Goldratt’s Theory of Constraints – Constraint Management

An Israeli physicist, Eliyahu Goldratt wrote a book titled ‘The Goal’, about a factory manager’s quest to save his factory from being closed down for lack of profitability. It chronicles the process that the manager and his staff go through as they learn how to save their factory. What they learn is how to apply the principles of what Mr. Goldratt calls the “Theory of Constraints.”

Theory of Constraints (TOC) is a logic-driven approach which focuses on system improvement. The core idea of TOC is that every organization has at least one constraint that prevents management from achieving the goal of the organization to a larger degree.

A system can be defined as a collection of interrelated, interdependent components or processes that act in concert to turn inputs into defined outputs in pursuit of a particular goal. Linking systems to chains, TOC defines weakest link as a Constraint. Constraint limits the systems performance. A constraint determines the maximum capacity of a System. Theory of Constraints assumes that every system has at least one constraint that prevents from achieving the system goals. The performance of the entire system is limited by the constraint. Constraints can be physical resources or policies. TOC develops a set of procedures and methodologies to identify and optimize such constraints. Theory of Constraints helps to increase throughput, reliability, and quality while decreasing inventory, late deliveries, and overtime.

Goldratt introduced a method called the five focusing steps for addressing system problems on a continuous improvement basis. The steps are:

  1. Identify the constraint: Identify the operation that is limiting the productivity of the system.
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Six Sigma – A Business Process Improvement Methodology

Six Sigma is a methodology that provides businesses with the tools to improve the capability of their business processes. This increase in performance and decrease in process variation leads to defect reduction and vast improvement in profits, employee morale and quality of product

Historical Background of Six Sigma

Around 1980 Robert Galvin, at that time CEO at Motorola, realized the importance of working systematically with variance reduction as the Japanese had done for a prolonged period. Together with Bill Smith, Mikel Harry and Richard Schroeder, he created an improvement program that was given the name Six Sigma. Bill Smith came up with the idea of “inserting hard-nosed statistics into the blurred philosophy of quality”. The program was inspired by Japanese work, but also strongly influenced by Juran’s thoughts. Due to Six Sigma, Motorola managed to reduce their costs and variation in many processes and were an inaugural winner of America’s Malcolm Baldrige National Quality Award in 1988. They reported a profit from the program of USD 700 million for 1991 alone.

“We quickly learned if we could control variation, we could get all the parts and processes to work and get to an end result of 3.4 defects per 1 million opportunities, or a Six Sigma level. Our people coined the term and it stuck. It was shorthand for people to understand that if you can control the variation, you can achieve remarkable results.” – Robert W. Galvin, Chairman Emeritus of Motorola, Inc.

The Six Sigma results by Motorola impressed Jack Welch, then CEO at General Electric (GE), and Welch launched Six Sigma in late 1995 as one of four strategic initiatives.… Read the rest

Theory of Flow by Mihaly Csikszentmihalyi

“The best moments usually occur when a person’s body or mind is stretched to its limits in a voluntary effort to accomplish something difficult and worthwhile. Optimal experience is thus something we make happen.” -Csikszentmihalyi, 1990.

The theory of flow (also referred to as positive psychology) was developed by Hungarian psychologist Mihaly Csikszentmihalyi, as described in his 1990 book, Flow: The Psychology of Optimal Experience. Csikszentmihalyi defines flow as “the state in which people are so involved in an activity that nothing else seems to matter; the experience itself is so enjoyable that people will do it even at great cost, for the sheer sake of doing it.” In this state of being, people are motivated by inherent enjoyment of the challenges provided by the activity, and are subsequently more productive and happier. He identifies a number of different elements involved in achieving flow:

  • There are clear goals every step of the way.
  • There is immediate feedback to one’s actions.
  • There is a balance between challenges and skills.
  • Action and awareness are merged.
  • Distractions are excluded from consciousness.
  • There is no worry of failure.
  • Self-consciousness disappears.
  • The sense of time becomes distorted.
  • The activity becomes an end in itself.
  • “A sense of that one’s skills are adequate to cope with the challenges at hand in a goal directed, rule bound action system that provides clear clues as to how one is performing. Concentration is so intense that there is no attention left over to think about anything irrelevant or to worry about problems.

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    Three Value Disciplines by Treacy and Wiersema

    Value discipline, a term coined by Michael Treacy and Fred Wiersema in their book, “The Discipline of Market Leaders” to describe different ways companies can differentiate itself from competitors. A value discipline is more than just a benefit statement—it is a statement of strategic focus and provides a context for a company to set its corporate vision and objectives, to target its most profitable customers, and to focus and align its activities.

    Treacy and Wiersema identified three different ways of bringing together a compelling value proposition with an effective operating model. The basic idea is that any company can deliver value to its customers in three value disciplines.

    1. Operational Excellence: Delivering quality products or services at the lowest total cost with the least inconvenience and always on time. Companies pursuing operational excellence are relentless in seeking ways to minimize overhead costs, to eliminate intermediate production steps, to reduce transaction and other “friction” costs, and to optimize business processes across functional and organizational boundaries. They focus on delivering their products or services to customers at competitive prices and with minimal inconvenience. An operationally excellent company proactively designs its entire business model for its targeted customer segments, paying particular attention to speed, efficiency, and cost.
    2. Product leadership: Aims to build a culture that continuously brings superior products to market. Companies that pursue product leadership are innovation-driven, and they constantly raise the bar for competitors by offering more value and better solutions. Product leaders continually scan the landscape for new product or service possibilities; where others see glitches in their marketing plans or threats to their product lines, companies that focus on product leadership see opportunity and rush to capitalize on it.
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    Mass Customization – Dynamic Stability Product/Process Matrix

    Mass Customization Concept

    “It is the customer who determines what a business is” – Drucker, 1954

    The concept of mass customization was coined by Stan Davis in 1987, in his book “Future Perfect”. In this book, he emphasizes that in traditional industrial production there is on the one hand mass production, using economies of scale to produce goods at low costs, but with nearly no variety or on the other hand individual production with a high degree of variety but in small volumes with high costs. Joseph Pine, an IBM-executive turned consultant and author who is the father of the mass customization concept, in his 1993 book “Mass Customization – A New Frontier in Business Competition”, outlines more about Mass Customization.

    “developing, producing, marketing and delivering affordable goods, and services with enough variety and customization that nearly everyone finds exactly what they want.” -  Joseph Pine, 1993

    “Mass customization is a system that uses information technology, flexible processes, and organizational structures to deliver a wide range of products and services that meet specific needs of individual customers at a cost near that of mass-produced items” - Hart, 1995

    Mass customization is a viable business strategy, by enabling customized products to be manufactured with the economies of scale associated with mass production. Mass customization explains how affordable products and services can be delivered to satisfy the needs of the individual by combining the efficiency of mass production and the customization level of craftsmanship. The goal of mass customization is to produce high quality products with the shortest delivery time and lower cost.… Read the rest

    Value Net Framework

    The Value Net Framework, also known as Coopetition Framework is an analytical strategy tool developed by Adam Brandenburger and Gary Nalebuff in 1996, combining strategy and game theory, in order to describe and analyze the behavior of multiple players within a given industry or market. The Value Net Framework is an alternative to Porter’s Five Forces framework, extends the five forces framework more general by examining the role of complementors.

    The frameworks fundamental idea is that cooperation and competition coexist. Cooperation and competition are both necessary and desirable when doing business. Cooperation is required to increase benefits to all players (focus on market growth), and competition is needed to divide the existing benefits among these players (focus on market share).

    Co-opetition

    Co-opetition is a neologism representing the ambivalence of competition and cooperation in business relationships. Co-opetition is part competition and part cooperation. It describes the fact that in today’s business environment, most companies can achieve more success in a dynamic industry than they ever could working alone. Specifically, when companies work together, they can create a much larger and more valuable market than they ever could by working individually. Companies then compete with each other to determine who gets the largest share of that market. Co-opetition allows for the real-world business situation that there can be multiple winners in the marketplace. Business, unlike war, is not a winner takes all proposition. The objective is to maximize your return on investment – regardless of how well or how poorly other people or other companies perform.… Read the rest