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Achieving quantum increase in performance the TOC Way

Homex India 9th April 2010


Goldratt India
www.goldrattindia.com Measurements drive behaviour

Workshop Agenda
     

Organizational Goal Measurement for the Goal Constraint for achieving the Goal Process Of On Going Improvement-five focusing steps Constraint identification Understanding the three most common causes for delay in projects Bad Multitasking Starting without Full-Kit Student Syndrome Next steps
Measurements drive behaviour

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Six Layers of Resistance


     

Layer 1: We do not have a problem or we do not have this problem. Layer 2: We do not agree on the direction of the solution. Layer 3: We are not in agreement with the solution. Layer 4: The solution has negative side effects Layer 5: We have implementation obstacles. Layer 6: Un-verbalized fear.

The Goal?

What is the Goal of your organization?

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The Goal?
Some organizations state that their Goal is to be a World Class Quality Company. Stated differently they would like to delight their customers now as well as in future.

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The Goal?

Many other organizations say that their Goal is to keep their employees happy now and in future.

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The Goal?

A few organizations declare that their Goal is to make money now and in future!

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The Goal?

Is there any conflict between the three Goals stated or a hierarchy of Goals?

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The Goal?
 For example

let us choose that our Goal is to delight customers now and in future.  In order to achieve our chosen Goal i.e. to delight our customers now and in future, it is absolutely necessary to keep our employees happy now and in future.  Similarly it is imperative to make money now and in future in order to continue to keep our employees happy.
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The Goal?
 Now let

us decide that our Goal is to keep our employees happy now and in future.  In order to achieve our chosen Goal, it is absolutely necessary to make money now and in future.  It is impossible to make money now and in future unless we continue to delight our customers now and in future.
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The Goal?
 Now if

we decide that our Goal is to make money now and in future, is it really possible to achieve it without delighting our customers now and in future!  And can we satisfy our customers without keeping our employees happy now and in future!

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The Goal?
 In reality

there is no conflict between the three different Goals.  Choose any of the three Goals, the other two become the necessary conditions for achieving the chosen Goal!  For the purpose of this presentation we will assume that the Goal is making money now and in future.
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Measures for the Goal-Making Money


Generally accepted measures are  Profit  Return on investment  Cash flow We do not question the validity of these measures. However we do question the usefulness of these measures as operational measures!
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Current situation


 

Only 23 out of 3000 (0.8%) companies actively trading on the Bombay Stock Exchange have increased their profits continuously in the last 10 years (The Economic Times 24th September 2005) And the Goal of the organization is to make more and more money Hence as per our agreed definition of Goal, 99.2% organizations are not achieving their Goal!
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Five levels of financial health Making more and more money


1. 2. 3. 4. 5.

Unable to meet financial commitments Meeting financial commitments but not making profits Meeting financial commitments, not making losses, but profits fluctuating Profits increasing continuously period after period Return On Investment (ROI) / Return On Capital Employed (ROCE) increasing continuously
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What measurements should we use?


 For the

average employee, seeing the effect that any given action has on Net Profit (NP) or Return On Investment (ROI) is almost impossible.  As a result we have created local measures like efficiency & utilization because we believe that they are linked to NP or ROI.  We do know that 99%+ organizations are not achieving their Goal.
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What measurements should we use?


New Operational Measures  Throughput (T)  Investment (I)  Operating Expense (OE)

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Flow of money
Goal Units

RM

+ OE
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Throughput (T)
 The

rate at which Contribution Rupees are coming into organization.  Only Rupees generated by the system are counted; e.g., Rupees spent on purchasing raw material or services do not count as they are passed on to your suppliers.  T=(Net sales-all truly variable costs)

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Investment (I)
 All

the money currently tied up inside the system.  All the inventory in raw material, WIP, or in Finished Goods.  Money blocked in plant and machinery.  Receivables are also part of I.

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Operating Expense (OE)


 All

the money that system spends on converting inventory into throughput.  All the expenses are clubbed together as OE and are thought as fixed.  All employee expenses are part of OE.

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Financial Links
Is there any link between the new Operational Measures T, I, & OE, and conventional measures as P, ROI, & Cash Flow?  P = T- OE  ROI = P/ I = (T-OE)/I  What happens to P, ROI & cash flow when we improve either T, I or OE, keeping other two as constant?
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Financial Links
 If we

increase T keeping I & OE constant, P=(T-OE) improves, ROI= NP/I improves, and so does the cash flow.  If we decrease I, keeping T & OE constant, P improves due to reduced carrying cost, ROI improves, and of course cash flow improves.  When we reduce OE keeping T, and I constant, P, ROI, and cash flow improve.
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Financial Links
 Improving

Throughput, Investment and Operating Expense have a positive co-relation with improving P, ROI, and cash flow.  Throughput, Investment and Operating Expense are valuable operational measures that can guide our day to day actions to making money now and in future.

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Constraint for making money

What is that limits your organization to achieving more of its Goal - to make more and more money?

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Theory of Constraints (TOC)


 The

core idea in the Theory of Constraints is that every real system such as a profit-making enterprise must have at least one constraint that limits the system to achieving its Goal.

 Every for

profit organization will have a constraint in Supply, Operations, or Market. Current constraint may shift, but there cannot be any situation when there is no constraint. Had it been so, its profit would have been Goldratt India infinite!

Theory of Constraints (TOC)


Constraints are neither good nor bad. They are facts of life.

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Theory of Constraints (TOC)


There is really no choice in the matter. Either you manage the constraints or the constraints will manage you. The constraints will determine the output of the system whether they are acknowledged and managed or not.
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Organization as a chain
 An

organization can be compared to a chain.  The activities that constitute a business are chain of dependent events.  For example we do not dispatch components unless they are packed, and we do not pack parts until they are manufactured.

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Organization as a chain
 The

output of the organization is achieved through the synchronized efforts of various functions.  The output is limited by the weakest area.  The strength of the chain is determined by the strength of the weakest link.  What should be done to improve the output of an organization?
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Organization as a chain
 Should we

improve all functions or all links?  Or should we strengthen the weakest function or the weakest link?  It is common sense that unless we improve the weakest link, the organizational output or chain strength would not increase at all.  Is it possible that overall organizational effectiveness is reduced by improving performance in one department ?
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Organization as a chain
 The

global improvement is not the sum total of all the local improvements.  Often organizations spread their energies thin in all areas in order to improve the output.  In the TOC world optimizing a sub-system would sub-optimize the whole system.

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How does TOC help companies


1.

2.

Focusing improvement efforts where it will have the greatest immediate impact on the bottom line. Providing a reliable process that insures Follow Through

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A process of on going improvement (POOGI)


1. 2. 3. 4. 5.

Identify the constraint. Exploit the constraint Subordinate all policies, decisions and procedures to exploiting the constraint. Elevate the constraint. If we need still more output from the constraint, elevate it. Avoid inertia. If in a previous step constraint shifts, start the cycle once again.
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POOGI: Step 1
Identify the Constraint.  The constraint can be internal or external to your organization. Internal constraint is preferable.  The constraint can be tangible or intangible. For example it could be an equipment or a policy.  Invariably (> 95%) the constraint is a policy.
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POOGI: Step 2
Exploit the Constraint.  Get the most possible out of the existing capacity of the constraint.  Utilization at the constraint is critical.

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POOGI: Step 3
Subordinate all decisions to exploiting the constraint.  All policies and measurements must be designed to get the most out of the constraint.  Utilization and efficiency at the non-constraint resources must not be measured. However this does not imply that there are no measurements for non-constraint resources.  This step is often missed, and thereby the majority of financial benefits of TOC is lost. This is the toughest step.
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Exercise-Profit Maximization
P
$90/U 100 U/week

Q
$100/U 50 U/week

BIC $5/U C 10 min./U

D 15 min./U

D 5 min./U

C 5 min./U

B 15 min./U

Perfect operation (no defects) Same selling price to any clients Fixed market potential Set-up times nil 4 workers (skills are not interchangeable): 1 worker with skill A 1 worker with skill B 1 worker with skill C 1 worker with skill D Each worker is available 5 days a week, 8 hours a day (i.e. 2400 minutes a week) Total operating expenses of the company are $6000 per week (which includes salaries, and everything else)

A 15 min./U

B 15 min./U

A 10 min./U

RM1 $20/U

RM2 $20/U

RM3 $20/U

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POOGI: Step 4
Elevate the constraint.  If more capacity is required after steps 2 &3 to meet the market requirements, increase it through capital investment, outsourcing, or offload the constraint by defining alternative routings, processes or design. Capital investment should not be the first option.  Often times, Exploitation and Subordination are sufficient to reach the needed output. Do not increase the investment too soon.
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POOGI: Step 5
Avoid Inertia.  If in a previous step the constraint is broken, go back to Step 1. Do not let inertia be the system constraint.  Often times when a new constraint is identified, it is necessary to change the policies you have just made!

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POOGI: Step 5
Avoid Inertia.  The long term strategic application of TOC does not call for continuous removal of all constraints.  Rather, the idea is to choose where the constraint should be in order to best exploit the market opportunities, and then keep it there!

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Constraints: Identification
 Every system will

always have only one weakest link at any given timeConstraint  Constraint is in market if market share > 50% of world market  Constraint is orders if On Time in Full (OTIF) > 95%
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Constraints: Identification


Supply is constraint if material availability < 95% despite payments being on time Suppliers if consumption is > 50% of world consumption Supplier policies if consumption < 50% of world consumption

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Constraints: Identification
 Constraint

is operations when OTIF < 95%, and material availability > 95% Equipment if OEE (Overall Equipment Effectiveness) for at least one equipment >95% on 24X7 basis Operational policies if OEE < 95%

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Cash Constraint
There is Cash Constraint only and only if there are  sufficient orders i.e. OTIF < 95%  manufacturing capacity i.e. OEE < 95% for all equipments  right suppliers  there are raw material shortages as suppliers are refusing to supply unless paid upfront  additional cash cannot be easily arranged  Cash shortage does not necessarily imply cash constraint.  However if cash shortage is not managed properly, it will lead to cash constraint
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Case study 1: Capital goods manufacturer


 Background

Capital goods manufacturer for refractory equipment It was losing money for 2.5 years Owner has decided to close the plant in six months Constraint: cash / Goal achievement level 1

 Actions
Stopped measuring machine utilization Stopped measuring local performance parameters to prevent

bad multi tasking Focus on cash generation Weekly review

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Case study 1: Capital goods manufacturer


 Results
Turned around in 100 days Turnover increases by 30 times in 5 years Current profit > 3 times turnover in 2000

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Case study 2: Auto component manufacturer




Background manufacturer of automotive gears Losing money for last 5 years Action initiated for divestment Constraint: Operational policies / Goal achievement level 2 Actions Stopped measuring Tons All functional heads Key Result Areas (KRAs) abolished Started measuring OTIF (On time in full) Focus on throughput instead of sales Weekly review
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Case study 2: Auto component manufacturer




Results Throughput increases by 70% within 2 years

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Case study 3: Refractory manufacturer




Background manufacturer of refractories for steel and cement industry Inconsistent profits Constraint: Orders / Goal achievement level 3 Actions Stopped measuring Tons Started measuring Throughput loss Focus on throughput instead of sales Weekly review Results Throughput increases by 25% within 3 months
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Solution Direction
the Goal of Homex  Agree on the measurements for the Goal (T, I, OE, T/I, & T/OE, OTIF)  Align the functional measurements with the overall Goal measurements  Focus on increasing OTIF
 Agree on

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TOC Way of managing projects


1.

2.

3.

Stop bad Multi-tasking / Focus: The objective is to finish all projects fast / on time and not start a project at the earliest! Work only on a few projects at any given time. Full kit: Work on any project can start only and only if all the relevant specifications, and resources are available in full. Remove all self imposed barriers to resource utilization within Homex. Remove all measures that prevent this and introduce right measurements that encourage this behavior.
Measurements drive behaviour

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TOC Way of managing projects


4.

Prevent Student Syndrome: In almost all projects we take safety time and then waste it!
Take ambitious target to finish the project in half the time (D / 2) The remaining 50% of time is buffer Monitor buffer consumption Prioritize according to buffer consumption

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Measurements drive behaviour

Next steps

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Measurements drive behaviour

Review Process
What is the purpose of review?  Know the current situation  Justify that better than what has already been achieved would have been impossible  Find the culprit  Or take corrective action!
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What are the UDEs of current review process?


  

  

A lot of the time is lost in validating the data presented People try to defend that nothing better could have been achieved People try their best to assert (give reasons) that they are not responsible for not achieving agreed targets (external causes are the culprits) In case budget targets are achieved, complacency sets in (full advantage is not taken in growth environment) Over all we are all satisfied with our underperformance What are the feelings people have at the end of the day that are involved in the review?
Measurements drive behaviour

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Recipe for success Make a few right decisions provided you do not make too many wrong decisions! Warren Buffett

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Measurements drive behaviour

Assumptions
     

People do not have good forecasting skills People want to improve People want to have a sense of achievement frequently Currently most people are not achieving a sense of achievement on daily / weekly basis Capacity is flexible (It goes down with failures, and increases with successes) Results achieved are a function of targets really strived for
Measurements drive behaviour

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New review process


  

  

Only a few (3-5) parameters chosen for focusing No fixed targets for the year / quarter People are encouraged to try their best to improve upon their last period performance. (we need to detail how long the past period should be) Why should review frequency be monthly? Suggested review period -about 20 invoices A very high degree of discipline is expected for regular review. There are no exceptions for not holding the review meeting on time.

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Measurements drive behaviour

New review process


  

Report for the period must be available every time on time Relevant information is available and displayed across the organization for all people No questioning of data in the review meeting (breaking heads before / after the meeting is perfectly acceptable) No analysis paralysis. Not wasting too much time for analyzing reasons for not achieving the target. The focus is for corrective action only
Measurements drive behaviour

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Thank you! ravigilani@goldrattindia.com

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Measurements drive behaviour

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