What can we learn from the development of the profound ideas of Dr. Goldratt?

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1 What can we learn from the development of the profound ideas of Dr. Goldratt? A Historical Perspective Presented By: Eli Schragenheim Date: 1

2 Learning from Paradigm Shifts An important part of learning from such a genius as Eli Goldratt is to learn from his own paradigm shifts! It truly teaches us to never say I know. I like also to emphasis that Goldratt always said: Never say I DON T know You always know something and never everything! The point is to improve the part of something.. Goldratt changed his own paradigms in a BIG way several times. This is already an insight: change your paradigms when you realize they are not in line with reality. Let s evaluate some of the older Goldratt paradigms and why they were changed. 2

3 The BIG Changes in TOC made by Goldratt 1. Moving from OPT to DBR and then to TOC. This move also marked a changed into educating managers. Staying away from regular consulting. 2. Moving from specific solutions to TP. 3. Moving back to solutions widening the scope of TOC. 4. Strategy as the kernel and also the integrator of all TOC solutions for managing organizations. This move also marked using much more direct consulting and less class education for managers. 3

4 It All Started with a Big MISTAKE Called OPT OPT was a software package, based on ideas from Goldratt s PhD dissertation, by a company under his leadership. The software scheduled any type of manufacturing shop floor, considering finite-capacity limitations of the resources. The software was capable of modeling the most complicated shop floors. The kernel of the scheduling algorithm was kept secret. It did differentiate between bottlenecks and non-bottlenecks. The sophistication of the software was not in doubt. It was very successful during the first years, but then sales dropped. So, what went wrong? 4

5 Between Sophisticated Software and Humans Goldratt spotted several problems resulting from the impact of OPT on managers: The schedule caused misunderstanding, wonder and even anger because there was no attempt to fully utilize all resources. The secret algorithm, the black box, did not improve the emotions raised against the schedule. There were attempts to tamper with the schedule to improve the efficiencies of resources. These attempts actually blocked the schedule from being realistic. Eventually, the software was blamed for poor results. 5

6 Explaining the Basic Logic of Good Planning The nine rules of OPT emerged: 1. Balance flow, not capacity. 2. The level of utilization of a non-bottleneck is not determined through its own potential but through some other constraint in the system. 3. Utilization and activation of a resource are not synonymous. 4. An hour lost at a bottleneck is an hour lost for the total system. 5. An hour saved at a non-bottleneck is just a mirage. 6. Bottlenecks govern both throughput and inventories. 7. The transfer batch may not, and many times should not, be equal to the process batch. 8. The process batch should be variable, not fixed. 9. Schedules should be established by looking at all the constraints simultaneously. Lead times are the result of a schedule and cannot be predetermined. 6

7 The Motto of OPT and the Shift from Software to Management Education The Motto of OPT: The sum of the local optimums is not equal to the global optimum. OPT thoughtware was developed to educate managers. The important points to learn from: 1. Software in itself is unable to change paradigms. 2. One cannot ignore the deep conviction managers have for cost accounting and good utilization of all resources. 3. The focus of the solution was to cause a paradigm shift in the mind of managers. 4. The more substantial paradigm shift was: Get away from sophistication and look instead for simplicity. 7

8 From OPT to DBR The major breakthrough was writing The Goal. Convincing through a story. Simple, yet based on solid logic. The basic planning rules of DBR are described in the book. Demonstrated by a story of scouts three important insights were developed: Drum, Buffer and Rope (DBR). The development of DBR marked a drastic change in the approach with few insights left from OPT. The most important remaining OPT insight was distinguishing between bottlenecks and all non-bottlenecks. DBR initial approach was to focus only on one bottleneck. 8

9 Drum Buffer Rope - DBR The concept of the DRUM: The bottleneck is what dictates the pace of the output! The plan/schedule of the bottleneck sets the specific drum for all the shop floor. Note, the drum is not the bottleneck, but the plan for it. When there is no bottleneck, then the market, meaning the flow of incoming orders, determines the drum. Still the drum is the actual plan, equivalent to the Master Schedule of MRP, but based only on firm orders. The concept of the BUFFER: Time giving to a production order to move to a protected area. The concept of the Rope: Do NOT start BEFORE the time set by the Drum and the Buffer! 9

10 The Buffers in DBR Customer Order The Shipping Buffer provides the time from the CCR to completion When no internal CCR is active: there is only one buffer: the shipping buffer! The Assembly Buffer provides the time for a nonconstraint part to reach the assembly point with a CCR part. CCR Assembly Buffer The CCR Buffer RM -1 RM-2 RM-3 RM-4 10

11 New Verbalization: The Five Focusing steps A definition: A constraint is anything the significantly limits the performance of the organization in achieving its goal. The five focusing steps: 1. Identify the system constraint. 2. Decide how to exploit the system constraint(s). 3. Subordinate everything else to the above decisions. 4. Elevate the system constraint. 5. If in the previous step the constraint was broken go back to step 1. Beware inertia! 11

12 The Impact of the Five Focusing Steps The verbalization of the five steps came after writing The Goal and the main ideas of DBR! Insights of the details sometimes precede the generic idea! The move from bottleneck to constraint was meaningful because: The market could be a constraint! A resource that is not a bottleneck, meaning it has some level of excess capacity, might still be a real constraint because its impact on the lead-time reduces the demand. Lack of material could be a constraint! Later this idea was rejected as no material should be the constraint (?) At some time Eli spoke also about: inventory constraints as secondary trouble-makers. 12

13 Re-definition the term constraint The formal TOCICO definition of constraint is: The factor that ultimately limits the performance of a system or organization. The factor that, if the organization were able to increase it, more fully exploit it, or more effectively subordinate to it, would result in achieving more of the goal (TOCICO dictionary 2012). Let s discuss the reasons for the change in the definition of the constraint. 13

14 T, I and OE and the Battle against Cost Accounting Goldratt created a huge scandal in APICS 1983 claiming that: Cost Accounting is enemy no. 1 of productivity He came with the definition of T: The pace at which the organization generates goal-units. Separating the net-inflows due to value delivered from the cost of generating those inflows Generating more T is what the organization is destined to do. I was first presented as the purchasing value of inventory. Years later it was re-defined as Investment. OE Operating expenses that include all other costs. At the year 2000, Goldratt stopped pushing T, I and OE saying people expect me to give them a number and I cannot give them a number! 14

15 Throughput per Constraint-Unit: T/CU The ruling idea during the late 80s was that the constraint should be internal. Hence, a good performing organization has one Capacity Constraint Resource (CCR) within its operations. When different families of products go through different resources, then each family could have its own CCR. The idea was that a system should not have more than one CCR. The above paradigms led the way to prioritize products by their throughput by constraint-units - T/CU. It seemed a very appropriate exploitation of the CCR capacity. I believe that Goldratt referred to T/CU saying he cannot give a number. 15

16 A New Major Insight: Buffer Management Buffer Management appeared first in The Race. Talking about the holes in the buffer. It took considerable time to understand the insight: The actual behavior of the buffer consumption tells us vital information that should be used to determine the priorities And it is enough to handle just three priorities: Red, Yellow and Green. Additional vital information for monitoring the state of the buffers is the validity of the buffer size! The rules for monitoring the time buffer size were never clearly verbalized. 16

17 Buffer Management as a Major Paradigm Shift Even before Goldratt the terms safety time and safety stock were known. The new element was the emphasis on including buffers as integral part of planning to protect real sensitive areas. The idea that we can use the state of the buffers to make decisions in the execution phase was not, to my mind, known before. I am still not aware of any similar idea out of the TOC materials. It gave legitimacy to expediting. Until then expediting meant failing to meet the plan and even something one should not do at all! Buffer management leads to smaller buffers and less pressure to size the buffers properly and still be protected from uncertainty. 17

18 A DBR Software Called: Disaster When DBR was first developed it was assumed that no software was required to implement it. This view changed due to: Difficulties in manipulating the MRP software. Software being capable of instituting processes and policies. Interactive constraints appeared to be a problem. Goldratt wrote The Haystack Syndrome to verbalize the logic of DBR software that was developed at the time. It included an algorithm for scheduling several CCRs! The book also reflects the growing understanding for the role of buffer management. The name Disaster for the new software package meant: If you do not understand the logic the result will be disaster! 18

19 Success and Failure with Software Goldratt became disappointed by the impact of the software on the demand for TOC/DBR. His expectations were that the software would sell TOC, rather than the software would just enhance and sustain implementation. His next endeavor into software was for CCPM years later. Several years later he supported development of SDBR software. Necessary but Not sufficient was target to impact ERP companies to create software that delivers value. By looking at the holistic impact of the decisions. By also ensuring the full managerial understanding of the logic. By understanding that the relationship between the simple and clear algorithms and the wider knowledge and intuition of the managers have to be firmly settled to solve the inherent conflict. 19

20 The Manager s Software Conflict A Manage a very successful organization B Ensure the stability and synchronization of the organization as a whole C Draw the best of your knowledge and intuition considering variables of which the software is not aware The TOC algorithms do not allow any MAJOR mistake D Follow the directives of the TOC software D Do whatever you think is RIGHT Software cannot contain all relevant information and even logic that humans possess. 20

21 The Manager s Software Conflict B A Manage a very successful organization Ensure the stability and synchronization of the organization as a whole C Draw the best of your knowledge and intuition considering variables of which the software is not aware Let the software dictate all the routine daily work Intervene only in special cases when truly necessary * Necessary condition: you understand very well the basic logic of the software! 21

22 Initial Ideas Regarding Distribution The ideas on how to maintain stock started with the distribution system (around 89). The problems of batching were noticed, per item and per transportation. The generic solution based on maintaining a fixed target level and frequent replenishment was developed. Buffer management was applied based on the actual state of the on-hand inventory. A simulator demonstrating the effects of maintaining stock at warehouses under large fluctuations of demand was developed. No application software was considered at that time. 22

23 Where to Go from Here? The Rise of the TP With software being developed according to DBR / Buffer Management, the TOC ideas for manufacturing and distribution seemed to be a complete set for big business success. However, problems regarding human behavior and buy-in of top management have emerged. Problematic behaviors were caused by common flawed paradigms. Such paradigms as efficiency and local thinking. Many implementations came to an end when managers were replaced. The rise of the TP was Eli Goldratt s reaction to the stagnation of the TOC progress. In 1990 Goldratt gathered people to use some of his old thinking tools to develop a full set of thinking tools (TP) to solve all kinds of problems. 23

24 The Scope of the TP Typically, in Goldratt s way of dealing with problems and inconsistencies, he did not improve the existing solutions, but came up with something new. The TP outlined a road map for a process of ongoing improvement, for both individuals and organizations. The TP can, theoretically, solve any problem. The tools: 1. Current Reality Tree (CRT), leading to the Core Problem. 2. The Cloud leading to identifying hidden assumption and challenging them. 3. Future-Reality-Tree (FRT), checking new ideas (injections) and their positive and negatives (NBR negative branches). 4. Prerequisite tree (PRT) achieving ambitious goal by overcoming obstacles. 5. Transition-tree (TT) planning the steps of a change. 24

25 A Certain Confusion The introduction of the TP has caused split and confusion throughout the TOC world at that time. Was there any value to the DBR and the five focusing steps? The connection between the constraint, CCR, and the core problem was not explained. Some undesired effects from the use of the TP emerged: In too many cases the CRT stretched too wide with many rootproblems leading to loss of focus. The criticism of any tree reached a disproportionate degree. Many long discussion about CLARITY actually about verbalization. It seemed like too much work which not always led to a breakthrough. My view is that we need more Practical TP. 25

26 Human Behavior Skills and Mafia Offer Two important developments based on the TP emerged: 1. Cause and effect understanding of behavioral aspects. Goldratt commented that the common idea is that humans are unpredictable but this is definitely not true and most of what people do can be predicted by cause and effect. This understanding had led the way for Oded Cohen to develop the management skills workshop based on the TP. 2. Creating some unique TOC insights for marketing. Most notably the concept of a mafia offer an offer that cannot be refused. Actually the idea is to understand the real needs of the client, creating an answer that already eliminates all the negative branches. 26

27 Back to Operations: CCPM During the 80s the idea was that managing projects could be done by DBR, maybe with some minor changes. This idea was discussed, but no practical solution emerged. There was no immediate opportunity to apply it. Several years after the development of the TP, and many Jonah workshops, Goldratt felt a certain disappointment. He claimed that people use the TP to procrastinate instead of focusing on finding practical solutions. An opportunity to develop a solution for projects pushed Goldratt to create a solution for managing projects that is different from DBR and also from common practice. 27

28 CCPM as a Distinct Solution from DBR In what way is managing projects distinct from managing manufacturing? While there are various differences the question is which of them forces different kind of planning. Danny Walsh and I observed the following points: The focus of projects is on continuous progressing. The focus of manufacturing is on good utilization of the CCR. Touch time in projects is high, and very low in manufacturing. These differences lead, only in projects, to focus on the longest chain of operations, critical path or critical chain. The buffers in projects do not include touch time. The exact sequence through which non constraints pass is not critical in manufacturing but could be very significant in projects. 28

29 Simplified-DBR Replacing DBR a Basic Change of Focus During the mid-90s, Eli Schragenheim developed the rational for moving from DBR to Simplified-DBR (SDBR). Realizing that the market demand is always the major constraint! When a CCR is active we are in a state of interacting constraints! Most organizations should strive to have their constraint in the market. Adding capacity when needed in order not to compromise the performance to the market, and exploit any additional demand. The resulting methodology uses only one buffer. Buffer management is a critical component of the solution. There is also a need to monitor the load versus capacity to make sure all commitments can be met. 29

30 Planning versus Execution During the writing of Necessary but Not Sufficient Goldratt said that the distinction between planning and execution is not well understood. The underlining rules are quite different! Planning should be reasonably immune to uncertainty. Any decision included in planning should have a reason to be included. Planning has to include buffers to protect decisions. Execution should have enough flexibility to deal with uncertainty. It should tolerate changes according to the most updated priorities. This new insight fully explains the logic of the move from DBR, along its three buffers, to SDBR with only one. 30

31 The Importance of the Planned Load Temporary lack of capacity is the most devastating cause for delays on the shop floor. The time buffer is able to protect up to a consumption of 2/3 of its size. In DBR the detailed schedule of the CCR ensures that such long delay caused by a non-ccr is unlikely to happen. Definition: The Planned load is the accumulation of the derived load on a relatively loaded resource of all the firm orders that have to be delivered within a certain horizon of time. The idea of the planned load is to get a measure of the existing load without forcing a sequence on the CCR. 31

32 Goldratt s Next Step for SDBR The planned-load points to the reasonable time where the most loaded resource would be able to work on a new order. Goldratt, upon formally adopting the SDBR planning technique, has added a key element to the solution: Linking the state of the planned load for the most loaded resources to due-date quotation. Calculating a safe-date based on the planned-load plus ½ production buffer. The planned load is also used to determine material release. More advances of S-DBR planning technique allow reserving capacity for rapid-response orders, special clients, and also make-to-availability (MTA) items. 32

33 Next Leap: Make-to-Stock/Availability The common paradigm, also in DBR, was to treat production orders for stock in exactly the same way as make-to-order. Adding an artificial due-date to the production order. Any make-to-order needs a time buffer, but why should we use time buffers when we don t have a specific due-date? The buffer is STOCK not TIME to protect the variable demand. Any translation of stock into time is based on forecast! Implementing the idea of replenishment in production had to overcome two related paradigms: 1. In order to control the execution we have to have a due date. 2. All buffers are time buffers! 33

34 Buffer Management for Stock Without a due-date there is need to set release time. Whenever there is a sale replenishment is triggered immediately. A minimum batch might be required to prevent too many setups. Determine the priority of every production order for stock. When we have only one replenishment order then the state of the stock buffer at the location determines the urgency. The struggle was to determine the urgency for several replenishment orders for the same item. Amir Schragenheim convinced Goldratt to look at all the stock that lies ahead of the order relative to the target level. This new paradigm led to having different buffer-statuses to the same buffer creating the term virtual buffer. What was achieved is one priority mechanism for both MTO and MTA. 34

35 A Failed Move for Integration: Impact Through Software that Delivers Value With the TP and several detailed techniques to deliver value, Goldratt looked for the core-impact to lead organizations to manage according to TOC. Necessary but Not Sufficient was written to persuade SAP and Oracle to introduce the TOC solutions within their ERP to enable organizations through it to achieve value. As well as even basing payments on actual return to the client organization! This move failed! Software companies did not feel they knew how to bring real value to their clients, how to measure the value and whether they could trust TOC. Organizations were frustrated by their ERP implementations and became disillusioned, unconvinced that the ERP could bring real change. 35

36 The Next Leap: Integrating TOC Knowledge through Strategy and Tactic (S&T) Establishing overall superior operations than conventional methods left open a generic question: How do we use this superiority to gain significant benefits? Guiding use of TOC knowledge and tools to achieve the everflourishing organization now and in the future. And how do we ensure the next leap in performance? Three different insights created the new knowledge: 1. Recognizing the current pains of potential clients, their unanswered needs, as major opportunities. 2. The emphasis on finding a decisive competitive edge (DCE). 3. The structure of the S&T especially the definition of a strategy as a desired objective and the tactic as the actions to be taken, and realizing it in a tree! 36

37 Standing on the Shoulders of Giants 1. Identify a giant, not a choopchik Intuition will guide you It is an important enough subject for you. 2. Identify the enormity of the area not addressed by the giant. Reality gives the signals that so much more can be done. You are aiming for a broader, not a more confined area than what was addressed by the giant. 3. Get on the giant s shoulders. Gain the historical perspective - understand the giant s solution better than he did. 4. Identify the conceptual difference between the reality that was improved so dramatically by the giant, and the untouched area. 5. Identify the wrong assumption. 6. Conduct the full analysis to determine the core problem, solution, etc. 37

38 What Can We Learn from SOSG Relative to the PAST? TOC has developed independently from other development of managerial approaches. The only references Eli Goldratt made during the 80s were mainly to Newton (Physics), and somewhat to Orlicky for the basic approach of MRP but not to the later developments of MRP. The changed paradigm led Eli to place himself as continuing the work of Ford and Ohno. This should influence us to be aware of the achievements of others even when we like to change and expand their methodologies. However, any expansion should lead to a significant improvement. Note the requirement of pointing to the conceptual difference between the original area and the expansion. The same as the difference between multi-projects and manufacturing. As well as the need to identify the wrong assumption. 38

39 Continuing the Progress of Knowledge My own reflections: We have to train ourselves to observe inconsistencies / surprises / mysteries and apply intuition, observation and logic to update our paradigms. This is for me the essence of learning and the use of TOC. We are FAR from realizing the full impact of Goldratt s ideas on how to manage organizations. However, what we already know is already very significant. The most devastating behavior we might adopt is to accept Goldratt s ideas without asking questions!!! I remember someone asking Goldratt a question saying that he, Goldratt, said something contradictory in the past. Goldratt reacted very sharply: The sentence but Eli said is not a logical statement! 39

40 About Eli Schragenheim Eli Schragenheim stands with both his feet on the TOC ground Eli Schragenheim is keen to support TOC implementations worldwide, by giving guidance to whoever wishing it Eli believes the capability of every manager and consultant can be significantly improved by learning TOC This kind of learning can be done from afar, using the current technology Eli is: 40 Eli Schragenheim in his procrastination mode