Theory Of Constraints: Can It Help You Achieve Lean?
Like many manufacturers today, your organization may be looking to embrace concepts like Lean and Demand Flow Manufacturing to remain competitive. Perhaps you have studied these concepts but have not yet put them into practice. Maybe you have launched an initiative but are having difficulty achieving the results you expected.
If you are pursuing Lean and Demand Flow, you owe it to yourself to study Theory of Constraints (ToC). ToC management principles, which have been around for twenty years, align closely with Lean and Demand Driven objectives and can provide methods and insights to help achieve your goals. Furthermore, by examining the factors that have limited more widespread adoption of ToC, you may be able to identify and avoid similar pitfalls in your pursuit of Lean.
Dr. Eliyahu Goldratt published the seminal book on ToC, The Goal, in 1984. Click Here for an overview of ToC's four basic constructs. Dr. Goldratt's concept of throughput accounting is universally applicable to Lean thinking. ToC's Drum, Buffer, Rope production scheduling technique can support Lean Manufacturing philosophies at manufacturers of custom or make-to-order products (where rearranging plant facilities into flow-oriented cells or lines might not be practical). For more information on this subject, click here for a white paper entitled Lean Manufacturing In A Make-To-Order Environment.
Over two million copies of The Goal have been sold. According to former president of APICS - The Educational Society for Resource Management, Carol Ptak, thousands of initiatives have achieved measurable results by adopting ToC management philosophies. The product offerings that fueled supply chain optimization vendor i2's (Dallas, Texas) phenomenal early growth, Factory Planner and Supply Chain Planner, are rooted in ToC. Charlie Allieri, vice president of marketing at Lilly Software Associates (Hampton, New Hampshire), points to dozens of small and medium manufacturers that Lilly has helped – not from installing software – but from training their management teams in ToC concepts and how to apply them.
A recent case study from enterprise software provider, IFS (Stockholm, Sweden), describes a plastics extrusion company with $50 million annual sales and 100 employees. After launching a ToC based performance measurement system, it has doubled its inventory turns, cut lead times in half, increased market share, and substantially improved its bottom line.
So, what has limited more widespread adoption of ToC? More importantly, what can be done to diminish those limitations? According to several manufacturing industry experts who are strong ToC advocates, the biggest limitation is the conflict between ToC's throughput accounting metrics and conventional performance measurement systems.
ToC Performance Metrics
In his book, The Goal, Dr. Goldratt suggests that the following three measurements cover everything you manage in your plant. The definitions are taken verbatim:
- Throughput is the rate at which the system generates money through sales.
- Inventory is all the money that the system has invested in purchasing things it intends to sell.
- Operational expense is all the money the system spends in order to turn Inventory into Throughput.
It is important to note that each of these definitions contains the word money. Throughput is the money coming in, inventory is the money currently inside the system and operational expense is the money expended to make throughput happen. So you have one measurement for incoming money, one for the money still stuck inside, and one for the money going out. Equally important is that you must not focus on improving one of these measurements in isolation. The goal is to reduce operational expense and inventory, while simultaneously increasing throughput.
Why do companies have such a hard time embracing these metrics? The answer lies in the fact that these measurements conflict with Generally Accepted Accounting Principles (GAAP) methods for cost accounting. This conflict raises debates such as: Is inventory an investment or an expense? How to account for value added through direct labor? What's more important, efficiency or throughput?
While production managers may be quick to embrace ToC, if they are still being measured by finance using standard accounting practices, the project will fail. When senior level management embraces the new metrics for managing the business, they are able to negotiate the compromise between production and finance. This is why there are more success stories in small and medium businesses where the owner is closer to the issues on the plant floor. If you choose to embrace throughput accounting to drive decision making at the plant operations level, you still need to maintain another set of books to satisfy GAAP financial reporting.
Use the following links to learn more about the conflict between throughput accounting and traditional cost accounting, and how to resolve it.
Access an overview written by Carol Ptak, vice president of manufacturing industries at Peoplesoft (Pleasanton, California), on the differences between traditional product cost accounting and the throughput metrics employed by ToC.
View a more detailed discussion on how to capture the mindset of your senior level management to accepting throughput measurements as a viable means to manage the business.
Download a more detailed comparison of throughput accounting versus GAAP accounting/absorption costing for a variety of production scenarios.
Click Here to review one of several books available through APICS' bookstore which address the Throughput Accounting.
By Kurt Menges, chief editor, Data Collection Online, Supply Chain Market, Logistics Online, and Wireless Workforce Online