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8/6/2019 Achieving Quantum Increase in Performance the TOC Way
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www.goldrattindia.com Measurements drive behaviour
Achieving quantum increase in
performance the TOC Way
Homex India
9th April 2010
Goldratt India
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www.goldrattindia.com Measurements drive behaviour
Workshop Agenda Organizational Goal
Measurement for the Goal
Constraint for achieving the Goal
Process OfOn Going Improvement-five focusing steps
Constraint identification
Understanding the three most common causes for delay in
projects
Bad Multitasking
Starting without Full-Kit
Student Syndrome
Next steps
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Six Layers of Resistance
Layer 1: We do not have a problem or we do
not have this problem.
Layer 2: We do not agree on the direction of thesolution.
Layer 3: We are not in agreement with the
solution.
Layer 4: The solution has negative side effects
Layer 5: We have implementation obstacles.
Layer 6: Un-verbalized fear.
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The Goal?
What is the Goal of your organization?
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The Goal?The Goal?The Goal?
Some organizations state that their Goal is to be a
World Class Quality Company. Stateddifferently they would like to delight their
customers now as well as in future.
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The Goal?The Goal?The Goal?
Many other organizations say that their Goal
is to keep their employees happy now and in
future.
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The Goal?
A few organizations declare that their Goal
is to make money now and in future!
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The Goal?
Is there any conflict between the three Goalsstated or a hierarchy of Goals?
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The Goal? For example let us choose that our Goal is to
delight customers now and in future.
In order to achieve our chosen Goal i.e. todelight our customers now and in future, it is
absolutely necessary to keep our employees
happy now and in future. Similarly it is imperative to make money now
and in future in order to continue to keep our
employees happy.
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The Goal?Now let us decide that our Goal is to keep our
employees happy now and in future.
In order to achieve our chosen Goal, it isabsolutely necessary to make money now and
in future.
It is impossible to make money now and infuture unless we continue to delight our
customers now and in future.
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The Goal?Now if we decide that our Goal is to make
money now and in future, is it really possible to
achieve it without delighting our customersnow and in future!
And can we satisfy our customers without
keeping our employees happy now and infuture!
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The Goal? In reality there is no conflict between the three
different Goals.
Choose any of the three Goals, the other twobecome the necessary conditions for achieving
the chosen Goal!
For the purpose of this presentation we willassume that the Goal is making money now
and in future.
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Measures for the Goal-Making
MoneyGenerally accepted measures are
Profit
Return on investment Cash flow
We do not question the validity of these
measures. However we do question theusefulness of these measures as operationalmeasures!
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Current situation Only 23 out of 3000 (0.8%) companies actively
trading on the Bombay Stock Exchange have
increased their profits continuously in the last 10years (The Economic Times 24th September2005)
And the Goal of the organization is to makemore and more money
Hence as per our agreed definition of Goal,99.2% organizations are not achieving theirGoal!
Goldratt India
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Five levels of financial health
Making more and more money1. Unable to meet financial commitments
2. Meeting financial commitments but not making
profits3. Meeting financial commitments, not making
losses, but profits fluctuating
4. Profits increasing continuously period after
period5. ReturnOn Investment (ROI) / Return On Capital
Employed (ROCE) increasing continuously
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What measurements
should we use? For the average employee, seeing the effect that
any given action has on Net Profit (NP) or
Return On Investment (ROI) is almostimpossible.
As a result we have created local measures like
efficiency & utilization because we believe thatthey are linked to NP or ROI.
We do know that 99%+ organizations are not
achieving their Goal.
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What measurements
should we use?
New Operational Measures
Throughput (T)
Investment (I)
Operating Expense (OE)
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Flow of money
--
OE
RM
I
+ S
Goal
Units
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Throughput (T)
The rate at which Contribution Rupees are
coming into organization.
Only Rupees generated by the system are
counted; e.g., Rupees spent on purchasing raw
material or services do not count as they are
passed on to your suppliers.
T=(Net sales-all truly variable costs)
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Investment (I)
All the money currently tied up inside the
system.
All the inventory in raw material, WIP, or inFinished Goods.
Money blocked in plant and machinery.
Receivables are also part of I.
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Operating Expense (OE)
All the money that system spends on converting
inventory into throughput.
All the expenses are clubbed together as OEand are thought as fixed.
All employee expenses are part of OE.
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Financial Links
Is there any link between the new Operational
Measures T, I, & OE, and conventional
measures as P, ROI, & Cash Flow? P = T- OE
ROI = P/ I = (T-OE)/I
What happens to P, ROI & cash flow when weimprove either T, I or OE, keeping other
two as constant?
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Financial Links
If we increase T keeping I & OE constant,
P=(T-OE) improves, ROI= NP/I improves, and
so does the cash flow.
If we decrease I, keeping T & OE constant, P
improves due to reduced carrying cost, ROI
improves, and of course cash flow improves.
When we reduce OE keeping T, and I constant,
P, ROI, and cash flow improve.
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Financial Links
Improving Throughput, Investment and
Operating Expense have a positive co-relation
with improving P, ROI, and cash flow. Throughput, Investment and Operating Expense
are valuable operational measures that can
guide our day to day actions to making money
now and in future.
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Constraint for making money
What is that limits your organization toachieving more of its Goal - to make more and
more money?
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Theory of Constraints (TOC)
The core idea in the Theory of Constraints isthat every real system such as a profit-makingenterprise must have at least one constraint thatlimits the system to achieving its Goal.
Every for profit organization will have aconstraint in Supply, Operations, or Market.Current constraint may shift, but there cannotbe any situation when there is no constraint.Had it been so, its profit would have been
infinite!
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Theory of Constraints (TOC)
Constraints are neither good nor bad.
They are facts of life.
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Theory of Constraints (TOC)There is really no choice in the matter.
Either you manage the constraints or the
constraints will manage you.
The constraints will determine the output of the
system whether they are acknowledged andmanaged or not.
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Organization as a chain An organization can be compared to a chain.
The activities that constitute a business are
chain ofdependent events. For example we do not dispatch components
unless they are packed, and we do not pack
parts until they are manufactured.
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Organization as a chain The output of the organization is achieved
through the synchronized efforts of various
functions. The output is limited by the weakest area.
The strength of the chain is determined by the
strength of the weakest link. What should be done to improve the output of
an organization?
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Organization as a chain
Should we improve all functions or all links? Or should we strengthen the weakest function
or the weakest link?
It is common sense that unless we improve theweakest link, the organizational output or chain
strength would not increase at all.
Is it possible that overall organizationaleffectiveness is reduced by improving
performance in one department ?
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Organization as a chain The global improvement is not the sum total of
all the local improvements.
Often organizations spread their energies thin inall areas in order to improve the output.
In the TOC world optimizing a sub-system
would sub-optimize the whole system.
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How does TOC help
companies
1. Focusing improvement efforts where it will
have the greatest immediate impact on thebottom line.
2. Providing a reliable process that insures
Follow Through
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A process of on going
improvement (POOGI)1. Identify the constraint.
2. Exploit the constraint
3. Subordinate all policies, decisions andprocedures to exploiting the constraint.
4. Elevate the constraint. If we need still more
output from the constraint, elevate it.5. Avoid inertia. If in a previous step constraint
shifts, start the cycle once again.
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POOGI:Step 1
Identify the Constraint.
The constraint can be internal or external to
your organization. Internal constraint ispreferable.
The constraint can be tangible or intangible.
For example it could be an equipment or apolicy.
Invariably (> 95%) the constraint is a policy.
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POOGI:Step 2
Exploit the Constraint.
Get the most possible out of the existing
capacity of the constraint. Utilization at the constraint is critical.
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POOGI:Step 3
Subordinate all decisions to exploiting theconstraint.
All policies and measurements must bedesigned to get the most out of the constraint.
Utilization and efficiency at the non-constraintresources must not be measured. However thisdoes not imply that there are no measurementsfor non-constraint resources.
This step is often missed, and thereby themajority of financial benefits of TOC is lost.This is the toughest step.
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$90/U
100U/week
$100/U
50U/week
D
15 min./U
D
5 min./U
C
10 min./U
C
5min./U
B
15 min./U
A
15 min./U
B
15 min./U
A
10 min./U
RM1
$20/U
RM2
$20/U
RM3
$20/U
BIC
$5/U
P Q
Exercise-Profit
MaximizationPerfect operation (no defects)Same selling price to any clientsFixed market potentialSet-up times nil4 workers (skills are not
interchangeable):1 worker with skill A1 worker with skill B1 worker with skill C1 worker with skill D
Each worker is available 5 days aweek, 8 hours a day (i.e. 2400minutes a week)
Total operating expenses of thecompany are $6000 per week(which includes salaries, and
everything else)
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POOGI:Step 4
Elevate the constraint.
If more capacity is required after steps 2 &3 to
meet the market requirements, increase itthrough capital investment, outsourcing, or off-load the constraint by defining alternativeroutings, processes or design. Capital
investment should not be the first option. Often times, Exploitation and Subordination are
sufficient to reach the needed output. Do notincrease the investment too soon.
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POOGI:Step 5
Avoid Inertia.
If in a previous step the constraint is broken, go
back to Step 1. Do not let inertia be the systemconstraint.
Often times when a new constraint is identified,
it is necessary to change the policies you havejust made!
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POOGI:Step 5
Avoid Inertia.
The long term strategic application of TOC
does not call for continuous removal of allconstraints.
Rather, the idea is to choose where the
constraint should be in order to best exploit themarket opportunities, and then keep it there!
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Constraints:Identification
Every system will always have only
one weakest link at any given time-
ConstraintConstraint is in market if market
share > 50% of world market
Constraint is orders ifOn Time inFull (OTIF) > 95%
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Constraints:Identification
Supply is constraint if material availability 50% of world
consumptionSupplier policies if consumption < 50% of
world consumption
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Constraints:Identification
Constraint is operations when OTIF 95%
Equipment ifOEE (Overall
Equipment Effectiveness) for at leastone equipment >95% on 24X7 basis
Operational policies ifOEE < 95%
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Cash Constraint
There is Cash Constraintonly and only if there are sufficient orders i.e. OTIF < 95% manufacturing capacity i.e. OEE < 95% for all
equipments
right suppliers there are raw material shortages as suppliers are
refusing to supply unless paid upfront additional cash cannot be easily arranged
Cash shortage does not necessarily implycash
constraint.
However if cash shortage is not managedproperly, it will lead to cash constraint
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Case study 1: Capital goodsmanufacturer
Background Capital goods manufacturer for refractory equipment
It was losing money for 2.5 years
Owner has decided to close the plant in six months
Constraint: cash / Goal achievement level 1
Actions Stopped measuring machine utilization
Stopped measuring local performance parameters to prevent
bad multi tasking Focus on cash generation
Weekly review
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Case study 1: Capital goodsmanufacturer
Results Turned around in 100 days
Turnover increases by 30 times in 5 years
Current profit > 3 times turnover in 2000
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Case study 2: Auto componentmanufacturer
Background manufacturer of automotive gears
Losing money for last 5 years
Action initiated for divestment
Constraint:Operational policies / Goal achievementlevel 2
Actions
Stopped measuring Tons
All functional heads Key Result Areas (KRAs)abolished
Started measuringOTIF (On time in full)
Focus on throughput instead of sales
Weekly review Goldratt India
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Case study 2: Auto componentmanufacturer
Results Throughput increases by 70% within 2 years
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Solution Direction
Agree on the Goal of Homex
Agree on the measurements for the Goal (T,
I, OE, T/I, & T/OE, OTIF)
Align the functional measurements with the
overall Goal measurements
Focus on increasing OTIF
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www.goldrattindia.com Measurements drive behaviour
TOC Way of managing projects
1. Stop bad Multi-tasking / Focus: The objective isto finish all projects fast / on time and not start a
project at the earliest! Work only on a few
projects at any given time.
2. Full kit: Work on any project can start only
and only ifall the relevant specifications, and
resources are available in full.
3. Remove all self imposed barriers to resourceutilization within Homex. Remove all measures
that prevent this and introduce right
measurements that encourage this behavior.
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www.goldrattindia.com Measurements drive behaviour
TOC Way of managing projects
4. Prevent Student Syndrome: In almost allprojects we take safety time and then waste it!
Take ambitious target to finish the project in half the
time (D / 2)
The remaining 50% of time is buffer
Monitor buffer consumption
Prioritize according to buffer consumption
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www.goldrattindia.com Measurements drive behaviour
Next steps
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www.goldrattindia.com Measurements drive behaviour
Review Process
What is the purpose of review?
Know the current situation
Justify that better than what has already
been achieved would have been
impossible
Find the culprit
Or take corrective action!
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www.goldrattindia.com Measurements drive behaviour
What are the UDEs ofcurrent review process?
A lot of the time is lost in validating the data presented
People try to defend that nothing better could have beenachieved
People try their best to assert (give reasons) that they arenot responsible for not achieving agreed targets (externalcauses are the culprits)
In case budget targets are achieved, complacency sets in(full advantage is not taken in growth environment)
Over all we are all satisfied with our underperformance
What are the feelings people have at the end of the daythat are involved in the review?
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www.goldrattindia.com Measurements drive behaviour
Recipe for success
Make a few right decisions
provided you do not make too
many wrong decisions!
Warren Buffett
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www.goldrattindia.com Measurements drive behaviour
Assumptions
People do not have good forecasting skills
People want to improve
People want to have a sense of achievementfrequently
Currently most people are not achieving a senseof achievement on daily / weekly basis
Capacity is flexible (It goes down with failures,
and increases with successes) Results achieved are a function of targets really
strived for
New review process
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www.goldrattindia.com Measurements drive behaviour
New review process
Only a few (3-5) parameters chosen for focusing
No fixed targets for the year / quarter
People are encouraged to try their best toimprove upon their last period performance.(we need to detail how long the past period
should be) Why should review frequency be monthly?
Suggested review period -about 20 invoices
A very high degree of discipline is expected forregular review. There are no exceptions for notholding the review meeting on time.
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www.goldrattindia.com Measurements drive behaviour
New review process
Report for the period must be available every
time on time
Relevant information is available and displayed
across the organization for all people No questioning of data in the review meeting
(breaking heads before / after the meeting is
perfectly acceptable)
No analysis paralysis. Not wasting too muchtime for analyzing reasons for not achieving the
target. The focus is for corrective action only
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Thank you!