TOC Beyond Manufacturing.

Executive Summary

The theory of constraints is alive and well in manufacturing environments around the globe. But manufacturing is not the only economic arena in which TOC can play a productive role. One TOG tool -- the drum-buffer-rope approach -- can have a positive impact on administrative functions, too. The authors present a short case study that illustrates the benefits of implementing drum-buffer-rope in the sales department of a manufacturing company.

The theory of constraints -- a management philosophy that defines a set of problem-solving and management tools -- has had a significant effect on the operation of businesses throughout the world. The roots of TOC can be traced to the development of a commercial software product known as Optimized Production Technology in the late 1970s and the publication of the book The Goal in 1984. The primary author of both is Eliyahu Goldratt, an Israeli physicist. In the years since the publication of The Goal, Goldratt has authored six additional books, and TOC has evolved into an overall management philosophy designed to help organizations achieve goals. The impact of TOC on business has been compared to that of both just-in-time and total quality management.

Fundamental to the TOG philosophy are several assumptions:

* The goal of most organizations is to make money now and in the future.

* We should evaluate changes in our organization's processes with respect to effects on throughput, inventory, and operating expense.

* Constraints determine the limits of performance for all processes.

* Drum-buffer-rope scheduling controls the flow of materials in an attempt to produce finished goods in accordance with market demand and with a minimum of inventory and operating expense. (In simplistic terms, "drum" refers to the constraint, which sets the pace for the system; "buffer" is a protective window of time that ensures the drum never runs dry; "rope" represents the schedule of releasing materials, which synchronizes all operations to the drumbeat for smooth and fast material flow.)

* The use of TOC principles can reduce lead-times, increase throughput, and lower operating expenses while improving quality.

Numerous organizations have implemented the principles of TOC. Empirical evidence and actual case studies indicate that TOC can promote complete turnarounds in struggling operations. Can the principles and concepts of TOC be applied to administrative functions? Let's explore an application of the drum-buffer-rope approach to scheduling in an administrative environment.

Fundamentals

According to Goldratt and other TOC proponents, a primary task of management is to improve an operation continually by reducing the impact of constraints on the process, thus reducing the restrictive effect they have on the firm's ability to make money. The recommended approach to improving any system includes the following steps:

1. Identify the constraints in the system.

2. Determine how to exploit the constraints to improve the performance of the system.

3. Subordinate all parts of the system to support Step 2.

4. Carry out the steps necessary to improve performance of the system by elevating the constraint.

5. If, in the previous step, a constraint has been broken or a new constraint develops, go back to Step 1 and begin the process again.

These are known as the five steps of TOC.

One of the more important and controversial elements of TOC is the conflict between the approach that Goldratt proposes and traditional labor-based management accounting.

TOC promotes the idea that traditional cost accounting concepts have directed firms to make the wrong decisions. Goldratt argues that there are only three measures on which a firm should focus its efforts: throughput, inventory, and operating expense. These measures allow a firm to evaluate the effect of operations on the productivity and profitability of the entire firm. The following case study illustrates how these measures can be used to measure the impact of the application of TOC concepts to an administrative function.

Sales quoting process

The case study involves applying the principles of TOC to the process of responding to requests for quotation by the sales department of an aerospace manufacturing firm.

Prior to the application of drum-buffer-rope, the quoting process was a lengthy, time-consuming exercise that often resulted in overdue quote submittals. The process requires significant resources in the form of sales, engineering, and managerial personnel. The original quoting process displayed characteristics of a traditional push system, with a high degree of variation in output. This process would not be described as a synchronous system.

The process consists of eight distinct steps. First, the firm received a request for quotation (RFQ). This quote can originate from a variety of sources; however, for the purpose of this study we will assume the REQ was submitted directly from one of the firm's customers. Second, the plant sales rep-resentative for this customer account entered the raw customer-submitted quote data into the corporate sales information system and the plant quote log. Third, the sales rep performed any necessary investigation or analysis to define the order requirements. Fourth, the sales rep researched and obtained any comparative or existing cost data that would be used to establish pricing for the quotation. Fifth, the sales rep scheduled and conducted a meeting with engineering personnel to determine specifics of the quote and establish associated pricing. Sixth, the sales rep generated material/time cost models by using an online system in conjunction with the information obtained from the meeting. Seventh, the sales rep scheduled and conducted a second meeting with engineering to analyze and agree upon the results of the models. Eighth, a manager approval meeting was conducted to review the team's cost analysis and obtain managerial concurrence with the team's pricing recommendations. Assuming this agreement was obtained, the quote was then ready for submission to the customer.

Applying TOC

Before we look at how TOG principles affected the RFQ process, it is important to note several facts:

* The firm receives an average of 10 RFQs per week. These 10 RFQs arrive at fairly predictable levels throughout the week: two per day on average.

* For simplicity, throughput is defined as the number of RFQs that can be completed in a week minus the number of quoting personnel resource hours required in a week.

* Inventory is defined as the total number of RFQs in process at one time.

* Operating expense is defined as the number of resource hours required in the week.

* RFQs in this process will be considered raw materials at TOG Step 1.

By applying drum-buffer-rope to this process, the firm was able to improve the performance of the system significantly. Figure 1 illustrates the process before and after application of drum-buffer-rope.

It was relatively simple to identify that the constraint (drum) in the RFQ system was conducting the first meeting between the sales rep and engineering personnel to review RFQ specifics. By establishing a series of scheduled weekly meetings for engineering quote activities, the firm was able to tie the rope from the input point (gate) to the constraint. Specifically, the meetings were scheduled for Mondays, Wednesdays, and Fridays at 3 p.m. The gate in the process was the first step (receipt of the RFQ), which in a manufacturing operation would be the warehouse. A protective buffer was established in front of the constraint by staggering the engineering quote meetings to three times per week. This was done so that significant quotes ready for this step in the process would be in queue prior to these meetings. This approach followed the process outlined by Goldratt, namely to identify, exploit, subordinate, and elevate the constraint. Figure 2 summarizes the impact of these changes on the firm's quoting process.

Conclusion

The application of TOC principles to this administrative process yielded significant results. The firm has positively impacted throughput by reducing quoting lead-time from an average of six days to a maximum of four days. Throughput has also benefited from the reduction in total quote personnel resource hours required during the week for the same amount of RFQs. Inventory was positively impacted by the resulting average of no more than eight RFQs in process at any one time versus the average of 12 found in the old system. Although measuring a reduction in operating expense with this study would be difficult, we can state that at the least, quote personnel resource hours have been freed up to be used in other activities that can impact the organization positively. As a result of the new process, the average engineering resource investment is 4.5 hours per week versus the previous average of 10 hours per week.

The findings in this study demonstrate that the principles and concepts presented of TOC can be applied to administrative functions. In fact, the strength of the TOC philosophy may be that it can be applied to any system, whether it is manufacturing, administrative, or even in our personal lives. TOC, by emphasizing common sense, simplicity, and a systematic approach, allows one to improve any existing system.

Monty Gillespie, is marketing manager for Howmet, Wichita Falls, Texas. He received his B.B.A. in management from Midwestern State University, where he is pursuing his M.B.A.

Mike Patterson, Ph.D. is professor of management at Midwestern State University, Wichita Falls, Texas. He received his doctorate in industrial management and computer science from the University of North Texas.

Bob Harmel, Ph.D., is associate professor of economics at Midwestern State University, Wichita Falls, Texas. He holds a Ph.D. in economics from Iowa State University.

For further reading

(See page 34 for ordering information)

Fox, Robert E., "Theory of Constraints," NAA Conference Proceedings, September 1987.

Goldratt, Eliyahu M., The Goal, North River Press, Second Revised Edition, 1992.

Goldratt, Eliyahu M. and Robert E. Fox, The Race, North River Press, 1986.

Umble, M. and M. Srikanth, Synchronous Manufacturing: Principles for World Class Excellence, The Spectrum Publishing Co., 1996.

The benefits of drum-buffer-rope

Throughput increase

Total process time reduced 33 percent

Inventory reduction

RFQ's in system reduced from 12 to 8

No change in operating expense

Benefits realized with no change in resource expenditures

Throughput potential gain

Two days of human resource capability available for other productive activity

Throughput potential gain

Process standardized, variation decreased, quality improved