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A Guide to Implementing the Theory of Constraints (TOC) |
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Postscript
Eli Schragenheim, Bill Dettmer, and Wayne Patterson have published a
book (2009) called Supply Chain Management at Warp Speed: integrating the
system from end to end. It is
published by CRC Press. If this book
had have existed several years ago, I might not have needed to write these
pages, especially those on replenishment and replenishment &
distribution. If your interest
encompasses any part of supply chain or make-to-stock then I thoroughly recommend
that you get a copy of this book. You will
find it most helpful. Crossing The Threshold – External Constraints Constraints
have just two locations, internal to the system or external to the
system. So far we have pretty much
dealt exclusively with internal constraints and usually physical ones at
that. However, we have mentioned that
often policy constraints are more important than physical constraints and that
these physical constraints are often simply an expression – a symptom – of a
deeper underlying policy constraint. Much of
the leadership and learning section was really addressed at policy
constraints, and similarly our need to reframe the environment from a
reductionist/local optima approach to a systemic/global optimum approach in
order to address these fairly large-scale or first-order problems. In the next section – tool box – we will
examine the means to address these types of constraints in more detail. We have
also briefly touched upon the subject of external constraints – principally
their effect on management accounting decisions and manufacturing policy
decisions. Now, however, it is time to
investigate external constraints – mainly sales constraints – in more
detail. We will look at some of the
operational implications, the effect of our distribution or marshalling
system (regardless of whether we own it or not) and how we can manage these
systems to increase sales. The
most common type of external constraint is a sales constraint – we can’t sell
as much as we can produce. This is in
fact the first time we have a constraint that is apparently outside of our
direct span control. Let’s draw it.
In our previous
dealings with physical constraints we found that often the physical
constraint was an expression of a deeper underlying policy constraint. So too with external constraints. Although the constraint may be external to
the system the underlying cause may well be internal and therefore actually
within our direct span of control.
This is why we used the term “apparently outside our direct span of
control” in the previous paragraphs.
If the cause isn’t within our direct span of control, then the cause
must be external to the system but still quite possibly within our sphere of
influence. Think
about it. If the cause isn’t within
the embrace of these two factors we should give up now, or we should do
something to bring it within the embrace of these two factors – extend our
span of control, and/or extend our sphere of influence. In fact there are those who argue against
the use of the word “external constraint” because it lets people “off the
hook” from asking what the real causes are – “it’s the market dummy.” Chances are that it is not. Therefore
the causes of marketing and sales constraints can be subdivided into two; (1)
Causes that are internal
to the company (2)
Causes that are external
to the company
(1)
Identify the system’s constraints. (2)
Decide how to
Exploit the
system’s constraints. (3)
Subordinate everything
else to the above decisions. (4)
Elevate the system’s constraints. (5)
If in the
previous steps a constraint has
been broken Go back to
step 1, but do not allow inertia to cause a system constraint. In other words; Don’t Stop. Let’s
have a look at some of the internal issues first. Let’s
have a look at some causes of sales constraints that are internal to the
company and under our direct span of control.
We will deal with each of these in more detail in the following pages. In a
make-to-order environment it is insufficient to be able to make acceptable
volume by increasing output; we must make it at least as quickly as, or
quicker, than our competitors can.
Failure to do this will present itself as a sales constraint although
the primary cause is our own lead time.
People won’t buy from us because they can get the same thing quicker
from someone else. Batching and
work-in-process are often a substantial cause of the overall lead time in a
make-to-order environment. In a
make-to-stock environment, increasing the output but not decreasing the lead
time may cause our finished goods stock to balloon. However we seem to be so busy building some
needed stock that we can’t keep up with the other needed stock. We end up perpetually chasing our tails
while our customers go elsewhere in search of our out-of-stock product. In this case the type of batching that we
choose to employ has a substantial effect on overall stock levels. We must use smaller process batches to have
an effect in make-to-stock environments. What if
we make-to-stock according to forecast?
In a make-to-forecast environment we exacerbate the previous
condition, we may in fact end up making too much of some things that our
customers don’t want, and too little of some things that our customers do
want. Again, this will look like a
sales constraint, however, the primary cause is forecasting and forecasting
in-turn has an undesirable effect on lead time. In a
distributed make-to-stock environment not only will we sometimes make too
much of things that our customers do not want and too little of the things
that they do want, but they will sometimes be in the right place at the wrong
time, and sometimes the wrong place at the right time. It looks like a sales constraint but the primary
cause is distribution, and this in turn is an effect of forecasting and lead
time. In each
of these levels we have missed sales by not having the right thing in the
right place at the right time. This is
internal to the business, we have direct control over this and can rectify it
and increase throughput (and decrease dead stock) as a consequence. We will examine these in the sections on
lead time, finished goods, and replenishment & distribution. Once we
have exhausted all of the internal causes of the sales constraint, and our
throughput has further increased, we should find that we can still produce
more than we can sell, thus the cause has also become external to the
business. The tool to overcome this
external cause is the Mafia Offer or unrefusable offer. Essentially this is the application of the
Thinking Process tools to a sales problem. Sometimes
the external constraint may be the next link in the chain – your direct
customer, sometimes it’s further removed – maybe it is your customer’s
customer, the end user. Even though
the end user is outside of our direct control they are still within our
sphere of influence. More importantly;
regardless of where the cause of the external constraint is, the solution is
actually internal to our own organization.
This is the power of the mafia offer. Let’s
reiterate; all the “internal” and “external” causes of the external sales and
marketing constraints must have internal solutions – just as in the
“internal” operations constraints had internal solutions. If they don’t then we must extend our span
of control or our sphere of influence outwards until we do have a solution. In most cases the solutions will be changes
in our own internal policies. How
transparent will the rationale for the changes in our own internal policies
be to our competitors – or even to our customers? Not transparent at all. If the rationale for the changes is not
apparent to our competitors, what is the chance that it can be readily
imitated? Not a very high chance at
all. Now what if we can do this faster
and more frequently than our competition, surely that is a significant
commercial and strategic advantage. We
will return to this theme in the in a number of places, but particularly the
page on strategic advantage. Throughout
these webpages we have stressed a systemic/global optimum approach. This means that sales and marketing and
production are integral. This does not
mean that once manufacturing gets its mess sorted out that, only then, should
we look at sales. Sales will always
invoke that the real problem is external.
Whereas we might be able to refute that in manufacturing we might not
be able to refute that in sales or marketing.
However, it is not the location of the problem that matters. It is the location of the solution, the
pivot point, the leverage point, and those are always internal. When sales personnel explain that the
problem is out of their hands, we must reframe the situation so that they
understand that the solution is indeed within our direct control. The
most important thing we can do is to make sure that we involve sales and
marketing at the very outset of any Theory of Constraints implementation,
because even though the constraint may not reside in the market currently it
soon will and indeed this is the preferred place for it to be located. Why should the constraint reside externally
to the system? Well, when the
constraint is internal it means that there are people who want to use our
service or buy our products that can’t.
We are missing out on real income.
People want to give us money but we can’t take it. What a waste! When
the constraint is external we know that we are not missing these sales anymore. Now we are searching for additional
sales. The more additional sales that
we can leverage over our fixed operating expense the more profitable the
organization. The more profitable the
organization, the more robust and secure is its future. Even
when the constraint is external, the preferred position, the cause giving
rise to the constraint could be external or internal. However, regardless of where the cause is,
the solution designed to overcome the cause must be internal. Most causes are policy in nature and
therefore so are the solutions.
Changes in policy are not usually capital intensive. Moreover changes in policy are not readily
visible to competitors. Let’s
have a look at the first of these internal solutions – lead time. This Webpage Copyright © 2003-2009
by Dr K. J. Youngman |
