Preface – A Bitter/Sweet Theory of Constraints Case Study
This was our first implementation – meaning, back in the late 1980’s. (Yes, Theory of Constraints has been around that long and yes, we’ve been implementing it for that long.)
And it was long before we provided the scope of consulting services we provide today – we were primarily educators, and only incidentally were we management consultants.
And it’s bitter-sweet.
I (Steve) was fresh from Theory of Constraints training. This client had a core team of a GM (one of the two owners), Production manager, and IT or Systems manager. It was a small business, but their enthusiasm and inclination towards action was first rate.
Their initial dramatic improvements were achieved within just 45 days. They eliminated a 6-week backlog of work, reduced lead time from weeks to just 6 days, hit close to 100% on-time delivery, and almost doubled productivity.
Subsequently we helped them with further internal improvements and helped them “break” a market constraint when sales slowed down.
I was frantically busy – Theory of Constraints was really in its infancy and we were spending most of our time on the road, planting seeds – and I lost touch for a couple of years. Also in those days we didn’t have the Sales and the Marketing solutions we developed in the early 90’s so I didn’t have a lot more to offer them anyway – they were doing just fine.
Revenues grew more than 100% in under 3 years, with almost no added headcount, and profits soared. A Canadian government productivity audit confirmed that they had the best performance in Canada in their industry sector for a wide range of measurements.
Then – the GM sold to his partner and moved on.
The IT Manager had already moved on (to his own business). That had been no threat, he’d already developed what the company needed in terms of computer support. Soon after the GM left, I heard that the Production manager had also moved on.
Later, rumor reached me that the company, with no Synchronous Manufacturing leadership, was moving away from Synchronous Manufacturing and to more conventional practices. I did not know the accuracy of this, so I naturally attempted to contact the remaining partner, with whom I had enjoyed minimal contact, offering my services. I received no reply.
My final letter offering my services again drew no response.
12 months later I read that the business’s assets were being sold.
As I say, bitter-sweet … for me. And perhaps even for the GM who made it fly, performed wonders, and reaped his reward when he sold out.
This case study was co-authored with that GM for publication in a Furniture magazine in the U.S. This was in the early 90’s; however, the last time I checked, the GM and the Production manager were still available to confirm the details.
Now, readers of this case history should recognize that the actions we/the client took have nothing to do with the specifics of the wood working industry, or RTA furniture industry.
They are exactly the same principles we have applied to the production of cabinets, wire, heavy machinery, 3-ring binders, pharmaceuticals, electronics, bicycle components, garments, pulp and paper, corrugated boxes – and the same principles our colleagues have applied to thousands of production environments, world-wide.
STARTING POINT: SMALL BUSINESS SUCCESS
The problems facing this small manufacturer when we first encountered them were of the type that many small manufacturers only dream about; demand for their growing line of ready-to-assemble furniture was almost beyond their ability to produce, even with two full shifts in operation. Certainly the order backlog on the plant was steadily increasing. This growing demand was gratifying for the owners. The company had been formed only 3 years earlier, in an unlikely location; a converted fruit-packing plant in an agricultural town a long way from the nearest major cities. The owners had worked hard to prove that their venture was no 12-month wonder.
“Our success at that point was no accident – we were doing a lot of things right,” stated the GM. “We had well-designed and well-built products, our prices were competitive, and we offered good service to our dealers.”
In an unusual move for such a small company, they had ensured that their distance from major consumer populations presented no obstacles to their dealers, opening distribution centers in Eastern Canada and the US Midwest. The GM stresses the importance of the service offered; “The dealers really appreciated our efforts to guarantee good service – we could usually get product to them from our warehouses more quickly even than their local suppliers.”
BUT SUCCESS BRINGS ITS OWN PROBLEMS
However, management were not slow to recognize the warning signs of impending troubles. The GM recalls, “As we became busier, our manufacturing lead time stretched to more than three weeks, which meant that we had to hold even higher inventories in our distribution warehouse because we couldn’t replenish them very quickly. Along with this, whenever we did try to deal with an urgent customer demand, it caused us lots of grief. We always made it, one way or another, but we always paid the price in terms of disruptions … other orders would become even further behind schedule, constant changes lead to mistakes and quality problems, and the people on the shop floor questioned whether we knew what we were doing, constantly shuffling priorities on them when they were already so busy.
Lengthy set-ups were a matter for concern on some equipment, and wherever possible components were manufactured in sizeable batches, not only to keep costs-per-piece down but also to avoid “wasting” productive capacity. One consequence of this was the ballooning work-in-process inventory which led to the increased lead times and also caused the company to seriously consider a relatively expensive plant expansion.
Quality, always a point of pride in this business, was also becoming more of an issue as the pressure grew. Notes the GM, “Occasionally, and usually at the worst possible time of course, we would find a whole batch of parts which either needed re-work or even had to be scrapped. Recovery gave us all the same problems as urgent customer orders – shuffling priorities, disrupting schedules, and hurting morale.
“CONVENTIONAL WISDOM” SOLUTIONS WERE NOT APPEALING
The GM had some formal training in Operations Management and recognized that the company’s planning and control systems would not be adequate as the growth continued. He investigated the Manufacturing Resource Planning systems that are now key components in today’s ERP systems, and also the Just-In-Time/Kanban approach that today forms a vital component of Lean manufacturing. “Implementing a computer system seemed to be the most popular step for companies in our position,” commented the GM, “but I was uneasy about it. I could see how we could tie up a lot of our time and energy in making the system work, rather than in making the business work better. Plus, the dollar investment would have been substantial.”
The Just-In-Time approach was interesting, but represented a radical departure from their current methods – one that management hesitated to commit to, given that any problems in implementation during peak demand would translate into lost sales.
THEORY OF CONSTRAINTS AND THE GOAL
Then, through a series of coincidences, the GM was introduced to the Theory of Constraints when he met Steve Jackson of Synchronix Technologies, and first read Eli Goldratt’s best-selling book The Goal.
“The Goal was a real eye-opener,” the GM recalled. “Although we were in no danger of being shut down (unlike the fictitious plant featured in The Goal), it was almost as if the book had been written about us. Lead times too long, orders behind schedule, and so on. It was hard to put the book down.”
Over lunch with Jackson the following week, he pursued many of the issues raised in the book. Unable to attend himself, he decided then and there to send his Production manager and systems specialist to a 2-day TOC workshop being sponsored at that time by the University of British Columbia, where Jackson was to introduce the technology to a small group of managers.
The production manager recalls “Our GM had given us the book to read before we went, but we still weren’t sure what we were in for. By the close of the first day’s session, they knew they were on to something different – and valuable. Even before the workshop had concluded, the duo were looking at how they could implement the concepts they’d learned. “The toughest part was acknowledging just how many of our methods and procedures had been developed around controlling costs and keeping spending under control – and not around doing those things that made money,” commented the Production manager. “Time after time throughout the workshop, it became clear that our cost-based actions not only didn’t help us to get where we wanted to be, they were actually stopping us.”
FROM CONCEPT TO ACTION
On their drive back to town following the workshop, the two debated how to apply the ideas. One problem was, the basic concepts seemed almost too simple. The pre-fabricated furniture they manufactured – principally stereo cabinets, speaker stands, television stands at that time – presented the problem of many different combinations of finished products in terms of sizes and finish, although many of the processes were similar for each product type. “Although we were dealing with a lot of different components that had to come together in different combinations for our product lines, with several different processes involved, the power of the TOC was that it showed us how we need concentrate on only a very few things, in order to guarantee results.”
As they had learned in the workshop, for this manufacturer (as for all) the first step was to identify which of their several busy resources was the “Drum”, the resource which most limited their rate of production. Although there was some debate, the Grooving line became the strongest candidate. “We really didn’t waste a lot of time capturing lots of data and measuring everything,” explained the Production manager. “Once we’d learned the kind of thing to look for, it wasn’t difficult. There were some real concerns, however; the Grooving line fed the packaging area which some also considered a limiting factor – it always appeared to be overloaded. If they tied the packaging flow to the Grooving line, perhaps the packaging would suffer … and damage total plant throughput?
They held their breath and tried it.
A QUICK VICTORY
By the second day, any doubts were removed – the packaging department was hitting record output. Systematically, then, they set about applying the methods they had just learned, in order to manage the production facility as a whole most effectively.
Later, the Production manager commented, “The workshop was never intended to give us all the “How-to” to actually implement the whole thing, it was supposed to be more of an introduction. However, in a small business, you sometimes just grab the ball and run with it. The GM says simply, “I may have done a little pushing, but once the basic concepts were clear, the folk in our shop made it happen.”
SYNCHRONIZING ALL THE PRODUCTION – POLICY CONSTRAINTS EMERGE!
Essentially, the implementation involved all the management and shop workers in making sure that the Grooving line was being used effectively, then synchronizing all other production activity to keep material flowing smoothly to the line, and from it (through packaging) to shipping. Simple in principle, and apparently just common sense; however, the detailed mechanisms developed by users of the TOC often contradict more traditional methods, which tend to be based on producing the lowest cost-per-unit produced, and maintaining high efficiencies in every work center.
In fact, by making sure that material from stores was only introduced into the front-end of the production process exactly in-sync with the production capability of the Grooving line, the company made it impossible for any resource except the Grooving line to be even close to 100% “efficient.
On these “non-constraint” resources, frequent set-up changes were no longer considered to add “cost” and therefore no longer discouraged; no one was looking to combine batches of parts in order to “save” a set-up, or reduce the cost per piece. Small quantities of components were passed onto the next workstation as soon as they were completed, instead of waiting for the completion of a whole batch.
It was not immediately smooth sailing. “After years of driving everyone to be as efficient as possible, to always keep busy, it was relatively easy to change our procedures and measurements, but not easy to change people’s behavior patterns,” noted the GM. “However, the beauty of the TOC is that occasional “stumbles” during the learning period don’t hurt. All sorts of little things might go wrong along the way to and from the Grooving line, but as long as we kept the constraint busy working on the right parts, the plant as a whole was always on track.”
MAJOR IMPROVEMENTS BLOSSOM
Results were quick to appear. Within days, there was a noticeable decline in the volume of work-in-process in the plant, causing inevitable tremors of anxiety that some of the resources might “run out of work” and cause the plant to fall further behind schedule. Yet as the WIP dropped, the “Drum-Buffer-Rope” system made sure that the constraint was rarely threatened with a stoppage, so production rates actually climbed and the backlog of orders was quickly consumed.
One unexpected side-benefit of the smoother flow through the plant and the reduced WIP was the early detection of quality problems – often, in time to make a correction to the faulty process while it was still running. The company was rarely caught any more with a whole batch of off-quality components. As quality improved noticeably, the elimination of a lot of re-work eliminated much of the schedule-shuffling on the floor.
Lead time shrank from more than 3 weeks to level out at 5 or 6 days, on average. This gave management a choice of opportunities; they could shrink the inventories in their distribution centers, since they had the capability to replenish stocks in far less time than before, or they could hold many more models at the DC’s without any overall increase in inventories. To take advantage of service-based sales opportunities, they chose the latter route.
Another unexpected benefit was the amount of floor-space made available. Any thoughts of expansion were quickly shelved; there was plenty of room in the existing plant, now the material flow was being better managed and a much higher output was being gained from the same resources.
The short lead time also made handling of urgent customer demands almost routine. Looking back, the GM commented, “Before the TOC, a request for an urgent job meant an almost-impossible seven day turnaround, and caused major problems. When Drum-Buffer-Rope was in place, many “urgent” requests could be dealt with routinely – although we may not always have let our customers know that we hadn’t killed ourselves for their sake!
Their fast turnaround ability made their entry into a new market segment, catalog sales, very easy; once a catalog appears, demand is instant and largely unpredictable, yet superb shipping performance is demanded by consumers – and the catalog companies. Their new found flexibility made the market entry glitch-free.
THE POWER OF FOCUS – A STRENGTH OF THE THEORY OF CONSTRAINTS
The GM and production manager were quick to point out, “We never subscribed fully to some of the “big company” ways of doing things, so by applying common sense we were doing a lot of things right even before the TOC came along. What the TOC has done is allowed us to make the most of what we had going for us – and we are still trying to find out what that “most” is. We haven’t hit the limit yet.
They agree on another point. “There is no limit today on the number of things that a company could choose to improve, and it seems like there’s no limit on the number of improvement tools we could be using – Total Quality, Statistical Process Control, MRP, empowerment, team concepts, and so on.
Yet by simply knowing where to focus, and how to focus, we achieved what we did in less than three months, mainly as a result of changing some policies, procedures, and measurements.
There was no need to change plant lay-out significantly, or extensively train teams in teamwork concepts, or reduce set-ups throughout the plant, form committees, buy new computer systems, collect accurate data real-time, or ask “why” five times.
Down the road, I suppose we may turn to any or all of these tools to help us improve even more, but unless an organization knows how to focus on the very few constraints they truly have, all these tools simply become what I like to call VPAI – Very Powerful Alternatives to Improvement. Genuine, bottom-line improvement, that is.
3 YEARS ON … A NEW CONSTRAINT EMERGES
Now we move almost 3 years ahead: “Well, the first thing to recognize is that the past two or three years have been among the worst in memory for our industry,” warns the GM. “A number of our competitors, even those ideally located near consumer demand points, have gone under. Some others have had to swallow substantial losses while waiting for the economy to turn-around.”
And this company?
They managed the Grooving line until it was no longer a constraint, then re-focused production around the next constraint, gaining even more output from the same resources.
However, there were times when the real constraint appeared to be a lack of business, especially as the company moved into the early stages of the recession. “In the summer we asked Steve (Jackson) for an in-house workshop for all our management team, after we had made it through our first cycle of improvements,” stated the GM. “It quickly became clear to all of us that there was much more to the Theory of Constraints than just its application to the shop floor. It gave us a very different perspective on the markets we could be in, and on issues such as pricing and bidding, even which new products to consider.
BEST EVER REVENUE, PROFIT PERFORMANCE
The workshop set the company up for its best-ever Fall, and best-ever year to that point, in terms of revenues, units shipped, and profits.
The product line was deliberately expanded, to include student desks, shoe racks, and storage towers for videotapes or CD’s. Creative marketing strategies, generally conforming to TOC-based segmentation and pricing ideas, helped keep the plant busy – and profitable – while competitors were shutting their doors.
The company encountered a couple of business stumbles along the way. Profit growth showed a hiccup when first an attempted purchase of another company fell through at the last minute after some substantial, related expenditures; then a major customer fell victim to the recession, closing their doors while owing our client a great deal of money. Operationally, however, results remained good.
MORE CHALLENGES, MORE IMPROVEMENT!
As the economy then recovered management was ideally placed to capitalize on their improved performance. By that Fall it was clear that demand from their much-expanded markets was out-stripping the output of their then-constraint, which had already undergone some set-up reduction as a natural part of “exploiting” the resource to its fullest.
A short telephone conversation was all it took for me to give them an avenue in which to find more capacity through set-up reduction, and this paid-off in spades. “Steve simply suggested that we treat the change-over on the constraints like an Indy-car pit crew treats their car on a pit-stop. Our own “pit crew” responded beautifully, people even coming into the plant in their own time to help with preventive maintenance on the constraints!”
By October, the constraint had been managed to the point where it had ceased to be the limiting factor, and yet another capacity constraint appeared – one which could be elevated relatively easily, simply by the addition of manpower.
60% MORE REVENUE THAN OUR BEST-EVER!
“We’re a privately owned company, and we don’t release many figures,” explained the GM, “but I can tell you that during the Fall, with relatively little increase in head-count and using exactly the same equipment we were able to record 60% more revenue than in our previous best-ever Fall – which at the time we had thought was close to the plant’s maximum production! In fact, since we first started with the TOC we have more than doubled our sales without a single additional piece of equipment, and only a small increase in headcount.” And profits? “Very satisfactory!”
“We were recently part of a Federal Government survey which compared the performance of furniture manufacturers across the country,” added the GM. “We were not too surprised to learn that we came out first among composite wood manufacturers – highest sales per employee, and highest productivity. In fact, we have also been nominated for a National “Excellence in Small Business” award.”
The production manager pointed out another less-obvious benefit of their operation, the kind of thing that could not be measured in surveys or captured in statistics; the impact on the people on the shop floor. “No one is constantly leaning over their shoulder to make sure they’re busy all the time. Even when we were really humming, through the Fall, there was far less pressure than when we did half the volume a couple of years ago.”
Looking back from the perspective of 2007’s Theory of Constraints know-how…
… It’s Still Impressive!
First of all, I’m still impressed with their results. They are far better than we see companies achieve even these days using improvement techniques that have emerged and grown in popularity since we helped with this implementation.
And to do this in 45 days … well, we’ve beaten this a few times now but it’s still extraordinary.
But what is most impressive is that these people were able to do what they did mostly from just what they learned at a workshop. Very few companies can – else, Rod and I would no longer be in business!
The reason it typically takes us 60 – 90 days to “Go Live” is that most companies we work with need education, training, help with systems design, help with implementation planning, project management assistance, and hand-holding throughout an implementation to make the new practices a habit.
In the early 80’s, those of us who were working with Eli Goldratt were largely forbidden to act as consultants – our job was to disseminate the Theory of Constraints knowledge and to educate. That’s partly why I, and many other Goldratt Associates of the time, left the network in order to be 100% independent and provide the full range of services we knew our clients needed.
Also, in the late 80’s if we encountered a sales constraint – as this company did, a few years into its work with the Theory of Constraints approach – our sales and marketing tactics revolved around being more flexible with pricing and also looking for market segments to expand in.
Boy, has this ever changed.
Introducing the Mafia Offer
These days, long before the sales downturn “hit” we would expect to be working with our client to develop a “Mafia Offer.” A Mafia Offer is a sales offering that capitalizes on a level of Operations performance that could ONLY come from the Theory of Constraints implementation, and one that solves a customer’s major problem – a problem they didn’t believe would ever be solved.
What this offer does for the Theory of Constraints user is to change their customer’s perception of the value that our client’s products and services bring to the table. A solid Mafia Offer means that the TOC user can often charge MORE than the competition, and increase sales while they’re doing it – even in a market where the sales people are convinced “it’s all about price.”
Today, with a very few exceptions we consider lowering prices to be the 1001st option out of 1000. If we were to work with this company today, we’d treat the sales constraint very differently.
In fact we’d do a LOT differently.
Seeing the Bigger Picture (Downstream Supply Chain)
Up-front, we’d spend time to thoroughly understand the downstream supply chain. It astonishes us how many companies we encounter that are involved in improvement projects which miss the boat on this.
For example, we’ll see Lean implementations aimed at reducing lead time (among other things) … which Lean can certainly accomplish. It’s taken as a “given” that this is a good thing to do.
But if the end result is a greatly-reduced lead time for a product that, when received by the customer, simply goes into make-to-stock products that sit on warehouse shelves for weeks … the reduction in lead time might be virtually worthless.
Sure it looks good, and sounds good, but will the customer pay more for the product because of it? Probably not. Will a prospective customer in this situation dump a trusted supplier with a longer lead time, in order to do business with you based on this? Almost certainly not.
Because IT DOESN’T SOLVE A PROBLEM!
It doesn’t offer a DEFINITIVE or DISTINCT competitive edge. When you offer it to an existing customer their response will be “Great; I now expect that level of performance routinely, and of course we still expect the 5% per year price cut from you.” And a new potential customer will tell you “We’ll keep you in mind.”
But what if the circumstances were different; what if halving the lead time enabled their customer to win an order, or an account, or a market that they hadn’t been able to win before? And what if none of their competitors could match that performance?
Now that lead time reduction has real value – value sufficient to exclude you from price cuts or even permit price increases (here’s the end of the dreaded margin squeeze!); value sufficient to cause a prospect to dump their existing supplier and give you their business (subject to the usual performance issues of quality, etc).
Up-front Education and Training
These guys took the ideas from the workshop and applied them internally before they conducted any formal education or training in-house.
They got away with it, but people are almost inevitably placed in a conflict when a change is implemented that calls for behaviors to change significantly. So we want to first get to the level of policies and procedures and measurements that drive the old behaviors, and change them before we aim for behavior changes.
And while we can see the flawed policies, procedures etc within minutes of walking into a plant, the current management team cannot – they still view the plant through the same old lenses. So it’s crucial that they understand these issues in depth – so it’s crucial that they receive some solid education.
This extends to EVERYONE – understanding what the new way of working will be, and why, and what their role should be.
And because there are so many policy constraints, deeply embedded, “the way we’ve always done it,” … it’s also important that people understand VERY clearly that initially the new way of working will create conflicts with the way they are used to working, and they need to understand how to identify these conflicts, and articulate them, and exactly how to deal with them.
For the first few weeks a lot of “silt” rises to the surface when this way of working is implemented. It has to be recognized quickly and skimmed-off.
The Moving Bottleneck
Also, did you notice how the constraint moved around?
In their case, this was over a period of a few years, so we’d probably not be concerned – it’s natural, and many things can change dramatically in that length of time.
But today we’d have anticipated the changes in demand (and perhaps product mix) stemming from the Mafia Offer, then worked with them to choose a “strategic” constraint to synchronize around … after which they’d aim to deliberately keep the constraint there.
This is extremely powerful.
To go one step further … if we definitely had a Mafia Offer and management commitment to aggressive growth we’d want to create an environment where there was no internal constraint for a long time, if ever. These are the types of advanced topics we mention in our workshops.
In some companies there’s a performance characteristic we call “moving bottleneck” syndrome. This morning the bottleneck seems to be at the Punch Press, this afternoon it popped-up in welding, tomorrow … who knows.
In 9 out of 10 cases there isn’t a genuine physical constraint at all. What there is, is a set of policies that create the syndrome when it is entirely unnecessary. So we help a company identify and deal with the policy constraints.
The Change in Ownership
In 19 years of consulting in the Theory of Constraints, the ONLY times I have known a TOC implementation to be halted mid-implementation, or to revert following a complete implementation, is when:
- There is a change in ownership or a change in senior management
- The new owner or senior manager is determined to make his or her mark, to do things their way
- And their way is not the TOC way. They go with what they know best.
Understandable, but sad.
We have heard from colleagues of showcase implementations with impressive profit growth and positive cash swings of tens of millions of dollars being suspended because of this reason.
We have had a client, probably the best in the world at what they did, bought by a competitor who moved our client’s equipment into their own facility, fired the people, shut the plant down and refused to adopt any of their working practices. Within 2 years they had lost almost every single customer from the business they’d bought, AND some of their original customers, because their service level, never great, plummeted – while the customers of our client had grown accustomed to 98% and better service levels for several years.
The bitter-sweet with this case study is that same issue.
The company added several million in sales at the expense of hardly any payroll increase. We helped management generate several millions of additional profit dollars over 3 years, in a company with fewer than 50 employees. Including surviving – even, prospering through – a major market downturn for their competitors.
The market for products they could produce was hundreds, even thousands of times larger than their sales. They could have grown at 35% per year for many years, increasing profitability at every step along the way. We know there are companies in that business today who couldn’t compete NOW with their performance as it was THEN.
But once the GM sold his share of the business and moved on, the owner/manager who had zero training in Theory of Constraints presided over a decline leading to a shut-down in very little time.