When practicing Six Sigma or any other form of process improvement, it is important to focus improvement efforts where they will do the most good. Of all of the things that we could work on, what should we work on in order to return the most benefit to the organization and the customers of the organization? One way to address this question is to apply Theory of Constraints thinking. We introduce the Theory of Constraints in our Green Belt course, and our Black Belt students are challenged to apply the thought process in the course of completing their Black Belt certification project.
The Theory of Constraints as developed by Dr. Eli Goldratt (1947-2011) is an overall framework for helping businesses determine what to change (the leverage point), what to change to (in terms of practical solutions), and how to cause the change (by overcoming the inherent resistance to change).
Goldratt was an educator, author, scientist, philosopher and business leader. He is the author of many books including The Goal, a best-seller that utilizes a non-traditional approach to impart important information regarding his Theory of Constraints.
An organization may be viewed as a chain of activities. For example, a company that sells a product may consist of a chain that includes raw material suppliers, manufacturing operations, distribution channels, dealers and retail customers. Every organization has a constraint in its chain of activities that prevents the organization from moving closer to its goal, which is to make money now and in the future. If there were no constraints of any sort, an organization would make an infinite amount of profit.
Goldratt points out that improvement requires change, but that change does NOT always result in improvement. I am sure that we all can think of situations where a change was made in the name of improvement but the results were negative instead of positive. Improvement is defined by Goldratt as improved net profit and improved Return on Investment (ROI).
There are three areas that we must focus on in order to improvement net profit and ROI. These are throughput (T), inventory and investment (I), and operating expense (OE). All are expressed in terms of dollars. Throughput is defined as revenue minus the cost of raw material. Revenue should be recognized only when a product is sold. Making a product and putting it into inventory does not generate any profit – all it does is increase the cost of having and carrying the inventory. Inventory and investment are the costs incurred to carry inventory and to purchase facilities and equipment. Operating expense is the cost to turn raw material into throughput.
Net profit is equal to T – OE, and ROI is equal to (T-OE)/I. It is clear from looking at these formulas that in order to improve we must increase throughput, decrease inventory and investment, and/or decrease operating expense. All potential improvement projects should be evaluated on their overall impact T, I and OE, and we must look at all three in unison.
Goldratt goes on to explain that improvement must be ongoing and must be focused on the constraints in the system. In practice we should use his thought process to determine where to focus our Six Sigma improvement efforts. There following five focusing steps are used to apply Theory of Constraints thinking:
1. Identify the constraint using data. Typically there are few constraints in a process; often times there is only one.
2. Exploit the constraint. Get the most out of the constraint given that the existing process is still in place. Focus attention here, and provide all the resources that the constraint needs to operate at maximum output.
3. Subordinate the rest of the system. Do not flow material to the constraint at a rate faster than it can be consumed. If we do so, the only result will be a pile up of inventory ahead of the constraint.
4. Elevate the constraint. Improve the constraint so that it has more capacity.
5. If you break the constraint, go back to step one and identify the next constraint in the process.
Think about a drive that you take on a regular basis – perhaps your commute to work at the same time each day along the same route. Let’s apply the Five Focusing Steps:
1. Identify the constraint. The constraint is the place where traffic always backs up and slows down. Data could include the number of cars in line at a traffic light, or the amount of time spent waiting.
2. Exploit the constraint. Use traffic officers to direct traffic as required. Have crews on call to quickly remove any broken down vehicles.
3. Subordinate the rest of the system. Restrict the amount of traffic that can enter the road where the bottleneck is occurring.
4. Elevate the constraint. Add more lanes to the road. Change the traffic lights so that they stay green longer on the constrained road.
5. If you break the constraint If the road that was the bottleneck now flows smoothly and another road is backing up, then go back to step one and start over.
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About the author: Mr. Roger C. Ellis is an industrial engineer by training and profession. He is a Six Sigma Master Black Belt with over 45 years of business experience in a wide range of fields. Mr. Ellis develops and instructs Six Sigma professional certification courses for Key Performance LLC. For a more detailed biography, please refer to www.keyperformance.com.