THEORY OF CONSTRAINTS

An OverviewHow TOC is being used as both a

Holistic Approach to Business Improvement, and Targeted Process

Improvements

Rocco Surace, CPA,ABV,CVA, CFF JonahGAINES KRINER ELLIOTT, LLP

100 Corporate Parkway, Suite 200, Amherst, NY 14226

Tel: 716/250-6600 Email: rsurace@gkecpa.com

Presentation

ORGANIZATIONAL DEVELOPMENT NETWORK

What is the purpose of the presentation?What will we learn that we do not know before the presentation?What will we be able to do that we could not do before the presentation?What will be the ROI on our time spent attending the presentation?

The Theory Of Constraints

Basic Assumptions/Concepts

Every organization has a goal

The global organization is more than the sum of its parts

The performance of an organization is limited by very few critical variables

Even the most complex organization is subject to cause and effect relationships

What is the Goal of your Organization?

The First Concept of TOC

Why is Goal Attainment C rucial?

The goal of an organization is the purpose for which it was created.

If we want to know how an organization is doing, we measure its rate of progress toward that goal.

What is the goal of a for-profit organization?

To make more money now and in the future?

Is that the only thing that’s important?

The Second Concept of TOCThe global organization is more than the sum of its parts

The TOC Basic Assumptions/Concepts

There is synergy between the parts of the organization.

Every product is the result of synchronized efforts of various resources within the organization.

There are many dependencies among the resources. An Organization as a Chain

Cost = ? Sum of all parts 1+1 2

EngineeringPurchasing Production Test Shipping A/RSales

Throughput = ? 1+1 > 2

The Third Concept of TOC

If the performance of an organization is dependent on the synchronization of many resources within the organization

And there are many partial dependencies between the resources

And each resource has a certain finite capacity

The performance of an organization is limited by very few critical variables

The Third Concept of TOCConclusions

ThenIt is NOT possible to utilize the vast majority of the resources to their full potential and still maintain an acceptable performance of the organization

HenceOnly very few resources, perhaps only one, can be utilized to almost their full capability/capacity

The Fourth Concept of TOC

Even the most complex organization is subject to cause &

effect relationships and thus Inherent Simplicity

For every real-life system there are very fewelements governing the entire system.

GOVERNING ELEMENT = CONSTRAINT = LEVERAGE POINT

The throughput of a goal-oriented systemis governed by very few elements.

Inherent Simplicity

The Theory of Constraints

These two sides combine to create a powerful process of

on-going improvement. The Thinking Processes define and build the connections of the system, the Logistical Applications are often the lever(s)

to apply.

The Thinking Process

Strategic Problem SolvingJonah Program an 4x4

Tactical Problem SolvingTactical Tools

Marketing Marketing Jonah Program

Management SkillsEvaporating Clouds

The Logistical Applications

OperationsDrum-Buffer-Rope

DistributionReplenishment

Project Management Critical Chain

Finance Throughput Accounting

“The performance of any real system is limited by its constraint.”

Constraint:“Anything that prevents a system from achieving

a higher performance relative to its goal.”

Improvement:“An action resulting in better performance relative to

the goal.”

Choopchicks:

The Theory of Constraints

• We must manage and control the elements of cost

• We must absorb overhead• A company is a system of

departments• If we know our product

costs, we can better compete

• Cost of errors = Scrap and returns

• Must have a system to track problems

• Variability can be eliminated

• The more we produce, the less it will cost

Lead Times

70%

Cycle Times

65%

InventoryLevels 49%

44%On-Time Delivery,Availability

63%73%

Revenue,Throughput

CombinedFinancial

Source: The World of Theory of Constraints, Vicky Mabin & Steven Balderstone, St. Lucie Press, 1999

Theory of Constraints (TOC)

The basic change process requires three competencies from management

No matter what the subject matter, accelerated improvement involves

continuously addressing three questions:

What to

Change?W

hat to

change to?How to cause the change?

TOC Basics

Typical Problems in OperationsWhat to change? Due dates are often missed There is too much overtime Original plans have a very limited life Priorities are constantly shuffled It is difficult to respond to urgent customer

requirements There are frequent resource shortages There is too much expediting Lead times are too long Inventory levels (WIP, RM) are too high Current systems do not provide for adequate

safety stock and times when needed

The Core Activities Used to Improve Operations

What to change to: Industry Standard Lead Times are determined for each major product

family Choking the Release - Orders are released to the floor at the

appropriate time before their committed due-date (a factor of Standard Lead Time)

The shop floor is governed by a simple, yet robust, priority system Maximize the Throughput (TP) of Capacity Constrained Resources

(CCR’s) Implement Load Control - Due-date commitments are given according

to first available slot on the designated CCR The sales force are trained to call operations before giving the

commitment to client. Operations is organized to give the answer in less than a minute.)

Implement POOGI - Compile the appropriate performance data from the first 6 steps, analyze the results, identify and implement qualified improvement actions

Allow Sales & Operations to rely on each other

Enable an increase in sales Enable an increase in

profitability

Then We Will Significantly reduce lead

time Enable High reliable due

date performance

Dependent resources Where is the constraint?

Performance is Dictated by Who?(Utilization/Efficiency/Productivity/Realization

/Standards – YADA, YADA, YADA)

OPERATIONAL FLOW

3000 2000 1200 1500 20001000

Dep

t 580

Dep

t 620

Dep

t 700

Dep

t 750

Dep

t 830

Dep

t 870

Finance and Measurements

What to change?The erroneous assumption:

A local impact is equal to the impact on the organization.

What to change to? Performance measurements T, I, OE

How to cause the change?

Re-assessment of investment, products and services

Resolution of conflicting measurements

Performance Measurements

The purpose of measurements is to motivate the parts to do what is good for the organization as a

whole.

MTO Measurement – Throughput Dollar Days:

Total of product throughput X’s number of days from due date of order to shipment.

Target: Zero TDD – to measure on time performance

Measurements should support & subordinate to the constraint

MTS Measurement – Inventory Dollar Days:Total of all products in inventory X’s number of

days it stays in warehouse.Target: Reduce IDD – to increase inventory

velocity

Financial Measurements

Throughput - the rate at which the system generates “goal units”

Investment - all the money tied up in the organization

Operating Expenses - all the money the system spends turning inventory into throughput.

Throughput = Sales – less – Variable Costs

Net Profit = Throughput – less – Operating Expenses

ROI = Net Profit / divided by / Investment

Investment Payback =

Throughput – less – Operating Expense Investment

Engineering & IT Critical Chain Project Management

What to change?The erroneous assumption: In order for the project to finish on time we have to strive to finish every task on time.

What to change to?Focus on the projects as a whole. Stagger the projects Concentrate the safety buffers Use buffer management to set priorities

How to cause the change? Consensus on Critical Chain Mechanism to enable Buffer management

Dr. Goldratt defines the Critical Chain as the longest chain of tasks that consider both task dependencies and resource dependencies.

Critical Path is defined as the longest chain of tasks based upon task dependencies.

The difference is subtle but important.

Critical Chain recognizes that a delay in resource availability can delay a schedule just as easy as a delay in dependent tasks.

Critical Chain Project Management

A Nice Success Story

Maintenance Center, Albany, GA

Matcom Video

© Realization Technologies, Inc.

FB

PBCC

Critical Chain Project Management

Supply Chain

What to change?The erroneous assumption: the closer the inventory to the client, the better the service level.

What to change to?Pull Vs. Push

How to cause the change?Measurements: Throughput Dollar Day Inventory Dollar Day

GKE

From “Push” to “Pull”

From Forecast to Replenishment

CONSUMPTION INFORMATION

REPLENISHMENT OF GOODS

Marketing

What to change to?The perception of value is determined by the benefits expected from acquiring the product/service.

How to cause the change?Building Un-Refusable Offers.

What is your decisive competitive edge?

Remember – Henry Ford was right

What to change?The erroneous assumption: The perception of value of a product or a service is based on the efforts of the supplier to design, produce, distribute, market etc.

Buy-In and Sales

What to change?The erroneous assumption: The first step in the sales process is to introduce your product or service.

What to change to?Overcoming each layer of resistance in turn.

How to cause the change?Preparation of the buy-in process

A Sales ProcessThe 6 layers of resistance to change

Has the right problem been identified?

Is this solution leading us in the right direction?

Will the solution really solve the problem?

What could go wrong with the solution? Are there negative side-effects?

Is the solution implementable?

Are we really up for this?

Strategy and tacticsWhat to change?

The erroneous assumption: A sustainable strategy is to maximize net profit by improving the service level, quality and cost of your products and services while reducing the operating expense.

What to change to?Create decisive dominant edge.

How to cause the change?Immunizing the future of the company.

Applying TOC

Production

•From local efficiency, cost driven mode of operation•To system flow, throughput driven mode of operation

Projects•From protecting single tasks, resources, and/or individual projects•To maximizing the global output of completed projects

Supply Chain, Distribution,

Retail•From buying and selling based on forecasts and batches•To synchronizing replenishment based on actual demand

Sales & Marketing

•From taking orders based on product features & price•To securing win-win business deals based on a decisive competitive edge

Thinking Processes

•From acting on extrapolation, correlation and compromise•To cause-effect scientific thinking, assuming conflicts are not facts of life

Holistic•From local improvements which can take years to return the investment•To system improvements that generate substantial results now and into the future.

“TO TEACH THE WORLD TO THINK”

“The more complex the problem, the simpler the solution must be”

“Common sense is not common at all”

“As long as you cannot verbalize your intuition, the only thing you will

communicate is your own confusion”

“TO TEACH THE WORLD TO THINK”

Tools to think with…

Where is the Constraint?

Why is it a Constraint?

STEP 1How to IDENTIFY

theConstraint or Opportunity

STEP 2How to EXPLOIT

Constraint or Opportunity

STEP 3How to SUB-ORDINATE

to the Constraint or Opportunity

STEP 5How to

MEASURE &

RE-FOCUS

STEP 4When to ELEVATESystem Constraint

5 Step Process & associated

tools to manage Physical

Constraints

STEP 1WHY

CHANGE?

STEP 2WHAT TO CHANGE?

STEP 3WHAT TO

CHANGE TO?

STEP 5HOW TO

MEASURE & RE-FOCUS

STEP 4HOW TO CAUSE &

IMPLEMENT THE CHANGE?

5 Step Process & associated

tools to identify & remove Policy

Constraints

STEP 0Define the Goal,

Strategic Objectives & KPI’s

What is the Goal of the System?

Theory Of Constraints

“The best solutions start with the right questions…”

How to manage the Constraint?

2013 John L Thompson, Global Focus LLC

WHY CHANGE?Step 0: Agree on the Goal / Objective & Metrics as it relates to the company as a

wholeStep 1: Part A: Agree on The Opportunity / The Undesirable Effects & Complaints

WHAT TO CHANGE?Step 1: Part B: Agree on the Core problem that if addressed, will make all the others

go away

WHAT TO CHANGE TO?Step 2: Agree on the direction of the solution to remove the core problemStep 3: Introduce the solution and agree on requirements that will solve all the

problems and achieve the Goal & ObjectivesStep 4: Ensure that all significant Negative side-effects have been surfaced &

addressed.

HOW TO CAUSE THE CHANGE?Step 5: Ensure that all Obstacles (Yes Buts) to implementation have been surfaced

& addressed.

HOW TO MEASURE & RE-FOCUS?Step 6: Agree on Measurement & Reward for all key stakeholders for a successful

implementation

WELL NOW WHAT? Step 7: Unverbalized Fear. Something was missed, probably a key player…Go back

to Step 1

The Ongoing Process - POOGI -

1Become an

Ever Flourishing Company

2:1Reliability

Comp. edge

2:2Rapid

Comp. edge

Base Growth Enhanced Growth

Reliable Rapid Response S&T

3:199% DDP

Build

3:3ExpandClient Base

3:2Reliability

Selling

Capitalize

3:4Load

Control

Sustain

3:5CapacityElevation

3:6LT 1/4

Build

3:7RR Load Control

Sustain

3:9Expand

RR client base

3:8RR

Selling

Capitalize

Sales generated by the Reliability offer are increasingly growing.

The knowledge to effectively capitalize on the Reliability competitive edge (in selecting market sectors, prioritizing prospects, designing offers and selling them) exists.

The changes required in the marketing and sales approach require time and there is no time to lose. The improvements implemented in production increased DDP, reduced LT and exposed capacity. Delaying the capitalization of these improvements (converting them to bottom line results) may erode the company’s confidence in the solution.

From the outset of the VV project the Company aligns its marketing and sales approach to fully take advantage of the Reliability offer.(The sales and marketing core team makes sure a test launch will be done properly and promptly – step 5:23:2; only when 99% DDP is demonstrated is the green light given to roll out the offer).

The required changes in the Company’s approach to capitalize on remarkably better service (the reliability offer) is different in nature from the changes the company did in the past (new products or new markets).

Leaving the positive impact of remarkably better reliability to the natural reaction of the client will slow down capitalization of the reliability decisive competitive edge.

Necessary assumption

s

Strategy

Parallel assumption

s

Tactic

Reliability Selling

Sufficient assumptio

n

Having a competitive edge that is service based is a paradigm shift for sales and marketing that are used to competing on technology/design/product/price.

3:2

Validating Strategy & Tactics

The introduction by Dr. Eli Goldratt in 2002 of a “new” TOC-based Thinking Process called a “Strategic & Tactics” Tree (S&T) is being viewed by more and more executives and managers who have been exposed to it, as one of the most important breakthroughs in ensuring that holistic business or organization strategies are defined, properly validated, communicated and implemented to achieving harmony within organizations. The S&T, they believe, can for the first time provide them with a practical process and logical structure for defining and communicating all the necessary and sufficient changes as well as the sequence of implementation of these changes to achieve more goal units for the organization – not just What to change, but more importantly, What not to change and especially How To implement the changes and Why.

Dr. Alan Barnard

Validating Strategy & Tactics

Any strategic plan is only as valid as the assumptions on which it is based. Therefore, it is the responsibility of managers at every level in the organization to: not only contribute to defining and communicating the Strategy

and Tactic for each proposed change, but also to define and communicate the logic of the proposed

change – why the proposed change is really necessary to achieve the higher level

objective and ultimately the goal of the company, why they claim it is possible to achieve the objective (Strategy) of the

change (especially considering it has probably never been achieved before),

why they claim their proposed change (Tactic) is the best or even the only way of achieving the Strategy of the change and finally,

what advice/warning they would give to their subordinates to ensure the sufficiency of the implementation of the proposed change.

Each S&T entity in the S&T is therefore simply a proposed change that should answer:

1. Why the change is needed? (Necessary Assumption)

2. What is the specific measurable objective of the change? (Strategy)

3. Why we claim the Strategy is possible and what specific requirements, potential negative branches or obstacles must be considered when selecting from the alternative ways (tactic) for achieving the Strategy? (Parallel Assumptions linking Strategy with Tactic)

4. How to best achieve the objective of the change (Tactic) e.g. what changes should be made to processes, policy or measurement?

5. What advice/warning should be given to subordinates, which, if ignored, will likely jeopardize the sufficiency of the steps they would take to implement this tactic or which is likely to be ignored (without the warning)? (Sufficiency Assumption)

Validating Strategy & Tactics

Sales generated by the Reliability offer are increasingly growing.

The knowledge to effectively capitalize on the Reliability competitive edge (in selecting market sectors, prioritizing prospects, designing offers and selling them) exists.

The changes required in the marketing and sales approach require time and there is no time to lose. The improvements implemented in production increased DDP, reduced LT and exposed capacity. Delaying the capitalization of these improvements (converting them to bottom line results) may erode the company’s confidence in the solution.

From the outset of the VV project the Company aligns its marketing and sales approach to fully take advantage of the Reliability offer.(The sales and marketing core team makes sure a test launch will be done properly and promptly – step 5:23:2; only when 99% DDP is demonstrated is the green light given to roll out the offer).

The required changes in the Company’s approach to capitalize on remarkably better service (the reliability offer) is different in nature from the changes the company did in the past (new products or new markets).

Leaving the positive impact of remarkably better reliability to the natural reaction of the client will slow down capitalization of the reliability decisive competitive edge.

Necessary assumption

s

Strategy

Parallel assumption

s

Tactic

Reliability Selling

Sufficient assumptio

n

Having a competitive edge that is service based is a paradigm shift for sales and marketing that are used to competing on technology/design/product/price.

3:2

TOC for Education:

Learning and Thinking Tools

To prepare children for life.

Russia

TOC for Education, I nc.

Colombia

United Kingdom

SerbiaPhilippinesMexico

Costa Rica Ecuador Israel Malaysia

Netherlands

Singapore South Africa Taiwan Trinidad & Tobago Ukraine

United States Venezuela

Worldwide Implementations:

Moscow Region Scouts

1,000 Scouts trained within Moscow region, including 10 towns

Ages 8 – 15 (girls and boys) Facilitator training conducted in

Theological University Featured in Russian Federation

Magazine

Scouting applications include:

Resolving team conflicts,

Behavioural modelling and modification Learning camping and survival skills i.e.

knot tying, safety, first aid, ecological issues

Planning scouting expeditions Mentoring and peer mediation Leadership skills (for senior Scouts) Setting and achieving goals (i.e. How to attain a badge)

Malaysia

Over 35,000 year one teachers trained in TOC in 8,000 schools

Taught to over 1.5 million students through national curriculum

Philippines

Endorsed by director of national capitol region, Philippines department of education who supervisors the education of 8 million children.

Over 5,000 teachers trained

Serbia TOCFE accredited by the Ministry of Education as part

of the teachers professional development program

USA - Florida TOCFE trial conducted to improve English Reading Test

Scores (FCAT)

% students increasing their scores grew from 61% in to 91% showing gains in the following academic year.

TOCFE was one of the major factors contributing to improvement.

Mexico TOC program to ‘construct effective solutions

in learning’ receives ‘best practice’ recognition from Department of Quality and Innovation, Mexico.

State of Nuevo Leon launches program to train every Civics teacher in TOC by end of.

‘The TOC tools constitute a didactic strategy that leads us to establish communication and empathy. They help everyone to develop their abilities and skills needs in all fields of life.’

Jose Martinez, Secretary of EducationNuevo Leon, Mexico

Run Away

Run away/Don’t runaway

Grade 7 boy - USA

10/04/2023 50

A Wedding Plan

Becky

Aged 5 years

England

GOAL

OBSTACLESSTEPS

People & StrategyWhere should we begin?

The #1 Constraint

Management Attention NOT Bad Management Rather, precious little time

to accomplish many things

MULTITASKING

52

A Prelude For Your ThoughtsIn 2011 Eli shared what he has researched and

verified the past few years. The number one constraint in most

organizations is Management Attention. It is not a competency issue. Rather it is based in the

day after day conflict that management faces: keeping their focus on current operations with all its daily

distractions and multi-tasking that comes with it vs. focusing on the long term success of the organization.

Eli’s suggested answer is in how to go about properly channeling management

attention. Bad multitasking is both a killer of quality and capacity,

especially at the management level. Do you measure and monitor management capacity?

A Prelude For Your ThoughtsEli has now shared what he calls

The Engines of Disharmony What are the core causes of disharmony in an organization? As an individual what is my contribution to this disharmony? What is the contribution of management?

Eli’s belief is that the higher the management position the more they are not aware of what the engines of disharmony are.

What are the inherent conflicts that exist in the environment? How much useless inertia is in place, where capacity is being

wasted on stuff that does not matter?

And one of the most recurring engines is the significant gaps that exist in what people are responsible for and what

authority they have to carry out those responsibilities.

The Engines of DisharmonyJune 8, 2009. A letter from Eli Goldratt…

Every manager, especially a top manager of a large engineering based company, is well aware of the impact of increasing the motivation, initiative, synchronization, willingness to collaborate and communication among his people. All those “soft” issues are actually the hardest, most important ingredients that determine the capabilities of the company. Unfortunately, the prevailing approach to improving these issues revolves around dealing directly with the people. Let’s take motivation as an example. As long as we think that the way to increase a person’s motivation is to talk with him, don’t we actually assume that the cause for his lack of sufficient motivation resides with the person himself?From my experience, I’m convinced that the root cause for insufficient motivation (or communication, or synchronization etc.) is the existence of engines of disharmony. One type of these engines of disharmony is the existence of conflicts. Of course, putting a person under a conflict doesn’t contribute much to his motivation. Critical Chain removes three of those conflicts* and therefore every time that CCPM is implemented the result is not just better performance but also a considerable increase in motivation and collaboration. See, for example, the quote from the most popular book on CCPM in Japan.

The Engines of DisharmonyJune 8, 2009. A letter from Eli Goldratt…

Although there are multiple cases documenting "several hundred million yen profit increase in a few months", many of them don’t regard making money itself as the success. Actually, many readers‘ comments are along the following lines: “Of course I am surprised and happy with the dramatic profit increase in such a short time. But far more important for me is people’s personal and professional growth. Widely spreading team work, motivation increasing across the company: I have always wanted our company to be like this! ”(CCPM, by Yuji Kishira)

Unfortunately, not only in every organization is there likely to be many more conflicts, but there are other (not less powerful) types of engines of disharmony.

*3 conflicts removed by CCPMEstimation turned into commitment

Priority achieved by pressureProject progress measured by ratio of efforts

The Engines of Disharmony1. What is my contribution? Many people don’t really

know (cannot clearly verbalize) how what they are doing is essential to the organization. Would you be motivated if you were in that position?

2. What is my peer’s contribution? Most people don’t really know how what many of their colleagues are doing is essential, or at least contributes to the organization. Would you be collaborative if you where in that position?

3. Conflicts. People are operating under conflicts.

4. Inertia. Many people are required to also do tasks for which the reason no longer exists. People’s intuition is always strong enough to feel it, but not always is it strong enough to convincingly explain it to their superiors.

5. Gaps between responsibility and authority. You, like any other manager, know firsthand how frustrating it is to have something you are responsible for accomplishing, but you do not have the authority for some of the actions that must be taken.

The Engines of Disharmony

The experience gained in removing (even partially) those types of engines of disharmony is more than enough to realize that if we systematically remove the above engines, we are bound to get the desired culture change. The huge positive ramifications are obvious.

Moreover, such effort will augment and expedite the initiative to change the prime operational measurement and institute the right procedures.

The Engines of DisharmonyLet’s Turn The Engines of Disharmony

into The Engines of Harmony

What is my contribution What is my peer’s contribution Conflicts Inertia Gaps between responsibility and authority

The Engines of Disharmony

The Engines of Disharmony

The Engines of Disharmony

The Engines of Disharmony

The Engines of Disharmony

The Engines of DisharmonyIdentify a specific case from personal or professional life that fits the criteria – your good and well intended solution was rejected. Describe the situation with just 4 sentences: CONSIDERING YOUR IDEA

Describe the Environment which triggered your proposed change. Why did you want the change?

What did you want the change to be?

Who resisted the change?

How do you feel about it/them now? ... And they about you?

The Engines of Disharmony

CHARLES DARWIN’S VIEW OF SUCCESS

“It is not the strongest of the species that survives, nor the most intelligent, it is the one

that is most adaptable to change.”