A favorite podcast of mine was with Bob Sproull, an experienced manufacturing executive with a distinguished track record of achieving improvement goals in Manufacturing, MRO, Quality, Product Development, and Engineering. In the podcast (Related Podcast and Transcription: Can Theory of Constraints, Lean and Six Sigma Co-Exist), I asked Bob; “Why do we need all three? It seems mind-boggling. I don’t have enough time to implement Lean. I have enough trouble implementing Six Sigma. Now, you throw Theory of Constraints on there. I think I’m headed for failure.”
Bob: Well, Joe, I can tell you it is not the first time I’ve been asked that question. So, let me try and tell you actually why I think it’s a whole lot easier using this integrated improvement method. In a typical Lean or Six Sigma or Lean Six Sigma implementation, one of the reasons why I think a lot of these efforts fail is because the organization ends up trying to do what I call “solve world hunger.” In other words, they try and Lean out every aspect of the business. When, in fact, if you look at the business, every business has key leverage points.
My thought is rather than trying to improve every single aspect of the business, let’s focus on those leverage points, and those leverage points end up being what Goldratt referred to as the system constraints. One of the things that you have to be a believer in, and I know you’re a believer in the Theory of Constraints, but one of the things you have to believe in is throughput accounting.
By that I mean, if you look at the components of how you make money in the business, you’ve got basically three things. You can go through an inventory reduction. The second thing is what most companies do is, they focus on reducing operating expenses, and, unfortunately, that typically comes in the form of layoffs, which I despise. The third component, though, is by increasing your revenue base.
If you look at those three components, when you reduce inventory, typically that’s a one-time improvement in cash flow. If you look at operating expense -my definition of operating expense is any money that you spend to turn inventory into throughput. And you can cut operating expense way too low. You actually can debilitate the organization, and that’s what happens to a lot of companies.
Throughput, on the other hand, and the definition of throughput in the Theory of Constraints world is new revenue entering the company, and that is really revenue minus total variable cost. That’s such things as the cost of raw materials, sales commissions, those things that vary with the sale of a product.
The bottom line here is… Back to your original question, why is it so much easier? Well, you don’t need nearly the army of improvement resources that you might think. I think another mistake a lot of companies make is they go out and train the masses and expect to see bottom line improvement. My belief is you need enough to focus on the constraint until you improve the constraint to the point where it’s no longer a constraint. But, as soon as that happens, another one takes its place.
Then, you simply move your resources, your improvement resources, to that new constraint, and it becomes a cyclic cycle of improvement. It sustains itself. So, from that perspective to me it’s a lot easier. All three initiatives, Lean, Six Sigma and the Theory of Constraints, not just complement each other, but they enhance each other. You get faster bottom line improvement with less effort. So, that’s my take on it. That has worked for me in many of the companies that I have implemented this.
Marketing with PDCA (More Info): Targeting what your Customer Values at each stage of the cycle will increase your ability to deliver quicker, more accurately and with better value than your competitor. It is a moving target and the principles of Lean and PDCA facilitates the journey to Customer Value.