An Introduction to Theory of Constraints (TOC)

1. An Introduction to Theory of Constraints (TOC) 300 – 3665 Kingsway Vancouver BC V5R 5W2 604-668-3253 stevej@synchronix.com

2. How Does it REALLY work in real life? 99% of our clients come from word of mouth so while we document our clients results on our website http://www.synchronix.com/results-testimonials/ we don’t use detailed case studies for our marketing, so this is the only detailed study on our site: http://www.synchronix.com/results-testimonials/rta-furniture-factory-case-study/ However, we work closely with 2 other TOC consulting companies from time to time (especially when the client is larger than we choose to work with)… one East coast, one West Coast … and they both have plenty of case studies: http://thoughtwarepeople.com/Results.aspx (check out the Letourneau story for spectacular sales, profit and inventory performance) and http://www.chesapeak.com/index.php?/success_stories/ A book “Theory of Constraints and its implications for management accounting” by Eric W. Noreen, Debra A. Smith, James T. MacKey has in-depth case studies of several very different Theory of Constraints implementations, from North America and Europe, as well as expanded coverage of the TOC 5 Focusing Steps (Identify the Constraints, Decide how to Exploit, etc.) and some examples of the Thinking Processes (Current Reality Tree, Cloud, etc) in action. This is a warts-and-all examination by specialists with extraordinary qualifications, sponsored by an organization that was somewhat skeptical of the technology. The book “Management Dilemmas” by Eli Schragenheim, at one time a partner of TOC originator Eli Goldratt, also contains an excellent overview of the technology plus, how he would apply the TOC way of thinking to more than a dozen different business problems including situations with a hotel, a military repair laboratory, organizational change, project failure, succession, and more. While these aren’t actual case studies he documents how he’d approach the problems, and how he’d use the TOC tools … there’s a LOT of food for thought in this book.

3. 3 Fundamental Questions In Any Change Process • The Status Quo is rarely acceptable; so, the crucial questions for managers are: • WHATto change? • TO-WHAT to change? • HOW to change?

4. Improvement Philosophies The most common philosophy of improvement in a seemingly complex environment is to break down the organization into smaller pieces, then seek improvement of each piece, independently. The TOC stance is different: it is to view the organization holistically; then, using cause-effect understanding, look for inherent simplicity inside even the most complex environment. TOC seeks out leverage points, pulse points, where a tightly-focused change, correctly executed, can have major benefits on the organization as a whole … often on many different aspects of the organization as a whole ... often very quickly, and often with relatively little effort.

5. The “Theory” of the Theory of Constraints “The performance of any real system, relative to the Goal of the system, is limited by its constraints.” Constraint: Anything that prevents a system from achieving a higher performance relative to its Goal. Don’t be fooled by the use of the word “Theory” … TOC is extraordinarily practical. By focusing on Constraints, we get Focus and Leverage … often large improvements, quickly and relatively easily.

6. Education Military Application to Industry PersonalMgmt Skills Distribution & SupplyChain SynchronousManufacturing ProjectMgmt Business Strategy & tactics Value-Based Selling $Throughput Accounting Government Marketing (Mafia Offer) Banking Health Care While not exactly a household name …TOC is Widely Used

7. To Provide Some Context … Synchronix’ TOC consulting practice is directed at small to mid-size organizations. However, to “borrow” some credibility for the technology, TOC is being used in a variety of ways in larger organizations such as Boeing, Intel, the US Marine Corp., US Air Force, US Navy, Nasa, Alcan, Travelocity, The California Department of Corrections, and more. Plus a 3-man, almost-Amish woodworking business in Ohio and a donut shop in Phoenix. In the US, hundreds of University Professors and College instructors have been educated on TOC, which is now taught in many major Universities. It is also taught to Kindergarten age children in parts of the US, UK and other countries. The TOC book “The Goal” became a best seller in Japan in the past 10 years. One of the largest TOC conferences in the world, recently, was in Korea. Locally, BCIT started teaching TOC in 1990 … the original Instructors, 2 of 3 now retired, were themselves taught the Theory of Constraints by Steve Jackson.

8. Types of Constraints Constraint: Anything that prevents a system from achieving a higher performance relative to its Goal. We can narrow this down to 2 types of Constraints. Physical Constraints … such as capacity. Or, sales. Policy Constraints … a generic term for Policies, Procedures, Rules and Measurements that compel behaviours that limit the performance of a system, to the detriment of the Goal. Policy constraints often surface themselves when they stop an organization from dealing effectively with physical constraints. But sometimes we have to hunt them down.

9. The Chain Analogy … How TOC Views an organization • We view an organization as a chain of tightly dependent links, not a collection of loosely connected links that can all be managed and measured independently. • In a Chain, the performance of any link, relative to the goal of the organization, is tightly dependent on the performance of OTHER links.

10. Chain Realities • A chain is only as strong as its weakest link • A chain can only have one weakest link • Strengthening any link other than the weakest link does NOT strengthen the chain • Strengthening EVERY link EXCEPT the weakest does not strengthen the chain

11. The 5 Focusing Steps of the Theory of Constraints – for PHYSICAL Constraints • 1.Identifythe constraint(s) • 2.Decide how to Exploitthe constraint(s) • 3.Subordinatenon-constraints to the decisions in Step (1) and Step (2) • 4.Elevatethe constraint(s) • If, in Steps (1) to (4), a constraint is “Broken,” . . . go back to Step (1)! • Do not let inertia become a constraint!

12. And for Policy Constraints? • 1.Identifythe constraint(s) • Remove it, or replace it!

13. Identifying & Dealing with Policy Constraints Often, the Policy Constraint is obvious when we examine the causes of an obstacle that’s preventing us from Exploiting, Subordinating, or Elevating. However, the TOC also offers tools that managers can use to identify, solve, and replace Policy Constraints. These powerful planning and analytical tools are called the TOC Thinking Processes.

14. The 5 basic Thinking Processes There are 5 “basic” Thinking Processes, each with variations: Current Reality Tree:Takes a list of symptoms, and kicks out a deep-rooted Core Problem responsible for generating them. Evaporating Cloud:Examines the Core Problem, produces the direction of a solution – usually a “good idea,” often an outside-the-box idea. Future Reality Tree:Takes the good idea, fleshes it out into a full-fledged solution that explains all the elements that will have to be in place for the symptoms to be removed, and for no unwanted side effects to be generated. Prerequisite Tree:By examining obstacles, this generates a roadmap of how the elements from the FRT will be made to happen. Transition Tree:The action plan that follows the roadmap.

15. Symptom #1 Symptom #2 Symptom #3 Symptom #4 Symptom #5 Symptom #6 Base Principle of TOC and the TP … Core Problems Cause Symptoms! Core Problem

16. Cause-Effect and the Core Problem • There is no point to attacking symptoms if the underlying causes remain intact. All you create is conflict. • So … dive down to the Core Problem. • Some will be familiar with a technique such as “Ask ‘Why’ 5 times” … this can be fine for helping identify a quality defect, for example, but sometimes, to find a core problem at a policy constraint level, we might be 10, 20 even 30 “Whys” deep. • This is why we need Cause-Effect thinking, not correlation. • How do you identify the Core Problem? • How do you PROVE it’s the Core problem with a high degree of likelihood? • How do you construct a no-compromise solution? • How do you PROVE the solution will eliminate or reduce the symptoms? • How do you preempt unwanted side effects of the solution?

17. There are MANY Uses for the TOC Thinking Processes • You can perform a “full analysis” … from symptoms through to a solution (powerful, but time consuming, rarely done) to construct a custom solution to a situation where there is no known “Application” • You can use the Processes independently, on specific problems • Understand “what’s going on, and why” when things are complicated • Verbalize and solve a conflict that’s at the heart of a lot of symptoms • Identify the flaws in a proposed plan of action, and fix them, in a way that doesn’t trigger defensiveness and promotes cooperation • Construct a roadmap of how to get from “here” to “there” when it’s not obvious and most people can only see obstacles (roadblocks) • Gain consensus as to a problem or solution (great communication and buy-in tools) • More

18. Synchronix Tends to Specialize in Manufacturing Businesses • The 2 partners in Synchronix have extensive experience in manufacturing, so this tends to be the focus. • A typical TOC implementation includes a new scheduling and shop floor control system, with a continuous improvement mechanism • In some implementations, this extends to whole-company synchronization for profit growth … sales, marketing, accounting, Engineering, Purchasing, HR, QC as well as production • Typical results, in 90 – 120 days from “Go:” • Lead times reduced 50% to 75% • On-time delivery in 98% - 99% range • Productivity increased such that can ship 20% to 40% more with no increase in people, equipment • Improved agility to cope with urgent customer orders, routinely • Operating expenses reduced • Scrap reduced • More

19. Scale of Results from 400 Case Studies * The World of the Theory of Constraints, Mabin & Balderstone, St. Lucie Press, 2000

20. But … NOT just an industrial solution! • The TOC became well known through it’s application to industry, but as an approach to improvement it is entirely applicable to ANY organization. • Sometimes, a problem situation analyzed through a TOC “Lens” doesn’t immediately suggest any known solution … so the Thinking Processes can be used to analyze the situation then plan a solution. • However, very often, known TOC applications developed for industry are entirely applicable and can produce large improvements, very quickly. For example …

21. Not just an industrial solution • Cont’d … However, very often, known TOC applications developed for industry are entirely applicable and can produce large improvements, very quickly. For example … • Shrinking the time for work to flow through a series of resources • Challenging the basis for price-setting • Identifying which products or services genuinely make the most profit for the business • Increasing the output from a series of resources • Improving the service level, no matter the type of business • Constructing a “Mafia Offer” (effective marketing to set-up sales to win more sales) • Learning to sell “value” to increase sales won • Increasing sales opportunities by increasing meetings with prospects • The concept of “protective capacity” • The concept of Replenishment

22. “Generic” TOC Applications • For Industry (and uses outside of industry) … • Strategic Planning & Management • Marketing … aiming to produce a “Mafia Offer” to increase sales and prices • Sales … an approach to selling value (associated with the Mafia Offer) and a Sales Process Engineering technique that generates more sales opportunities • Production … a scheduling and shop floor management approach • Big-picture manufacturing … “Synchronous Manufacturing” … synchronizing ALL aspects of a manufacturing business, starting at the level of a strategy or even just a Goal, then synchronizing everything towards it. • Project Management … an approach that shrinks project durations by 25% to 50%, with increased on-time performance and increased productivity • Finance & Accounting – there are alternative measurements for decision support • Distribution & Supply Chain … reduces inventory, improves service levels • Example of an application outside Industry … • Health Care … reducing waiting times in Emergency, creating empty beds (in a nice way), increasing the number of surgical procedures and reducing backlogs