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Every dollar of the material prosperity we enjoy can find its roots in the industrial revolution and our ability to produce more for less. We came off the farms to work in the factories and delivered unprecedented growth in wealth for our toil.
This is Part 3 of our series on Asset constraint management: Part 1 | Part 2 | Part 3 | Part 4 | Part 5
Dickens gave us the literary view of what those early days were like and Marx had us thinking about how the means of production, distribution and exchange could be put to better effect if it were all owned and run centrally. Thankfully, I live in a country where Marx’s ideas carry little weight. Instead, our commercial and economic systems are deeply grounded in the concept of free enterprise, with unprecedented opportunity of wealth for toil.
People are at liberty to enter into a voluntary exchange between each other for the provision of goods and services that have the intention of delivering additional value and wealth to both parties. In the free market, it means that we have to compete against all comers in the global economy to both persuade and influence our existing customers to remain loyal and to win new ones.
If we have established that there are customers willing to pay us for products or services we wish to offer the market, then the question has to be how we go about producing them. Because we are thinking about production, we’ll ignore for now the work that goes into, in the first place, the marketing and engineering of the product or service—which is better suited to the domain of portfolio, program and project management.
Productive questions
My definition of production is simply the making of goods or services available for use. It is clear, then, that besides the desirability of the product or service itself, the critical factor is how we go about its production. How long will it take to get to the customer? What fixed and variable costs will I incur in doing so? What contribution will I make per unit, and what profit will the product or service add to my business? What penalties will I incur if I cannot deliver against my promise? What premium might I get if I can supply in shorter times than my competitors? How much do I need to invest in plant, equipment and inventory to be a reliable and agile supplier to my customers? How will I ensure that everything I supply is routinely of a quality that satisfies the needs of my client and minimises rework? What kind of learning program do I need to pursue with my team to continuously upgrade their ability to deliver ever better outcomes?
We owe an enormous debt to the pioneers of productivity, from the ‘scientific management’ of Frederick Taylor to Deming’s System of Profound Knowledge and from Taichi Ohno and the Toyota Production System onto the revolution wrought by Eliyahu Goldratt and his Theory of Constraints (TOC).
Ohno gave us the first fundamental principle of Lean in his famous quote: ‘All we are doing is looking at the timeline,’ he said, ‘from the moment the customer gives us an order to the point when we collect the cash. And we are reducing the timeline by reducing the non-value-adding wastes’. I always thought that the simplicity of Ohno’s injunction was akin to golf: get the ball in the hole in as few strokes as possible, or Goldratt’s injunction to make more money now and in the future. Compelling ideas because of their simplicity but requiring high levels of mastery to accomplish.
Below is a diagram of eight different types of waste identified by the Toyota Production System and subsequent development of Lean Manufacturing. In Goldratt’s words, he stood on the shoulder’s of giants to take what his predecessors had accomplished and use his insights from TOC to go further. While eliminating waste is a good start, it’s not the reason you run a business. What you’re there to do is, as mentioned a moment ago, ‘make more money now and in the future’.
There is a fascinating story told of the early days of TOC production software development. There were two significant challenges. First, most of the focus in those early days was in developing software for financial controls. Thus, access was granted to the ops analysts and programmers for minimal amounts of time in the dead of night when everyone else had gone home. Second, the memory available on the processors was tiny, so the pioneers had to enforce certain assumptions about fixed lead times and batch sizes, or else the computer couldn’t calculate the resulting production plan. This rule on batching and lead times became the norm in the development of materials requirements planning (MRP) software.
“Get the ball in the hole in as few strokes as possible”
The consequence of these fixes was an enormous impost on big manufacturing companies, in the form of the massive inventories the algorithms demanded. In a way, it suited them, as their management accounting systems were being run based on absorption costing principles. The more stock you made, the more of your cost base you ‘absorbed’ into it. Work in progress piled up on the shelves and the balance sheet showed them as assets. The only trouble was that much of the resultant product didn’t have a customer. All that production capacity, working capital and physical space were wasted.
All systems have constraints
Along comes Goldratt with his remarkable truth: all systems have constraints—if they didn’t, the output would be infinite. Since no system is capable of producing an infinite output, the theory holds as a valid falsifiable scientific hypothesis. A consequence of this insight was the development of the Five-step FOCUS, Drum Buffer Rope Scheduling and the TOC approach to management accounting called Constraint Accounting. These three innovations in productivity provided a platform to address the systemic issues associated with the complexity of the production environment.
Consultants and improvement practitioners around the world applied these methods and tools across an increasingly diverse array of industries. It turned out there were four basic production shapes—V, A, T, and I—each of which had their particular challenges. It is a testimony to the power of TOC’s approach to production planning and control that it can tailor the general principle to the specific use case. The four main production archetypes are recalled by the letters VATI because of the way the parts flow through the system. Each process looks like one of the letters, traced from bottom to top.
To quote from Eli Schragenheim’s paper in the TOC Handbook (p.201):
Material dependency, resource dependency, convergence points and divergence points are the fundamental elements of a product flow diagram (PFD). Production operations can be classified into families based on which element is the dominant element in the PFD of that particular operation. If divergence is the dominant element, then we have a V plant. If convergence is the dominant element, then we have an A plant. If both divergence and convergence exist (and exist at the same stage, then we have a T plant. If we have neither convergence or divergence, then we have a simple case of resource contention, and the plants are classified as I plants.
It’s essential to know what kind of product flow you are dealing with if you’re looking to optimise production. The way you implement Drum Buffer Rope (DBR) in each case is different. Some quick examples:
V – producing different electrical cables from separate windings and insulation of the same gauge copper wire.
A – the manufacture of an aero engine.
T – the production of a range of cars of the same model, but with different features such as a sunroof and mag wheels.
I – production of alumina in a refinery.
V and A – the overhaul of an aeroplane. The V pulls it apart to get to all the serviceable components, and the A puts it all back together again.
It is beyond the scope of this article to articulate the way you could use DBR in each environment. Still, there is more than enough evidence that this breakthrough in optimising production is, for all practical purposes, universally applicable. If you are in the market for systemic improvement, some further investigation will yield a handsome return.
A critical success factor for the delivery of excellence in production is the constraint accounting framework. At a speech given to an accounting conference, Goldratt once famously declared that ‘accounting is the number one enemy of productivity’. Accountants would like to know what a product costs so they can establish what profit it contributes when that cost is subtracted from the selling price.
To achieve this feat, they add together the material costs of the widget being produced to the product of the minutes and unit cost of the labour that went into making it. The problem is that not all minutes are equal. Saving a minute at the constraint saves a minute for the system as a whole, whereas saving a minute at a non-constraint is a mirage. Optimising production is a function of how the constraint performs, and not the efficiency of the parts.
Work your working capital
The ultimate in optimised production is that you are able to replace a sold product the instant it is bought by a customer. I go to the supermarket and scan my bar of chocolate across the till. Every gear should go into action to send it to replenish the shelf as if an attachment to an email. But most operations don’t do this. Instead, they wait until the retailer has assembled their sales report; they compare that against their own sales report; they wait to run a sales and operations planning meeting and finally they let a production order loose onto the shop floor. Then, they delude themselves about what makes up a minimum production order and what size batch they need to ship to make it economically viable.
Eventually they have a container load to ship and thousands more bars of chocolate have been sold. The system is stuffed with inventory to try and deal with the extended lead time it takes to replace a bar of chocolate.
They would like to avoid the risk of carrying inventory by doing everything they can on a make to order basis. Their customers won’t tolerate the time it would take to go from order to fulfilment, so they come up with very fancy forecasting algorithms to predict how much they should be making to stock. They always get it wrong and end up writing down or scrapping the excess.
The real task at hand is to understand what is reasonable and possible in terms of lead time to replenishment. By Little’s Law, the less lead time we take, the less inventory there will be in the system. Use the insights from TOC and DBR to reduce lead times, increase due date performance, increase throughput and reduce inventory.
Let me leave you with a few questions:
- What shape does production take in your organisation?
- Do you know where your bottleneck is?
- Are you optimising your limited resources around that constraint?
As an executive in charge of production, you need to be a reliable and responsive supplier to your customers. Yet how do you really know what you can promise, by when? You don’t want to be a tyrant demanding impossible feats from your team. But, until you investigate the principles of TOC, you may not know what is reasonable and possible. In the next article in this series, we’ll look at how maintenance can move from a regret cost to a throughput enabler.
This is Part 3 of our series on Asset constraints management.
Part 1: Asset Constraints Management Capabilities
Part 2: Projecting Projects
Part 3: Producing production
Part 4: Maintaining production
Part 5: Controlling contractors
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What’s next?
The change from standard thinking to Theory of Constraints (TOC) is both profound and exhilarating. To make it both fun and memorable, we use a business simulation we call The Right Stuff Workshop.
We’d love to run it with you. To learn more:
- download the brochure (no email required)
- schedule a call
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“Know the whole, focus on the constraint.”
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