Achieving Quantum Increase in Performance the TOC Way

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www.goldrattindia.com Measurements drive behaviour

Achieving quantum increase in

performance the TOC Way

Homex India

9th April 2010

Goldratt India


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Workshop Agenda Organizational Goal

Measurement for the Goal

Constraint for achieving the Goal

Process OfOn Going Improvement-five focusing steps

Constraint identification

Understanding the three most common causes for delay in

projects

Bad Multitasking

Starting without Full-Kit

Student Syndrome

Next steps


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Six Layers of Resistance

Layer 1: We do not have a problem or we do

not have this problem.

Layer 2: We do not agree on the direction of thesolution.

Layer 3: We are not in agreement with the

solution.

Layer 4: The solution has negative side effects

Layer 5: We have implementation obstacles.

Layer 6: Un-verbalized fear.


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The Goal?

What is the Goal of your organization?


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The Goal?The Goal?The Goal?

Some organizations state that their Goal is to be a

World Class Quality Company. Stateddifferently they would like to delight their

customers now as well as in future.


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The Goal?The Goal?The Goal?

Many other organizations say that their Goal

is to keep their employees happy now and in

future.


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The Goal?

A few organizations declare that their Goal

is to make money now and in future!


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The Goal?

Is there any conflict between the three Goalsstated or a hierarchy of Goals?


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The Goal? For example let us choose that our Goal is to

delight customers now and in future.

In order to achieve our chosen Goal i.e. todelight our customers now and in future, it is

absolutely necessary to keep our employees

happy now and in future. Similarly it is imperative to make money now

and in future in order to continue to keep our

employees happy.


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The Goal?Now let us decide that our Goal is to keep our

employees happy now and in future.

In order to achieve our chosen Goal, it isabsolutely necessary to make money now and

in future.

It is impossible to make money now and infuture unless we continue to delight our

customers now and in future.


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The Goal?Now if we decide that our Goal is to make

money now and in future, is it really possible to

achieve it without delighting our customersnow and in future!

And can we satisfy our customers without

keeping our employees happy now and infuture!


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The Goal? In reality there is no conflict between the three

different Goals.

Choose any of the three Goals, the other twobecome the necessary conditions for achieving

the chosen Goal!

For the purpose of this presentation we willassume that the Goal is making money now

and in future.


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Measures for the Goal-Making

MoneyGenerally accepted measures are

Profit

Return on investment Cash flow

We do not question the validity of these

measures. However we do question theusefulness of these measures as operationalmeasures!


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Current situation Only 23 out of 3000 (0.8%) companies actively

trading on the Bombay Stock Exchange have

increased their profits continuously in the last 10years (The Economic Times 24th September2005)

And the Goal of the organization is to makemore and more money

Hence as per our agreed definition of Goal,99.2% organizations are not achieving theirGoal!

Goldratt India


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Five levels of financial health

Making more and more money1. Unable to meet financial commitments

2. Meeting financial commitments but not making

profits3. Meeting financial commitments, not making

losses, but profits fluctuating

4. Profits increasing continuously period after

period5. ReturnOn Investment (ROI) / Return On Capital

Employed (ROCE) increasing continuously

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What measurements

should we use? For the average employee, seeing the effect that

any given action has on Net Profit (NP) or

Return On Investment (ROI) is almostimpossible.

As a result we have created local measures like

efficiency & utilization because we believe thatthey are linked to NP or ROI.

We do know that 99%+ organizations are not

achieving their Goal.


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What measurements

should we use?

New Operational Measures

Throughput (T)

Investment (I)

Operating Expense (OE)


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Flow of money

--

OE

RM

I

+ S

Goal

Units


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Throughput (T)

The rate at which Contribution Rupees are

coming into organization.

Only Rupees generated by the system are

counted; e.g., Rupees spent on purchasing raw

material or services do not count as they are

passed on to your suppliers.

T=(Net sales-all truly variable costs)


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Investment (I)

All the money currently tied up inside the

system.

All the inventory in raw material, WIP, or inFinished Goods.

Money blocked in plant and machinery.

Receivables are also part of I.


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Operating Expense (OE)

All the money that system spends on converting

inventory into throughput.

All the expenses are clubbed together as OEand are thought as fixed.

All employee expenses are part of OE.


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Financial Links

Is there any link between the new Operational

Measures T, I, & OE, and conventional

measures as P, ROI, & Cash Flow? P = T- OE

ROI = P/ I = (T-OE)/I

What happens to P, ROI & cash flow when weimprove either T, I or OE, keeping other

two as constant?


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Financial Links

If we increase T keeping I & OE constant,

P=(T-OE) improves, ROI= NP/I improves, and

so does the cash flow.

If we decrease I, keeping T & OE constant, P

improves due to reduced carrying cost, ROI

improves, and of course cash flow improves.

When we reduce OE keeping T, and I constant,

P, ROI, and cash flow improve.


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Financial Links

Improving Throughput, Investment and

Operating Expense have a positive co-relation

with improving P, ROI, and cash flow. Throughput, Investment and Operating Expense

are valuable operational measures that can

guide our day to day actions to making money

now and in future.


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Constraint for making money

What is that limits your organization toachieving more of its Goal - to make more and

more money?


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Theory of Constraints (TOC)

The core idea in the Theory of Constraints isthat every real system such as a profit-makingenterprise must have at least one constraint thatlimits the system to achieving its Goal.

Every for profit organization will have aconstraint in Supply, Operations, or Market.Current constraint may shift, but there cannotbe any situation when there is no constraint.Had it been so, its profit would have been

infinite!


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Theory of Constraints (TOC)

Constraints are neither good nor bad.

They are facts of life.


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Theory of Constraints (TOC)There is really no choice in the matter.

Either you manage the constraints or the

constraints will manage you.

The constraints will determine the output of the

system whether they are acknowledged andmanaged or not.


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Organization as a chain An organization can be compared to a chain.

The activities that constitute a business are

chain ofdependent events. For example we do not dispatch components

unless they are packed, and we do not pack

parts until they are manufactured.


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Organization as a chain The output of the organization is achieved

through the synchronized efforts of various

functions. The output is limited by the weakest area.

The strength of the chain is determined by the

strength of the weakest link. What should be done to improve the output of

an organization?


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Organization as a chain

Should we improve all functions or all links? Or should we strengthen the weakest function

or the weakest link?

It is common sense that unless we improve theweakest link, the organizational output or chain

strength would not increase at all.

Is it possible that overall organizationaleffectiveness is reduced by improving

performance in one department ?


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Organization as a chain The global improvement is not the sum total of

all the local improvements.

Often organizations spread their energies thin inall areas in order to improve the output.

In the TOC world optimizing a sub-system

would sub-optimize the whole system.


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How does TOC help

companies

1. Focusing improvement efforts where it will

have the greatest immediate impact on thebottom line.

2. Providing a reliable process that insures

Follow Through


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A process of on going

improvement (POOGI)1. Identify the constraint.

2. Exploit the constraint

3. Subordinate all policies, decisions andprocedures to exploiting the constraint.

4. Elevate the constraint. If we need still more

output from the constraint, elevate it.5. Avoid inertia. If in a previous step constraint

shifts, start the cycle once again.


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POOGI:Step 1

Identify the Constraint.

The constraint can be internal or external to

your organization. Internal constraint ispreferable.

The constraint can be tangible or intangible.

For example it could be an equipment or apolicy.

Invariably (> 95%) the constraint is a policy.


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POOGI:Step 2

Exploit the Constraint.

Get the most possible out of the existing

capacity of the constraint. Utilization at the constraint is critical.


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POOGI:Step 3

Subordinate all decisions to exploiting theconstraint.

All policies and measurements must bedesigned to get the most out of the constraint.

Utilization and efficiency at the non-constraintresources must not be measured. However thisdoes not imply that there are no measurementsfor non-constraint resources.

This step is often missed, and thereby themajority of financial benefits of TOC is lost.This is the toughest step.


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$90/U

100U/week

$100/U

50U/week

D

15 min./U

D

5 min./U

C

10 min./U

C

5min./U

B

15 min./U

A

15 min./U

B

15 min./U

A

10 min./U

RM1

$20/U

RM2

$20/U

RM3

$20/U

BIC

$5/U

P Q

Exercise-Profit

MaximizationPerfect operation (no defects)Same selling price to any clientsFixed market potentialSet-up times nil4 workers (skills are not

interchangeable):1 worker with skill A1 worker with skill B1 worker with skill C1 worker with skill D

Each worker is available 5 days aweek, 8 hours a day (i.e. 2400minutes a week)

Total operating expenses of thecompany are $6000 per week(which includes salaries, and

everything else)


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POOGI:Step 4

Elevate the constraint.

If more capacity is required after steps 2 &3 to

meet the market requirements, increase itthrough capital investment, outsourcing, or off-load the constraint by defining alternativeroutings, processes or design. Capital

investment should not be the first option. Often times, Exploitation and Subordination are

sufficient to reach the needed output. Do notincrease the investment too soon.


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POOGI:Step 5

Avoid Inertia.

If in a previous step the constraint is broken, go

back to Step 1. Do not let inertia be the systemconstraint.

Often times when a new constraint is identified,

it is necessary to change the policies you havejust made!


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POOGI:Step 5

Avoid Inertia.

The long term strategic application of TOC

does not call for continuous removal of allconstraints.

Rather, the idea is to choose where the

constraint should be in order to best exploit themarket opportunities, and then keep it there!


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Constraints:Identification

Every system will always have only

one weakest link at any given time-

ConstraintConstraint is in market if market

share > 50% of world market

Constraint is orders ifOn Time inFull (OTIF) > 95%

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Supply is constraint if material availability 50% of world

consumptionSupplier policies if consumption < 50% of

world consumption

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Constraint is operations when OTIF 95%

Equipment ifOEE (Overall

Equipment Effectiveness) for at leastone equipment >95% on 24X7 basis

Operational policies ifOEE < 95%

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Cash Constraint

There is Cash Constraintonly and only if there are sufficient orders i.e. OTIF < 95% manufacturing capacity i.e. OEE < 95% for all

equipments

right suppliers there are raw material shortages as suppliers are

refusing to supply unless paid upfront additional cash cannot be easily arranged

Cash shortage does not necessarily implycash

constraint.

However if cash shortage is not managedproperly, it will lead to cash constraint

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Case study 1: Capital goodsmanufacturer

Background Capital goods manufacturer for refractory equipment

It was losing money for 2.5 years

Owner has decided to close the plant in six months

Constraint: cash / Goal achievement level 1

Actions Stopped measuring machine utilization

Stopped measuring local performance parameters to prevent

bad multi tasking Focus on cash generation

Weekly review

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Case study 1: Capital goodsmanufacturer

Results Turned around in 100 days

Turnover increases by 30 times in 5 years

Current profit > 3 times turnover in 2000

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Case study 2: Auto componentmanufacturer

Background manufacturer of automotive gears

Losing money for last 5 years

Action initiated for divestment

Constraint:Operational policies / Goal achievementlevel 2

Actions

Stopped measuring Tons

All functional heads Key Result Areas (KRAs)abolished

Started measuringOTIF (On time in full)

Focus on throughput instead of sales

Weekly review Goldratt India


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Case study 2: Auto componentmanufacturer

Results Throughput increases by 70% within 2 years

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Solution Direction

Agree on the Goal of Homex

Agree on the measurements for the Goal (T,

I, OE, T/I, & T/OE, OTIF)

Align the functional measurements with the

overall Goal measurements

Focus on increasing OTIF

Goldratt India


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TOC Way of managing projects

1. Stop bad Multi-tasking / Focus: The objective isto finish all projects fast / on time and not start a

project at the earliest! Work only on a few

projects at any given time.

2. Full kit: Work on any project can start only

and only ifall the relevant specifications, and

resources are available in full.

3. Remove all self imposed barriers to resourceutilization within Homex. Remove all measures

that prevent this and introduce right

measurements that encourage this behavior.


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TOC Way of managing projects

4. Prevent Student Syndrome: In almost allprojects we take safety time and then waste it!

Take ambitious target to finish the project in half the

time (D / 2)

The remaining 50% of time is buffer

Monitor buffer consumption

Prioritize according to buffer consumption


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Next steps


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Review Process

What is the purpose of review?

Know the current situation

Justify that better than what has already

been achieved would have been

impossible

Find the culprit

Or take corrective action!


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What are the UDEs ofcurrent review process?

A lot of the time is lost in validating the data presented

People try to defend that nothing better could have beenachieved

People try their best to assert (give reasons) that they arenot responsible for not achieving agreed targets (externalcauses are the culprits)

In case budget targets are achieved, complacency sets in(full advantage is not taken in growth environment)

Over all we are all satisfied with our underperformance

What are the feelings people have at the end of the daythat are involved in the review?


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Recipe for success

Make a few right decisions

provided you do not make too

many wrong decisions!

Warren Buffett


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Assumptions

People do not have good forecasting skills

People want to improve

People want to have a sense of achievementfrequently

Currently most people are not achieving a senseof achievement on daily / weekly basis

Capacity is flexible (It goes down with failures,

and increases with successes) Results achieved are a function of targets really

strived for

New review process


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New review process

Only a few (3-5) parameters chosen for focusing

No fixed targets for the year / quarter

People are encouraged to try their best toimprove upon their last period performance.(we need to detail how long the past period

should be) Why should review frequency be monthly?

Suggested review period -about 20 invoices

A very high degree of discipline is expected forregular review. There are no exceptions for notholding the review meeting on time.


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New review process

Report for the period must be available every

time on time

Relevant information is available and displayed

across the organization for all people No questioning of data in the review meeting

(breaking heads before / after the meeting is

perfectly acceptable)

No analysis paralysis. Not wasting too muchtime for analyzing reasons for not achieving the

target. The focus is for corrective action only


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Thank you!

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Achieving Quantum Increase in Performance the TOC Way

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