Tag Archives: Theory of Constraints

We did a very successful Theory of Constraints Implementation a while back, that incorporated a wide variety of approaches. 

  • Critical Chain Project Management
  • Process Reengineering
  • Supply Chain Management

The results were great.  So we made a presentation telling our story.  Here it is on slide share.
FMC Critical Chain Project Management Implementation

The Article is can be found on the website by clicking on the link below
Pit Crews cut final assembly time in half, giving FMC Technologies “The Racer’s Edge.”

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Today, companies are focused on increasing throughput – the rate at which a company generates money through sales. They want to expand products, customer base, markets, and so on. They want to grow as much as possible, as quickly as possible. They do not want to focus on shrinking their company or labor force. Yet, the most commonly used financial tools tell companies to focus on cutting costs in order to maximize profits, making expenses the focus of companies, not sales generation. This often leads management to make decisions that actually harm a company.

Companies need to use financial tools that move them toward their goal. Throughput Accounting provides managers with a transparent and focused method to make decisions that consistently lead them in the right direction.  Through better managerial decision making, Throughput Accounting improves a company’s ability to make more money now and in the future because it approaches accounting from a cash management basis. It meets the need that companies have to meet management challenges, including outsourcing products, process improvement, and purchasing capital equipment.

Is Traditional Cost Accounting Bad for Decision Making?

It is often difficult to see how decisions made in a local area affect the organization as a whole.  This is particularly true of managers who are not able to see or affect every area of the organization.  The organizational view of most managers is typically limited to their own area of responsibility and those nearby. 

For a business leader in an enterprise, the issue is more troublesome, because he or she must concern themselves with the decision making of multiple managers involved in many aspects of the enterprise.  We know from experience that local managers often make decisions that are counter to the purpose of the enterprise.  A single person periodically making a bad decision is usually not significant, but if there is a systemic error in many managers’ understanding of the enterprise’s functioning, many poor decisions will be made, which could create significant, long lasting damage.

Larger, subdivided enterprises lose their system-wide perspective, and managers are forced to rely on decision rules that are typically based on Traditional Cost Accounting; the bigger the enterprise, the bigger the problem.

Download and read the rest of the Throughput Accounting Whitepaper

I have another relevant paper on the impact of cost accounting and productivity.  It’s a bit old, but I thought that as long as I was on this topic, you’d want to have it, too.

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Last week, I did an interview with Joe Dager of Business 901 on the topic of the integration of Theory of Constraints with Lean and Six Sigma.  We discuss how it all fits together and the biggest problem facing managers who want to implement a continuous improvement program.

Click below for a listen!

You can also download the podcast to your iPod using iTunes by searching for Joe Dager Podcasts.

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You’ve read all of the books on the Theory of Constraints and heard of the terrific successes other achieve with this method.  You may be wondering what a real implementation looks like.  I’ve led nearly 100 implementations and have seen a wide range of companies. 

All implementations of the Theory of Constraints will follow this general pattern: procedure development, education, implementation, [OH MY GOD! LOOK AT THE BOTTOM LINE!], procedure and policy refinement, re-education and re-implementation.  Implementations are fun and staggering in the bottom line results they achieve.  

What can you expect in your implementation?

It’s difficult to give a specific answer to that question, since every organization is different.  In general, the implementation goes like this:

  • Enthusiastic changing of some policies
  • Unbelievably positive improvement
  • Less enthusiastic changing of more policies and procedures
  • Positive improvement
  • The constraint moves to an area not addressed by the initial implementation.
  • Pretty good improvement
  • Results level off
  • Management looks elsewhere to improve

Most theory of constraints implementations in manufacturing are completed in less than 2 years.  The plant is now running like clockwork, costs are down, performance is up.  The constraint is no longer in manufacturing.  The focus of the business and the improvement projects must now shift to external issues.  So, rightfully so, the attention of the organization moves to other areas, not in manufacturing.

However in those 2 years you’ve implemented, your business will change in ways you can’t possibly imagine today.  Your performance will level off at a much higher level of performance you are enjoying today.  How about a 43% annual ROI?  Could you sit there awhile?  I know a company that did.  How about taking your order fulfillment cycle from 3 weeks to 3 hours and stalling there?  I know another company that did that.

The first stage of the implementation will be like housecleaning, with many constraints that you identify and then quickly break.  Each time you break one, results improve.  This period lasts about 90 days.  Eventually, you’ll find a constraint that will be difficult to break.  Might be the market.  Might be the product.  Might be a $2 million machine. 

Then comes the hard work.  Implementing the system to exploit and subordinate will take longer than the quick results you’ve been getting up until now.  If you don’t prepare for it, the implementation can get bogged down here.  This phase may take 30 days; it might take 6 months.  It’s at this time the commitment you’ve gained in the prior steps will pay off.  It’s not really that fun implementing a scheduling process and dealing with people that want to work on product early.  You’ll also encounter the “back to Egypt” crowd here.  (The “back to Egypt” crowd was the Israelites that thought they were better off being slaves in Egypt than being killed at the Red Sea – just before the Red Sea parted.)  They’re the ones who will insist that everything was better before the theory of constraints management concept came around.  They’ll resist changing.  Project deliverables will be missed.  People will be “reassigned” because they won’t change.  It will happen. 

The most difficult obstacle to continuing improvement is inertia.  Your implementation process must move people from working in the business to actively working on the business.  Anything you can do to remove the fear of change will help you achieve your goal.

A typical implementation of the theory of constraints gets positive bottom line results.  If you’re committed to managing the constraints and not letting them manage you, you’ll continue to see positive results on your bottom line.

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Here’s a short clip from my presentation last month.

Many organizations struggle with their continuous improvement (CI) efforts; achieving real bottom line results, whether in cost savings or increased revenues, has proven to be difficult.  In spite of the widespread implementation of Lean and Six Sigma principles, poor results persist.

The TLS process generates 15-20 times better performance than Lean or Six Sigma.  This presentation will show the root causes of poor CI program performance and a systematic framework to create ongoing bottom line results.

You can view the entire presentation by registering here

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