Lean and Six Sigma are two powerful methodologies that have transformed the world of operations and business management and amazing things happen when they are combined. They complement each other nicely. While they share common goals of improving efficiency, reducing waste, and optimizing processes, they both lack certain skills and tools that are vital for achieving organizational excellence. That is where the Theory of Constraints comes in. Let’s explore what Lean Six Sigma practitioners can learn from the Theory of Constraints (TOC) and how integrating elements of TOC can lead to more robust and effective operational improvements.
Understanding Lean, Six Sigma and the Theory of Constraints
Lean: Lean principles, derived from the Toyota Production System, emphasize the elimination of waste, continuous improvement, and the pursuit of perfection. Lean focuses on streamlining processes, improving flow, and minimizing inventory to create value for customers.
Six Sigma: Six Sigma focuses on understanding the causes of variation either in their inputs, outputs or process in between. The key focus on reducing variation and keeping it within “control” i.e., within desired (measurable) parameters.
Theory of Constraints (TOC): The Theory of Constraints, developed by Eliyahu Goldratt, centers around identifying and managing bottlenecks or constraints within a system. TOC argues that a system’s performance is determined by its weakest link, and improvement efforts should be concentrated on resolving these constraints to maximize throughput.
What Lean Six Sigma Practitioners Can Learn from TOC
Constraint Identification and Systems Thinking
TOC promotes a holistic view of systems and their interdependencies. Lean practitioners can gain valuable insights by adopting a system thinking approach, considering how changes in one area might affect others. This can help prevent unintended consequences when implementing Lean Six Sigma improvements as Lean and Six Sigma projects sometimes focus on improving a part of the organization without much thought to how it will affect the rest of the organization.
TOC excels at pinpointing constraints that limit overall system (organizational) performance. Lean practitioners can benefit from adopting TOC’s rigorous constraint identification methods to ensure that their improvement efforts are focused on the areas that matter most. By addressing constraints first, Lean Six Sigma initiatives can deliver more immediate and substantial results.
One of the key weaknesses of Lean and Six Sigma is that neither methodology has a primary focus for their continuous improvement efforts or instead focuses it on non-constraint activities within an organization (system). This, in fact, can lead to negative effects that worsen the organization and lead them further away from their desired goals.
As an example, I worked at an organization, a freight forwarder, as a Team Lead many years ago, that didn’t have a continuous improvement program or culture (but that is not important for the point I want to get across). I implemented Lean, Six Sigma and Theory of Constraints tools such as Drum Buffer Rope and the Five Focusing Steps in the operation I managed which significantly increased our capacity without a matching increase in cost, no investments in machinery or infrastructure and we reduced lead times within my part of the value stream.
Did this improve the lead time to customers i.e., did they get their products faster?
Not by a single minute!
Why?
Because our operation was not the bottleneck. It was the next operation in the value stream. As they were the bottleneck and their speed to process through their operation was the same, all my efforts in Continuous Improvement only lead to more work-in-progress (WIP) for them. To manage their ever increasing WIP they had to spend more time managing their WIP which meant, in the world of Lean Six Sigma, more waste!
Only by improving their operation would customers get their product faster. While my initiative to improve my part of the organization through Continuous Improvement led to great results for my department, it didn’t lead to an organization wide improvement to the business. Customers didn’t get their products faster and costs actually rose (due to managing the increasing WIP).
But at the time, I didn’t care. I still got my bonus! It wasn’t my responsibility at the time to manage the entire organization.
Buffer Management
TOC advocates the use of buffers to protect critical processes from disruptions throughout a value stream.
While Lean Six Sigma practitioners focus a lot on increasing process stability, it is a fact of life that things break down and don’t operate as expected. In the world of Theory of Constraints, these are called “Murphy” events after Murphy’s Law which states that “Anything that can go wrong will go wrong”. Due to these, sometimes uncontrollable, events TOC incorporate buffer management techniques to ensure that workflow interruptions, variations, and delays are mitigated effectively and reduce the risk of lowering throughput. This can enhance process stability and reduce the impact of fluctuations and process breakdowns.
TOC emphasizes the importance of implementing the Drum, Buffer, Rope (DBR) by putting buffers before bottlenecks so the bottleneck is able to operate near 100% of the time.
Performance Metrics
TOC emphasizes the use of Key Performance Indicators (KPIs) that align with the organization’s overarching goals i.e., to be more profitable now and in the future. Lean Six Sigma practitioners can refine their approach and select their projects based on expected improvements to KPIs as measured by “Throughput Accounting”.
What is Throughput Accounting?
Throughput Accounting is a management accounting approach that focuses on identifying and managing constraints within a production or operational system. This method is based on the Theory of Constraints (TOC) and aims to optimize the use of resources to maximize throughput or the rate at which the system generates money through sales. Throughput Accounting challenges traditional cost accounting principles by emphasizing the importance of flow and the impact of constraints on an organization’s overall performance.
At its core, Throughput Accounting revolves around three key metrics: Throughput (T), Operating Expenses (OE), and Investment (I). Throughput represents the rate at which a system generates money through sales, Operating Expenses are all the costs directly related to producing throughput, and Investment is the money tied up in the system through inventory, equipment, and other assets. Unlike traditional cost accounting that focuses on reducing costs, Throughput Accounting centers on maximizing throughput by managing constraints and optimizing the flow of products or services through the system.
The primary objective of Throughput Accounting is to identify and alleviate bottlenecks or constraints that limit the flow of production. By focusing Lean and Six Sigma projects on these constraints and managing them effectively, organizations can enhance their overall performance and generate more throughput.
Throughput Accounting advocates for focusing and prioritizing continuous improvement initiatives on the metrics in the following order:
- Throughput (projects that increase the flow of value to the customer and generates sales) – this is prioritized as increasing sales tend to (but not always) lead to a direct positive impact on profitability as most organizations have fixed costs that do not increase as a function of volume.
- Inventory (projects that reduce the amount of Finished and Work-In-Progress goods on hand at any time while still satisfying the customer) – inventory ties up money that can be used for alternative uses and significantly impacts cash flow)
- Fixed Assets (in traditional TOC this is included in inventory) – we separate this out in this article. Projects can reduce the amount of machinery, buildings and hardware necessary to create value for the customer.
- Operating Expenses – this is prioritized last as quite often, improvements don’t lead to a reduction in operating expenses. A key example is a project that reduces the hours required to do tasks by a salaried person earning 40 hours salary. If you reduce their workload via process improvements from 42 hours to 36 hours, they will still be paid 40 hours salary.
Another example is that staff who are no longer needed due to newly-created excess capacity are redeployed or still retained due to the variability of customer demand.
Critical Chain Project Management: TOC introduces Critical Chain Project Management, a method for managing project schedules with an emphasis on constraint management. Lean practitioners involved in project management can integrate Critical Chain principles to improve project execution and reduce delays.
Conclusion
While Lean Six Sigma and the Theory of Constraints have distinct methodologies and philosophies, they are not mutually exclusive. Lean Six Sigma practitioners can gain valuable insights and strategies from TOC to enhance their continuous improvement efforts. By adopting TOC’s constraint identification, buffer management, system thinking, and performance metrics, Lean Six Sigma practitioners can refine their approach and achieve more effective results. Ultimately, the integration of Lean and TOC principles can lead to a more holistic and robust approach to operational excellence, benefiting organizations in various industries.