Theory of Constraints Application to Production … and More
Note: If you want to bypass the explanations and jump down the page to see what Synchronous Manufacturing can do for you … click on Symptoms We Fix or Outcomes we Generate or The Financial Business Case.
You can also check out some implementation case studies … including charts and graphs from our clients at stages of implementation.
So: Synchronous Manufacturing … the most popular application of the Theory of Constraints.
While the TOC is certainly best known for its application to production scheduling, Synchronous Manufacturing is a broader concept that implies ALL the elements of a business – not just production – working in sync to achieve the strategic goals of the business.
Still, the heart of a Synchronous Manufacturing implementation is a shop schedule that actually works.
What we mean by “works” is, a schedule that remains valid and keeps the plant pumping out the right products on time to meet delivery schedules, despite “Murphy” – despite inaccurate data, absenteeism, machine breakdowns, unreliable vendors, unexpected scrap, etc.
And yes – we can develop these schedules just as easily in job shops where no two products or routings are ever the same, as in a plant with a standard product line.
One of the beauties of this technique is that schedules developed and managed using the Drum-Buffer-Rope (DBR) technique of Synchronous Manufacturing produce short lead times, fast flow, and low inventory … yet these schedules are extremely robust, they remain valid while Murphy is alive and well … in other words, while all sorts of things may go wrong in the plant.
Incidentally, if you’re wondering how good inventory and lead times and on-time performance are relative to the JIT/Kanban approach … theory, research, and real life ALL agree that DBR schedules generate better performance. Companies have moved from JIT/Kanban to Theory of Constraints and made massive additional improvements … and made their results public.I don’t think you’ll find ANY that have moved the other way, with one exception: when a new senior manager arrives at a TOC-managed plant and simply imposes what he or she knows best, which is usually Lean Manufacturing.
The scheduling approach is also typically fast to implement, and while it can take advantage of existing software the approach usually does not depend on software. Now … I wrote that 10 years ago and while it remains entirely accurate, Rod and I do lean towards buying DBR software these days. It shortens implementations, can actually reduce the cost of the implementation, provides a better quality of Synchronous Manufacturing and helps “cement” Theory of Constraints inside a company. Even so, we still encounter a lot of small- to mid-sized companies where off-the-shelf software really isn’t a great “fit,” or is in reality very costly. That’s where we still develop custom applications.
But I do need to stress that Synchronous Manufacturing is far more than just a production system.
It involves every aspect of the business – from sales and marketing through purchasing, production, shipping, finance and accounting, R&D, HR, engineering, and QA – all working together to a degree that most managers can only imagine.
And if that sounds difficult to achieve, sounds like a pipe-dream – it isn’t. With TOC it’s almost an inevitable outcome of doing a small number of things right.
Incidentally, the approach works equally well for high-volume manufacturers or manufacturers of locomotives, for make-to-stock or make-to-order, for repetitive manufacturing or job shops, for large business or one-man garage manufacturers. It is truly a generic approach to high performance manufacturing.
And, the people side of things is very positive.
In our education we typically get a 95% to 100% consensus from employees (at all levels of all functions) in support of the implementation, and employees’ buy-in just gets stronger as the implementation progresses.
Our approach gets very high plant productivity but with a lot less stress and tension than in many other “high performance manufacturing” environments. And so many of the day-to-day frustrations of an employee’s typical day just disappear; employees appreciate the opportunity to work smarter rather than working harder.
- Inventories are too high (at ALL stages where the company holds inventory)
- Lead times are too long
- Poor customer service, in terms of on-time delivery or service-from-stock
- Poor productivity
- Too much overtime
- Too much expediting
- Priorities constantly shifting
- Frequent materials and parts shortages
- Unable to quickly and easily respond to urgent customer requirements
Management’s frustrations are not only because of the poor performance but also because of the seeming contradictions:
- “How can we possibly have such lousy customer service when our inventories are sky-high?”
- “How come we’re paying for 100’s of hours of overtime when our capacity report shows we have surplus capacity everywhere?”
- “How come we’re always ‘3 parts waiting on the 4th’ when our WIP and parts inventories are sky-high?”
- Large improvements realized quickly, without wholesale improvement projects, capital acquisitions, or floor lay-out changes. Synchronous Manufacturing is tolerant of poor data, inaccurate data and missing data.
- Simple, intuitive measurements connect every decision and action in all departments to the bottom-line impact. Shop personnel, people in all departments, people at all levels of management use exactly the same vocabulary and measurements.
- Low inventory, fast-flow material movement. Finished Goods and WIP inventories often shrink by as much as 75%.
- Short cycle times, short promised lead times.
- Extremely high due-date performance or service levels. Synchronous Manufacturing users often receive “best supplier” awards for on-time performance.
- A shop schedule that protects due-date performance against disruptions, that people trust and rely on; also, that needs relatively little maintenance.
- Schedule that provides stability; priorities remain stable, expediting is at a minimum.
- Synchronous Manufacturing schedules typically require overtime only to respond to genuine problems or to opportunities to make more money.
- No sophisticated or expensive computer support usually needed – although we DO recommend software for larger implementations because it shortens the implementation and reduces (yes, reduces) implementation costs. Payback can be less than 60 days.
- The approach generates a broad and deep buy-in from all managers, all functions, all levels. People at all levels are usually enthusiastic and impatient to get Synchronous Manufacturing up and running once they understand what it will do for them.
- Typically 25 – 40% additional capacity “found” in same resources; 20% almost always, 30% often, with some work; and 40% over time, in some cases. That means 20% more shipped without any increase in real operating expenses. That’s a huge boost to the bottom line.
- Clear basis for continuous improvement – continuous quality improvement, and continuous process improvement.The beauty is that the improvements are tightly focused, so actually get put in place.
- Provides a framework for dealing routinely with urgent customer demands. The schedule can actually be built to accommodate urgent customer demands without any disruptions to the orders already in the system, and without any threat to due-date performance.
- Focuses other technologies you may have for maximum leverage and ROI. Theory of Constraints all by itself is a very high-performance system. However it can be even better when it “pulls in” elements of Lean and Six Sigma and SPC etc in a highly focused, highly leveraged manner.
- Enables companies to gain a ROI (or, a better ROI) for the money they’ve invested in ERP implementations or Lean implementations.
The combination of increased output from the same resources along with greatly improved competitive performance and the potential for sales growth makes a Synchronous Manufacturing implementation very attractive, financially.
The Business Case for Implementation is Solid Incidentally, the scale of improvements we discuss below are still typically achievable with Theory of Constraints even if the company’s starting point is a successful Lean implementation. Assumptions:
- The company has sales revenues of $10 MM per year.
- The company’s material costs represent 40% of the Revenue figure, on average.
- The implementation provides the client with an additional 20% of Throughput from the company’s resources following the implementation, AND it can be sold at regular prices.
Note: 10% is ALWAYS achievable, almost effortlessly. I do not know when a minimum 20% improvement has not been recorded. 30% is often recorded. And 40% more is not unheard-of.
The outcomes of the implementation will typically include a lead time reduced by 50% or more. On time delivery percent in the high 90’s. And the increase in productivity that generates the additional Throughput … a 20% increase in Throughput for this example.
From a financial perspective:
- The additional revenues will be 20% X $10MM = $2MM for the first full year.
- The added expenditure on materials to produce the additional revenues will be 40% X $2MM = $800,000.
- The additional Operating Expense needed to generate the additional revenues (beyond the investment in the implementation) will be zero, or negligible. Occasionally some increase in Operating Expense is necessary; however it is always trivial relative to the scale of the added Throughput.
Therefore, the additional Net Profit in this first year is $1.2 MM.
If we choose (for the sake of example) an earnings multiple of 3.5, the value of this business has just increased by $4.2MM …
provided the performance can be maintained.
I want to focus on the assumption in the above that the additional production can be sold.
When the company is able to take the new lead time and on-time delivery performance to the marketplace, it’s usually a good assumption that the added sales can be won, by the regular sales force using conventional tactics.
However, if the improved performance can NOT easily be translated into added sales, we also have more tricks up our sleeve.
The Theory of Constraints offers an application known as the Marketing Solution, aka the “Unrefusable Offer;” and also offers a powerful sales solution that works with the Unrefusable Offer (and also has stand-alone value for any sales force)..
We don’t often need it, but the Marketing Solution comes into play as a way of creating such a clear and major competitive edge that added sales are inevitable.
Check out the Marketing Solution here, or Throughput Accounting – it’s the Marketing Solution that can translate plant improvements into explosive growth, but Throughput Accounting is what opens the door to Synchronous Manufacturing in the first place.
Or return home: Fast, massive performance improvements