My rating: 79/100
See Book Notes for other books I have read. If you like my notes, go buy it!
- Measurements which express the goal of making money: throughput, inventory, and operational expense.
- Throughput is the rate at which the system generates money through sales (not production).
- Inventory is all the money that the system has invested in purchasing things which it intends to sell.
- Operating expense is all the money the system spends in order to turn inventory into throughput.
- Make your bottleneck match the demand of the market.
- Put quality controls in front of bottlenecks to prevent processing defective parts.
- To achieve better flow, limit the inventory or the space allowed for inventory.
- The Five Focusing Steps: (1) IDENTIFY the system’s constraint. (2) Decide how to EXPLOIT the system’s constraint. (3) SUBORDINATE everything else to the above decisions. (4) ELEVATE the system’s constraint. (5) If in the previous steps a constraint has been broken go back to step 1, but do not allow inertia to cause a system constraint
So this is the goal:
To make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow.
They’re measurements which express the goal of making money perfectly well, but which also permit you to develop operational rules for running your plant. There are three of them. Their names are throughput, inventory, and operational expense.
Throughput is the rate at which the system generates money through sales. …. Through sales – not production. If you produce something, but don’t sell it, it’s not throughput. Got it?
The next measurement is inventory. Inventory is all the money that the system has invested in purchasing things which it intends to sell.
Operating expense is all the money the system spends in order to turn inventory into throughput.
Direct labor shouldn’t be a part of inventory because the time of the employees isn’t what we’re really selling. We ‘buy’ time from our employees, in a sense, but we don’t sell that time to a customer – unless we’re talking about service.
All employee time – whether it’s direct or indirect, idle time or operating time, or whatever – is operational expense. If you’ve got a machine, the depreciation on that machine is operational expense. Whatever portion of the investment still remains in the machine, which could be sold, is inventory. …. Investment is the same thing as inventory.
Money for knowledge depends on what the knowledge is used for. It it’s knowledge which gives us a new manufacturing process, something that helps turn inventory into throughput, then the knowledge is operation expense. If we intend to sell the knowledge, as in the case of a patent or a technology license, then it’s inventory. But if the the knowledge pertains to a product which UniCo itself will build, it’s like a machine – an investment to make money which will depreciate in value as time goes on.
A plant in which everyone is working all the time is very inefficient.
A balanced plant is essentially what every manufacturing manager in the whole western world has struggled to achieve. It’s a plant where the capacity of each and every resource is balanced exactly with demand from the market.
The real reason is that the closer you come to a balanced plant, the closer you are to bankruptcy.
The goal is not to reduce operational expense by itself. The goal is not to improve one measurement in isolation. The goal is to reduce operational expense and reduce inventory while simultaneously increasing throughput.
There is a mathematical proof which could clearly show that when capacity is trimmed exactly to marketing demands, no more and no less, throughput goes down, while inventory goes through the roof. And because inventory goes up, the carrying cost of inventory – which is operational expense – goes up.
… it’s an accumulation of slowness – because dependency limits the opportunities for higher fluctuations.
The maximum of deviation of a preceding operation will become the starting point of a subsequent operation.
We shouldn’t be looking at each local area and trying to trim it. We should be trying to optimize the whole system. Some resources have to have more capacity than others. The ones at the end of the line should have more than the ones at the beginning – sometimes a lot more.
What you have to do next is distinguish between two types of resources in your plant. One type is what I call a bottleneck resource. The other is, very simply, a non-bottleneck resource.
A bottleneck is any resource whose capacity is equal to or less than the demand placed upon it. And a non-bottleneck is any resource whose capacity is greater than the demand placed on it. Got that?
Where does market demand come in? There has to be some relationship between demand and capacity. … Yes, but as you already know, you should not balance capacity with demand. What you need to do instead is balance the flow of product through the plant with demand from the market. Let me repeat it for you: Balance flow, not capacity.
The idea is to make the flow through the bottleneck equal to demand from the market. Actually, the flow should be a tiny bit less than the demand. Because if you keep it equal to demand and the market demand goes down, you’ll lose money.
To increase the capacity of the plant is to increase the capacity of only the bottlenecks.
Put Quality Control in front of the bottlenecks.
The capacity of the plant is equal to the capacity of its bottlenecks. Whatever the bottlenecks produce in an hour is the equivalent of what the plant produces in an hour. So … an hour lost at a bottleneck is an hour lost for the entire system.
The actual cost of a bottleneck is the total expense of the system divided by the number of hours the bottleneck produces.
How is the time of a bottleneck wasted? One way is for it to be sitting idle during a lunch break. Another is for it to be processing parts which are already defective – or which will become defective through a careless worker or poor process control. A third way to waste a bottleneck’s time is to make it work on parts you don’t need.
We must not seek to optimize every resource in the system. A system of local optimums is not an optimum system at all; it is a very inefficient system.
Keep the kid at the front of the line from walking faster than Herbie. If we can do that, then everybody will stay together.
If you consider the total time from the moment the material comes into the plant to the minute it goes out the door as part of a finished product, you can divide that time into four elements.
One of them is setup, the time the part spends waiting for a resource, while the resource is preparing itself to work on the part.
Another is process time, which is the amount of time the part spends being modified into a new, more valuable form.
A third element is queue time, which is the time the part spends in line for a resource while the resource is busy working on something else ahead of it.
The forth element is wait time, which is the time the part waits, not for a resource, but for another part so they can be assembled together.
An hour saved at a non-bottleneck is a mirage.
The entire bottleneck concept is not geared to decrease operating expense, it’s focused on increasing throughput.
Any organization should be viewed as a chain. Since the strength of the chain is determined by the weakest link, then the first step to improve an organization must be to identify the weakest link. … Or links. Remember, an organization may be comprised of several independent chains.
The real question: how does one go about identifying the system’s constraint?
What are we asking for? For the ability to answer three simple questions: ‘what to change?’, ‘what to change to?’, and ‘how to cause the change?’ Basically what we are asking is for the most fundamental abilities one would expect from a manager. Think about it. If a manager doesn’t know how to answer those three questions, is he or she entitled to be called manager?
An intuitive way to achieve better flow is to limit the space allowed for inventory to accumulate.
Flow lines fly in the face of conventional wisdom; the convention that, to be effective, every worker and every work center have to be busy 100% of the time.
Unfortunately, the improvements efforts of other companies [vs Toyota] are misguided since they are aimed at achieving cost savings rather than being totally focused on improving the flow.
The end result of focusing on flow and ignoring local cost considerations is a much lower cost per unit.
One of the ramifications of concentrating on cost reduction is that almost all initiatives to foster a process of an on-going improvement quickly reach a point of diminishing returns and as a result many deteriorate to lip service.
In summary, both Ford and Ohno followed four concepts (from now on we’ll refer to them as the concepts of flow):
- Improving flow (or equivalently lead time) is a primary objective of operations.
- This primary objective should be translated into a practical mechanism that guides the operations when not to produce (prevents overproduction). Ford used space; Ohno used inventory.
- Local efficiencies must be abolished. My note: Local efficiencies must be ignored in light of the global efficiency.
- A focusing process to balance flow must be in place. Ford used direct observation. Ohno used the gradual reduction of the number of containers and then gradual reduction of parts per container.
We now realize that:
- The Toyota Production System is restricted to relatively stable environments.
- Most environments suffer from instability, and
- Relatively unstable environments have much more to gain from better flow than even stable environments.
We shouldn’t accept the size of batches as given; that economical batch quantities are not economical and instead we should and can strive to reach a one-piece flow. It is easy to realized that when a batch of parts is being processed (except in processes like mixing or curing) only one item is actually worked on while the other items in the batch are waiting. That means that in conventional companies that use batch sizes of more than ten unites in a batch (which is the case in the majority of production environments) the touch time is actually less than 1% of the lead time.
Contrary to the common belief, striving to constantly activate all resources all the time is not a recipe for effective operations. On the contrary, the exact opposite is true; to reach effective operations, local efficiencies must be abolished.
A good starting point for improving flow will be to choose the time buffer to be equal to half the current lead time.
Trying to be more accurate than the noise (in our case, trying to use sophisticated algorithms that consider every possible parameter in an environment of high variability) does not improve things but makes them worse.
The first step in balancing the flow is relatively easy. Choking the release of material exposes the abundant excess capacity that was masked before.
An effective rule to adjust the time buffer, without taking a risk of deteriorating the high due date performance, is to decrease the time buffer when the number of red orders is smaller than 5% of the number of total released orders and to increase it when the proportion of red orders is more than 10%.
The Five Focusing Steps
- IDENTIFY the system’s constraint.
- Decide how to EXPLOIT the system’s constraint.
- SUBORDINATE everything else to the above decisions.
- ELEVATE the system’s constraint.
- If in the previous steps a constraint has been broken go back to step 1, but do not allow inertia to cause a system constraint.