinking! The organisation believed it had reached the limit of what could be done with and for the constraint. However senior management stood by their no hire and no replacements policy. What happened next was amazing – the organisation found more ways to subordinate even more effectively to the limiting factor and some more capacity was found.

 

Protective Capacity

If a business in trouble follows the actions outlined above it will very soon be operating near the limit of its capacity – assuming the market buys its products. It is common knowledge that as an operation approaches capacity its flexibility and delivery reliability decline while lead-times extend. These three parameters are, however, extremely important in many competitive environments – flexibility, reliability and short lead-times help ensure the business wins orders. As these qualities deteriorate demand will decrease. A certain amount of protective capacity is essential to maintain these important parameters so that sales can continue to increase.

When the corporation considers their strategy and tactics for a particular (poorly performing) business they should include protective capacity in their considerations. Management can ignore protective capacity; the market will not ignore it. The market will soon realize flexibility, reliability and speed are deteriorating and will react accordingly. Demand will drop, price pressure will increase and all the good work to exploit the limiting factor can be undone. Why go to all the effort if a lack of protective capacity will undo the work?

Within the business all non-constraint resources have and must continue to have sufficient protective capacity to make sure the constraint can always be exploited to its maximum. There is a strong likelihood that the business will experience pressure to reduce costs wherever excess resources exist. Excess resources can be reduced, but the sufficient protective capacity must alwazs be available.

 

Summary

The 5 Focusing Steps process is an ideal replacement for the commonly applied rule “No New Hires and No Replacements”. Applied correctly it does the same thing as the rule I wish corporations would change. The difference is in the process when no further improvement from the limiting factor is possible. At that point the corporation should allow expansion at the constraint because of the high leverage found at this point. If the limiting factor cannot be expanded, then the business concerned may as well be shut down. No further significant improvement in the bottom line can be expected.

Management should, before they embark on an exercise to try and improve a business in trouble, decide at what point they will allow expansion (at the limiting factor) and this should be communicated to the organisation concerned. The proper exploitation of the constraint becomes the businesses first target. Management needs to be knowledgeable enough to recognise when the organisation has not yet squeezed the maximum from the limiting factor and when they must allow expansion – in the right place.

Following the 5 steps as described should, in the majority of cases result in 20-50% greater internal capability, that if it can be sold should bring most businesses in trouble to profitability! (20% greater internal capability represents 2million€ added sales and 1.2million€ to the bottom line (Throughput is assumed to be 60% of sales) (IF, and only IF you can sell the extra capability)!

If you are wondering, the 5th step is, "If during any previous step the constraint or limiting factor is broken during any of the previous steps, go back to step 1. BUT, DO NOT let your own inertia (fast thinking!) become the system's constraint!

Technorati Tags: Continual Improvement, Cost, Costing, Efficiency, Goldratt, Key Performance Indicator, KPI, Little's Law, Management, Shareholder Value Add, Supply Chain, SVA, Theory of Constraints, TOC, TQM, Value Chain

“Shit Happens” Deal with It! - 1

Almost everyone desires security, the natural reaction is to forecast and plan. Still, even with the best laid plans “shit will still happen”! We live in a chaotic World and might as well get used to it. The question is how to deal with uncertainty – is it better forecasts, budgets and plans, or is it better strategies, tactics, procedures and algorithms to deal with “shit” when it does happen.

I choose better strategies and tactics to deal with the consequences of “shit”. I do not have a crystal ball so I know that I cannot forecast with any accuracy – so why waste my time fine tuning forecasts and plans?

The Past is what is wrong with Forecasts

We simply have not enough of a clue about the future – we have no knowledge of what is really going to happen. Every forecast I have ever seen is an assumption about the future – most often this assumption is some sort of extrapolation (very often linear) made from the past. Extrapolation in some form or another occurs whether or not a person or a computer makes the forecast – it is the only way most of us know how to visualize the future. After all we have to base our forecast on some sort of information and assumptions.

In my career I have seen interesting situations that demonstrate the unreliability of our forecasting and planning capabilities (as long as the future looks like the past forecasts will be Ok – when something jolts the economy (even just a little bit) accuracy goes out the window.

• I was responsible for a type of Nylon for hosiery that had a superb texture and feel to it, but it was significantly more expensive than other, conventional, nylons. This, rather superb, product was not selling well around the World and my sales area was no exception. Based on forecasts we would never make any money with it. Management decided to get out of the business – starting with my market; told me to get out of the market – stop selling the product.As sales manager for the region the best way I knew to cut demand was to increase price dramatically. So I doubled it. What happened next was a surprise … demand increased! Doubling the price did not work, so I did it again. Demand continued to increase and at this new price the product became very profitable. What I had done – quite accidentally – was to create a luxury product.Our forecast based on historical demand and therefore our business plan indicated the best we could was to get out of the market. As it turned out, we did not understand our (customers’) market and by total accident created a success. The lesson I learned was to be ready for surprises, and when they happen take advantage of them.
• Later on I was manager of another business and had the good fortune to have two excellent years of growth in sales and profit. It was budget time near the end of the second year and my sales forecast was due. From what my gut was telling me (I could not prove it and extrapolation of the trend showed continued growth) sales in the following year would at best match what we had just achieved. Well the computer’s projection out of the past indicated my business would grow again. In the end my gut lost to the computer’s forecast – management ‘talked me into’ a growth forecast (despite the knowledge that our industry was operating at close to capacity). Reality showed that my gut (which I could not explain well) was the much more accurate forecast. (NB. In this case my gut was correct, but could just as well been way off with the computer’s gut delivering the better, more appropriate, forecast.We don’t know which forecast will be correct – what we need are tools and processes to react to reality correctly.
• A long time ago double knit polyester fabrics were all the rage – they were cheap and did the job. Every year we made new 5-year forecasts always showing that the dramatic increases in sales would not continue – demand would be flat the following year. Well, it was not – the same fantastic growth went on for more than 5-years. After a number of years of forecasting too low, we learned – this market was growing at a fantastic rate and we had better forecast and plan capacity accordingly. So we extrapolated from history – which by that time looked like almost vertical exponential growth … so you can imagine what our latest 5-year forecast looked like.That was the year growth went from almost exponential to flat and then decline! Clearly using history was a big mistake!

The lesson from this and many other such stories is not that we should stop making plans. We must, however, recognize the fallibility of our plans and therefore the need to build processes and tools that help us respond correctly to surprises in either direction.

The story that follows should speak to many of us. It takes place in January 2009 soon after the recession started.

 

 

 

 

 

 

 

 

Technorati Tags: 6-Sigma, Continual Improvement, Efficiency, Execution Management, Focus, Goldratt, Key Performance Indicator, KPI, Management, Production, Replenishment, Sales, Supply Chain

Learning from Experience III

Paradigms

An inappropriate paradigm will result in unfulfilled (or even over fulfilled) expectations.
In the Post “Where should we hold Stock” the organisation may have followed the following paradigms:
1. Distributors are given a good margin to sell our products – it’s only right that they invest in the correct amount of inventory to supply their customers.
2. Adding value – through cutting the rolls and sheets to customer requirements is an additional way to make more money.
3. Holding stock close to customers (at distributors) ensures a better customer service. Material availability is better; lead-times are shorter.
Unfortunately the result was quite different – not only did distributors complain about the high cost of holding inventory, but; customer service to the end client actually deteriorated. What is going on?
Maybe holding inventory centrally and cutting to size centrally is much more effective. Maybe the aggregation effect (at a central warehouse) causes less waste in added stock and makes it much easier to service the market. Maybe aggregation of demand makes demand at that level much less uncertain. The aggregation paradigm is well known in a number of areas – insurance aggregates many risks that offset each other.
Maybe the right paradigm is aggregation! Don’t many supply chains use aggregation to prepare inventory at such a point and differentiate the product when customers actually order?

It seems you should ‘watch your paradigms’!

Nov 11th,2011 Eli Schragenheim will lead a workshop on Learning from Experience. The purpose is to learn how to understand the cause and effect (the why) of disturbing and unexpected results from our actions AND, more importantly to take and apply the important lessons we learn.
The stories in these posts are all about unexpected effects that someone has experienced and that he or she could not properly understand. With Eli, we will look at such problems (bring your own!) and analyse them.
If you are interested the Workshop (in English) will be at the hotel Schiller in Olching (near Munich) followed by the TOC4U Meeting (mostly German) on Saturday Nov. 12th. You can register here: Register or call +49 6252 795 3070 if you have problems with the German registration page.


Technorati Tags: Availability, Continual Improvement, Distribution, Efficiency, Focus, Goldratt, Inventory, Make to Stock, Replenishment, Risk Management, Shareholder Value Add, Strategy and Tactics, SVA, Theory of Constraints, TOC, Value Chain

Below is the text from an email I received in the 90-ies (as a copy). What Chandrashekhar explains is still valid. Anyway, I thought I would post this after I found the email again by accident - especially in relation to my last post "Isn't It Obvious (part of the Learning from Experience series.)

CHICKENS

Hi Luis This is Chandrashekhar from India.

From the inputs what you have provided, ToC’s distribution / replenishment solution is the best solution. To design the solution completely you need to have past data.  I have implemented replenishment solution in the distribution of a Chicken (Shelf life of 24 hrs only).

The case was:

• The supplier had one factory from where he was supplying to more than 200 outlets in the city. All outlets were giving their next day’s requirement by afternoon 3.00 • Live birds then transported to factory by 10.00 in night.• Factory used to start the production late night and complete it by morning 6.00. the finished product was delivered to all outlets in the morning by 10.00• If a shop sells less than what he has ordered, the extra chicken is wasted.• If a shop sells more than he ordered, there is stock out and sale is lost.  17% of the rejections were taking place due to this. Sale lost – no data available

Solution:

• Instead of one delivery, now we are making two deliveries, one in morning, second in evening. • In first delivery (Morning 10.00) we supply 40% of the forecast or ordered quantity by the retailer.• At 3.00 they call up all retailers and take sale figures.
• If sale is less than forecasted, then quantity in second delivery is reduced • If sale is more than forecasted, extra quantity is supplied in second delivery.

This reduced the rejection (chicken coming back from retailers) from 17% to 6%. On one side the rejections came down, i.e. the loss of throughput is arrested on other side the sale improved by 11% i.e. Throughput increased. I hope this example will help you in developing solution for your problem.

 

 

Technorati Tags: Availability, Consumer, Cost Accounting, Distribution, Efficiency, Goldratt, Inventory, Inventory Management, Replenishment, Retail, Sales, Shareholder Value Add, Strategy and Tactics, Supply Chain, SVA, Theory of Constraints, TOC, Value Chain

Learning from Experience II

Friday Nov. 11th,2011 Eli Schragenheim will lead a workshop on Learning from Experience. The purpose is to learn how to understand the cause and effect (the why) of disturbing and unexpected results from our actions AND, more importantly to take and apply the important lessons we learn.

The stories below are all about unexpected effects that someone has experienced and that he or she could not properly understand. With Eli, we will look at such problems (bring your own!) and analyse them.

The Workshop (English) will be at the hotel Schiller in Olching (near Munich) followed by the TOC4U Meeting (mostly German) on Saturday Nov. 12th. You can register here:REGISTER or call +49 6252 795 3070 if you have problems with the German registration page.

“Isn’t It Obvious?”

Eli Goldratt’s latest book (and I think his last) is about retail. The store manager is on his way to work when he receives a call that a water main has burst in the shopping centre and that his storage area is under water. He finds out that until repairs are made he has no storage available within the shopping centre. To further compound his problems the price of other local warehousing has jumped – obviously because the know demand will be high!

The store manager comes to an arrangement with the regional warehouse that they supply he with what he needs on a daily basis to be able to sustain sufficient stock in the store. The two of them work out a system whereby the store locates its inventory at the warehouse and the warehouse replenishes the store based on whatever they order the evening before.

The surprise for the store manager is the sudden jump in performance. Before the burst water main the store was languishing somewhere near the bottom of the performance rankings. Soon after the ‘disaster’ the shop’s performance jumps to the top of the pile – not just in the region, but, for the entire chain. The store manager is at a loss to explain what has happened.

What do you think was the real cause for his sudden spurt in performance?

What can we all learn from the story?

To find out what really happened – read the book!

Technorati Tags: Availability, Consumer, Distribution, Efficiency, Focus, Goldratt, Inventory, Inventory Management, Replenishment, Retail, Supply Chain, Theory of Constraints, TOC, Value Chain

Learning from Experience I

Learning from Experience

Friday Nov. 11th,2011 Eli Schragenheim will lead a workshop on Learning from Experience. The purpose is to learn how to understand the cause and effect (the why) of disturbing and unexpected results from our actions AND, more importantly to take and apply the important lessons we learn.

The stories below are all about unexpected effects that someone has experienced and that he or she could not properly understand. With Eli, we will look at such problems (bring your own!) and analyse them.

The Workshop (English) will be at the hotel Schiller in Olching (near Munich) followed by the TOC4U Meeting (mostly German) on Saturday Nov. 12th. You can register here: REGISTER or call +49 6252 795 3070 if you have problems with the German registration page.

Where should we hold our Stock?

The business produces sheets of an insulating and fireproof material sold to the electrical, electronic and speciality construction industries. Sheets are produced in a standard width and must be cut to size for the various specific applications – into roll widths, and various panel (or sheet sizes). The company had a central stock together with a slitting and cutting operation to produce to customer requirements. From there material is sold through distributors throughout Europe (one distributor per country).

The division was under constant pressure to reduce stock levels. Levels were always high because cutting to customer requirements resulted in many end-products produced against a forecast and many partial rolls and off-cuts kept in stock in case a customer required something that could be supplied from these rests. Their computer system always selected material from these off-cuts whenever this was possible.

The pressure to minimize stock resulted in the strategy to give distributors the job of cutting to customer order. Distributors would order the few standard rolls and cut these to customer requirements. Distributors were happy because they gained an additional way of adding value to their service and the supply chain manager finally got the ‘too high inventory’ monkey off his back.

Soon, however, things did not turn out as expected. Distributors started to complain about the huge investment they had to make in ‘off-cuts’ that then could only be sold with great difficulty. On top of this they had to invest in cutting equipment to produce for clients. Distributors began to demand lower prices and/or consignment stock to take care of their deteriorating financial situation – their increased need for working capital to finance the additional stock.

What is happened?

What can we learn?

What might be the better solution?

 

Technorati Tags: 6-Sigma, Continual Improvement, Costing, Distribution, Efficiency, Focus, Inventory Management, Replenishment, Shareholder Value Add, Strategy and Tactics, SVA, Theory of Constraints, TOC, TQM, Value Chain