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By Eli Schragenheim Supporting TOC implementations worldwide
Workshop 15-16th October 2015Paris, FranceHosted by Marris Consulting
Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Agenda part 1
From the current practice to the wider-scope throughput accounting approach
Cost-per-Unit
The benefits, problems and flawed
assumptions
Throughput Accounting
Overcomes distortions of Cost-per-Unit and
compared with marginal costing
Wider-Scope Throughput Accounting
Creating the managerial process for
making mutual key decisions
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Agenda part 2
Hands-On
P&Q, MICSS and large-case
exercises
Database & implementation
issues
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
How does management make the following key basic decisions?
Announcing a one month promotion on several products of price reduction of 12%A
Signing a contract with a large client on 12% reduction in price for a commitment to purchase monthly quantities of specific products A certain min and max monthly total sales are agreed
B
Launching a new line of products that would compete, to a certain degree, with the older line of productsC
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Lets examine:
What is the critical information that is absolutely required to make a sound decision? Goldratt defined information: an answer to a question asked
We will also consider: How such decisions are taken today? Is there a better way and if so how come it is not widely used?
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Critical information for decision A
1. Is the low price too low to cause a loss? What data would tell us that?
2. Even when the price still yields some profit - would we make less profit due to the reduction in price?
3. Do we have enough capacity for the promotion?4. During the promotion regular clients buy more than what they
need right now what are the longer-term ramifications?
Announcing a one month promotion on several products of price reduction of 12%A
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Critical information for decision B
This deal is on top of the current sales at the current price Do we make more profit due to this contract?
Are we certain that such monthly deliveries are not losing?
Do we have enough capacity to produce the extra quantities? We have to consider the maximum commitment for answering this
question If we dont have enough capacity:
Is the contract so good that we should reduce some current sales? Should we add capacity in order to meet the contract requirements?
Signing a contract with a large client on 12% reduction in price for a commitment to purchase monthly quantities of specific products A certain min and max monthly total sales are agreed
B
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Critical information for decision C
Launching a new line of products that would compete, to a certain degree, with the older line of productsC
How can we know the precise impact of the launch on the sales of the older products?
Do we have enough capacity to cover for both new and old products?
How to determine the price of the new products? How to determine whether to reduce the price of the old products? And what to do if the old products are not sold?
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The benefit of using cost-per-unit
Having a reliable cost-per-unit of every product is key information for product-mix and pricing decisions because:
1. It quickly allows to calculate the cost of any deal, including the cost of maintaining a specific client
2. Making the decision mechanism very simple and straightforward The cost-per-unit is built mainly of cost of materials and cost of
capacity and it is independent of all the other sales
The challenge is to calculate the cost of any usage of capacity
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Can we trust the cost-per-unit figure?
If cost-per-unit is truly reliable then it means:
Whenever a unit of a product is produced/delivered the perception is that the cost-per-unit is an actual expense
Even when there is spare capacity the cost-per-unit is still the same - the calculation doesnt consider the total capacity used by other sales
However, when spare capacity exists then the capacity costs considered in the calculations do not really incurred
Does it make a difference to the cost-per-unit when a certain resource is fully loaded?
Can we increase its capacity to match the demand and would the cost be about the same as the cost included in the cost-per-unit?
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The two BIG mistakes of any cost-per-unit calculations:
1. Sometimes the use of capacity is free
2. Sometime the use of capacity is much more expensive or even impossible
The problem with cost-per-unit is NOT how fixed costs are allocated, but the assumption that whenever capacity is
consumed there is a cost to it!
Can we trust the cost-per-unit figure?
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
1. The vast majority of the expenses of organizations are spent to maintain fixed available capacity of various resources:
Buildings that provide space
Equipment
Employees that agree to provide N hours a month for a fixed salary
Working capital
All the above require paying for the provided capacity no matter whether that capacity is
actually utilized or not
On the nature of maintaining capacity
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
2. Some capacity can be purchased quickly for specific needs like a firm order Overtime, extra shifts, temp workers and outsourcing
Materials can be also viewed as resources
Even here most of the purchasing is done only in multipliers of certain quantities
However, note that the quickly purchased capacity is usually more expensive per-capacity-unit than the regular fix available capacity
The conclusions have to be that, unlike the common assumption, the cost of capacity behaves in a non linear way, and without considering the ramifications of the non linearity big mistakes are going to happen
The non-linear behavior of the cost of capacity
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Ramifications of the non-linear behavior
When we need x% more capacity, we are missing info:
When that capacity is NOT fully available:
It depends on all the other capacity-requests
Do we have enough available capacity?
Why?What?
It could be that we can get only much more of what we need and for much higher cost
Why?
How much additional capacity can we get?
How much it costs?
What?
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The wish to match capacity to demand
We invest good money to maintain capacity it looks like a natural wish to fully exploit the investment First of all by making sure every bit of available capacity is used to create
value that eventually would be delivered to clients
In other words: match capacity to demand!
Then, making sure the value generated per unit of capacity is higher than the cost of that capacity
So, we make sure every sales is profitable
If and only if matching capacity to demand is possible then it is possible to derive cost-per-unit in a reliable way Then we could also know the real cost of an hour-of-work of an employee,
acquiring a new client and offering free services
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Realizing the utopia: it is not possible to match capacity to demand
The simple fact is that there are three reasons why it is impossible to match capacity to demand:
1. TOC has proven that if two or more interactive resources are fully loaded then some level of starvation would occur preventing the overall system from performing at top capacity
And the delivery to clients would become chaotic
2. The market demand is fluctuating. It is practically impossible to manipulate capacity in the same speed as the demand
3. The non-linearity discussed before: capacity can be purchased only in certain sizes
So when just 11.2% more capacity is needed the practical solution could be either to purchase additional 50% or give up some demand
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The basic insight to go ahead
The obvious obstacle to answer the simple question is:Calculating the net-profit of a decision looks very
complicated It takes considerable time to come up with the P&L statement for the
whole organization! For just one decision it looks even more complicated
An observation:Every decision at hand might impact both the flows of incoming
revenues and outgoing costs Is it possible to concentrate on the in and out flows per decision? There is a third element of the money invested in the system
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The TOC goal performance measurements
The first generic idea is to measure the incoming flow:Throughput (T): the pace at which the organization generates
goal-units Non-profit organizations may have a goal that is not measured
by money Thus, T is not necessarily expressed by money
For profit-organization Throughput is the flow of money generated by the organization
The pace of Revenues minus the Truly-Variable-Costs (TVC) per single sale
An alternative definition of Throughput is the periodical added-value generated by the organization
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The cost of generating T
Investment (I): the money/capital captured within the organization
Operating Expenses (OE): the periodical expenses, not including the TVC, that the organization spends in order to generate T
The distinction between I and OE: The concept of OE is expenses that are expected to generate value
within the current year Tax rules refer to a year
The concept of I is expenses that are supposed to give value for longer time-periods
Financial tools convert I to a flow of OE for several/many years An alternative definition I is the financial value of the organization
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Truly-variable-costs (TVC)
The idea is to include all costs that truly occur with every single sale
It usually includes raw materials, outsourcing and commissions We assume that the cost of raw materials are TVC because a sale of the
end-product triggers replenishment of materials
There are some areas for potential discussions on what should be included in TVC
When maintenance is forced by law per hours used, like it is for aircrafts, then one could argue that those costs are TVC
When the cost of materials change the logic is to consider the new cost figures in TVC calculations, but practically a moving average of the materials is good enough
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Between the common and TOC global performance measurements
The common two key financial global measurements are:
1. Net Profit before tax (NP) = Sales (revenues) Expenses
2. Return-on-investment (ROI) = NP/I
The connection to the TOC definitions:
NP = T OE
ROI = (T-OE)/I
Productivity = T/OE
T/Price, or T/total-revenue, gives quick insight regarding the possible flexibility of the selling price
Price reduction of 10% - how does it impact T? How many more sales you need for the same level of T?
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
An example : Common practice and TOC
Product Price TVC Capacity Cost Allocated
Margin Units sold
TotalSales
Total T
A 7 5.5 1 0.5 (7.14%) 1M 7M 1.5M
B 10 6 3 1 (10%) 0.3M 3M 1.2M
C 10 4 5.5 0.5 (5%) 0.2M 2M 1.2M
Total: 12M 3.9M
Lets assume we have enough spare capacity on all resources: Which product you like to focus on expanding its sales in the short-term? When you do that what do you need to watch carefully?
If ALL the cost was allocated to the actual sales (not the usual way) can you state the profit before tax?
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The TOC insight for decision making
Delta(P) = Delta(revenues TVC) Delta(expenses TVC) = Delta(T) Delta(OE) Delta(T) is fully focused on the sales as TVC is linear with the sales
Thus calculating delta(T) is not too difficult
Delta(OE) is generated by changes in the available capacity And this can be calculated as well
The result is that while assessing delta(R)-Delta(E) seems complicated, calculating delta(T)-Delta(OE) is simpler by being straight-forward
What still needs considering is the potential indirect impact of a decision on other sales! Like the impact of low price of one product on other products
And the impact of running out of capacity even of just one resource!
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The five focusing steps and their impact on T
1. Identify the system constraint2. Decide how to exploit the system constraint(s)3. Subordinate everything else to the above decisions4. Elevate the system constraint5. Go back to step 1. Warning: beware of inertia!
The above insights guide us to note the one resource that truly limits the flow of T
The logic leads us always to note the weakest link
The resource that is more vulnerable to additional demand and would, most of the time, be the first resource to run-out of capacity
When a capacity-constraint-resource (CCR) is truly active then any additional demand is on the expense of other sales
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
T/CU throughput per constraint-unit
When a CCR is active then a priority list between the different products needs to be in place Because there is a trade-off between selling more ProdA or ProdB
The priority is based on the T generated per constraint-unit T/CU
T/CU, when applicable, yields a priority list on all the products
Guiding Sales where to focus
T/CU is easy to calculate as it requires only the T to be generated and the amount of required capacity of the CCR
All the required information refer to the decision-at-hand plus the recognition that the CCR truly constrains the flow of T
So, it serves the decision-maker in a similar manner to cost-per-unit
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Marginal costing is it truly the same as TA?
The problems in calculating ONE number representing the cost-per-unit are certainly known to accountants
But, much less to managers
Marginal costing (direct costing) is an accounting method that looks only on the variable costs of producing a unit
Materials, direct labor and commissions
Marginal costing faces very strong opposition claiming itd lead the organization to disaster!
Marginal costing looks very similar to TOC and the resistance against TOC stems from the same resistance against
Marginal Costing28
Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The damage of using marginal costing and its similarity to TA
The main concern is that basing decisions only on marginal costs might not be enough to cover the fixed costs This concern is intensified by salespeople giving too high reductions in
price, causing eventually a huge loss
The throughput of a sale equals the price minus marginal cost
TOC has been accused, for instance by Prof. Robert Kaplan, as being focused on the short-term, but yielding the wrong approach in the longer term in the long term the CCR can be elevated, while the capacity of the non-
constraints can be reduced
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Handling the arguments against TA
Making sure that the fixed costs are covered First, cost accounting methods also cannot ensure that the fixed costs
are covered!
Meeting the quantities assumed for the cost allocation is not guarantied
TOC puts a lot of pressure to maximize the total T
So, the focus of TA is always on the GLOBAL PICTURE rather than the isolated opportunity
Even when TOC considers just one deal the impact on the whole organization, now and in the future, is taken into account
Thus, delta(T) delta(OE) means considering the true deltas for the whole organization
- And the decision should be checked for the long term
Sales people should be measured by the total T they generate, not by sales30
Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The limitations of TA in supporting decisions
What happens when there is no active CCR? The majority of the organizations are not constrained by capacity!
Many times there are resources that are loaded to 100% or more
But, then there are quick means to increase the capacity
- Overtime, temp-workers, extra-shifts and outsourcing
So, actually the potential capacity is significantly larger than the formal available capacity
- But, any use of capacity, on top of the formal available capacity, generates delta(OE) that needs to be considered
- In such a case is such a resource a CCR?
- It does not truly limit the flow of T but the delta(T) minus delta(OE) is lower
The problem is that T/CU is absolutely USELESS in this case!
How should we treat a CCR that is active only in part of the time?31
Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The critical difference between small and large decisions
When a CCR is active we assume that the next most-loaded-resource(s) have enough protected capacity Thus, when the decision-at-hand requires relatively small amount of
capacity we assume enough protected-capacity would remain
And then our only concern is the load on the one CCR
However, many marketing and sales initiatives cause significant change in sales that could generate interactive constraints Certainly this could happen when Sales tries to sell much more products
with low T/CU
Even when currently there is no clear CCR a relative large decision might create a bottleneck
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
A simple example
Suppose ResourceA is currently loaded, on average, 95% of its capacity, while ResourceB is loaded 86% of its capacity Sales suggests to enter a new segment, yielding 10% less T-per-unit than
in the current market still adding 5% more total T
But, its T/CU of resourceA is still relatively good
The overall sales at that new segment require about 3% of the capacity of ResourceA and 15% of the capacity of ResourceB
How should we evaluate selling at the inferior segment? Should we base the decision solely on the T/CU of ResourceA?
Usually in TOC implementations we have good data regarding the CCR and all the rest is either ignored or not-too-good quality
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The impact of uncertainty
Any marketing or sales initiatives are subject to a lot of uncertainty
Especially regarding the actual demand generated by the move
The ramification is that we dont really know the impact of a proposed move on the total T and on the capacity levels
T/CU totally ignores the quantity of the sales
The basic assumption of having enough excess capacity on all non-constraints might be invalid!
Another parameter depending on uncertainty is the level of protective capacity that is necessary for reliable delivery
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The ramifications of not having a good way to judge the value of new opportunities
Managers are afraid of being unjustly criticized after the fact When the seemingly outcome of a decision is negative
Thus, managers need to protect themselves against such criticism and there are two different protection schemes1. The decision criteria is ultra-conservative
2. Following the book to show the manager has taken the decision everybody else would have taken
This explains the popularity of cost-per-unit in spite of the troubles
It explains how come there are very few ideas to increase sales
Managers are too afraid of making decisions, out of their comfort-zone, which could lead to negative results
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Stagnation as a common state for organization
Organizations are often stuck with the same products and clients without even trying to improve their state
What is the cause? One might argue that organizations that achieve good profitability have no
real incentive to look for changes that look risky
The problem is that not looking for a change is very risky as well
And this risk is frequently ignored
What about organizations that are financially unstable?
Sales and Marketing people are not truly encouraged to come up with crazy ideas
Being unable to make a good assessment of the economic outcomes, including assessing what could go wrong, managers get cold-feet to even consider such an idea
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The benefits of intuition
People process a lot of information in an unconscious way Much of the data the intuition is build upon is not registered in any
computerized system But, those data items can have a significant influence on many decisions
Typical intuition data example:- Selling X has significant impact on selling Y
- Because some customers need both X and Y
When people truly care about their organizations their intuition reflects many valid parts of the cause-and-effect of their reality
The conclusion is that:The intuition of good managers is an asset and thus it has to
play an active part in the decision making process of the organization
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting 38
Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The limitations of human intuition
Intuition is personal and cannot be easily explained Thus, intuition cannot be easily communicated to other people
Intuition of any person is also influenced by personal values and thus is significantly biased
Many people have flawed intuition when it comes to calculations
Most people prefer not to lose X than to earn X
Even though from net economic view these are the same
Intuition is slowly built with time, so when a change is happening it becomes flawed and outdated pretty quickly
How can we consider the intuition of relevant people while being concerned with the quality of the intuition?
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Structure process for decision making
Providing a structured process for decision making of key basic decisions that is based on mutual efforts of Operations, Marketing and Sales, Finance and possibly R&D, led by the CEO/President.
Operations
Sales & Marketing
CEO /President
Finance
R&D
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The basic key decisions of any organization
1. What where and to whom should the organization sell?
Products and related services as well as the business rules
2. Is the price about right?
That would leave nice profit and be well accepted by the market
3. How much formal available capacity should be maintained?
And what quick means to increase capacity should be maintained
Definition: Capacity Buffer are all the means to quickly and temporarily increase capacity when needed for extra cost
(delta-OE)
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The concept of the proposed solution
The most straight-forward key for judging an idea is calculating
Delta(P) = Delta(T) Delta(OE)When there is a need for an investment, we either convert the I
into a stream of delta(OE) OR judge the I versus a stream of delta(T) delta(OE)
The core concept is to judge every new idea as an addition to the current state of the organization Ignoring the means for per-unit misleading tools
Measuring the net impact of the considered decision on the bottom-line!
We have to combine the intuition of relevant people with the numerical analysis of the full ramifications and be careful
when we translate intuition into numbers43
Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The criteria of delta(T) delta(OE) > 0
The calculation of delta(T) has to include two stages:1. The direct T to be generating by the idea at hand
The quantity to be sold is based on forecast usually according to intuition that also considers the uncertainty
2. Inquiring dependencies that might impact other sale
Calculating delta(OE) by considering whether the total load penetrates into protective capacity If this happens one way is to give up some sales an action that
would reduce delta(T)
Adding capacity from the capacity-buffer causing delta(OE)
Making the decision based on delta(T) delta(OE) Well see later how to handle the uncertainty
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Critical Resources
Do we need to consider the capacity of ALL resources? Reasonably increased demand for some products, not including extreme
jumps in sales, might cause few resources to penetrate into their protective capacity
Few, even very few, definitely not all resources
A critical resource is one that could easily run out of capacitywhen moderate changes in the demand happen We need to be careful not to define too many resources as critical
Only resources that could truly limit the performance of the organization
The capacity considerations should be focused on the critical resources
The impact of most resources on the calculation of delta(OE) is negligible
There should not be more than eight critical resources
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
More on capacity buffers
The vast majority of the resources have the ability to provide more capacity when necessary Equipment is usually utilized for only part of the day/week
So, it is possible to utilize it for more time
We might need extra manpower or overtime
Even machines that are utilized 24/7 can be usually squeezed for more capacity with extra manpower especially at night
This extra capacity serves as protective capacity
Outsourcing is a very important channel for having options to increase capacity when truly required
Capacity buffers have to be treated as regular TOC buffers Controlling them with buffer-management to ensure the level is right
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Two levels of protective capacity
Protective capacity is the amount of spare capacity needed to ensure reliable delivery of the commitments Spare capacity means it can be deployed when required
Protective capacity can be capacity that is utilized for no-priority (light-blue demand) demand, for which there is no commitment
The wisdom of TOC leads us to recognize TWO different levels of protective capacity:1. One resource, the CCR, could be loaded very high
Assuming it is in the focus to prevent any waste of capacity
2. The protective capacity for all the rest
It has to be higher than the one protecting the CCR as it has to prevent interactions that waste the capacity of the CCR
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
T-generators
The term Product has two different meanings and this creates a certain confusion :1. The outcome of operations
it requires capacity from various resources and also raw materials
This is a product
2. What is sold by the organization Could be one unit of a product sold for a certain price
It could be a package of various products, plus additional services
Like transport to the client, special packaging and warranty
This is a t-generator
Each T-generator has a price tag and the products in contains
Sales profile is the list of t-generators and the predicted sales
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Making decisions through what-if scenarios
Every idea to be checked defines a what-if scenario where the idea is either new t-generators, changes in existing t-generators or a combination of the two Changes to existing t-generators are either price or predicted sales
The first step is to ask whether there are indirect impacts of the idea on the sales of other t-generators
The first check validates whether the delta(T) is positive
The delta(T) refers to the additional T of the ideas as a whole relative to the total T of the current sales profile
If delta(T) is positive then the load vs capacity is checked
Do one, or more, of the critical resources penetrate into protective capacity?
If so, what can we do?
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Handling capacity shortages
When one or more of the protective capacities are penetrated then there are two different ways to handle it:1. Manage demand: identify current sales that can be reduced in order
to free capacity We like to reduce sales that yield less T per capacity unit of the resource
that penetrates the protective capacity
When several resources are overloaded we need to watch the impact of reducing sales on all those resources
Sales reduction could be achieved by increasing the price
However, only sales people can confirm that the specific sales reduction is possible
2. Increase capacity: use the capacity buffer, or, depending on the time frame, buy additional capacity This action increases delta(OE)
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
The problems in managing the demand
Clients expect to get the exact quantity they like to have Thus, the supplier needs to maintain protective capacity to be able to face
sudden increases in demand
When we have only part of the demand the sale is not certain
The clients might look elsewhere
How can we reduce the demand for specific products? The decrease in sales could be larger than what we have intended
Selling large quantities to specific clients needs special care when sales reduction is considered
Price increase is a good mean, but it is definitely risky
The role of salespeople in judging how much sales reduction is possible is critical
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Handling uncertainty
Every decision that is checked through a what-if scenario has to consider the impact of uncertainty The impact of the predicted sales given the price
The proposed way is to define two what-if scenarios:1. A reasonable pessimistic assessment of the sales due to the decision
at hand
Pessimistic scenario leads to low delta(T), but lower load vs. capacity
Negative delta(T) could happen when the decision tries to increase sales of some products on the expenses of others
Or promotions where the increased sales are on the expense of future sales and reduced T per unit
2. A reasonable optimistic assessment of the sales
Deal with capacity shortages that might disrupt the financial results!52
Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Decisions under uncertainty
There are three objectives to the use of pessimistic and optimistic assessments1. Having the best information for supporting the key decisions
Taking into account that any assessment is just partial information
We need to know the ramifications of what we know and, especially, what we dont know
The intuition of people is more tuned to a range than to an average
The experience we have tracks results that are tend to be more towards the extreme side
2. Reducing the amount of fear of key people that they would be unjustly judged after the fact
3. Allowing meaningful feedback on the assessments
Monitoring cases where the actual sales falls outside the range
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Making the decision
When both pessimistic and optimistic scenarios are evaluated for the same basic decision a dilemma might arise When one scenario yields nice profit and the other causes a loss The actual result could be anything between the two
The details of the decision itself could be significantly different between the two scenarios For instance, the optimistic requires a lot of overtime and/or reduced
sales of some t-generators The pessimistic scenario might still based on continuing to sell those t-
generators and not using any overtime Accepting the decision might require checking whether the actions have
to be taken upfront or it is possible to wait and see
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Decisions for different time frames
The default for the decision process on what to sell and at what price is a month The session, with Sales, Operations and Finance should be scheduled
one or two weeks prior to the start of the month
When the impact on Sales have longer ramifications there is a need to switch the time-frame to a longer one Like a quarter or a year
Long time-frames, a year or more, are required when an increase of available capacity is considered Purchasing equipment, hiring manpower, setting an agreement for
outsourcing
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Eli Schragenheim - Supporting TOC implementations worldwide Workshop 15-16th of October 2015 - Paris, France - Hosted by Marris Consulting
Service organizations and capacity issues
The main difference between manufacturing and service organizations is:
Service organizations need a customer to produce the service
Another difference is that in service most key resources are human, while in manufacturing they are equipment The use of human resources capacity is more tricky to measure
Because of the dependency on availability of customers - much more protective capacity is required
The same decision making process we deal here can be implemented in service But, we need to provide a mechanism measuring capacity and load
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