For an organization to sustain in business, making enough income for reinvestment and expansion is critical. While all parameters of running the organization revolve around this premise, it does not always happen. Or, the company may be an underperformer when compared to the peers in the industry. Or, going to the next growth trajectory may be a challenge in itself.
This is normally countered by several strategies – expand markets, products and production or simply control expenses. Result could be improved profitability. But sometimes these strategies do not work.
Theory of Constraints (TOC) dares the daring to think of converting their current topline into bottomline in four years. But, this requires looking closely at the current systems, identifying bottlenecks for growth and addressing them specifically.
In case of Eicher Engineering, for instance, though they had the capacity to manufacture for Rs 6 crore/month, they had achieved only Rs 2.3 crores and were running into losses. (Refer Case 1)
Step in TOC experts who say that identify the root cause for this low profitability, and keep analysing the impact of each possible cause till the true cause of the constraint to the profitability is identified, as was done in Eicher’s case. Surprisingly, unlike their perception that low demand was the problem, it turned out that poor collections were the hindrance to their growth.
One of the prime assumptions of TOC is that the existing system can be made to give more, once the bottleneck to that growth is identified. Ravi Gilani, founder and the managing consultant of New Delhi-based Goldratt India, explains, “Almost all technologies say how to improve. TOC says where to improve.”
Elaborates Prabhakar Mahadevan, regional director (India), Chennai-based Goldratt Consulting, “TOC is all about focusing at the right place to generate more from limited resources (men, machine, cash, space, management etc).”
A formal definition runs something like this: TOC provides a set of holistic processes and rules, all based on systems approach, that exploits the inherent simplicity within complex systems through focusing on few logical, physical and logistical leverage points as a way to synchronise the parts to achieve ongoing step change improvement in the performance of a system as a whole.
In simpler terms, every organization works with a set of systems, and every system has more than one link. Identify the weakest link and focus your improvement measures there. Making a strong link stronger will not improve performance. It is the weakest link that is the main constraint area. And only when it ceases to be will meaningful growth result.
Does this mean that when one constraint is removed another comes up in its place? “If you keep chasing constraints, then your policies will keep changing and then there is no organization,” points out Gilani. Instead, what it requires is that critical constraints – the one that is the actual bottleneck to growth – be focused on. If it has been correctly identified, then just addressing that will result in the required growth.
Kiran Kothekar, Director, Mumbai-based Vector Consulting Group, adds, “All systems are inherently simple. Once the cause and effect are known, then it becomes simple to understand the solution. There are only one or two root causes, and a few relevant changes will lead to huge performance improvements. Find the leverage point.”
What this also implies is that TOC can work with any other quality management system like total quality management, Six Sigma and in fact, enables the focused implementation of these systems to ensure their effectiveness. Kothekar supports this saying, “TOC is an enveloping principle. If you find the constraint and focus your quality management practices there, then it will be more effective.”
Commitment from top
The three pillars of TOC are: Reality is inherently simple (as against the common notion that it is complex); there are no conflicts in reality (common belief is compromise is the only way to resolve conflicts, whereas TOC believes in resolving conflicts through breakthrough win-win solution); and people are good (and hence must be trusted and respected. It is the assumptions that are wrong and need to be worked on).
TOC works like science, and has codified all processes to address these three issues. Propounded by Dr. Eliyahu Goldratt, a management guru, it works through the concepts of Viable Vision, Thinking Processes, and Critical Chain Project Management.
For this process to succeed, TOC consultants insist on complete top management commitment to the process. Says Gilani, “This is because I insist that there be no layoffs either at the time of implementation, or later. For that, I need top management commitment.” So he does an orientation for the top management, then the entire team, and only on their buying in the concept does he take up the company for TOC implementation.
Kothekar agrees. “We start with a three-hour session after analyzing the problem, and then a 6-8 day program to elaborate the action plan. Only when the top management is convinced and committed do we proceed,” he says.
“For TOC to be effective, it mandates management’s full and undivided attention. TOC can be applied for a company as a whole or at its any of its division. Either way, it requires full attention of the management team, as TOC implementation involves breaking prevailing paradigms that are existing in the company for many years,” adds Prabhakar. These mostly do not involve any physical/structural change such as changes to plant layout, repositioning the machines, changing the organisation structure etc. It is not a one-time solution but is systems/procedure driven. (Refer Case Study on Eicher Engineering and Fleetguard Filters)
One of its fundamental rules is the change in the financial measurements area. TOC introduces the concept of Throughput, which is income minus expense (T=I-E). It mandates that expense be kept constant (one of the reasons why layoffs are not accepted) and improve variable income so that throughput improves. For that again, the focus comes back to the constraint to the growth – be it production, inventory, or the market.
Also, TOC does not encourage the concept of profit centers, or individual key result areas. “How is it that individuals or profit centers do well but the organization overall does not?” asks Gilani. “What you need is a company wide focus,” he adds.
This is also a critical criterion of the TOC, and all individual goals need to be aligned to the organizational goals.
As a result of this, TOC has brought quantum jumps in business performance in a very short time such as reducing inventory (by 35 per cent to 40 per cent in most cases), reducing lead times (by almost 50 per cent), increasing availability of products (up by 50 per cent) and overall increase in sales and profits by 25 per cent to 30 per cent year-on- year, says Prabhakar. (Refer case studies)
Industry no constraint
In India, TOC has been implemented primarily in manufacturing companies so far. However, it is applicable across segments, and there are implementations worldwide in other segments, including insurance, tourism, hotels, hospitals and retail.
It is also a useful tool for start-ups, though constraints start showing up later into the business cycle. “Start-ups come with great hope, good product and great market, and yet, only 10 per cent succeed. This is because there is no long-term plan. TOC also helps start-ups by creating strategies for short and long terms,” says Kothekar.
The concept, though in existence for the last 15 years, is in its nascent stages in India. Kothekar and Gilani agree that it needs more visibility, and therefore, there are more seminars and public events that are planned. Dr. Goldratt conducts these himself.
Prabhakar says, “Of course, due to lack of proper infrastructure (such as training, education, availability of professionals/experts) etc, the speed of awareness was relatively slow in the past until five years. Right now TOC awareness is on a exponential curve and is spreading rapidly across many industrial sectors in India and abroad.”
We did not apply just one TOC concept for this, as the enormity of challenge was so high. Dr. Goldratt helped us build a comprehensive strategy, incorporating in four competitive edges into a single tree. We called it Aspire Unlimited in 2005. In fact, Dr. Goldratt himself told B Muthuraman, Vice Chairman, Tata Steel, “If the Viable Vision Program of converting bottomline to topline in four years was audacious, you have raised the bar by saying that you want to be unaffected by the price cycle.”
Our profitability was getting affected due to the price of the raw material. TOC suggested that if we could tap our additional capacity and sell, then we could retain our advantage. All the infrastructure was in place, and this became a successful program.
I was then appointed at Executive-in-Charge at Tata Growth Shop, a multi-project set up. TGS became a good test case for developing a proof of concept based on TOC principles. The business unit was running into losses and had been pruning work force. OTIF was a problem and capacity had become a constraint restricting order inputs.
We used a combination of TOC, Six Sigma and Total Productive Maintenance – these become interchangeable after a point and work well in combination. We used the critical chain project management approach (See Brief Definitions of terms used box) of TOC to manage the multi-project environment. The TOC Thinking Processes helped understand assumptions that were causing undesirable effects. Strong cause and effect based thinking mostly appears, as common sense, and our Workers Union understood that easily. This helped us get the cooperation of all the employees.
While the turnaround of TGS became visible within six months achieving 100 per cent growth in turnover compared to previous year’s Rs.140 crore, it has tripled in 4 years with decent profitability. More importantly, the TGS story helped create self-belief that emboldened our efforts in implementing TOC concepts in our core business of steel.
The steel business portfolio of Tata Steel has since been implementing the TOC concepts in various areas. Its application helped us increase our coal output from mines providing us a good hedge against rising prices of imported coal. We could get more out of operations by reducing planned down time. And, most importantly we have been able to build a very strong pull-based distribution network on the strength of high due date performance. Return on Invested Capital of our channel partners is running at all time high. Using TOC in combination with its TQM approach, Tata Steel’s Indian operations have reached benchmark level of value creation in global steel industry. Yet, we know, our journey is unfinished till we isolate ourselves completely from the commodity cycle of steel.
Brief Definitions of terms used
Drum-buffer-rope is the TOC production application. It is named after the 3 essential elements of the solution; the drum or constraint or weakest link, the buffer or material release duration, and the rope or release timing. The aim of the solution is to protect the weakest link in the system, and therefore the system as a whole, against process dependency and variation and thus maximize the systems’ overall effectiveness.
Bottleneck machine: In manufacturing systems, there often exists a bottleneck machine whose capacity is equal to or less than the market demand. Any idle or waste time at the bottleneck machine directly impacts the output of the entire plant because it results in a loss of throughput. In order to maximize the capacity utilization by less setup losses at the bottleneck machine, the parts are often produced in batches.
Viable Vision promises that Bottomline = Topline in four years.Critical Chain Management: This is a method of planning and managing projects with emphasis on the resources (physical and human) needed in order to execute project tasks. The goal is to increase the rate of throughput (or completion rates) of projects in an organization.
Thinking Processes: a set of tools to help managers walk through the steps of initiating and implementing a project in a logical flow.
Buffers are placed before the key constraint, thus ensuring that the constraint is never starved. Buffers used in this way protect the constraint and should allow for normal variation of processing time and the occasional upset before the constraint.
Focus on On-time, In-full Delivery
Pradeep Kapse, Chief Executive, Eicher Engineering Components, a business unit of VE Commercial Vehicles (a joint venture between the Volvo Group and Eicher Motors).
From 1997-2003, we were running into losses. We tried all the tricks in the trade, but nothing worked. Finally, we decided to try TOC. Gilani insisted that I lead the process, be in the meeting and that the entire team should be convinced.
The next process was to identify the constraint. We said it was the market (demand) as we had a production capacity of Rs. 6 crore per month but were selling only Rs. 2.3 crore.
As part of analysis, we were expected to study our OTIF – on-time, in-full – a delivery criteria. And only if both criterion were met would the delivery be counted as complete. We found that we had done only 4 per cent of OTIF. So the constraint was not the market, but production, because material was not available on time. And this is due to cash shortage as the customers were not paying on time. The marketing team agreed and we initiated a collection drive. Once the payments started happening, we could get the materials on time, and work could go on as per plan. The OTIF went up to 75 per cent.
This had a ripple effect. Our customers used up our components faster because competition had not delivered, so the demand for our products went up. We had the capacity and in 1.5 months, we were back on full swing. In 3-6 months, we started seeing the results.
As a result of TOC, our top team parameters for performance are OTIF and revenue. The variable income is linked to this directly for all, and then there may be some function specific KRAs that are different for each. The second focus area is the Drum-Buffer-Rope: We ensure that the bottleneck machine (See Brief Definitions of terms used box) runs 24 hours a day and all monitor this. The third change we implemented was to give heavy discounts if we are paid in cash. This ensures quick rotation of money, and even if it looks like we have sold at less price, with more sales, we make up for the balance. For instance, if we would have made 40 per cent in four rotations, we may do 20 per cent in 12 rotations. So the total in a year adds up to better cash balance, and we can achieve volumes. This is implemented till capacity is achieved.
We have now turnaround completely. Our sales has grown from Rs 2.3 crore in 2003 to Rs 9 crore as of January 2010. And profit is 9 per cent of current sales.
Change in Organizational System
Niranjan Kirloskar, Managing Director, Fleetguard Filters, manufactures filtration solutions, coolants and chemical technologies for diesel engines, and is a part of Cummins Filtration, USA
Any company’s goal is to grow faster than the market without substantial investments, and TOC teaches you just this. It helps you to utilise your current resources to extract maximum result out of it. It also says don’t do too many things and do only one at a time, and it will give you the best results out of the system. This appealed to us and we went for it.
We started to implement TOC in 2004-05 to improve our overall growth. Since then we are at it and seeing very good results. We didn’t take any referrals as we had nothing to lose. We didn’t have to make any additional investments and hence our risk was low.
We spoke to the entire team about TOC and, subsequently, changed their measurements to throughput. ‘You tell me what you will measure me on and I will behave accordingly,’ is what TOC tells you.
Initially, there was resistance as we were changing the entire method of working followed across the globe. We told them to focus on throughput and not on costs. This 180 degree change from a system we have been using since 1991 was difficult to accept. But within a period of three months, we started to see the result. We were even awarded the best TOC implementor globally for the year 2009.
Now, I only review three things every morning: Sales/day, buffer report and buffer development (drum buffer rope). In buffer report, if it is yellow or green, I don’t bother. Only if it is red, I call to find out why. In the third criterion, if it has been penetrated, I check why. (See Brief Definitions of terms used box)
We have ensured that we follow the TOC principles because there is commitment from the top. It clearly says, forget cost cutting. Focus on increasing sales. And, don’t think of minor improvements. They add costs that go unnoticed, and the throughput comes down. Focus only on changes that ensure quantum growth.
Breaking off from Commodity Price Fluctuations
Bimalendra Jha, Principal Executive, Tata Steel, former Executive-in-charge, Tata Growth Shop, a division of Tata Steel, catering to multiple segments
Steel industry was a value destroyer because of the fluctuations in the steel prices. The industry is rarely able to recover the cost of capital over a price cycle. When it was at the lowest in 2001-02, we created an Aspire program at Tata Steel, which combined best practices of continuous and one time or cyclic improvement techniques to become consistent value creator. Though it had all known quality management systems, a piece was missing.
In 2004, I met Dr. Eliyahu Goldratt. His Viable Vision (See Brief Definitions of terms used box) program was what we were looking for – it was an inspiration for us. We were already EVA + (Economic Value Added), but thought we could move higher up. But we wanted to get out of the price cycle.