A Process Of On-Going Improvement (POOGI) - Part 9

Normally, Lean and Six Sigma tools provide additional benefits very quickly. For example, it is common that the constraint resource could benefit from set-up reduction. Focusing Lean tools—which cost little to implement—results in additional capacity where it is needed and that has an immediate bottom-line result.

Due-date performance improves because of the reduction in lead-time, the increased capacity, the predictability of the time to process an order has improved, and jobs are prioritized according to due date.

The “Drum” is the schedule for the constraint resource. It sets the pace for the entire operation. In Goldratt's Theory of Constraints, we assume there is one system constraint that is limiting the throughput of the entire business. The drum is the only resource that needs to be scheduled. All other operations have relative excess capacity, meaning that orders can flow through the plant until reaching the constraint resource, and after it.

The “Buffer” is what protects the constraint from going idle from lack of material to process. The buffer needs to be large enough to prevent starvation on the constraint resource. It is really a time buffer, not physical materials, but we’ll explain that at another time.

The “Rope” is the mechanism for release of new material into the operations.

There are conventional cost accounting assumptions that may block you from implementing Drum-Buffer-Rope. Next time, we’ll address those issues, and describe how TOC’s Throughput Accounting concepts will free you to take the needed actions.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang(
c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

______________________________________________________________________ About About the co-authors:

Brad Stillahn is a business owner that has successfully implemented TOC methods in his own business and is now helping other business owners do the same. His consulting company, TOC Professionals engages in long-term relationships with companies implementing TOC. His business and personal partner is Dr. Lisa Lang. Brad can be reached at Brad@ScienceofBusiness.com or 303-886-9939.

“Dr. Lisa” Lang is President of the Science of Business. Her speech “Maximizing Profitability” is popular with Vistage groups and as a keynote speech. Recently Dr. Goldratt’s Global Marketing Director, she offers the “Mafia Offer Boot Camp” for companies wanting to develop and implement a Mafia Offer. She can be reached at DrLisa@ScienceofBusiness.com or 303-909-3343.

A Process Of On-Going Improvement (POOGI) - Part 8

Once the lower level of WIP is achieved (using Theory of Constraints) which takes about two weeks, as a job is processed through milling, this triggers the release of another job to the floor to begin processing.

What is the effect?

Do you realize that the amount of work-in-process on the shop floor is directly related to production lead-time? In this example, within just a couple of weeks, lead-time dropped in half, from 4 to 2 weeks. WIP inventory dropped in half as well.

Of course, in this simple example and in the real world, dropping WIP levels will cause some work centers to go idle from time-to-time. Before, with higher WIP levels, we were just masking the reality that different work centers had different capacities. With lower WIP levels, that reality is now exposed and there is an opportunity for further process improvement.

We still haven’t addressed how Goldratt's Drum-Buffer-Rope yields additional available capacity. It does so by revealing hidden capacity on the constraint. The time a job spends waiting is reduced. With focus on the constraint resource, actions are taken that cause better utilization. When everyone knows that the constraint is what limits the net profit of the company as a whole, focus is provided that is unavailable when the shop floor is flooded with work and everything is a priority.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 7

Let’s take a simple environment as an example. Say that there are seven operations in this environment:

1. customer service receives and enters the order,
2. engineering programs the part, and when released the order processes through
3. lathes,
4. mills,
5. outside heat treat,
6. inspection, and
7. packaging/shipping.

Let’s assume the starting condition is a quoted lead-time of 4 weeks with due-date performance of 80%. Work-in-process (WIP) inventory is $100,000.

After an initial Goldratt Theory of Constraints analysis, we determine that milling is the constraint resource. In order to protect the mills from running out of work, we decide we always want a buffer of ready-to-process material in front of milling. And we want to release new work to the floor only at the rate milling is processing.

Since there is more WIP on the floor than desired, our first action is to not allow any new work to be released to the floor! We have a rule of thumb to reduce WIP to about half the level of WIP we started with. The focus is not starting new jobs, but finishing the jobs that have been started.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 6

Of course, doubling available capacity must mean that we aren’t managing our current capacity as well as we would like, despite our best efforts to do so. Is this a reasonable possibility? Let’s check some “facts”:

Does your mix vary widely from week-to-week, as is typical of most job shops?
Do most jobs spend more time waiting than being worked on?
Is the touch-time for a job less than 10% of the quoted lead-time?
Are your lead-times relatively long, for example, are they measured in weeks instead of days?
Is your due-date performance less than 99%, as measured by your original promise date?

If you answered “yes” to some of the above questions, then there is a good possibility you can reveal substantial capacity with Goldratt's Theory of Constraints Drum-Buffer-Rope (DBR) scheduling.

But first let’s see if your like most traditionally managed job shops. If you are, you have excess work-in-process. In an effort to keep resources—machines and people—busy, jobs are released to the floor as soon as possible. Queues of work are in front of many machines. Once a worker has finished the job they were working on, the next job is available to get started on. This is done in the name of high efficiencies.

What are the problems associated with this traditional approach?
First, having too many orders on the shop floor masks priorities, promotes local optima behavior and therefore prolongs lead-time and significantly disrupts due-date performance. Second, hectic priorities (hot, red-hot, and do-it-NOW) cause chaos on the floor; not having a priority system can cause some orders to still be late. Finally, in many plants, there are bottlenecks that prevent attainment of 99% due-date performance.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 5

Up to this point, we provided an overview of Goldratt's TOC (Theory of Constraints), the business improvement process methodology described in the popular business novel “The Goal”. Perhaps you’ve had the opportunity to take our recommendation from last month and read or re-read it.

“The Goal” refers to the goal of most for-profit organizations, which is to make more money now and in the future. If an organization is not making an infinite net profit, and of course no organization does, then something is limiting the system. TOC calls this the “system constraint”. If the constraint is external, the company does not have enough sales to fully utilize its available resources. If the constraint is internal, the company cannot sell all that is demanded from the company. Let’s consider the case when the constraint is internal.

We claimed that if a company implemented the scheduling methodology described in The Goal, that it just might be possible to double available capacity with little or no investment or added expense. The scheduling methodology is known as “Drum-Buffer-Rope” and we will discuss it in more detail this month.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 4

Most companies don’t have processes in place to sell twice what they are selling now, so it is necessary to develop a compelling, un-refusable “Mafia Offer”. A Mafia Offer is an offer so good that your customer can’t refuse it and your competition can’t or won’t offer the same. Developing and implementing a Mafia Offer is not trivial, but having one improves typical closing rates from less than 5% to as much as 80%, so additional sales people aren’t required, but sales funnel management is. (See also http://www.mafiaofferbootcamp.com/)

Let’s check the numbers using an example of a company with $5 million in sales, net profit of $250,000, and raw material costs, outside services and sales commission of 30% (what we call Truly Variable Costs in Goldratt's Theory of Constraints Throughput Accounting). One year after implementing DBR, and developing and implementing a Mafia Offer, the company has twice the capacity to sell, and is selling it at a rate of $8 million per year with no additional fixed costs. The additional raw material, outside services, and sales commisions are $900,000 on the additional $3 million in sales. The difference of $2.1 million drops through to the bottom-line which is now $2,350,000. So, net profit went from 5% to 29%! Incredible! Unbelievable?

What if your results were only half as good? Are you doing anything else with so much potential for sustained increased profit with so little risk?

TOC is a collection of “silver bullets”, and when implemented well in conjunction with Lean and Six Sigma, the result is an ongoing exponential increase in net profit. We believe that it possible for most companies to achieve a Viable Vision. One definition of Viable Vision is to turn your sales level into your net profit level in about four years, and sustain the exponential net profit increases beyond that.

If you haven’t read The Goal, we recommend you read it. If you have read The Goal, we recommend you read it again.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 3

TOC is holistic, meaning that there is a complete set of tools available to support “A Process of Ongoing Improvement”:

· For operations, there is Drum-Buffer-Rope scheduling
· For projects, there is Critical Chain Project Management
· For finance and measures, there is Throughput Accounting
· For marketing, there is the compelling, un-refusable “Mafia Offer”
· For sales, there is the Buy-In Process
· For people, there are Management Skills
· For distribution and supply chain, there is Replenishment
· For anything else, there are the Thinking Processes.

Drum-Buffer-Rope (DBR) scheduling embraces the concept that there is one constraint for the entire organization. If the constraint is internal, the company cannot sell all that is demanded from the company. Due-date performance is probably less than 99%, and lead-times may be longer than desired. On the other hand if the constraint is external, the company does not have enough sales to fully utilize its available resources. More sales are desired. Implementing DBR brings a company to 99+% due-date performance (DDP) and maintains that level even with rapid sales growth. It can be implemented in a very short time. Typically, 50% capacity can be freed up to sell with little or no investment or added expense.

Check out the results from one of our clients in this video: http://www.scienceofbusiness.com/tmi-on-time-video.aspx

and here's more results: http://www.scienceofbusiness.com/Portals/0/Richard%20Pettibone%20DREWCO%20testimonial.pdf

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.