Reaching the Goal€¦ · 2010. TOCICO 2010 Conference About the author John Arthur Ricketts is an...

TOCICO 2010 ConferenceTOCICO 2010 ConferenceTOCICO 2010 ConferenceTOCICO 2010 Conference

1© 2010 TOCICO. All rights reserved.

Reaching the GoalReaching the GoalReaching the GoalReaching the Goal

Presented by: John Arthur Ricketts, IBMPresented by: John Arthur Ricketts, IBM

Date:Date: June 7June 7--8, 20108, 2010


AgendaAgendaAgendaAgendaAgendaAgendaAgendaAgenda

1. Professional, Scientific, and Technical Services

2. TOC Applications

3. Theory of Constraints for Services

2

© 2010 TOCICO. All rights reserved.


Which system is simpler?Which system is simpler?Which system is simpler?Which system is simpler?Which system is simpler?Which system is simpler?Which system is simpler?Which system is simpler?

1 2 3 1 2 3

Conventional wisdom says B looks simpler, but TOC shows A is actually simpler.

3


4 6

7

5

8 9

4 6

7

5

8 9

Manufacturing & Distribution

Professional, Scientific, & Technical Services

System A System B


Professional, Scientific, & Technical ServicesProfessional, Scientific, & Technical ServicesProfessional, Scientific, & Technical ServicesProfessional, Scientific, & Technical ServicesProfessional, Scientific, & Technical ServicesProfessional, Scientific, & Technical ServicesProfessional, Scientific, & Technical ServicesProfessional, Scientific, & Technical Services

2007 North American Industry Classification System (NAICS), Sector 54

This sector comprises establishments that specialize in performing professional, scientific, and technical activities for others.

These activities require a high degree of expertise and training.

4


Source: www.census.gov

• Accounting• Advertising • Architecture • Bookkeeping• Computing• Consulting

• Engineering• Law • Research • Photography• Translation / Interpretation• Veterinary


Resource ManagementResource ManagementResource ManagementResource ManagementResource ManagementResource ManagementResource ManagementResource Management(Hire(Hire--toto--plan vs. Hireplan vs. Hire--toto--deal)deal)

5678

Deal Actual Bench

1112131415

Res

ou

rces

Plan Actual Bench

Methods based on conventional wisdom are prone to under- or over-supply resources.

5


-6-5-4-3-2-1012345

1 2 3 4 5 6 7

PeriodR

eso

urc

es

0123456789

1011

1 2 3 4 5 6 7

Period

Res

ou

rces

When the capacity plan anticipates growth, but the services market turns down, the bench grows.

When capacity lags demand, the “bench” becomes depleted and there are “open seats.”


Resource ManagementResource ManagementResource ManagementResource ManagementResource ManagementResource ManagementResource ManagementResource Management(Replenishment for Services: Hire(Replenishment for Services: Hire--toto--buffer)buffer)

Inventory• Total consumption• Unreliability • Time to resupply• Unidirectional buffer

People are not inventory, but the Aggregation Principle and Buffer Management do apply in RS.

6


Resources

• Unidirectional buffer

• Net consumption• Unreliability• Time to adjust• Bidirectional buffer

Constrained Skill Group

Non-constrained Skill Group

Project 2

Project 1

1 2 3 4 5 6 7

? ? ?

?

?

?

?


Project ManagementProject ManagementProject ManagementProject ManagementProject ManagementProject ManagementProject ManagementProject Management(Critical Chain for Services (Critical Chain for Services –– MultiMulti--project Critical Chain)project Critical Chain)

Strategic Task

Nonstrategic Task

Strategic Resource Buffer

PrecedenceInternal Constraint

CCI optimizes the internal constraint. CCE uses RS to satisfy the external constraint.

7


Task

External Constraint Replenishment

Client’s start date

Client’s finish date

Client’s match date


Process ManagementProcess ManagementProcess ManagementProcess ManagementProcess ManagementProcess ManagementProcess ManagementProcess Management(DBR for Services)(DBR for Services)

Buffer Management

RMFG

WIP1 2 3

WIP

G Y RG Y R

Drum

Shipping ropeConstraint rope

DBRG uses fixed capacity to deliver goods. DBRS uses variable capacity to deliver services.

RM = raw material# = taskWIP = work in processFG = finished goods

8


Capacity Management

G Y RG Y RShipping ropeConstraint rope

BufferBuffer

SR SL1 2 3

RGR

Drum

Service level ropeConstraint

rope

Buffer

CM

SpeedCost

Quality

SLAs

Q Q

SR= service request# = taskQ = queueSL = service level


Finance and AccountingFinance and AccountingFinance and AccountingFinance and Accounting(Cost Accounting for Services)

• Cost allocation àààà Standard cost àààà Billing rate

• Billing rate * Hours = Standard price

• Utilization drives client billing by profit centers

• Cost centers must recover costs from profit centers

9


• Cost centers must recover costs from profit centers

• Inventory can be of little or no concern

• Priorities: 1) Expense, 2) Revenue, 3) Investment

• Local optimization àààà Global optimization


Finance and AccountingFinance and AccountingFinance and AccountingFinance and Accounting(Throughput Accounting for Services)

Financial Measures§ Throughput (T) – cash generated through deliverables and

service levels, which is sales prices minus truly variable costs (subcontractor fees, commissions, travel & living, etc.)

§ Investment (I) – all money spent on service production systems, facilities, skills, intellectual capital, and assets;

10


systems, facilities, skills, intellectual capital, and assets; plus money spent responding to requests for information, preparing bids and proposals, and negotiating contracts

§ Operating Expense (OE) – all money spent to produce deliverables and service levels from investments, which is primarily direct labor of practitioners, managers, and partners; but also includes selling, general, and administrative (SG&A) costs



Performance Measures§ Net Profit of project or process (NP) = T – OE

§ Return on Investment (ROI) = NP / I

§ Productivity = T / OE

Resource Measures

11


Resource Measures§ Throughput per Constraint Unit (T/CU) =

( revenue – TVC ) / constrained resources

§ Throughput per hour (T/h) = ( revenue – TVC ) / productive hours

§ Operating Expense per hour (OE/h) = ( direct labor + SG&A ) / available hours

§ Utilization (U) = time a resource spends producing / time available to produce



Decision-support Measures§ Change in Net Profit (∆NP) = ∆T - ∆OE

§ Payback (PB) = ∆NP / ∆I

Control MeasuresProject or Process Dollars per Day (PDD)

12


§ Project or Process Dollars per Day (PDD) = NP / daysPDD corresponds to TDD in the sense that both encourage on-time delivery, but “on-time” has a somewhat different meaning in services because both the start and finish are generally relevant to clients.

§ Resource Dollars per Day (RDD) = excess resources * OE/dayRDD is the rate at which excess resources erode NP by generating OE which cannot be recovered by T or redirected into I.


Finance and AccountingFinance and AccountingFinance and AccountingFinance and Accounting(Throughput Accounting for Software)

Software Engineering (TAE)

Software Business (TAB)

Throughput Accounting for…

Internal External Product Service Throughput is… Zero Cash from

code Cash from code

Cash from code + infrastructure

Investment is mainly…

Ideas + tools

Ideas + tools

Ideas + tools +

Ideas + tools

13


inventory Operating Expense is…

Labor Labor Labor + SG&A + training + support

Labor + SG&A + training + support + infrastructure

Professional, Scientific, and Technical Services often produce computer software for semi-automation of services,

but pure software companies are in the Information sector.


Marketing & SalesMarketing & SalesMarketing & SalesMarketing & Sales

Marketing & Sales for Services Conventional TOC-based Client needs indicated by… Pain points Core problems Typical value proposition is… Decrease client’s OE Increase client’s T Pricing is based on… Provider’s cost Client’s value Service prices tend toward… Standard Flexible Sales management focus is… Entire pipeline Sales constraint Opportunities are ranked by… Profit margin ∆NP

14


Opportunities are ranked by… Profit margin ∆NP

Marketing and Sales for Services follows the same TOC principles as manufacturing and distribution,

but PSTS enterprises may provide TOC services to others.


Strategy & ChangeStrategy & ChangeStrategy & ChangeStrategy & Change

Strategy & Change for Services Conventional TOC-based Strategy is determined by… Various methods Cause and effect Competing mainly on price is… Acceptable Not acceptable Heart of strategy is… Core competency Compelling market offers Strategic constraints are… Not crucial to strategy Deliberately chosen Problems are… Framed by change agent Reached by consensus Direction of solution is set by… Compromise Conflict resolution

15


Direction of solution is set by… Compromise Conflict resolution

Strategy and Change for Services follows the same TOC principles as manufacturing and distribution,

but PSTS enterprises may suffer the “shoemaker’s children” syndrome.


Implementation & TechnologyImplementation & TechnologyImplementation & TechnologyImplementation & Technology(Management Systems connected by Enterprise Service Bus)

Resource Management

System

Sales Project

Skill Groups

OpportunitiesTime

16


Sales Management

System

Project Management

System

Process Management

System

Cash

Financial Management

System

Service Requests

ESB


Resource Mgmt

TOC for ServicesTOC for ServicesTOC for ServicesTOC for Services

Critical

Replenishment

Deliverables

Strategy & Change

17


Finance & Accounting

Process Mgmt

Project MgmtMarketing & Sales

Critical Chain

Drum Buffer Rope

Throughput Accounting

Deliverables

ServiceLevels

Implementation & Technology


ReferencesReferencesReferencesReferencesReferencesReferencesReferencesReferences

Ricketts, John A., Reaching the Goal: How Managers Improve a Services Business Using Goldratt’s Theory of Constraints, IBM Press, 2008.

Ricketts, John A., “Theory of Constraints for Services: Past, Present, and Future,” The Science of Service Systems, Haluk Demirkan, James C. Spohrer, and Vikas Krishna (editors), Chapter 40, Springer, New York, 2010.

18


New York, 2010.

Ricketts, John A., “Theory of Constraints in Professional, Scientific, and Technical Services,” Constraint Management Handbook, Jim Cox and John Schleier (editors), Chapter 29, McGraw-Hill, New York, 2010.


About the authorAbout the authorAbout the authorAbout the authorAbout the authorAbout the authorAbout the authorAbout the author

John Arthur Ricketts is an IBM distinguished engineer.

Formerly a consulting partner in IBM Global Services, Dr. Ricketts is currently a technical executive in IBM Corporate Headquarters.

His experience includes manufacturing operations, higher education, software engineering, telecommunications, information technology consulting, new ventures, professional development, and service

19


consulting, new ventures, professional development, and service delivery.

John’s doctorate is in Information Systems, Computer Science, and Behavioral Science.

Date post:	27-May-2020
Category:	Documents
Upload:	others
View:	5 times
Download:	0 times

Reaching the Goal€¦ · 2010. TOCICO 2010 Conference About the author John Arthur Ricketts is an...

Documents