Understanding theory of constraints
- 1. ©2012 Vector Consulting Group. All Rights Reserved. 1 Is it an OPERATIONS IMPROVEMENT TOOL such as SIX SIGMA, TPM etc.? What is Theory Of Constraints Is it a way of MANAGING BUSINESS?OR Is it SOMETHING ELSE?OR OR A tool for improving SUPPLY CHAIN?
- 2. ©2012 Vector Consulting Group. All Rights Reserved. What is the goal of a company? 2 Make Money Cut Cost Increase Sales
- 3. ©2012 Vector Consulting Group. All Rights Reserved. How does a company try to make money? 3 Increase Sales Decrease Costs Reduce Lead Time Marketing Improve Quality Quality Increase Production Production Small lots, Large variety Marketing Reduce Inventory Finance Reduce Raw Material Cost Purchase Reduce Man Power HR Large lots, Small variety Production Increase Sales Decrease Costs Decisions taken in one department can be in conflict with the needs of another!!
- 4. ©2012 Vector Consulting Group. All Rights Reserved. The company is rendered “Directionless”!!!!! 4 HR PPC Sales Quality Manufacturing Each department would like decisions to be made in a different direction! What decisions to make?
- 5. ©2012 Vector Consulting Group. All Rights Reserved. Why is the company rendered “Directionless”? 5 • Performance Targets are set for each function so as to get desired behaviour to control financial and operational elements. • Unfortunately, an action which has positive impact on one element creates negative impact on some other element. For example: • Reducing inventory may result into unavailability of materials for production thereby increasing lead times. • Trying to deliver on time may result in sacrificing quality or increase in costs. • Management is continuously engaged in doing a tight rope walk to achieve balance between these elements. • The strategy of the company based on its Vision and Mission is lost in the process.
- 6. ©2012 Vector Consulting Group. All Rights Reserved. Why is the company rendered “Directionless”? (Cont..) 6 The Company is continuously struggling to reach a balance between Sales and Cost… We do not have a mechanism to know what is the optimum balance among sales and cost related elements. As a result it becomes impossible to get consensus of all functional heads for the target levels of all the elements together. Cost Sales
- 7. ©2012 Vector Consulting Group. All Rights Reserved. What is the conventional way of managing a company? 7 • Decide a Vision and derive the Mission for the company • Prepare the Annual Business Plan based on goals and objectives it strives to achieve • Divide the goals and objectives and distribute it to the departments • The departments set annual targets and distribute the same to there functions • Each department/function initiates multiple improvement programmes to achieve desired objective What is the hidden assumption? The Assumption Sum of improvements in each part of the system. Overall improvement in the system.
- 8. ©2012 Vector Consulting Group. All Rights Reserved. But is the assumption true? 8 No!! The additive rule does not apply when the components in a system are interdependent To analyze and manage organizations, the four fundamental principles of Theory Of Constraints have to be applied! Is there another way to manage an organization?
- 9. ©2012 Vector Consulting Group. All Rights Reserved. Fundamental Principles or Beliefs of TOC 9 Inherent Potential Inherent Goodness of people Inherent Harmony Inherent Simplicity
- 10. ©2012 Vector Consulting Group. All Rights Reserved. Fundamental Belief No 1 10 Inherent Simplicity
- 11. ©2012 Vector Consulting Group. All Rights Reserved. The interdependent systems are inherently simple 11 System BSystem A Which one is less Complex ? System B is less complex! Interconnected systems offer a leverage point!
- 12. ©2012 Vector Consulting Group. All Rights Reserved. Belief 2 : Inherent Harmony 12 • Every unresolved chronic problem is because of a conflict. Conflicts are only because of erroneous assumptions • Win-Win solutions are possible Inherent Simplicity Inherent Harmony Win-Win
- 13. ©2012 Vector Consulting Group. All Rights Reserved. Belief 3 : Inherent Goodness 13 Inherent Simplicity Inherent Harmony Win-Win Inherent Goodness of people • All people are good • Blaming individuals stops the effort to solve real systemic problems
- 14. ©2012 Vector Consulting Group. All Rights Reserved. Belief 4 : Unlimited Potential 14 Inherent Simplicity Inherent Harmony Win-Win Inherent Goodness of people Unlimited Potential • All organizations have the potential to grow • Take the next leap in Performance
- 15. ©2012 Vector Consulting Group. All Rights Reserved. 15 I smile and start to count on my fingers: One, people are good. Two, every conflict can be removed. Three, every situation, no matter how complex it initially looks, is exceedingly simple. Four, every situation can be substantially improved; even the sky is not the limit…. Eli Goldratt
- 16. ©2012 Vector Consulting Group. All Rights Reserved. Benefits of TOC implementation 16 • TOC implemented successfully in hundreds of companies worldwide • Typical Benefits experienced*: 1. Increase in revenue/ throughput (approx 63%) 2. Improved due date performance (up by 44%) 3. Reduced Inventory (down by 49%) 4. Reduced Lead times (down by 70%) * source: “The world of theory of constraints“ by V. Melbin and S.Balderstone,2000
- 17. ©2012 Vector Consulting Group. All Rights Reserved. Thank You Facebook/VectorConsultingIndia Twitter/Vectorconsultin www.vectorconsulting.in ): ©2012 Vector Consulting Group. All Rights Reserved.