– Is your sales growth stagnating or inadequate?
– Are your profits fluctuating from year to year?
– Are you struggling to meet your financial commitments to your vendors, banks, or employees?
– Do you often get customer complaints for delayed deliveries?
– Do you have month end syndrome?

Goldratt Bharat (formerly Goldratt India) has been helping Indian organisations to increase their sales, profits, and cash by an order of magnitude in weeks and months through the concepts of Theory of Constraints (TOC) and philosophy of Better than Before for the last 24 years.

If you would like to explore more, please connect with us at
info@goldrattbharat.in

Learn more: https://lnkd.in/gv9hwDVq

Critical Chain Project Management (CCPM) was introduced in 1997 in Dr. Goldratt’s book, Critical Chain. The critical chain is the longest chain of dependent resourced tasks in the project. The solution aims to protect the duration of the project, and therefore, completion date, against the effects of each task’s structural and resource dependency, variation, and uncertainty. The outcome is a robust approach that enables completion of projects on-time, every time, and within budget. The shorter duration provides a huge opportunity to deliver more projects over all, in the same amount of time, and same operating expenses, thereby significantly improving the bottom line.

CCPM solution aims at removing some of existing behaviours that are harmful to the goal of the project, such as bad multitasking, student syndrome and Parkinson’s Law.

It is common for resources to be required to switch between tasks on multiple projects or within the same project. Such multitasking usually extends the duration of all projects and, therefore, is considered bad multitasking. Bad multitasking occurs when switching tasks does not help any project
finish earlier.

Preventing bad multi-tasking is the single largest contributor in reducing project lead time. In project management, Full Kit refers to the process of clarifying requirements, getting approvals, staging materials, etc. for the project, before the project is released for execution. The discipline of not starting without Full Kit helps hugely in preventing bad multi-tasking. For some projects, we can define different level of Full Kit for different stages of the project.

Student syndrome refers to the human tendency of failing to start a task, even though the start date has passed, because there appears to be plenty of time before the seemingly distant due date.

Parkinson’s Law refers to the phenomenon of work expanding so as to fill the time available for its completion. CCPM attempts to reduce its impact by using significantly reduced task time estimates and getting frequent estimates of time remaining until completion.

CCPM methodology of planning projects focuses on the following:

• A plan, or project network, that includes all task and resource dependencies as well as time estimates with safety removed
• How to create a schedule showing the critical chain and the buffers
• Identifying expediting and improvement activities based on buffer management
• In multi-project environment, how to determine the staggering of projects based on the resource whose capacity or capabilities

Results that can be expected with the help of CCPM:

• 20-40% faster completion of projects
• Meeting delivery timelines and budget commitments
• Clear priority system across the organization
• Harmony and flow among the team members

TOC solution Drum Buffer Rope (DBR) helps in reducing lead time by a factor of 2 to 6 times. It is a method for scheduling and managing operations, that have an internal constraint or capacity- constrained resource.

• Drum: Schedule at the bottleneck
• Buffer: The amount of time raw material is released before it is required at the bottleneck
• Rope: The mechanism of choking the release of raw materials to match consumption at the constraint; do not release the material too soon

The drum schedule combined with the rope mechanism helps limit work in progress inventory which, in turn, reduces lead time and increases output. Ensuring that the inventory is balanced, and full kit is available prior to start of production is critical in reducing lead time, WIP and increasing On Time Delivery.

A necessary pre-condition for successful implementation of DBR is Full Kit, which refers to ensuring availability of all inputs (raw materials, tooling, specs, etc.) for an upcoming order prior to release of the order to the shop floor.

In this short clip, Ravi Gilani, Founder & Managing Consultant, Goldratt Bharat explains Drum Buffer Rope with a simple example. The process of identifying the constraint and scheduling production as per its capacity helps in reducing lead time dramatically and improving on time delivery.
 

The core idea in TOC is that every real system such as a money-making enterprise must have at least one constraint that limits the system to achieving its goal. Every for profit organization will have a constraint in supply, operations, orders or cash. Current constraint may shift, but there cannot be any situation when there is no constraint. Had it been so, its profit would have been infinite!

The output of the organization is achieved through the synchronized efforts of various functions. The output is limited by the weakest area. The strength of the chain is determined by the strength of the weakest link. What should be done to improve the output of an organization?

Dr. Goldratt created a Process Of Ongoing Improvement (POOGI) or five focusing steps.

Step 1: Identify the system’s constraint
The first step is to identify what factor is currently limiting the organization from achieving its goal.

Step 2: Decide how to exploit the system constraint
It is imperative the most possible out of the existing capacity of the constraint. Utilization at the constraint is critical. In the case of an internal resource constraint, to exploit means get more goal units by taking actions that make the best use of or take the best advantage of the constraint. Some examples: staffing the machine during lunch, breaks, and shift changes, quality inspection just prior to the constraint machine, reducing setup times at the constraint etc.

Step 3: Subordinate everything else to the above decision
Subordination is vital to achieve full exploitation of the constraint. It has two major components:
1. All non-constraint resources must be managed to ensure that the constraint always has exactly what it needs when it needs it; and
2. All non-constraint resources are not allowed to process work beyond what is required for the constraint.
All policies and measurements must be designed to get the most out of the constraint. Utilization and efficiency at the non-constraint resources must not be measured. However, this does not imply that there are no measurements for non-constraint resources. This step is often missed, and thereby the majority of financial benefits of TOC are not achieved.

Step 4: Elevate the system constraint
If more capacity is required after steps 2 and 3 to meet the market requirements, increase it through capital investment, outsourcing, or off-load the constraint by defining alternative routings, processes or design. Capital investment should not be the first option. Often, exploitation and subordination are sufficient to reach the needed output. Do not increase the investment too soon.

Step 5: If in the previous steps a constraint has been broken, go back to step 1, but do not allow inertia to become a system’s constraint.
The five focusing steps are not intended to be used as an infinite loop whereby an organization identifies and eliminates the current constraint over and over again. Rather, top management should determine where to move and hold the constraint.

The long-term strategic application of TOC does not call for continuous removal of all constraints. In any case all constraints cannot be removed. Rather, the idea is to choose where the constraint should be in order to best exploit the market opportunities, and then keep it there!

Theory of Constraints (TOC) is a management philosophy that treats a corporation as an interlinked, interdependent system rather than just a collection of independent processes or functions. Dr. Eliyahu M. Goldratt, the creator of TOC, observed that just as the strength of a chain is dictated by its weakest link, the overall performance of any company is dictated by its constraint. If you can find a way to manage the constraint you can dramatically increase sales, cash, and profit without any significant investment.

Dr. Goldratt, was an educator, author, scientist, philosopher, and business leader. But he was, first and foremost, a thinker who provoked others to think. TOC was first introduced in the best-selling book, The Goal, an intriguing business novel that transformed the thinking of managers throughout the world.

Due to the overwhelming popularity of The Goal, most people assume that TOC is applicable to manufacturing only. Companies that have implemented TOC understand that it is a holistic philosophy, with as much application to strategy and marketing, as it does to supply chain and operations. The real strength of TOC lies in its Thinking Processes, that were first introduced in Dr. Goldratt’s book Its Not Luck (also known as The Goal II). The constraint of any system/ organization is defined in relation to its goal. Often, there is no upfront discussion and agreement on the organizational goal and its measurement(s) among the team members. Different team members have a different perception of the goal and its measurement depending upon which function they are responsible for. In most cases, team members are not aware of the effects that their actions will have on other functions. Therefore, the top team must learn the cause and effect relationships across the organization. Can each employee understand the impact of his/ her actions on the goal of the company?

An understanding of TOC metrics or operational measures, Throughput (T), Investment (I), and Operating Expenses (OE) can help each employee understand the effect of his/ her actions on the financial performance of the company. These metrics form the basic building blocks of the TOC methodology. TOC based metrics help in imparting financial literacy and aligning the entire top team. This helps the team in understanding the impact of any decision on Throughput, Investment, Operating Expenses (T, I, OE), and arrive at decisions swiftly. With the help of these metrics, each employee is able to understand the impact of his/her actions on the overall goal of the company. This leads to vastly improved team work and ownership.

TOC provides a simple and effective process for system improvement or five focusing steps, outlined
below.
Five Focusing Steps
1. Identify the constraint
2. Decide how to exploit the constraint
3. Subordinate to the constraint
4. Elevate the constraint
5. If the constraint has shifted, go back to Step 1. Do not allow inertia to become the constraint!

Over the last 40 years, TOC has evolved from a methodology primarily used in operations, to one that has applications across all functional areas such as production, supply chain, distribution, projects, sales and marketing, strategy and tactics. It has been applied across sectors such as automotive, steel, pharmaceutical, consumer goods, electronics, retail, apparel, packaging, construction, aerospace and defence, software, insurance, hospitals, and schools.

TOC’s production scheduling solution Drum Buffer Rope (DBR) helps in reducing lead time by a factor of 2-6. This is done by following simple logistical procedures, and applying the five focusing steps to the identification of bottleneck, followed by exploitation and subordination. Most organizations are able to get 30-40% additional output without adding any new resources.

In projects environment, the application of Critical Chain Project Management (CCPM) has helped several organizations to reduce project lead time by 20-40%, thereby, enabling them to complete projects early, and within budget.

Does culture have any relationship with measurements, be it formal or informal?

Service providers often try to increase their business by trying to delight their existing customers or offering great benefits to potential customers. However, in many cases, they end up annoying the customers.

TOC’s replenishment solution helps in increasing availability without increasing inventory, taking into account the variability (or reliability) of the supply from the vendors.

Few weeks ago, I had written an article explaining cash constraint and some ways for organizations to overcome it. Subsequently, several readers informed me that I had not done full justice to the article because I had not explained why organizations run into cash constraints and how to prevent them from getting there in the first place. This is my attempt to address these questions and rectify that blemish. First, let’s recapitulate some important aspects. In my previous article, I shared TOC’s five focusing steps to overcome cash constraint within 13 weeks, or one quarter.

Step 1: Identify the constraint. When is cash the constraint?

An organization has a cash constraint if and only if all the following conditions are met:

• Sufficient orders
• Sufficient equipment, manpower and other resources including space
• Right vendors are available but will not give credit any more
• Insufficient raw materials or packing materials
• Additional cash cannot be easily arranged

Simply put, an organization is facing a cash constraint when it has sufficient orders, that is, on time in full (OTIF) < 95%, enough manufacturing capacity, that is, no machine/ equipment/ resource has overall equipment effectiveness (OEE) > 85- 90%, a reasonable number of right suppliers, and yet it suffers from material shortage as vendors refuse to give any more credit.

Step 2: Decide how to exploit the constraint

We need to squeeze as much throughput as possible through effective utilization of existing cash. In cash constraint situation, organizations need to make decisions taking into account a key parameter: cash velocity. Cash velocity is defined as an increase in per unit of cash in a period of time. As an example when the totally variable cost (TVC) is 50% of sales and the time from cash outflow to cash inflow is one month, that is, a cash induction of Rs. 50 in additional material will result in a sale Rs. 100 in a month. Here, the cash velocity per month will be 100%.

Even a small increase in cash increases sales, throughput, and profit significantly. Some of the suggested means for increasing cash velocity are: reducing customer payment time, shrinking manufacturing lead-time, and reducing supplier lead-time.

Step 3: Subordinate everything else to the constraint

All functions, departments and decisions should be aligned to get the most out of the constraint. This step is often difficult to implement, as it requires changes in existing practices and policies of local optimization. For manufacturing companies, rather than purchasing large volumes and producing large batches, it is recommended to buy the minimum raw materials required for making ‘full kit’ for immediate production.

Step 4: Elevate the constraint

In most cases, exploitation and subordination are sufficient to overcome cash constraint situation. However, if required it makes sense to borrow even at a comparatively very high rate of interest, since, for a vast majority of manufacturing organizations the cash velocity per month ranges between 10% and 15%.

Step 5: Go back to Step 1; don’t let inertia be your constraint

Once the cash constraint has been overcome, identify the current constraint. Where is your constraint – is it in orders or operations? The long-term strategic application of TOC does not imply removal of one constraint after another. Rather, the objective is to choose your constraint and manage it well to ensure that cash never becomes your constraint.

In my consulting experience of more than two decades for various types of organizations – small, medium or large, I’ve observed that the senior management usually has a reasonable knowledge of profit. Of course, it’s a different matter that they all may refer to different versions of the profit the company has earned in the previous period. Some of the commonly used profit measurements are EBITDA (earnings before interest, tax, depreciation, and amortization), Cash profit, PBT (profit before tax), or PAT (profit after tax). Some of the more financial savvy managers may also have some inkling of another important financial parameter – ROCE (return on capital employed).

However, most top managements are almost totally ignorant of another very important parameter: free cash flow (FCF). In his book, Conspiracy of Fools, Kurt Eichenwald writes that in 2001, just a month before the collapse of Enron, its chairman Kenneth Lay, CEO Jeffery Skilling, and CFO Andrew Fastow did not know that Enron will run out of cash in a matter of weeks! Often, organizations are unable to assess increased cash requirement while increasing sales, or chasing market share. In some cases, small and medium enterprises (SMEs) that are dependent on just a few big customers accept unfavorable terms in a bid to increase sales, and it increases the squeeze on cash.

The table below depicts the typical cost structure for an Indian manufacturing organization and the impact of increase in sales by 10%.

Here, for net sales increase of Rs. 10 crore per month or Rs. 120 crores per year, net working capital will increase by about Rs. 30 crores immediately. Assuming no increase in fixed expenses at all, this will translate into an increased profit after tax of Rs. 28 crore at the end of the year.

This means that for the first 12 months, the organization would have less cash than the starting cash in hand. Only after the 13th month, cash in bank will start increasing. When the organization does not have enough cash to sustain increased sales, there is high probability of the organization getting into cash constraint. Here, we have neither invested any money in increasing capacity nor increased any fixed expenses. It is obvious that when we invest additional funds for increasing capacity, stress on cash will be more severe. In a vast majority of sick companies or bank NPAs (non-performing assets), there was an expansion in the previous two-three years.

In their quest for growing fast, many companies invest without comprehensively looking at cash flow for various scenarios. Business owners and decision makers need to monitor and plan cash judiciously and ensure that they have sufficient cash buffer at all times. When you have enough cash, it does not matter much. However, if you do not have cash, then nothing else matters.

When should companies go about increasing sales and take full advantage of growth opportunities? Recommendation: Before increasing sales, improve working capital turns. Only, thereafter, increase sales slowly, keeping a hawk’s eye on the cash in hand. Instead of targeting new customer segments, exploit current customers segments, solve their pains and generate more from the same segment. Improved service levels will not only boost sales, but will also provide opportunities for increasing prices and cash velocity. Eli Goldratt summed it up succinctly when he said: Focusing on everything is synonymous with not focusing on anything.

The following table shares various stages of an organization as it gets into cash constraint.

Implementation issues

I’ve often said the TOC solutions are simple, though not necessarily easy. The biggest obstacle with cash constraint is that the top management does not accept reality. There is a belief that the situation will improve if we just tighten controls to deal with this temporary situation. Owners or key decision-makers refuse to accept they have severe issues of cash. Therefore, the first step to overcoming cash constraint is to accept that it’s an unusual situation that will not go away through usual means.

It is not just finance managers, but the entire top management team that needs to get involved to create cash flow statement for next 13 weeks or one quarter and make a plan of action. There are challenges in creating this statement sometimes due to distortions in financial reporting (such as inflated or obsolete inventory being shown on books). There are also significant differences in total receivables and collectible receivables, and disagreements between accounts and sales.

The top management team needs to agree on the useable inventory in next 13 weeks. Correcting mismatch in inventory has to be a priority. Often the total inventory available at macro level is enough for few weeks but not for next few days. Some small low-items items are always missing, while cash is blocked in high value materials that were purchased in bulk. Similarly, there has to be clarity and common understanding on the total overdue receivables and due payments that can be collected.

Thereafter, modify cash flow so that closing cash is always positive – cash can never be negative! This means prioritize actions and payments based on the current cash availability. The importance of cash velocity cannot be over-emphasized in this situation. Take actions that will block cash for the least amount of time. Sometimes, it may make sense to defer purchases of raw materials and use air rather than sea shipments, though it would be more expensive. Another action could be to sell obsolete or unusable materials, even at deep discounts.

It is of utmost importance to create a sense of urgency, be transparent with employees, modify current measurements, and take corrective actions to overcome cash constraint in a short period of time. I also recommend creating a weekly dashboard for monitoring key parameters such as free cash flow, overdue payments, cash in hand and stop measuring sales, market share, and local parameters such as efficiency.

I have often observed during my interactions with business leaders that they correctly understand the Theory of Constraints (TOC) to be a management philosophy that looks at an organisation as a chain, where identification of the weakest link and exploiting it suitably can lead to unprecedented improvement in the performance of the system. Yes, that might be an accurate description of TOC, but its scope is much wider than that. Under TOC, there is a fundamental belief that every system is inherently simple. Dr Eliyahu M Goldratt, the founder of TOC, postulated that as there are no conflicts in hard sciences, there must not be any conflicts in the real world. In case we do find one, we should look for the wrong assumptions — one set of assumptions has to be erroneous. Once we are able to surface them, invalidating assumptions is not a Herculean task and, thereby, conflicts can be eliminated. Uncovering these deep-rooted hidden assumptions, invalidating them, not accepting status quo and challenging industry practices are some of the traits one would associate with TOC practitioners.

As a management consultant, these days the common grouse I hear is about the poor macro environment, lack of demand, stagnation of economy, policy paralysis, etc. I am often asked if TOC can help companies in such an environment of multiple constraints. I urge them to introspect instead of blaming the external environment and factors that are not under their control.

Blame it on demand

Most organisations today complain that they are unable to grow because demand is an issue. Though I agree, I would like to challenge the corollary that since organisations cannot secure fresh orders, maintaining or growing profitability is a challenge.

Let me explain. If order flow has reduced significantly, there has to be excess capacity in the system. In other words, companies should be able to deliver existing orders faster and more reliably. But, in reality, how many organisations are able to achieve on time in full (OTIF) of close to 100%? In my 20 years of consulting experience in the manufacturing sector, I have rarely seen organisations achieving OTIF above 50%. When some of my potential clients argue that this is not the case, I ask them that if they are so sure of delivering reliably, would they be okay with accepting 30% of order value as penalty for a delay of one day or delivery of even one piece less. Bedford, a privately-owned company in central Pennsylvania, manufactures structural fiberglass products to serve a wide range of applications and markets. It offers nation-wide distribution through warehouse facilities from coast to coast. The company not only has a unique standard structural performance guarantee, but also is willing to pay a heavy penalty for each day’s delay.

Imagine if one of your competitors were to actually offer this — what would happen to your business? Or, if you could offer this to your customers, what would be the impact on your business? Needless to say, it is assumed that you would then try to develop a delivery process that helped you consistently avoid paying a penalty.

Blame it on the slowdown

These days, whenever I ask people in the industry how their business is doing, the standard response is: the market is in the dumps. This is akin to a father asking his son, “How much did you score?” and the son responding, “Shyam failed as well!”
It is very easy to pinpoint the external environment as the cause for our problems (low sales, low profits). Whenever I ask any salesperson in India or abroad why his or her company is receiving fewer orders these days, I get every possible reason as to why business is slow. Not once have I met a sales head who has confessed, “I do not know how to sell”.

To put it differently, I believe that the recession is a state where consumers are no longer excited by the current goods and services in the market. Firms that are able to solve a customer’s pain will be able to command a higher price, no matter what the economic conditions. Of course, to be able to do that, marketers and decision makers need to know the pain points of their customers and develop capabilities to tackle the same.

Just remember that there were overnight queues outside Apple’s stores for buying the iPhone when it was launched in 2007. Again, in 2012, there were queues for buying the new iPad. So much for a slowdown. The real issue is perhaps sticking with our deeply held beliefs.

Most sales managers confess that they are forced to reduce prices to procure orders. Do you know their underlying assumption? More often than not, the assumption is that their product has no competitive edge other than lower prices. (Think about it, does a sales guy ever suggest an increase in prices?) Though not necessarily easy, the answer is quite simple. If a product or service does not have any other competitive edge other than a lower price, then the company needs to work towards creating one. Yes, it may take some months or even years. If not, what is the alternative — can a company sustain itself in the long run without a competitive advantage?

So the next question is: can one create a competitive edge? My favourite example is about an organisation operating in a highly commoditised business — milk. There is a company known as Chitale Bandhu in Pune. When I started my career in Pune in 1972, Chitale Bandhu was commanding a 15-20% price premium for home delivery of milk. Today, not only does it command a similar price premium but also boasts of a waiting period. It must have some competitive edge that customers are willing to wait and pay a premium. The point here is: not only has the company created a competitive edge, it has been able to sustain it over the past 42 years. Now, the typical defence to that will be: “We are not dealing with households, we negotiate with hardcore professionals in the B2B space”. For these sceptics, I can share the case of a privately-owned firm in the extremely competitive automotive component manufacturing business that has been able to increase its profits continuously for the past 37 quarters. The core issue is not the volatile external environment; rather, it is our erroneous assumption that the cause of our problems is outside our control and we have limited ability to influence the environment. Those familiar with Steven Covey’s work know of this concept as ‘circle of concern vs. circle of influence’.

Over the past 15 years, ever since I was besotted with the TOC concept, every year, at least one of my clients has achieved an order of magnitude improvement in its financial performance. They are also operating in an ostensibly volatile environment, but what sets them apart from competition is their mindset.

Measurements: Global and Local

In the last quarter of calendar 2008, Toyota Motor Corporation achieved two distinctions. First, it became the largest seller of vehicles, overtaking General Motors. Second, it declared a loss in the quarter, after 70 years. While ‘sales’ is definitely a means for achieving the organisational goal, it is definitely not the goal.

However, there was nearly a revolt when I suggested that all of them should be evaluated and rewarded by the achievement of the overall organisational goal and not by their respective functional KPI (key performance indices). I requested each one of them to share how many promotions each one got during the same period that the unit was going downhill. The shocking answer: the average number of promotions was two, and some even got three promotions. How come? The answer is painfully obvious — local parameters were not aligned with the global parameters. This is an illustration that excellent local performances do not necessarily measure up to a good global performance.

My mentor, Dr Goldratt, repeatedly emphasised that measurements drive behaviour. When asked to share what is TOC in one sentence, his response was that one sentence is too long, one word would suffice — focus. That being the case, organisations today should worry more about getting their house in order rather than delude themselves in a recessionary cocoon.