How does Theory of Constraints Work? Print E-mail
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Written by Sudhanshu saraf   

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All organizations are governed by the top management through some set rules and policies. Many of these rules / policies are written down, but an equally large number of these policies are not on paper; and even the senior management gets to learn of these, through the review meetings, dialogue and as an inference of certain decisions / actions.

The rules/policies take their birth and grow through a few routes:

a) Beliefs: Some are deeply rooted in the shareholder’s core beliefs, vision and values;

b) Experience: A large number of these policies are an outcome of the top management’s collective past experience, perception of environment and basic comfort with the risk-desires balance;

c) Industry mindset: Another set of policies stem from some current and past industry “norms” or practices. Though many of these are already included in the group “b”, but some of them are assumed to be so “fundamental” and “unquestionable” that even the top management do not state it and everyone accepts it;

d) Law: A fourth section of these rules / policies come from the statutory / regulatory requirements.

 

 

The rules and policies get transformed into many procedures, processes and practices for people across the levels to follow. The challenge then becomes to ensure that all procedures, processes and practices are adhered to – consistently and comprehensively across the levels. In order to achieve that, the top management installs performance measures, system audits and review mechanisms. All these initiatives are primarily to discipline everyone so that a “stable” system can be achieved, which could then be analysed effectively for cause-and-effects. But in this process, a lot of performance measures get created across the levels within a group/function/department and across the groups/departments on the basis of their roles, their procedures and their processes. The organization lands-up with a large number of performance metrics, across the groups and across the levels. And since, measurements drive human behaviour; everyone gives their best shot to achieve their targets. And since the targets are around their processes and their circle of influence, the targets in effect become very “local”; and the whole organization gets governed by the psyche of “Local Optima” with the belief that “If all parts improve, the whole would improve”!

TOC is in gross disagreement with this approach / belief of the world.

Typical examples that are omnipresent in the business world are around “productivity” / “efficiency” / “utilization” enhancement of resources at very local levels. A logistics manager “waits” for a “full load” to dispatch goods to their retail store and saves transportation cost (his measure) at the expense of loss of sale due to “stock-outs”; a production manager takes larger batches to get better “productivity” (his measure) causing overproduction, longer lead times and eventually poor on-time performance; purchase managers prefer lower cost supplier over higher flexibility (premium) supplier to have their performance look better; … and revenue is the only truth in the salesman’s world!

This orientation towards their departmental / individual goals gets further reinforced on a day-to-day basis by the top management asking the very same questions in their reviews or even corridor interactions.

So, too many measures and that too with a focus on “local targets” is one set of problem; the other set of problems come from bogus measures that take away a lot of top management energy and attention and do very little or none and sometimes even damage the profit, free cash or ROCE.

TOC kills all bogus measures!

In reality, the measures per se are not wrong, but their context at that “time” or stage of the organization is inappropriate. Like thermometer cannot help in influencing a corrective action in case of a broken bone, x-ray would be unable to detect an infection. Measures exist to facilitate corrective actions and hence their appropriateness is of utmost importance.

TOC questions the appropriateness of measures such as geographical penetration (# of countries or # of cities), market share, capacity utilization, product costing (through allocations – activity based costing) and sometimes, even sales!

So far we have talked about how Policies of the top management cause a large number of measures focused on local optima; and then another set of large number of bogus measures. Since measurements drive behaviour of one and all, including the top management, the organisational efforts replicate a “Brownian Motion” … everyone does achieve something, many people even excel their performance metrics and earn great increments / bonuses … but, the organisational performance does not move (not in any reasonable proportion to the host of individual brilliances)!!

The FIRST primary change that TOC brings in any organisation is “alignment of metrics”; the whole of top management and their direct reports have just one set of metrics and that too, not more than five. This whole team is educated, coached and transformed to drive the organisation through these five levers. The direction of “improvement” of each of these metrics is clear and reinforcing the others. The Policies are then viewed with respect to their impact on these metrics and then they are either abolished, strengthened or modified. As Ishikawa’s cause-and-effect tool has successfully taught the world about the value of working on the root cause(s); TOC finds the root cause in management’s policies in almost 100% of the cases.

That is how TOC is able to create breakthrough / quantum results in less than three months, with no investments on plant / machinery / any other resources, with no physical changes (layout etc) in the operations and with no additional “hard-work” by the teams across the levels. All changes happen in the top management’s mindset.

It is about Focus and Alignment. It is more about doing more of the right things and discarding the wrong (not so right) ones. It is also about creating more time to do more of the right things, by abandoning all “not so right” projects or initiatives.

But, can the performance improve infinitely without anything else? Not really!! The performance would hit a road-block and get constrained by what we call a “Constraint”!

That is the other big aspect of the “Theory Of Constraints” (TOC). It teaches the thought processes, tools, mathematical formulations and decision making processes to “deal” with the constraint.

Dr. Goldratt also created a five-step continuous improvement process, which starts with identification of the Constraint and details out a hierarchy of strategies to deal with the situation. At a broad level it leverages the core principles of doing more with less, but for implementation it provides the methodology that helps in “managing the change” from the mindset of “local optima” to establishing a clear connection with the larger goals. At each of these steps what really changes are the Policies; some are to do with the everyday management, but a large number could be related to the companies policies for hiring, outsourcing (make or buy), purchasing, capacity management, plant engineering, new product development, pricing, etc. Another large degree of quantum improvement in performance happens during this phase without any investments for capacity enhancement. This is still “squeezing the lemon”.

TOC is not averse to investment or expansion, it just does not let you compromise on your today’s performance on any of the three parameters (profit, cash & ROCE), under the garb of a “better future”! Most companies in good times make huge errors in their expansion plans. TOC gives a scientific methodology to arrive at the answers of the three critical questions: When, How and How Much? A short-term view of answers to many of these questions appear to be very lucrative and then a longer-term view is “created” based on projections / forecasts etc. to make the “case” look even better. TOC does not believe in forecasts, it actually invests in building an organisational capability to respond faster. Probable gains are compromised against a degree of probable risks.

After all, a good, reliable management should consistently improve its Profit, Free Cash and Return-On-Capital-Employed (ROCE) year over year and every year. A feat not achieved by a single BSE-listed organisation, for all the three parameters between 1994 and 2004 (quoting Economic Times Survey for 3500 companies for the said time period).

 

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