Maximizing Profits Through the Integration of Lean, Six Sigma and Theory of Constraints
I must say that I’ve been very fortunate in my career. Not because I have been successful financially, although I haven’t done badly. I’ve been fortunate because I’ve been able to be a part of so many different process improvement initiatives over the years. I was around during the Deming years and was able to learn and apply his now-famous 15 principles, as well as his teachings regarding the significant impact variation has on processes and systems. I was around when Lean manufacturing and Six Sigma came on the scene and was fortunate enough to have worked for a great TPS consulting firm. All of these and more had a very profound impact on me as a professional.
Like most consultants, I was looking to remove waste and variation in every process I touched. After all, waste and variation exists everywhere, right? If I could reduce both of these harmful negatives from every process, surely the results would flow directly to the bottom line. And they did, but not in what I thought were significant enough numbers. What was I doing wrong? I mean the companies I worked for certainly looked better because of my 5S events and our changeovers were being done in record time, but the bottom line was not growing enough to suit me. Our process layouts were better, we had manufacturing cells in place, our inventory was lower and there was much less waiting, but the financial results just weren’t there, at least not enough to satisfy me. We even reduced the time it took to purchase supplies and materials. And not only were we not seeing positive effects on the bottom line, our orders were still late getting to our customers. Something had to change!
My Introduction to the Theory of Constraints and Throughput Accounting
In the late 1980s, however, something more powerful and influential came to me as a gift...a copy of The Goal by Eli Goldratt. As I read The Goal I began to visualize how I could apply the many Theory of Constraints lessons I had read about. I asked myself, "Could I actually utilize Goldratt’s teachings in the real world?" After all, this was only a fictional setting, and there really wasn’t an Alex Rogo. It wasn’t apparent how I would use this Theory of Constraints information until the early '90s when I had an epiphany. Goldratt’s simple, yet elegant message of identifying, deciding how to exploit the system constraint and subordinating everything else to the constraint changed me forever.
In addition to introducing me to the Theory of Constraints, Goldratt introduced me to what he called Throughput Accounting. Specifically, Throughput (T), Inventory (I) and Operating Expense (OE) took on a whole new meaning. It became apparent to me that reductions in inventory typically have a one-time impact on cash flow, and after that, little can be gained. It was also evident that operating expense had a functional lower limit, and once you hit it, you could actually do more harm than good to the organization by reducing it further. Throughput, on the other hand, theoretically has no functional upper limit. But more importantly, throughput was only throughput if money exchanged hands with the customer. That is, producing products for sale is just not the same as receiving cash for it because, in reality, it’s simply inventory.
I came to the realization that everything I do in the name of process improvement would give us a better return on investment if we focused our efforts on the operation that is limiting throughput. I decided then and there that constraints are the company’s leverage points, and if I wanted to maximize our profits our primary process improvement efforts should be focused on the constraints. So off I went with the Theory of Constraints and throughput accounting, and the results were immediate and significant. Our on-time delivery sky rocketed. Our profits rose at an unprecedented rate and everything was right with the world. Right until the constraint moved, that is. All of a sudden my world came crashing in on me because I hadn’t anticipated this. I should have, but I didn’t. It wasn’t hard to find the new constraint since there was a pile of inventory sitting in front of it. So we just moved our process improvement efforts to the new constraint. I learned what Goldratt meant about "breaking the constraint."
Integrating Lean, Six Sigma and Theory of Constraints Gets You the Ultimate Improvement Cycle
Although I am a huge supporter of both Lean and Six Sigma, the profits realized from these two initiatives, or even the hybrid Lean Six Sigma, pale in comparison to what can happen from an integrated Lean, Six Sigma Theory of Constraints (TOC) (or as I call it, the Ultimate Improvement Cycle [UIC]). In fact, one double blind study of 21 electronics plants has confirmed that an integrated Lean Six Sigma Theory of Constraints improved profits roughly 22 times that of Lean and 13 times more than Six Sigma if these were both singular process improvement initiatives.1
Lean, Six Sigma, and Lean Six Sigma Initiatives Are In Trouble
Before I get into how the UIC works, I want to talk about the current state of Lean, Six Sigma and Lean Six Sigma initiatives as it relates to sustainment. The Lean Enterprise Institute (LEI) conducts annual surveys on the subject of how well Lean implementations are going.2 Considering the last three surveys (2004, 2005 and 2006), the results do not paint a rosy picture. In fact, the LEI reported in 2004 that 36 percent of companies attempting to implement Lean were backsliding to their old ways of working. In 2005, the percentage of companies reporting backsliding had risen to almost 48 percent, while in 2006 the percentage was at 47 percent. With nearly 50 percent of companies reporting backsliding, we are not looking at a very healthy trend, especially when you consider the amount of money invested in the initiative. Add to this what Jason Premo of the Institute of Industrial Engineers reports: "A recent survey provided some shocking results, stating that over 40 percent of Lean manufacturing initiatives have hit a plateau and are even backsliding, while only 5 percent of manufacturers have truly achieved the results expected."3
In the case of Six Sigma initiatives, the results have been more impressive, but not as impressive as they could or should be. Celerant Consulting carried out a Six Sigma survey in 2004, generating responses from managers across all business sectors, and although the results of the survey were more positive than negative, there were several problems that did surface.4 The survey suggests that most businesses new to Six Sigma often find that running effective Six Sigma projects has been a significant challenge, with Six Sigma projects often quoted as taking four to six months or even longer to complete.
Poor project selection is a key area where many businesses still continue to struggle. Industry experience suggests that about 60 percent of businesses are currently not identifying the process improvement projects that would most benefit their business.
OK, so if Lean, Six Sigma or Lean Six Sigma aren’t working well enough, then what do I recommend should replace these process improvement methodologies? The fact is, we shouldn’t replace them at all. Lean and Six Sigma are vital to the success of all process improvement initiatives. What is missing is the necessary focus and leverage needed to maximize your return on your process improvement investment. By focusing the Lean and Six Sigma principles, tools and techniques on the operation that is limiting throughput, your profits will soar.
Utilizing the Ultimate Improvement Cycle
Figure 1 is a graphical representation of what I have named the Ultimate Improvement Cycle.5 What you see are three concentric circles representing three cycles of process improvement. The inner or core cycle represents the Theory of Constraints process of on-going improvement.6 Theory of Constraints provides the necessary focus that is missing from Lean and Six Sigma process improvement initiatives. Based upon my experience and results, the key to successful process improvement initiatives is focusing your process improvement efforts on the right area, the system constraint. Remember, the constraint dictates your throughput rate, which ties directly to bottom-line process improvement.
The second circle represents the Six Sigma roadmap popularized by at least two authors.7 Here you will recognize the now famous DMAIC roadmap associated with Six Sigma. The outer circle depicts the Lean improvement cycle popularized by Womack, Jones and others.8 Both Six Sigma and Lean are absolutely necessary for my Ultimate Improvement Cycle methodology to work...he only difference being where and when to apply them.
Figure 2 summarizes the tools and actions needed to effectuate the process improvement in the constraint and a general idea of when to use them.9 Keep in mind that all processes are not the same, so the type of tool or action required and the usage order will probably be different. This is clearly situation dependent. (Click on diagrams to enlarge.)
Ultimate Improvement Cycle Case Study
This Ultimate Improvement Cycle case study involves a company that had been manufacturing truck bodies for the transportation industry since 1958 and had been one of the recognized industry leaders. The company had a staff of 17 full time Engineers; and Engineering performance was measured by the number of hours of backlog waiting to pass through Engineering, which seemed odd because such a negative performance metric was being used. I had been hired in as the VP of Quality and Continuous Improvement because the company was losing market share as well as delivery dates being missed. In addition, morale within Engineering was apparently at an all time low. Upon arriving at this company I was informed that I was also to have responsibility for Engineering. Because of the poor performance in Engineering, the company had fired their VP of Engineering. Apparently the backlog of quotes had risen from their normal 300 hours to approximately 1,400 hours just in the previous two months.
My first step was to create a high-level P-Map and a VSM to better understand what was happening. It was clear immediately that the constraint was the order entry system in that the process to receive a request for a quote and deliver it back to the customers was consuming 40 days! Since it only took two weeks to produce and mount the truck body, it was clear to me why market share was declining. I then created a lower level P-Map of the quoting process to better understand what was consuming so much time.
My next step was to develop a run chart to get some history of what was happening within this process. Figure 3 represents the number of backlog hours from February 1999 through April 2000. The data confused me because I first observed a steady decline in backlog hours beginning in May of 1999 through October 1999 and then a linear increase from November 1999 through April of 2000. My investigation revealed that the decline was associated with mandatory Engineering overtime and the ascent occurred when the overtime was canceled. The Engineering VP hadn’t solved the problem; he had just treated the symptoms with overtime.
My next step was to create another run chart going back further in time. If I was going to solve this problem, I needed to find our when this problem actually started. Figure 4 is the second run chart I created. It was clear that this backlog problem was a relatively recent change, so the key to solving it was to determine what had changed. (Click on diagrams to enlarge.)
In fact, somewhere around January of 1999 the incumbent VP of Engineering had decided to move on to another position outside the company. His replacement apparently didn’t like the way the Engineering Group was arranged. The company produced three basic types of truck bodies and historically had three different groups of engineers to support each type. These groups were staffed based upon the ratio of each type of truck body. Between June of 1996 and December 1998 the company had maintained a very stable level of backlog hours. The new VP of Engineering consolidated the three groups into a single group and almost immediately the backlog grew exponentially. The company fired him in May 1999 and hired the new VP that used overtime to bring the backlog hours down. Part of the problem was the performance metric in place, which caused abnormal and unacceptable behaviors.
For me, the fix was clear. Return to the previous Engineering configuration and drive down the backlog hours. The results were swift and amazing in that the backlog decreased from 1,200 hours to 131 hours in five weeks and has remained within an acceptable maintenance level ever since. In fact, because we also eliminated much of the waste within this process the time required to process orders through Engineering decreased from 40 days to an astounding 48 hours! Figure 5 represents the final results of our efforts. Not only had the amount of backlog hours decreased to levels never seen before, the number of quotes completed here at all time highs for the company. (Click on diagram to enlarge.)
Conclusion to the Ultimate Improvement Cycle Case Study
The key to this success was to first identify the operation that was constraining throughput; second, decide how to exploit the constraint by applying various Lean and Six Sigma tools to the constraint; third, subordinate everything else to the constraint and then if need be, break the constraint by spending money. Thanks to Lean and Six Sigma, we did not have to spend any money. And the good news is, the market share increased dramatically!
1Reza M. Pirasteh, PH.D., and Kimberly S. Farah, PH.D.—"The Top Elements of TOC, Lean, and Six Sigma (TLS) Make Beautiful Music Together," APICS Magazine, May 2006.
2Lean Enterprise Institute, 2004 and 2005 Surveys on Lean Manufacturing.
3Premo, Jason P., Please Help! My Lean Is Broken, Institute of Industrial Engineers.
4Survey by Celerant Consulting, December 2004.
5Reprinted with permission from The Ultimate Improvement Cycle—Maximizing Profits Through the Integration of Lean, Six Sigma, and the Theory of Constraints, CRC Press, Taylor & Francis Group, Boca Raton, FL, 2009.
6Goldratt, Eliyahu M., The Goal, Great Barrington, MA: North River Press, 1986.
7Harry, Mikel, and Richard Schroeder, Six Sigma: The Breakthrough Management Strategy Revolutionizing the World’s Top Corporations (New York: Doubleday, 2000) and Pande, Peter S., Robert P. Newman, and Roland R. Cavanaugh, The Six Sigma Way—How GE, Motorola, and Other Top Companies Are Honing Their Performance (New York: McGraw-Hill, 2000).
8Womack, James P., and Daniel T. Jones, Lean Thinking—Banish Waste and Create Wealth in Your Corporation (New York: Free Press, 2003).
9Reprinted with permission from The Ultimate Improvement Cycle—Maximizing Profits Through the Integration of Lean, Six Sigma, and the Theory of Constraints, CRC Press, Taylor & Francis Group, Boca Raton, FL, 2009.