3. Pricing indifference modeling (the comparative rate that different products generate cash over the constraint) based on Throughput constraint rates.

4. Strategic market analysis that focuses on both tactical short-term market exploitation (utilizing "free product" capacity) and the mid- and long-range strategic market offers.

5. Throughput Accounting (TA) financial statements.11 In today's globally competitive environment, new decision-making tools are required to monitor, measure, and improve the business. A TOC information system is designed to plan, execute, and focus/prioritize improvement. Buffers provide the cushion at strategic points in the production system and BM provides real-time exception reporting on the status of the system. These buffers are visible across the organization and tie local actions to satisfying market demand.

How is the status of the buffers used to ensure sustained improvement? Five questions (5 Q's)12 must be asked concerning all buffers (time,13 stock, and capacity) in the system: 1. What is the condition of the orders? Are they on time or late? Are the Replenishment/ASR buffers healthy?

2. If they are late, is the trend getting worse or better?

3. If it's getting worse, what is the recovery plan?

4. Is the recovery plan effective?

5. What preventive measures are in place to keep the root issue from recurring?

Employing an effective feedback and accountability system requires answering these questions daily, weekly, monthly, and quarterly at different levels of the organization. In TOC, the point is to get an operational system in place quickly that can deal with variation, and a feedback system that can begin the process of execution, feedback, and ongoing improvement.

Generally, there are some key points of measurement and feedback that are important to maintain a real-time feedback system. In constraints management there will be relatively few control points-constraints and buffers-across an entire supply chain that can provide all of the information you need to judge the health of the entire chain and direct attention to places of need and opportunities for improvement.

Remember, all improvements are a change, but not all changes are improvements. If removing variation, waste, setups, etc., does not affect the rate at which Throughput can be generated or speed to market, do not be fooled that the company has made an improvement.

A Problem Is Identified, Now What?

Traditionally, problems are defined as those things in our organization that are not up to par from the fixed target perspective (i.e., "our on-time delivery is too low," "too much expediting," etc.). In TOC, these types of issues are referred to as symptoms or undesirable effects (UDEs) given that there is something more fundamental, the core problem, causing these symptoms.

The real problem is something that blocks the symptoms from being permanently addressed-the conflict. If it were as simple as taking an action to combat the symptom, management likely would have long ago resolved the issue. The fact that a symptom still plagues the organization is evidence that there is an equally important pressure-likely another system target or measure being jeopardized-that prevents a sufficient and longstanding solution to prevail. As stated earlier, a good measurement should drive the quest for increased ROI. Given that the tactical objectives for increasing ROI create conflict, resolving conflict must be at the heart of the improvement discussion.

Any time individuals in the organization are not synchronized around the right action to take, then by definition, they are wasting the capacity of their resources. Conflict over direction and the right action inhibit exploitation of and subordination to the constraint and likely casts an organization-wide doubt in leadership's ability. Once gaining the necessary visibility through the proper execution system, the conflict cloud must become part of the team's toolset to effectively resolve any day-to-day or deeper organizational dilemmas as well as aligning all key members in a common direction.

A common dilemma that many organizations face on a daily basis is the conflict between Sales (top side) and Operations (bottom side) shown in Fig. 14-10.

Sales versus Operations Conflict Cloud

A major customer comes to the salesperson and wants to place a very big order, but it is in a much shorter lead time than currently quoted. The salesperson's job (increase sales) is to book orders for the company to bring in revenue. To do this, he must commit to this short lead time (which disrupts the schedule). On the other hand, Operations has to respond to making orders for all customers (effectively flow product). Operations is continually pressured to expedite parts through the system and has numerous other orders already late or near late. Flow is constantly being disrupted by changes in the schedule (therefore, Operations wants to maintain the schedule). If you have Sales and Operations in your system, you've probably experienced this or some derivative of this conflict. So what's the right answer? Generally, people in Operations will fight for stability in the schedule and people in Sales will fight equally hard for the additional sales opportunity. Does this conflict have anything to do with a fixed performance measure within these departments (i.e., commissions, efficiencies, etc.)?

A market constraint dictates one set of assumptions and will direct the solution in one direction, and an Operations constraint dictates another set of assumptions and will direct the solution in another direction. Without this knowledge, there is no way to properly resolve this cloud. Even if you can resolve the conflict, with fixed metrics driving Sales (sales revenues, sales quotas, commissions) and opposing metrics driving Operations (DDP or overtime, for example) departments independently, there is no way to resolve this cloud to everyone's satisfaction. However, with visibility of the constraint's current load, Sales can be an active participant in both managing sales to exploit the constraint capacity as well as prioritizing the use of scarce capacity when the constraint is overloaded (market spike) in the short-run. A good BM system dramatically reduces the conflict in the organization by giving everyone the same view of the state of the logistical system and tying all of their measures/actions to the global metrics (ROI or RACE).

FIGURE 14-10 Sales versus Operations conflict cloud.

Should We Ever Be Satisfied?

We believe that an organization is either growing or dying and therefore should never be satisfied with maintaining the status quo (however healthy the current organization is). The problem is that targets, standards, and metrics are often assumed to have an end point-a state of "being achieved"-and therefore do not promote ongoing improvement. A reference environment that we can use to clarify the problem comes from a professor examining young students' responses to different forms of expectation and measurement of their academic performance.

Dr. Carol Dweck, a Stanford psychology professor, has been researching the subject of learning and motivation for years. In a series of experiments, Dweck tested the effects of praise and acceptance of achievement (promoting fixed intelligence) versus the effects of praise of hard work and encouraging an interest in tackling adversity (promoting growth). Her thesis concluded that students who hold a "fixed" theory are mainly concerned with how smart they are-they prefer tasks they can already do well and avoid ones on which they may make mistakes and not look smart. In contrast, people who believe in an "expandable" or "growth" theory of intelligence want to challenge themselves to increase their abilities, even if they fail at first.

"I also became very interested in coping with setbacks," she said. . . "(being) so concerned about not slipping, not failing" (Trei, 2007).

We find a very similar situation concerning fixed organizational targets and standards set as departmental goals. Meeting the target that was set becomes the only concern of the department managers, killing any motivation for ongoing improvement beyond sustainment.

Individuals who excel in education, sports, and industry instantly relate to Dweck's findings. Tiger Woods, for example, coming off arguably one of the greatest seasons in golf history, made the decision that it was the right time to completely reconstruct his golf swing. Was this foolish? Not if you understand that Woods' motivation is not driven by the recognition of being the best in the world or a fear of falling from that status. He simply is obsessed with seeking perfection in a game where such a goal is unattainable.

A Case Study

Let's explore another example. A company is vertically integrated and owns its supply chain from raw material through assembly of finished product to be delivered to the dealer or directly to the end user. Purchased parts from outside vendors feed different levels of the bill of materials (BOM), but the rest of the process is internal although managed at different plants in different geographical regions. The BOM for major end items is deep (10 to 20 + layers) and, to most people, this would be considered a very complex environment to manage.

Obviously, organizations like this one that are of any size will be broken into manageable pieces to be directed and operated by different individuals. How are meaningful measures provided to the parts of the whole so that they act as one? This company, facing the heights of complexity and delivery challenges, had to take a first step that most of the team would have argued to be the exact opposite of minimizing this complexity-tear down the walls that separated the organization into different business units. It was a necessary condition to any alignment of action and improvement to strip out the systems and metrics that encouraged the whole organization to be viewed as the sum of its parts. This local viewpoint drove organizational conflict over the use of its shared resources (i.e., capacity, inventory, etc.) Once the artificial segmentation of the organization was removed, the pool of capacity was available to be directed to the highest need and Throughput opportunity for the company as a whole. Because customer tolerance time (CTT) was less than some of the very long lead-time parts were, it was necessary to design and implement a global ASR system immediately followed by DBR (see Chapter 12 on ASR).

Highly visible buffers at only the control points of the organization let all management see the real-time status of the performance of the entire company. No matter how large and complex, the simplicity of TOC allows relatively few points of data collection to provide the relevant information for focusing all decision making. BM and the five questions become the primary day-to-day measurement of the health of the system. Most importantly, the entire organization's measurements are synchronized from local to global through measuring the resources of each feeding link to its buffer. Every cycle time reduction allows for a reduction in the stock buffers supporting its feeding links. For an in-depth understanding and a case demonstrating the dramatic effect this can have on a supply chain, see Chapter 12 on ASR.

Given the size and complexity of this organization, this company designed a central planning function to oversee the trends of the strategic buffers. This allowed for leveraging capacity system-wide, an objective feedback system for upper management, recommendations for improvement initiatives (with the supporting evidence), and an accountability loop to ensure follow-through to the five questions. It was vital that this team also become wellversed in conflict clouds and the tactical thinking processes (Clouds, Negative Branch Reservations [NBRs], and prerequisite trees [PRTs])14 to mentor and assist other managers in proper alignment for continuous flow.

Figure 14-11 shows the metric and feedback/accountability system at this company.

With little more than the tools to provide proper visibility and focus, this company, starting in 2004, was able to exploit a market opportunity to grow from approximately $260 million to $1.2 billion and increase RACE from under 5 percent to over 22 percent (Figure 14-11b). Equally important was that properly focused growth also allowed for better positioning to weather the storm of a global economic downturn in late 2008.

These results were presented at the 2008 Constraints Management User Conference and the 2008 TOCICO Conference, Las Vegas, Nevada (Dan Eckerman, LTI President, A Vertically Integrated Supply Chain Case). For additional case study information on this company, see Chapter 12.

Summary

What are the key steps all companies should take to achieve an effective measurement system?

1. Design and implement the proper operational solution given their relevant business factors. In many cases, this means ASR and DBR. Without a clear understanding of the organizational leverage points and their interactions with each other, there is no hope to align actions with a measurement system. Even if the constraint is in the market, it is important to get your house in order first to generate and enable market offers.

FIGURE 14-11a Metric and feedback/accountability system.

FIGURE 14-11b Growth in revenue and RACE percent.

2. Implement a set of simple and coordinated global and local metrics based on the form of the above solution.

3. Establish highly visible buffers, whether through the use of manual or software mechanisms. These tools are critical to having real-time status of the leverage points of the system (organization or supply chain). With visibility to these buffers, a company can utilize the five questions to ensure proper trending and improvement.

4. Use the TOC tactical thinking process tools, particularly the conflict cloud. Design and implement an information system to provide the reports mentioned earlier. This information is required to align the actions; the conflict cloud provides the framework for organizing and analyzing that information so that everyone understands clearly what actions need to be taken.

The most important thing to remember for all individuals playing a role in a TOC system is that this is a thinking and evolving system, not "fire and forget." Fixed metrics will often point toward a single direction that, regardless of the need of the system, will continue to motivate efforts independently toward its achievement. A truly effective TOC measurement system will point everyone in the direction that will have the greatest return which, by definition, is a growth model. The BM feedback system will provide the relevent information to make day-to-day decisions in line with the organizational ROI measure. As changes occur, people must think, adjust, and adapt to achieve the greatest potential of the organization.

References

Blackstone, J. H. 2008. APICS Dictionary. 12th ed. Alexandria, VA: APICS.

Goldratt, E. M. 1990. The Haystack Syndrome: Sifting Information Out of the Data Ocean. Crotonon-Hudson, NY: North River Press.

Horngren, C. T., Sundem, G. L., and Selto, F. H. 1993. Introduction to Management Accounting. 9th ed. New York: Prentice Hall.

Horovitz, B. 2009. "CEO profile: Campbell exec nears 'extraordinary' goal," December 26, USA Today.

Johnson, H. T. and Kaplan, R. S. 1987. Relevance Lost: The Rise and Fall of Managerial Accounting. Boston: Harvard Business School Press.

Mabin, V. J. and Balderstone, S. J. 2000. The World of the Theory of Constraints: A Review of the International Literature. Boca Raton, FL: St. Lucie Press.

Smith, D. 2000. The Measurement Nightmare, How the Theory of Constraints Can Resolve Conflicting Strategies, Policies and Measures. Boca Raton, FL: St. Lucie Press.

Sullivan, T. T., Reid, R. A. and Cartier, B. 2007. TOCICO Dictionary. http://tocico.i4a.com/i4a/pages/index.cfm?pageID=3331 Trei, L. 2007. "New study yields instructive results on how mindset affects learning," Stanford Report. Stanford, CA: Stanford University. Available at: http://news-service.stanford. edu/news/2007/february7/dweck-020707.html.

About the Authors

Debra Smith is a partner with Constraints Management Group, LLC, an international partnership committed to assisting organizations achieve breakthrough results and sustainable, ongoing improvements using the Thought Process (TP) tools and application solutions offered through the Theory of Constraints (TOC).

Ms. Smith has extensive experience in public accounting, financial management in manufacturing companies, teaching at the university level, and consulting in TOC. Debra began working with Dr. Eli Goldratt in 1990 when she was an Associate Professor of Accounting at the University of Puget Sound. She is responsible for original research in the field of TOC applications in manufacturing environments and has created numerous courses and workshops integrating TOC and traditional manufacturing measurement and scheduling processes.

Her research has focused on understanding changes necessary in measurements, accounting and information systems to support continuous improvement processes in manufacturing. She is coauthor of "The Theory of Constraints and Its Implications for Management Accounting," an independent research study of TOC funded by the Institute of Management Accounting, and she is the author of a book entitled The Measurement Nightmare, How the Theory of Constraints Can Resolve Conflicting Strategies, Policies and Measures (St. Lucie Press, 2000).

Prior to teaching, Ms. Smith worked in public accounting as a CPA for Deloitte & Touche and spent nine years in publicly traded manufacturing firms, both as a Division Controller and Vice President of Finance and Operations. She is internationally recognized as an authority on management accounting and is a noted speaker on TOC.

In 2001, Ms. Smith was elected to the founding Board of Directors of the Theory and served for five years on the Theory of Constraints International Certification Organization (TOCICO), a certification organization founded by Dr. Eli Goldratt. Ms. Smith is certified by TOCICO in all applications of TOC (Operations Management, Distribution Management, Project Management, Finance and Measures, TOC Thinking Processes, and Holistic Management.), since 2003.

Jeff Herman has dedicated the past fifteen years of his work to the development and practical application of strategic and tactical Thinking Processes with an emphasis on resolving organizational conflict.

Mr. Herman began working with the TOC Thinking Processes in 1994 and received extensive formal training in TOC from the Avraham Y. Goldratt Institute Academy. Following his education in the Academy, Mr. Herman went on to become a Jonah's Jonah and worked as a Regional Director and Product Specialist in the United Kingdom for the Goldratt Institute for two years. He opened a new territory for TOC implementations with Dr. Eli Goldratt in the Baltic States in 1997.

Mr. Herman returned to the United States in 1998 and now resides in Eau Claire, WI. He is currently a partner of Constraints Management Group, LLC (CMG)-a leading international consulting enterprise that specializes in the application of TOC-and is Practice Leader of Strategic Thinking Processes. Since the late 1990s, Mr. Herman and his partners at CMG have been at the forefront of developing and articulating the concepts behind Actively Synchronized Replenishment (ASR) as well as building ASR and Drum-Buffer-Rope (DBR) compliant technology. He has guided hundreds of executives and managers through the application of strategic and tactical thinking processes within a diverse scope of organizations and industries across 16 countries.

Mr. Herman is a certified expert by the Theory of Constraints International Certification Organization in the TOC fields of Operations Management, Distribution Management, Project Management, Finance and Measures, TOC Thinking Processes, and Holistic Management.

Mr. Herman and Ms. Smith are currently coauthoring a revision of The Measurement Nightmare, due to be released in the fall of 2009.

CHAPTER 15.

Continuous Improvement and Auditing

Dr. Alan Barnard