Theory of Constraints = Buffer Management

Dr. Eli Goldratt, founder of the Theory of Constraints, said Reaching The Goal: How Managers Improve a Services Business Using Goldratt’s Theory of Constraints was one of the best books ever written on TOC. It was published in 2008 by IBM Press and authored by Dr. John Ricketts, a practitioner and innovator in the field of Theory of Constraints.

I asked Dr. Ricketts, When you apply TOC to professional services, it’s still about managing the buffer, and you have to build a flexible buffer to handle that. Correct?

Related Podcast and Transcription: Theory of Constraints in Services

John:  “Any time you’re talking about a TOC application, you’re talking about some form of buffer management. One of the things that makes the buffer in this replenishment for services application different, however, is it’s explicitly a bidirectional buffer. And for that statement to make sense, let me explain what the traditional TOC buffer would look like in a replenishment arena.

Conventionally, the buffer, and you could think of this as a product sitting on a shelf in a warehouse. The buffer is expressed in the computer somewhere, and its color coded based on the number of items sitting on the shelf. If the number of items sitting on the shelf is so few that you’re likely to sell out before you can get another shipment from the manufacturer, then the buffer level is said to be low or in the red zone. The typical management action would be to reach out to the manufacturer to expedite delivery of more of that product so that you don’t run out.

If you have somewhat more inventory than what I just described, you’ve got enough that you probably won’t run out, but you can’t really be sure, there’s still a little risk there, it would be said that that buffer is in the yellow zone. You would not take explicit action there. You would simply watch it, and if it strayed down into the red zone, you would expedite. Otherwise, you just simply continue to monitor any buffer that’s in the yellow zone.

The third and final level in the conventional replenishment application is the green level. Essentially, green means you’ve got more than enough product to handle the next few day’s worth of sales, or few weeks worth of sales. There’s really no action required. For most of the products that would exist in the warehouse you would find that they would be in the green zone, some in the yellow zone and relatively few in the red zone.

One of the important contributions that TOC makes is it focuses management attention on those aspects that really require their attention, i.e. the products with buffer levels down in the red zone.

What’s unstated in that conventional view of a buffer is there really is a downside to having too many instances of the product in the green zone. In other words, if for some reason the manufacturer shipped you twice as much as you had ordered, and you accepted that order and you had just mountains of that product sitting in your warehouse and you had paid the manufacturer for that that would be a situation where you really had too much of a good thing because as you implement TOC, it drives inventory levels down to help make the enterprise leaner and not tie up so much of its capital in unneeded inventory.

So, I don’t want to leave anybody with the idea that just because you’re in the green zone there’s no problem. If you truly have excess inventory, it’s a problem. However, when we switch over to the services side of implementing replenishment, and I’m getting back now to what I was saying before about this being a bidirectional buffer, the color coding in the buffer for a service’s buffer in this arena is red, green, red, which means if you have too few people on the bench, you may sell an engagement that you can’t staff and, therefore, you have customer dissatisfaction because you have a delayed start.

If you have just enough consultants on the bench ready to be deployed or accountants or whatever the service provider’s core skill is, if you’ve got enough of them, it’s in the green zone. But if you happen to be in, let’s say a seasonal business, and you’ve got more resources coming back from engagements than being deployed onto engagements, or if you’re in an era where the overall economy is sliding into recession, and you’re not selling work quite at the same rate that you did before, here again, the number of people coming back for reassignment exceeds the number going out, and that can tip the buffer level into the red zone on the excess end of that scale.

So what I’m saying is that in TOC for services, we have an explicit bidirectional buffer, and you want either too few or too many instances of whatever it is you’re trying to manage in the buffer. And that really is, because it’s explicit, that’s different from the original incarnation of replenishment buffer for goods.

Related Podcast and Transcription: Theory of Constraints in Services

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