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Systems Thinking and the Theory of Constraints

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  1. Focusing on Throughput Systems Thinking and the Theory of Constraints Mandyam (“Srini”) Srinivasan The Pilot Corporation Chair of Excellence The University of Tennessee

  2. Systems Thinking • Integrated decision making • “Big Picture” Thinking • Thinking “Globally” rather than “Locally” • Understanding how localized decision making can affect the overall goal

  3. Systems Thinking and the Theory of Constraints • The Theory of Constraints (TOC): A “new” way to manage business: based on 2 premises: • The Goal of a business is to achieve sustainable growth and stability, … now and into the future. • A system’s constraint(s) determine its output. • Eli Goldratt and The Goal. • Recent book: The Choice (2008) • The Viable Vision: “Current revenue = net profits in 4 years”

  4. TOC: Multiple “Layers” of Understanding Managing Physical Constraints (e.g., “DBR”) Managing Policy Constraints (e.g., Metrics) Managing Human Behavior (e.g., CCPM) The Thinking Process What should we Change? What should we Change to? How to cause the Change?

  5. Types of Constraints • Physical Constraints • Physical, tangible; easy to recognize as constraint. Machine capacity, material availability, space availability, etc. • Market Constraints • Demand for company’s products and services is less than capacity of organization, or not in desired proportion • Policy Constraints • Not physical in nature. Includes entire system of measures and methods and even mindset that governs the strategic and tactical decisions of the company

  6. Policy Constraints • Mindset Constraints • A constraint if thought process or culture of the organization blocks design & implementation of measures & methods required to achieve goals • Measures Constraints • A constraint if they drive behaviors that are incongruous with organizational goals • Methods Constraints • A constraint when procedures and techniques used result in actions incompatible with goals

  7. TOC and Big Picture Thinking • TOC challenges the conventional approach to managing businesses • “Cost World” vs. “Throughput World” • “Uncommon Sense”

  8. Systems Thinking and the Cost World Lean Supply Chain Principle 1 Improving the performance of every subsystem in isolation will not improve system performance. Improvements in subsystem performance must be gauged only through their impact on the whole system. Systems thinking requires “Uncommon Sense”

  9. Developing “Uncommon Sense” “Uncommon Sense” examples that become “Common Sense” when you apply a Systems perspective: • “If you want to have more safety on project completion times, do not put safety on task completion times.” • “If you want to solve conflicts, ignore the conflict.” • “If you want to complete projects faster, delay their start times” • “To make more money, sell at or below cost.”

  10. Example of Systems (Uncommon Sense) Thinking: A Couple of Definitions • A definition for Finished Goods Inventory • Something you built that the customer does not want … yet • A definition for Raw Material Inventory • Something you bought that you do not intend to use … yet

  11. Adopting a Throughput World Perspective The TOC Performance Measures

  12. TOC Performance Measures • Throughput (T): The rate at which the system generates money through sales = (Sales Revenue – Variable Costs) per unit time • Investment (I): All the money invested in purchasing things needed by the system to sell its products (Fixed + Working Capital Assets) • Operating Expenses (OE): All the money the system spends, turning investment into throughput = All Fixed Costs per unit time

  13. T ? I ? OE ? The Throughput World Perspective • For any decision you undertake consider the following. Will the decision: • Help you sell more products, profitably? • Help reduce investment? • Help reduce payments/expenses, long-term? Ask the same questions when setting metrics!

  14. Left Right Traditional Management Approach:Divide and Conquer • Division of Labor breaks down linkages complex systems into manageable chunks. • Which is harder to manage? Left or Right?

  15. Mindset Constraints and “The Trinity” • The Trinity: • You Don’t Understand • We Are Different • That Won’t Work Here!