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Focusing on Throughput

Systems Thinking and the Theory of Constraints

Mandyam (“Srini”) SrinivasanThe Pilot Corporation Chair of Excellence

The University of Tennessee

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Systems Thinking

Integrated decision makingo “Big Picture” Thinking

o Thinking “Globally” rather than “Locally”

Understanding how localized decision making can affect the overall goal

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The Theory of Constraints (TOC): A “new” way to manage business: based on 2 premises:

o The Goal of a business is to achieve sustainable growth and stability, … now and into the future.

o A system’s constraint(s) determine its output.

Eli Goldratt and The Goal.o Recent book: The Choice (2008)o The Viable Vision: “Current revenue = net profits in 4

years”

Systems Thinking and the Theory of Constraints

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TOC: Multiple “Layers” of Understanding

Managing Physical Constraints (e.g., “DBR”)

Managing Policy Constraints (e.g., Metrics)

Managing Human Behavior (e.g., CCPM)

The Thinking ProcessWhat should we Change?

What should we Change to?How to cause the Change?

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Types of Constraints Physical Constraintso Physical, tangible; easy to recognize as constraint.

Machine capacity, material availability, space availability, etc.

Market Constraintso Demand for company’s products and services is less than

capacity of organization, or not in desired proportion

Policy Constraintso Not physical in nature. Includes entire system of

measures and methods and even mindset that governs the strategic and tactical decisions of the company

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Policy Constraints Mindset Constraintso A constraint if thought process or culture of the

organization blocks design & implementation of measures & methods required to achieve goals

Measures Constraintso A constraint if they drive behaviors that are

incongruous with organizational goals

Methods Constraintso A constraint when procedures and techniques

used result in actions incompatible with goals

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TOC challenges the conventional approach to managing businesseso “Cost World” vs. “Throughput World”o “Uncommon Sense”

TOC and Big Picture Thinking

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Systems Thinking and the Cost World

Lean Supply Chain Principle 1

Improving the performance of every subsystem in isolation will not improve system performance. Improvements in subsystem performance must be gauged only through their impact on the whole system.

Systems thinking requires “Uncommon Sense”

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Developing “Uncommon Sense”

“Uncommon Sense” examples that become “Common Sense” when you apply a Systems perspective:“If you want to have more safety on project completion times, do not put safety on task completion times.”“If you want to solve conflicts, ignore the conflict.”“If you want to complete projects faster, delay their start times”“To make more money, sell at or below cost.”

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Example of Systems (Uncommon Sense) Thinking: A Couple of Definitions

A definition for Finished Goods Inventory

… yet

A definition for Raw Material Inventoryo Something you bought that you do not

intend to use… yet

o Something you built that the customer does not want

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Adopting a Throughput World Perspective

The TOC Performance Measures

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TOC Performance Measures

Throughput (T): The rate at which the system generates money through sales = (Sales Revenue – Variable Costs) per unit time

Investment (I): All the money invested in purchasing things needed by the system to sell its products (Fixed + Working Capital Assets)

Operating Expenses (OE): All the money the system spends, turning investment into throughput = All Fixed Costs per unit time

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The Throughput World Perspective

For any decision you undertake consider the following. Will the decision:

OE ?

I ?

T ? o Help you sell more products, profitably?

o Help reduce investment?

o Help reduce payments/expenses, long-term?

Ask the same questions when setting metrics!

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Traditional Management Approach:Divide and Conquer

Division of Labor breaks down linkages complex systems into manageable chunks.

Which is harder to manage? Left or Right?

Left Right

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Mindset Constraints and “The Trinity”

The Trinity:

1. You Don’t Understand

2. We Are Different

3. That Won’t Work Here!

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