6 March 2014
Sometimes, improvement doesn’t require innovation or invention. Rather, existing, perhaps even obvious paths to improvement can often be revealed by removing the blocks that obscure them. Consider the question: “why didn’t we produce one more (whatever you make, including dollars) last (shift, month, quarter, year)?” Regardless of how many you did produce, there is always some reason why one more didn’t happen.
The Primacy of Throughput
Eliyahu Goldratt’s Theory of Constraints provides a widely applicable method for addressing the “why didn’t we produce one more…” question. Theory of Constraints began with the familiar factory floor problem of getting orders out when promised. Theory of Constraints, as its name implies, focuses on locating, prioritizing and elevating constraints to throughput. Initially, “constraint” referred to some specific piece of equipment or work center that, for whatever reason, consistently limited the throughput of the entire facility. [i][ii]
Goldratt’s idea of throughput is worth considering. For Goldratt, “throughput” might be defined as a measure of progress toward achievement of the organization’s goal. Since a business unit is a system, that goal needs to reflect the throughput of the entire system, not the performance of various parts of the system. Goldratt originally defined the goal of a commercial enterprise as “to make more money now, as well as in the future”. [iii][iv]
Be aware that “throughput” refers to products sold — to revenues, not to building (and valuing) inventories. Unlike conventional managerial accounting methods, throughput trumps operating costs as a managerial tool. [v] Simply put, costs cannot be reduced beyond zero, while throughput has the potential for increase without apparent upper bound.
Zoomed out Blocks [vi]
As mentioned, Theory of Constraints was originally envisioned as a tool for factory floor improvements. However, as improvement progresses, the operative constraint zooms out from the factory floor to policy issues, or to the market, or to many other areas.
Tesla Motors is currently facing a numerous and diverse array of constraints as they attempt ramp up throughput of their electric automobiles. Tesla’s current situation provides a rather extreme example of the sorts of constraints that must be prioritized and addressed in order to bring a new industry to global reality. Here are a few of them:
Quality: For a new product like Tesla to rapidly gain traction globally, product quality (and all that “quality” means) must be exceptional. Tesla has won prestigious awards for design, quality and safety. Still, when three Tesla automobiles were involved in fire situations, public reaction (fanned by the media, of course) was harsh, never mind that the fires were related to significant impact situations, that nobody got hurt in any of the fires, and that thousands of ordinary automobiles are involved in fires every year.
Recharging: Since potential customers are reasonably concerned about recharging the Tesla automobile wherever they go, Tesla is building extensive networks of recharging stations in North America, Europe and China (Tesla’s biggest markets). Many hospitality businesses already provide recharging facilities. Also, Tesla automobiles are equipped with GPS locators, so drivers always know where near-by charging stations are.
Dealer Networks: For sound reasons, Tesla prefers to market its automobiles directly to consumers, rather than through a conventional dealer network. However, several States have passed laws to require that automobiles be sold exclusively through dealers. Tesla’s preference for direct sales requires that Tesla provide satisfactory vehicle delivery, maintenance and service alternatives to local dealerships.
Supply Chain: In 2014, Tesla’s current manufacturing schedule will require almost half of the lithium ion batteries produced in the world. So, Tesla has announced that they will build a “gigaplant” to produce the batteries that will power Tesla vehicles, to be on stream in 2017. This in addition to the usual problems associated with locating and proving suppliers for any rapidly growing manufacturing business.
Surviving / Striving / Thriving
Firms in crisis — survival mode — may have little alternative to intense costs management — including cost reductions that are likely to have negative consequences in the future. Firms that are on a more solid footing, however, should emphasize throughput increase over operating costs reductions, as Theory of Constraints suggests.
This does not mean that operating costs controls are not important. It does mean that the opportunities for improvement through increased throughput usually far exceed those of costs reduction. It also means that emphasis on costs — especially allocated costs or costs that do not involve immediate cash expenditures — often lead to poor management decisions.
Thoughtful comments and experience reports are always appreciated.
… Chuck Harrington (Chuck@JeraSustainableDevelopment.com)
P.S: Contact me when your organization is serious about pursuing Sustainability … CH
This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published on Wednesday evenings.
[i] Information on Theory of Constraints, as cited in this post, relies primarily on E. Goldratt The Goal, Third Revised Edition, North River Press (2004) and on E. Goldratt, What is TOC?, Chapter 1 of J. Cox III and J. Schleier, Theory of Constraints Handbook, McGraw-Hill Professional (2010).
Note: Several individual chapters of the Handbook, including Chapter 1, are available for inexpensive download on Amazon.
[ii] Wikipedia, referencing Goldratt’s The Goal, lists the steps in the Theory of Constraints program of on-going improvement as follows:
Assuming the goal of a system has been articulated and its measurements defined, the steps are:
>> Identify the system’s constraint(s) (that which prevents the organization from obtaining more of the goal in a unit of time)
>> Decide how to exploit the system’s constraint(s) (how to get the most out of the constraint)
>> Subordinate everything else to the above decision (align the whole system or organization to support the decision made above)
>> Elevate the system’s constraint(s) (make other major changes needed to increase the constraint’s capacity)
Warning! If in the previous steps a constraint has been broken, go back to step 1, but do not allow inertia to cause a system’s constraint
[iii] Goldratt later rephrased this goal as “to become an ever-flourishing company” to emphasize the importance of building stability as the business grows. “(T)o become an ever-flourishing company” implies an emphasis on Sustainability. For more on this, see Beyond Red Curve, Green Curve, this blog: http://blog.jerasustainabledevelopment.com/2013/12/11/beyond-red-curve-green-curve.aspx
[iv] My personal choice for most manufacturing firms is to express this goal operationally as net sales dollars (revenues minus directly associated raw materials costs) and return on capital employed objectives.
[v] For more on managerial accounting and Theory of Constraints, see Thomas Corbett, Throughput Accounting, North River Press (1998) or Eric Noreen, et al, The Theory of Constraints and its Implications for Management Accounting, North River Press (1995).
[vi] “Zoom lens” thinking is a hallmark of this blog. For more on zooming in and zooming out, see Green and the Zoom Lens Mind, this blog: http://blog.jerasustainabledevelopment.com/2012/02/22/green-and-the-zoom-lens-mind.aspx