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This is the last part of the series on Lean and The Theory of Constraints, where I originally asked how Lean and the Theory of Constraints can work together.
I then proceeded to describe the fundamentals of the Theory of Constraints, followed by an explanation of the fundamentals of Lean Management.
This post is my attempt at showing where Lean Manufacturing and The Theory of Constraints agree and can work harmoniously together and also on the areas where they disagree.
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But, my overall argument is this: there is no Either/Or – Lean Thinking and The Theory of Constraints can and do work just fine together.
Where Lean and Theory of Constraints Agree
- Value: both Lean and the Theory of Constraints agree that value is critical and is defined by the customer. In the Theory of Constraints, Value is a determining factor on whether the organization will increase throughput, or the rate at which money enters the company’s coffers. In Lean, Value plays a different role: to maximize Value, we must identify and eliminate waste (muda).
- Flow: both Lean and the Theory of Constraints agree that flow is important.
- Pull: both Lean and the Theory of Constraints agree that Pull is how a good, product, or service should be produced. In the Theory of Constraints, Pull is the force behind the Drum-Buffer-Rope method while, in Lean, Kanban is the tool used to implement Pull. Both Lean and Theory of Constraints view work-in-process (WIP) as counter to the goals of the organization and counter to the financial health of the firm.
In Sum, the main point is this:
Rather than looking at a value stream, identify the system constraint first. Then, eliminate waste at the system constraint.
That is a simplistic statement, but it also demonstrates the main point I’m trying to make and how to reconcile Lean Thinking with the principles of The Theory of Constraints.
Where Lean and Theory of Constraints Disagree
In Lean, the idea of Profit is explained in the following simple equation:
In Lean: Profit = Price – Cost
Knowing this equation puts Lean squarely on the path toward attacking what is controllable by the organization; in this case, Costs are controllable. This mindset leads, then, to the identification of wastes, and systematically attacking waste, etc.
In the Theory of Constraints, the definition of Profit is confusing and a bit conflated:
Throughput (T) = the rate at which the organization generates money through sales
and Operating Expense:
Operating Expense (OE) = all of the money the organization spends in order to turn inventory into throughput
Given the above, Profit is calculated thus:
Profit = T – OE
So, in the Theory of Constraints, Profit is equivalent to Throughput minus Operating Expense. It is confusing because the definitions of Throughput and Operating Expense are not standard. In itself, that’s not a big deal, but it becomes an issue when trying to adopt the Theory of Constraints as a management method in an organization.
Lean and The The Theory of Constraints differ here, but this is not a big deal. I see it as a minor disagreement and does not impede from these two management methods from working well together.
Another area where Lean and Theory of Constraints differ is in the role of people. Lean places a high value on people and elevates this principle as a Pillar – Respect for People. In the Theory of Constraints, I have not read or seen or experienced a prioritization of people over profit or process. In fact, people aren’t discussed much, from my experience of the Theory of Constraints.
In Conclusion
Lean Management and The Theory of Constraints can and do work just fine together. There is no either/or, but instead an “and”. To blend both, one must identify the system constraint, and then systematically eliminate waste from the constraint.
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This post was written by Pete Abilla | ||||
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{ 4 comments… read them below or add one }
Very good synopsis. I think the “Respect for People” in the TOC body of knowledge is probably best captured in the novel It’s Not Luck. The last few pages do a good job of defining what is the actual “Respect for People” pillar of Lean in the TOC way, in my opinion. Alex Rogo, the protagonist, clarifies or spells out both necessary and sufficient prerequisites for “making money now and in the future”. A key to “in the future” is happy and productive workforce. It is saying “Respect for People” in a less explicit way.
To add to Scott’s comment–Eli Goldratt considers layoffs, especially just for the purposes of short term profit, as being one of most evil deeds possible in a company. If you remember in “The Goal” when Alex, the plant manager, is told that his plant will be shut down in 90 days unless he meets specific profit targets the thing that most motivates him is that if the plant is shut down almost all the people will be out of a job. In “It’s Not Luck” Alex is given the role to help sell off 3 plants and he spends a fair amount of time complaining about how the Board of Directors just cares about short term profits at the expense of people’s well being. (And in the course of the book he sets it up so that people are, in fact, well taken care of.)
As Scott said, in “It’s Not Luck” there is a discussion as to the goal of a company and the necessary conditions to meet that goal. It’s also pointed out that you can choose any one of the 3 and the other two are necessary conditions. In other words you MUST have all 3 to be successful. They are:
You must make money now and in the future.
You must have a safe and satisfied workforce now and in the future.
You must have a product valued by the market now and in the future.
In each case, the “and in the future” is there to ensure that the company makes investments in the long term and that most definitely includes the people.
I have to agree with Holts’s insightful comment. The investment is truly in people when it comes to the workforce, project management and manufacturing. I’ve never thought about the two theories but the three points to be successful made by Holts are very true.
The interesting thing about the Profit equations above has to do with another important topic in the Theory of Constraints literature: that of how many of the standard accounting principles are applied incorrectly to making operational decisions. This is why the definition of profits has been adjusted. The term “cost” is used in most organizations to include cost allocations to a product or service. So instead, the Throughput term specifically includes only “totally variable cost” of the product or service: the cost of the raw materials that are directly attributable to what you’ve just sold. Everything else (rent, utilities, overhead, salaries) goes into the Operating Expense bucket. So, profits are simply what you made on selling the product (T = Sales – TVC) less everything else that you spent to keep the business running (Operating Expense). In the TOC view, this makes it clearer what we are doing when trying to improve profits.