UPM PDU Question 5: Who is the owner of the project management methodology TOC®; on what type of projects would you use TOC®?; and what is the main project management philosophy behind TOC®?
Answer 5: A ‘Professional Development Unit’ (PDU) or ‘Project Management Credit’ from ‘Universal Project Management’ (UPM) – 3 PDU’s
A. The owner of the Project Management Methodology TOC® is – The Theory of Constraints International Certification Organization (TOCICO®)
B. The list below consists of the people that pledged seed money during the Atlanta, Georgia Conference held by Dr. Eli Goldratt in November 2001, which started the TOCICO Organization. The people below are the Founders of TOCICO:
Abramowski, Krzysztof
Abuhab, Miguel
Salgado, Flavio
Anderson, Melvin
Arevalo, Javier
Baker, Daniel
Barnard, Alan
Bergland, David
Bergland, Suzan
Bernett, Richard
Blackstone, John
Brill, Guy
Brown, Anne
Caldwell, David
Cardella, Tony
Cartier, Brad
Cerveny, Janice F.
Coetsee Havenga Marinus
Cohen, Oded
Cole, Stephen
Conde, Rafael
Cooper, Marjorie
Corbett, Thomas
Cox, Jim
Dinham, Mike
Dubois, Stefan
Ferguson, Lisa
Franks, Richard L.
Gaskill, Bill
Georges, Leonard
Gilani, Ravinder
Goldratt, Eli
Gowland, Eric
Hartman, Gerald
Holt, James
Jackson, Andrew
Kendall, Gerry
Kendall, Jacquelyn
Kingman, Owen
Klarman, Alex
Knight, Alex
Leader, Alan
Lang, Lisa
Leishman, KathrynA.
Leme, Flamino
Leonard, Patrick
Li, Rong-Kwei
Limon, Teodoro Gabriel Lopez
Machado, Ricardo
Meeks, Howard
Miremont, Jean-Claude
Morales, Oscar
Neumann, Carlos
Newtown, Kent
Parol, Zenon
Parr, John
Patrick, Duncan
Patrick, Frank
Powell, Martin
Putz, Richard
Rizzo, Tony
Romero, Alfredo
Romero, Karina
Ross, Romey
Saathoff, John
Schragenheim, Eli
Sebastian, Bill
Selden, Paul
Siegel, John
Smith, Chad
Smith, Debra
Spoede Budd, Charlene
Stillahn, Brad
Suerken, Kathy
Surace, Rocco
Thompson, John
Tosi, Frank
Tripp, John
van Zantwijk, Yohyon
Waite, Jeff
Walsh, Danny
Warchalowski, Jack
Watt, Andy
Witt, Stewart
Wright, Alan
Zajc, Milan
C. What is the Theory of Constraints?
The Theory of Constraints is a methodology for identifying the most important limiting factor (i.e. constraint) that stands in the way of achieving a goal and then systematically improving that constraint until it is no longer the limiting factor. In manufacturing, the constraint is often referred to as a bottleneck.
The Theory of Constraints takes a scientific approach to improvement. It hypothesizes that every complex system, including manufacturing processes, consists of multiple linked activities, one of which acts as a constraint upon the entire system (i.e. the constraint activity is the “weakest link in the chain”).
So what is the ultimate goal of most manufacturing companies? To make a profit – both in the short term and in the long term. The Theory of Constraints provides a powerful set of tools for helping to achieve that goal, including:
The Five Focusing Steps (a methodology for identifying and eliminating constraints)
The Thinking Processes (tools for analysing and resolving problems)
Throughput Accounting (a method for measuring performance and guiding management decisions)
Dr. Eliyahu Goldratt conceived the Theory of Constraints (TOC), and introduced it to a wide audience through his bestselling 1984 novel, “The Goal”. Since then, TOC has continued to evolve and develop, and today it is a significant factor within the world of management best practices.
One of the appealing characteristics of the Theory of Constraints is that it inherently prioritizes improvement activities. The top priority is always the current constraint. In environments where there is an urgent need to improve, TOC offers a highly focused methodology for creating rapid improvement.
A successful Theory of Constraints implementation will have the following benefits:
Increased profit (the primary goal of TOC for most companies)
Fast improvement (a result of focusing all attention on one critical area – the system constraint)
Improved capacity (optimizing the constraint enables more product to be manufactured)
Reduced lead times (optimizing the constraint results in smoother and faster product flow)
Reduced inventory (eliminating bottlenecks means there will be less work-in-process)
D. Applications
The focusing steps, this process of on-going improvement, have been applied to manufacturing, project management, supply chain/distribution generated specific solutions. Other tools (mainly the “thinking process”) also led to TOC applications in the fields of marketing and sales, and finance. The solution as applied to each of these areas are listed below.
D1. Operations
Within manufacturing operations and operations management, the solution seeks to pull materials through the system, rather than push them into the system. The primary methodology use is drum-buffer-rope (DBR) and a variation called simplified drum-buffer-rope (S-DBR).
Drum-buffer-rope is a manufacturing execution methodology, named for its three components. The drum is the physical constraint of the plant: the work centre or machine or operation that limits the ability of the entire system to produce more. The rest of the plant follows the beat of the drum. They make sure the drum has work and that anything the drum has processed does not get wasted.
The buffer protects the drum, so that it always has work flowing to it. Buffers in DBR have time as their unit of measure, rather than quantity of material. This makes the priority system operate strictly based on the time an order is expected to be at the drum. Traditional DBR usually calls for buffers at several points in the system: the constraint, synchronization points and at shipping. S-DBR has a buffer at shipping and manages the flow of work across the drum through a load planning mechanism.
The rope is the work release mechanism for the plant. Orders are released to the shop floor at one “buffer time” before they are due. In other words, if the buffer is 5 days, the order is released 5 days before it is due at the constraint. Putting work into the system earlier than this buffer time is likely to generate too-high work-in-process and slow down the entire system.
D2. Supply chain / logistics
In general, the solution for supply chains is to create flow of inventory so as to ensure greater availability and to eliminate surpluses.
The TOC distribution solution is effective when used to address a single link in the supply chain and more so across the entire system, even if that system comprises many different companies. The purpose of the TOC distribution solution is to establish a decisive competitive edge based on extraordinary availability by dramatically reducing the damages caused when the flow of goods is interrupted by shortages and surpluses.
This approach uses several new rules to protect availability with less inventory than is conventionally required. Before explaining these new rules, the term Replenishment Time must be defined. Replenishment Time (RT) is the sum of the delay, after the first consumption following a delivery, before an order is placed plus the delay after the order is placed until the ordered goods arrive at the ordering location.
1. Inventory is held at an aggregation point(s) as close as possible to the source. This approach ensures smoothed demand at the aggregation point, requiring proportionally less inventory. The distribution centres holding the aggregated stock are able to ship goods downstream to the next link in the supply chain much more quickly than a make-to-order manufacturer can. #:Following this rule may result in a make-to-order manufacturer converting to make-to-stock. The inventory added at the aggregation point is significantly less than the inventory reduction downstream.
2. In all stocking locations, initial inventory buffers are set which effectively create an upper limit of the inventory at that location. The buffer size is equal to the maximum expected consumption within the average RT, plus additional stock to protect in case a delivery is late. In other words, there is no advantage in holding more inventory in a location than the amount that might be consumed before more could be ordered and received. Typically, the sum of the on hand value of such buffers are 25–75% less than currently observed average inventory levels.
3. Once buffers have been established, no replenishment orders are placed as long as the quantity inbound (already ordered but not yet received) plus the quantity on hand are equal to or greater than the buffer size. Following this rule causes surplus inventory to be bled off as it is consumed.
4. For any reason, when on hand plus inbound inventory is less than the buffer, orders are placed as soon as practical to increase the inbound inventory so that the relationship On Hand + Inbound = Buffer is maintained.
5. To ensure buffers remain correctly sized even with changes in the rates of demand and replenishment, a simple recursive algorithm called Buffer Management is used. When the on hand inventory level is in the upper third of the buffer for a full RT, the buffer is reduced by one third (and don’t forget rule 3). Alternatively, when the on hand inventory is in the bottom one third of the buffer for too long, the buffer is increased by one third (and don’t forget rule 4). The definition of “too long” may be changed depending on required service levels, however, a general rule of thumb is 20% of the RT. Moving buffers up more readily than down is supported by the usually greater damage caused by shortages as compared to the damage caused by surpluses.
Once inventory is managed as described above, continuous efforts should be undertaken to reduce RT, late deliveries, supplier minimum order quantities (both per SKU and per order) and customer order batching. Any improvements in these areas will automatically improve both availability and inventory turns, thanks to the adaptive nature of Buffer Management.
A stocking location that manages inventory according to the TOC should help a non-TOC customer (downstream link in a supply chain, whether internal or external) manage their inventory according to the TOC process. This type of help can take the form of a vendor managed inventory (VMI). The TOC distribution link simply extends its buffer sizing and management techniques to its customers’ inventories. Doing so has the effect of smoothing the demand from the customer and reducing order sizes per SKU. VMI results in better availability and inventory turns for both supplier and customer. More than that, the benefits to the non-TOC customers are sufficient to meet the purpose of capitalizing on the decisive competitive edge by giving the customer a powerful reason to be more loyal and give more business to the upstream link. When the end consumers buy more the whole supply chain sells more.
One caveat should be considered. Initially and only temporarily, the supply chain or a specific link may sell less as the surplus inventory in the system is sold. However, the immediate sales lift due to improved availability is a countervailing factor. The current levels of surpluses and shortages make each case different.
D3. Finance and accounting
The solution for finance and accounting is to apply holistic thinking to the finance application. This has been termed throughput accounting. Throughput accounting suggests that one examine the impact of investments and operational changes in terms of the impact on the throughput of the business. It is an alternative to cost accounting.
The primary measures for a TOC view of finance and accounting are: throughput, operating expense and investment. Throughput is calculated from sales minus “totally variable cost”, where totally variable cost is usually calculated as the cost of raw materials that go into creating the item sold.
D4. Project management
Critical Chain Project Management (CCPM) are utilized in this area. CCPM is based on the idea that all projects look like A-plants: all activities converge to a final deliverable. As such, to protect the project, there must be internal buffers to protect synchronization points and a final project buffer to protect the overall project.
D5. Marketing and sales
While originally focused on manufacturing and logistics, TOC has expanded lately into sales management and marketing. Its role is explicitly acknowledged in the field of sales process engineering. For effective sales management one can apply Drum Buffer Rope to the sales process similar to the way it is applied to operations (see Reengineering the Sales Process book as reference). This technique is appropriate when your constraint is in the sales process itself or you just want an effective sales management technique and includes the topics of funnel management and conversion rates.
E. Main article: Thinking processes (theory of constraints)
The thinking processes are a set of tools to help managers walk through the steps of initiating and implementing a project. When used in a logical flow, the Thinking Processes help walk through a buy-in process:
1. Gain agreement on the problem
2. Gain agreement on the direction for a solution
3. Gain agreement that the solution solves the problem
4. Agree to overcome any potential negative ramifications
5. Agree to overcome any obstacles to implementation
TOC practitioners sometimes refer to these in the negative as working through layers of resistance to a change.
Recently, the current reality tree (CRT) and future reality tree (FRT) have been applied to an argumentative academic paper.
F. Development and practice
TOC was initiated by Goldratt, who until his recent death was still the main driving force behind the development and practice of TOC. There is a network of individuals and small companies loosely coupled as practitioners around the world. TOC is sometimes referred to as “constraint management”. TOC is a large body of knowledge with a strong guiding philosophy of growth.