While visiting a plant last month, our Founder, Dr. Domenico Lepore, told the dramatic story of his experience at a German aluminium plant, part of a multi-billion, multi-national business. The General Manager had invited Domenico to give a presentation after hearing him speak at a Theory of Constraints (TOC) conference. In that plant, the hot mill alone was a billion dollar asset operation with 127 people working three shifts. The Plant Manager was understandably proud as he showed the hot mill off during a tour of the giant machinery that melted the metal, stirred it in what looked like a massive cauldron and rolled it out into sheets, like a giant lasagna factory.
“So what do you think?” the Plant Manager was beaming. Perhaps he should not have asked that question.
“Well, instinctively,” Domenico answered, “from what I’ve seen today, I’d say that the phase of pre-heating is a bit narrow. It’s fine for big lots but if you have to change over too fast you’ll have a bottleneck where you don’t want it.”
That very evening, there was a major explosion at the factory. Thankfully, no one was injured. The Plant Manager, however, began to realize that the problems he experienced every day were linked to the under-sizing of the pre-heating phase. He was so distressed by this realization and all its implications that he had to take 6 months off work. The General Manager offered Domenico a highly-paid position to stay at the mill. Domenico politely refused and explained that his job was to advise companies and he could only do that effectively because he was not part of the system.
Balanced vs. unbalanced – a revolutionary insight with the Theory of Constraints
What Domenico had noticed and that had such a dramatic impact on the aluminium plant was that it was a “balanced” plant instead of being “unbalanced” around a physical constraint. Dr. Eliyahu Goldratt who developed the Theory of Constraints provided a revolutionary insight that is alarmingly simple: every organization is a system and every system has a constraint. Consequently, the only way to make sure that the system produces maximum throughput in a reliable way is to identify (choose strategically) a constraint and design the rest of the system, or “unbalance” it, around that constraint to make sure the constraint works constantly. Why? Because the constraint is the point that generates the most value. It dictates the pace at which the system generates units of the goal. It makes no sense to focus on optimizing other parts of the system. The constraint must be the focus.
If it is so spectacularly effective to manage an organization around a constraint, then why doesn’t everyone do it? Why doesn’t everyone use the Theory of Constraints? There can be several reasons.
“Lean” is an approach that has become very popular and widely known over the last 10-15 years. Lean is intrinsically a “balanced” approach. Lean is undoubtedly effective in certain environments, such as Toyota in Japan where a limited number of highly standardized products are produced in a “pull” market situation. However, as in the case of the German mill, when conditions are not completely and reliably standard and reality shifts, there is no excess capacity to deal with the variation.
Measurements that mislead
A balanced approach inevitably leads to an increase in inventory. While this can mean that an unnecessary and even harmful amount of cash is tied up in inventory, it is also true that traditional accounting considers inventory to be an asset. It also likes “efficiency”, i.e. all the assets working to the maximum, whereas in TOC the ONLY place where efficiency makes sense is on the constraint that has to work all the time. Banks value inventory and that can make it complicated for companies to switch to an unbalanced approach that reduces levels of inventory. Constraint-based operations use a completely different set of measurements to traditional cost accounting. The measurements of TOC provide exactly the information that gives the most insight into how a business is in fact performing in terms of cash in and out, which products are most profitable and how to price them correctly as opposed to accounting conventions and cost allocation. (See: Radically Simple Accounting for Real Information)
Switching to an unbalanced approach means changing not just the physical way you operate but the mindset of the organization. A constraint-based operation works on speed of flow. It is a systemic way of working; it reveals the fallacy behind the linear thinking that optimizing every “piece” of the organization leads to optimizing the whole. The opposite is true. Everything that is an artificial barrier to improving the Quality of the goods and services provided, the involvement of personnel and the speed of flow of throughput needs to be reconsidered. This is a process in change management that requires courage and the ability to challenge what we have come to call the “cognitive constraint” of the organization, i.e. the set of assumptions (mental models) that keep an organization stuck.
Dr. Goldratt knew that radically and reliably improving the performance of an organization goes well beyond operations and “techniques”. It involves leaving behind familiar ways to embrace transformation and braving a new world. And for that reason he developed the Thinking Processes. These are powerful cognitive processes to accompany any important Change Management efforts.
Without a systemic understanding of how to manage an organization, many decisions, investments and actions can be ill-informed. It is always immensely rewarding to be with a client in that precise moment, as happened last month, when they see the radical clarity and the new opportunities that come from managing an organization around a constraint.
Intelligent Management works with decision makers with the authority and responsibility to make meaningful change. We have helped dozens of organizations to adopt a systemic approach to manage complexity and radically improve performance and growth for 25 years through our Decalogue management methodology. The Network of Projects organization design we developed is supported by our Ess3ntial software for multi-project finite scheduling based on the Critical Chain algorithm.
See our latest books Moving the Chains: An Operational Solution for Embracing Complexity in the Digital Age by our Founder Dr. Domenico Lepore, The Human Constraint – a digital business novel that has sold in 43 countries so far by Dr. Angela Montgomery and ‘Quality, Involvement, Flow: The Systemic Organization’ from CRC Press, New York by Dr. Domenico Lepore, Dr. .Angela Montgomery and Dr. Giovanni Siepe.