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Theory of Constraints Helps Set Project Priorities

In another article published by iSixSigma, I proposed that implementing an integrated approach of Lean Six Sigma and theory of constraints (TOC) can lead to greater success for an organization than the use of an independent Lean Six Sigma approach. Since that article was published, I have received multiple queries about how to apply this tactic in a practical manner. During this time, I also have come across several critical business scenarios where implementation of this integrated approach proved beneficial.

This article uses those scenarios – one organization facing a project priority dilemma and another dealing with budget allocation woes – to help practitioners understand how integrating TOC with Lean Six Sigma can ultimately make for a stronger deployment by easing certain decision-making processes.

Introducing the Business Scenarios

The following business situations help illustrate the benefits of using TOC with Lean Six Sigma.

  1. An organization has used maps to document its processes, and has discovered it has more than 1,000 detailed-task-level processes. The key challenge for the organization is to decide which processes to improve. Each of the processes has associated risks and inefficiencies, so analyzing and improving all the processes could turn into a futile exercise. Thus, the big question is, “How to prioritize process analysis and improvement?”
  2. A project sponsor has an information technology (IT) budget of $200 million to invest in their organization. The sponsor wants to distribute/allocate the money to five different departments (functions). The key challenge is to understand how much money should be allocated to each department.
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The common theme in both of the scenarios is the problem of focus – which processes should be improved, and which departments should receive money and how much. Without the use of TOC, this lack of focus can result in local optimization, where capital investment does not bring global benefits and the company loses potential progress.

The problem of focus can be resolved by implementing TOC concepts. According to the theory, there are three basic metrics for any business: throughput, inventory and operational expenses. TOC says that practitioners need to ensure that they look at all of these while improving the system in order to increase throughput, decrease system inventory and decrease operational expenses.

These concepts are implemented in five steps:

  1. Identify the constraints.
  2. Exploit the constraints.
  3. Subordinate complete system to the constraints.
  4. Elevate the constraints.
  5. Don’t let inertia become a constraint.
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Successful identification of the constraint (Step 1) helps practitioners to focus their improvement efforts. This is shown through the implementation of Step 1 in the first business scenario.

Identifying the Constraints

The problem in the first business scenario is how to identify and prioritize the processes that are in the greatest need of improvement. To begin, the practitioner in this scenario linked all the processes to form a value chain. The 1,020 very detailed Level 3 processes were grouped to form Level 2 (detailed), Level 1 (less detailed) and Level 0 (organizational view) maps. The resulting process distribution is represented in Table 1.

Table 1: Processes Grouped by Level

Process Mapping LevelsLevel 0Level 1Level 2Level 3
Number of maps15621,020
Number of process steps in L0 map5
Number of process steps in five different L1 mapsStep 1
Step 2
Step 3
Step 4
Step 5
14
11
8
17
12
Number of process steps in eight different L2 maps for Step 3 of Level 121
8
14
12
14
5
14
20

Note: Few numbers have been modified here for the sake of simplicity. The numbers do not impact the implementation.

For reference, Table 2 shows the metrics that were collected by the business before implementing the TOC concepts, and the improvement objectives derived from those metrics.

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Table 2: TOC Metrics and Objectives

Process Level 0 StepsEfficiency (Output/Input)Resources UtilizationManager’s Objectives
Step 1100%70%Increase productivity to 80%
Step 264%100%Increase efficiency to 85%
Step 378%100%Increase efficiency to 85%
Step 4100%90%High efficiency, good productivity (continue as-is)
Step 5100%75%Increase productivity to 80%

The improvement team started studying the L0 process map, and then moved forward with the following steps:

  1. They measured the average monthly throughput within the defined tolerance limits.
  2. They calculated the throughput capacity based on the average monthly throughput and productivity (resources utilization).
  3. They established improvement objectives for each process step, based on the business objective of 28 percent improvement in revenue.
  4. They also derived improvement triggers and priorities.

Table 3 represents the information collected and improvement objectives derived from that information.

Table 3: Process Information and Objectives

Process L0 Level StepsAverage Monthly ThroughputThroughput CapacityImprovement ObjectiveImprovement TriggerPriority
Step 150,00071,429Reduce the throughput capacity if long-term plans don’t require this high capacity3
Step 232,00032,000No change required
Step 325,00025,000Increase throughput capacity to 32,0001
Step 425,00027,778Increase throughput capacity to 32,000 once improvement trigger level is reachedStep 3’s throughput is improvement by 2,7782
Step 525,00033,333No change required
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Because Step 3 must be improved first, the team only looked at the Level 1 process map for Step 3. This improved the focus – the total number of maps to be analyzed was reduced from 1,020 at Level 3 to just 108 (the sum of the maps in Level 1, Step 3). The team then repeated the four actions listed above specifically for Step 3 at Level 1 (and then for Step 4, following the priority set in Table 3) and improved the focus further.

The same process was repeated at Level 2 and then at Level 3. At the end of this exercise, the team had a list of the top 15 Level 3 processes that required improvement, having had to analyze only about 100 processes at Level 3 to achieve this.

Additionally, they ensured that the operational expenses at each step were enough to support the capacity, which is always equivalent to capacity of the Level 0, Step 3 process. They also implemented just-in-time production to ensure that inventory level was always around zero.

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In the second scenario introduced above – that of a project sponsor looking to invest their IT budget – a similar strategy was implemented to help determine how much to allocate and where in order to support the projects that will have the highest impact.

Integration Assurances

Using TOC in combination with Lean Six Sigma offers organizations the following benefits:

  • The overall improvement strategy will be tied to business objectives.
  • Each individual department’s improvement objectives will be in line with the business objectives.
  • Only relevant processes will be analyzed. In the first scenario, this reduced the analysis to about 10 percent of the original task. The team was able to get results earlier, and the business didn’t waste precious time and money.
  • Improvement is made only once it is needed.
  • Capital will be invested only as needed, which leads to better cash-flow management.
  • The correct metric (throughput as compared to efficiency) will be being used to track and prioritize improvements.

In short, TOC can be used as a filtration or prioritization framework for process improvement, budget allocation and variety of similar business scenarios.

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Comments 8

  1. Gopal Ranjan

    Very Nice Article….

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  2. Bhawna

    Excellent followup to your first article. Keep it up.

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  3. Siddharth Fadnis

    nice article sir

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  4. Kaustubh Jatadhar

    Hi Dushyant

    Thanks for highlighting how to apply TOC for process re-engineering. In the organization I work at, we also use certain metrics like Overall Operating Efficiency, Wait Time, Resource Utilization to identify the processes with improvement opportunities. But the problem we face because of only relying on these metrics is we end up neglecting some of the other processes which might offer actual re-engineering opportunities.

    We are still trying to figure out whether we can find out any other metric which can help us identifying such re-engineering opportunities. Can Process Sigma be one of these options which we can look at ?

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  5. Sergey

    Simple and clear explanation how TOC and Six Sigma work, really like it!

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  6. Cutler McMartin

    Great article! I can definitely see myself using this approach when confronted with this many process maps.

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