Theory of Constraints Contribution to First Solar's Success

At the outset, TOC is one of a set of tools and approaches introduced to drive performance improvement in First Solar. The impact of TOC (and similar approaches) is determined entirely by top management's attitude to change and its assumptions about limits to sustainable growth. It is only an enabler of extremely capable managerial skill and orientation. Although TOC started out as a set of Throughput-focused applications, TOC grew to become a business management philosophy embedded in decision-making at many levels in the company. Therefore, the key question that this case study serves to answer is "How does management turn a set of Throughput-enhancing tools into an embedded Throughput-driven culture?"

To appreciate the significance of TOC as a business management philosophy, we should place it in context of the 21st century global economic and business environment.

The advent of the Internet and the massive increase in the availability of information has made the world a much smaller and connected environment within which to conduct business. Any comparative advantage that a company may have has a much shorter and precarious life. In order to stay ahead, management is more pressed to drive continuous improvement faster and more predictably.

There is a very significant risk of applying resources to low leverage improvement opportunities, which may slow growth. You may recall Microsoft's spectacular failure to grasp the impact of the Internet when Netscape became the dominant browser, only to have the error repeated when Google came to dominate the search engine space.

By truly understanding the constraints that limit growth and profitability, scarce resources can be focused on the most valuable points of leverage. First Solar top management deliberately and continually assess the internal and external business environments to identify the constraints to rapid growth and to focus the organization on leveraging those constraints.

Organizations that consider the inward focused, internal efficiency of individual resources to be the primary cause for success are frequently blindsided by changes in behavior of the large systems within which they exist.

Conversely, those that consciously, and with discipline, take advantage of such system changes are bound to be more successful in the long-term. TOC accomplishes exactly that. First Solar's stellar success can be attributed also to the diligent analysis of internal and external system-level constraints.

Building the Foundation

Three aspects are crucial to elevate TOC from a defined toolset to a deeply embedded culture: Throughput World versus Cost World, the importance of systems and constraints, and the importance of a dedicated and motivated TOC subject matter expert.

Throughput World versus Cost World

This very subtle, but crucial aspect affects the entire organization.

Cost World companies are characterized by an inherently defensive mindset. There is a general feeling that the company always has its back to the wall. Expenditures are subject to prolonged scrutiny, employees are constantly in a state of disquiet, many functional silos exist, and frequently there is low-level internal warfare between management and employees. In biblical terms, there is a general feeling that it is better to hide the talents than use them.

In contrast, Throughput World companies are characterized by a belief that success is only limited by management's ability to identify and remove system-level constraints. Goals are merely milestones on a continuing journey to higher levels of success and not the annual justification of contribution. Teamwork is understood to be essential, embraced to help remove system constraints, and used to drive large, cross-functional improvements. Where traditional improvement approaches are focused on optimizing the existing system components, TOC assumes that large system change is essential for rapid and sustained growth. For this to happen, a consistent value system and decision framework must exist across the organization.

Over a period of six years, nearly all business decision-making employees in First Solar were educated in the fundamentals of TOC. Using the Socratic teaching method and simulation models, participants were taught the principles of a Throughput-driven organization and a simple decision-making model applicable across all functions and systems. The core concepts are: Maximize Throughput. For every business system within the organization, the requirement is straightforward. Continuously improve the Throughput rate and value that systems deliver to First Solar. Conceptually, Throughput has no limit.

Minimize Inventory. Lower inventory levels enable higher Throughput. Inventory should be reduced to a level just above where Throughput is compromised.

Minimize Operating Expense. Operating Expense reductions are judged by the impact on Throughput and should be reduced to the level where Throughput is not compromised.

Systems and Constraints

Throughput World companies succeed in the long-term by relentlessly driving improvements through all of the business systems. This can be accomplished by: Identifying, describing, and analyzing all the core business systems in the organization.

Identifying the constraints within those systems.

Removing the constraints, making sure that no unintended consequences prevail (through better exploitation or elevation).

Reconfiguring functions, jobs, responsibilities, resources, and measurements to sustain a higher level of performance (subordination).

Repeating the process.

Employees who have worked in Cost World companies find this to be both energizing and exhilarating, but also more stressful because significant change is the order of the day.

The last point serves to highlight the critical importance of top management's deep understanding and commitment to being a Throughput-driven company.

In this context, the successful and sustained use of TOC in First Solar during the past six years is due entirely to the support and commitment of the CEO, Mike Ahearn, and the President, Bruce Sohn. They share a deep understanding of the subject and have firsthand experience of its impact on success.

Deployment of Dedicated TOC Subject Matter Expert

The third important aspect to embed TOC deeply in the culture of the organization is the deployment of a motivated and dedicated TOC subject matter expert or team. Ray Immelman, a TOC pioneer and now Vice President of Strategic Services at First Solar, leads such a team. That team acts in a staff role to top management and shares one extremely important character trait essential for success. Despite the stress of simultaneously changing politics, people, and systems, they never let go or let up. Their motto: Don't blink!

A strong TOC culture offers more value than just improving the internal functioning of the organization. When First Solar initiated its IPO discussions with Goldman Sachs in 2005, the Throughput-driven culture was presented as an important element in the company's success. In addition, when capital equipment vendors became a constraint to First Solar's growth, the company exerted pressure on them to become more Throughput-driven. Subsequently, those vendors exhibited similarly impressive growth trajectories and in turn exerted pressure on their vendors to do the same.

Unbolting the Existing Systems and Measures

Since the Cost World mentality is driven by traditional assumptions and operating paradigms, companies implementing TOC should not underestimate the effort required to identify the measures, information systems, policies, and business rules that are in conflict with the requirements for establishing a Throughput-driven company.

Luckily, in the case of First Solar, there was very little to undo since Solar Cells Inc. was eager for a way to shake off its hand-to-mouth existence. Still, it took a number of years before the culture truly changed. The rallying cry that sustained the implementation effort was "Throughput." That single word is the fulcrum around which the organization's culture was built.

It also provided the measure against which all existing systems are evaluated and changed. If systems, policies, and rules are Cost World oriented, they are treated with due care to ensure that they don't become constraints in and of themselves. For example, the CFO once wished to introduce a new set of accounting rules. The CEO flatly refused to implement the recommendation, insisting that it would introduce a policy constraint, which would affect the Throughput of the organization. This has become a norm for many on the management team.

Building on Early Success

The old adage that "nothing succeeds like success" is exquisitely truer in an environment where large system change is undertaken. Although early success in the use of Drum-Buffer-Rope (DBR) principles immediately improved the Throughput of the manufacturing process, the real watershed event was the construction of the first plant expansion. Early on, Mike Ahearn discerned that the existing manufacturing facility would not be able to scale to support the required growth, and decided that a new facility must be constructed. It would not just be an extension of the existing facility, but a new, state-of-the-art plant. The key manufacturing technology was all that carried over. Everything else was new-new equipment, new vendors, new plant design, and new IT systems. To complicate matters, the expectation was that it would be accomplished in record time.

The first project plan developed by the project team showed substantial completion in mid-2005. After introducing Critical Chain Project Management (CCPM), the anticipated completion was October 2004-a 30 percent reduction in the timeline.

Despite the project team being understandably apprehensive that this was not doable, they did complete the plant in that time frame.

The impact on team psychology was immense.

In contrast to the previous culture of hand-to-mouth existence, there was a palpable sense of significant achievement, which in turn created a belief that significant change was indeed possible. That watershed achievement formed the basis for First Solar's "Copy Smart" philosophy, which enabled the company to rapidly and predictably replicate plants much faster than the industry norm.

The factors that enabled that seminal event were: Intense support from top management Project leadership from Alan Henderson, Director of Corporate Engineering Implementing CCPM with software, extensive training, and active support The use of a dedicated Critical Chain project manager Progress reporting to board-level using Buffer Management (BM) as the reporting mechanism The use of a consistent language and a consistent process across the entire organization The use of the CCPM performance and improvement measures to gain even greater effectiveness A team-level response to buffer incursions Understanding the different cultures in each CCPM application area-IT is quite different from R&D or construction.

Understanding the business drivers for behavior in each group-what drives the current behavior and how does this need to change?

Supporting the decisions people have to make-ensuring that the behavior and information generated by CCPM contributes to the business decisions they have to make Providing strong technical support and reassurance-Critical Chain software is the only software that directly touches people's work and corporate interaction (even on a daily basis) Today, CCPM is in widespread use throughout the company, continuing to contribute tremendous success. For example: In 2007, as a new public company, First Solar had to comply with Sarbanes-Oxley financial control requirements. Using CCPM, the company successfully adapted all financial controls in less than one year, earning recognition from the external auditors, Price Waterhouse Coopers, for the fastest error-free implementation the team had ever seen.

In 2009, the MIS organization doubled the number of projects completed in one year, using CCPM to manage their large project portfolio.

Implementing the Proven TOC Toolset

Once the Throughput-driven culture is established, and early success is celebrated, the remainder of the TOC toolset has fertile ground for implementation. What follows is a description of some of the embedded applications.

Drum-Buffer-Rope

When the first new plant was designed, BM was embedded and automated as best as possible. Pacing resources were identified, constraint and feeding buffers were established, and robots were deployed to execute most of the BM tasks. Combined with the use of Six Sigma applications to eliminate process variation, line utilization is consistently in the high 90-percent range. One aspect that really helped to validate line performance is the extensive use of simulation modeling. Since TOC is all about the behavior of large systems, a key requirement for successful change is use of good simulation models. It provides: Insight into how the system will behave before actual implementation.

Reassurance to all involved that intended changes will work.

The ability to test all options, thereby ensuring strong buy-in.

Buffer Management

To leverage the application of DBR, the manufacturing team under the leadership of the plant manager, Todd Spangler, created the TOC Information System (TOCIS). This system enables management to monitor the performance of any manufacturing line anywhere in the world, in real time. It displays Throughput rates, current constraints, buffer inventories, and yield performance. All data are generated directly from the manufacturing lines and represent harsh reality.

In addition, the information is projected onto the factory walls in a simple graphic format for all to see. This has galvanized the attention of operators and supervisors alike, since team performance is unvarnished public knowledge.

The Role of TOC's "Thinking Processes" at First Solar

The TOC thinking tools are used to understand the changes to First Solar's current reality, to identify the core conflicts and assumptions that need to be understood, and to build and validate the logic for desired future reality. The First Solar management team uses these tools both as a day-to-day management tool in many instances, as well as to develop large-scale business strategy. In 2009, the company deployed the corporate strategy development and review process by having each operational unit present the current realty, injections, and future reality to the top management team. This enabled: Focused discussion around the high-impact issues.

Deep common understanding of the way respective business systems behave.

Alignment and coordination of work across business units.