Breaking the constraints to world class performance

Breaking the constraints to world class performance

Norton, Brian R

Hour often does it occur that no real benefits are achieved from a new computer system, other than changing the may that things are done, or substituting capital for labour with no real increase in overall productivity? The reported lack of success of ERP systems to deliver acceptable returns is a case in point.

Why do many apparently good management interventions result in conflict or passive resistance to the change? Such initiatives are started with a great deal of fanfare, stumble and then just fizzle out.

Unless a way is found to answer questions such as these the next major management change or new system is likely to suffer the same outcome. The advent of electronic business and electronic commerce present major opportunities to companies to improve customer management and the performance of their supply chain and if all works, their profitability However, unless the technological changes to be implemented are balanced with the human aspects of the organisation (capabilities – physical, mental and psychological) and the operational aspects of the organisation (policies, procedures and measurement systems) the changes required may suffer the same consequences of many major management initiatives (e.g.TQM).

Most managers are swamped with information and initiatives.They are aware of the need to manage the business as a system but lack the tools. In order to achieve major throughput increases in our organisations we need to understand the assumptions (paradigms) underlying our current way of doing business and managing. Only then can we apply a breakthrough thinking process to break the assumptions in our current paradigm. Only then can we create a new, more favourable paradigm in which to operate. Otherwise new initiatives, no matter how good the technology will founder.

Goldratt’s five focusing steps provide a way to enable managers to focus on the very few real constraints in a business that exist at any point in time and revise their focus as the constraints move into new areas. According to research undertaken by the Avraham Y Goldratt Institute of many different types of organisations across the globe over the last 10 years, there is 40% of untapped potential locked up in most organisations because of constraints in the business. This potential can often be released by removing the constraint with little or no investment.These constraints may not only lock up potential but may prevent sound initiatives from being implemented, which could increase the businesses potential even further.These constraints are either external (the market or the supply side) or internal (operations or policies and behaviours).

The changes required in organisations to operate in the new electronic business environment requires a systematic way of removing constraints from the business prior to and during the implementation of the new systems. The Theory of

Constraints methodology as developed by Goldratt, is an approach to break the constraints to ensure initiatives are successful. By applying cause and effect analysis the approach challenges many of the accepted methods and measurements currently in business today The methodology as given life in the book The Goal, has been applied very successfully in production and project environments (Critical Chain) because that is where it started. However, the approach is generic and applies to all business,governmental and non-governmental entities and in all areas of an entity

The analysis starts by getting agreement on the goal of the organisation (there are frequently very different views as to the goal and this need to be brought into alignment). In a commercial enterprise, for example, the goal may be to make money now and in the future. Having agreed the goal the next step is to get agreement on the absolutely necessary conditions that need to exist in order to achieve that goal. These conditions usually include:

* Satisfied customers (this would include suppliers and partners) now and in the future.

* Satisfied employees now and in the future.

* Be a good corporate citizen now and in the future.

Unless each of the necessary conditions are satisfied the goal will be sub-optimised. A company that starts an initiative to become more cus. Comer focused must not optimise customer focus at the expense of the other necessary conditions.

Management frequently looks for a compromise in order to satisfy different objectives. However, as Goldratt points out, compromises lead to sub-optimisation and are often disliked by all parties involved. He uses the example of two surveyors that are asked to measure the height of a building.The one measures it 15 meters and the other at 20 meters.The two surveyors do not get together and arrive at a compromise result by taking an average of the two calculations. First they make sure that the arithmetic is correct.Then they will review the assumptions that each has made and by analysis they will arrive at an answer to which both agree.

The essence of the approach is to analyse the existing situation (the problem), using cause and effect analysis, before making changes.The approach starts by identifying the cause and effects in the current reality (the way people currently perceive the existing environment) that result in the present undesirable effects that are being experienced by the organisation.This analysis reveals the core problem that must be resolved.The new reality is then developed using the same cause and effect techniques to remove the core problem without introducing any new undesirable side effects.

The real benefits of the approach are that it enables management to focus and ensure that resources and efforts are applied in the right place and to address in the right order those constraints that need to be removed in order to achieve significantly higher throughput.The table below sets out the steps in the process.

In both cases don’t let inertia (the need to change again) become the constraint.

Having understood the goal and necessary conditions, the approach is to break the key constraint that prevents the Organisation achieving its goal by using the approach set out above.

Goldratt’s approach promotes continuous improvement in the Organisation and uses the analogy of a chain.At any point in time there is only one weakest link in a chain and doing anything to the other links does not strengthen the chain (it will make it heavier i.e. cost more). Unless the weakest link is appropriately dealt with in an Organisation, investing in the other links brings no benefit and may even be counterproductive. If there was no weak link the system would have infinite capacity to produce income. There is always a weakest link but as one is strengthened and is no longer the weakest link a new one appears. Studies have shown that whilst there may be more than one weakest link there are rarely more than three.

Investing in new systems or new equipment that does not address the constraint will not increase output and may in fact cause, for example, inventories to rise or service levels to deteriorate. In both cases profits will be squeezed. As mentioned earlier, a constraint may be physical (e.g. units than can be produced or the number Of items that can be processed error-free by a system). It may be a policy, or a measurement system that is in conflict with the goal, or it may be external (within the market or supply chain),

It is against this background that the introduction of e-commerce or e-business needs to be examined. Not only may such projects be unsuccessful but they may also be counterproductive and reduce throughput and overall profitability

As James Naisbitt once said”we are drowning in information but starved of knowledge”. By applying Goldratt’s focusing steps it is possible to focus on the important information and sort it from the trivial and convert the new understanding into knowledge.

The next article will demonstrate that traditional accounting information Oust one of a number of internal constraints) can be a significant constraint on business performance and result in wrong decisions being made. Explanations will be given as to why poor accounting information in many companies continues to be used despite the fact that it leads to poor decisions. ASH

References

The Goal – E M Goldratt

Critical Chain – EM Goldratt

Breaking the Constraints to World Class Performance – H. William Dettmer

Brian Norton is a Director of Marstec Customer Management Solutions (Pty) Limited

Copyright South African Institute of Chartered Accountants Jun 2000

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