Review of Lectures 23-29

The first 22 lectures deal with the management functions of staffing, communicating and motivating. The remainder of the lectures deals with selected aspects of control. It is assumed that the student understands methods of cost and schedule control appropriate to the student’s organization. If not, references for self-study are provided in lecture 23. It is critical to understand how to apply the principles of control to different organization types because these principles must be tailored to the organization type and applying them inappropriately results in significant inefficiencies. It is also necessary to understand management accounting, which differs from standard financial accounting, in order to make sound decisions relating to costs of products or services. The three aspects of control discussed in lectures 23-28 relate to processes involved in the day to day work of any organization. These three are risk management, theory of constraints and process improvement.

Risk is the consequence of undesirable events on the work of an organization. Risk is inherent in every type of activity. The objective of risk management is to proactively identify risks and take actions that reduce the probability that an undesirable event occurs and/or reduce the consequence of the event should it occur. Lecture 24 describes a ten-step process for effective risk management and provides templates used in risk management. The primary templates are the risk summary grid, which is useful in the early stages of an activity for communicating risks to managers, customers and the team working the activity and the risk register, which is more useful in day to day management of risks once an activity is underway.

Lecture 25 is a brief overview of the theory of constraints. Understanding the theory of constraints is easier if we think of a process as the combination of supplier, input, process, output and customer, or what is termed SIPOC for the initials of each word. The inputs are transformed to outputs by the process. The activities or processes that any organization performs are a series of SIPOC steps with the outputs of one step being the inputs to the following step. Actual processes are usually complex networks of SIPOC steps but we can understand the theory by examining a simple series of steps. Then it is clear that the output of the overall process cannot occur at a rate any faster than the rate of the slowest step in the process. Applying the theory of constraints should be the first step in process improvement.

Often managers try to keep every worker busy all of the time thinking that is the most efficient way to manage an activity. This can violate the theory of constraints and lead to costly excess work in process and sometimes extra workers to facilitate work in process. It doesn’t matter if the process is a service process dealing with paperwork or a manufacturing process. Applying the theory of constraints minimizes work in process, cycle time and staff size. Some workers may not be busy at all times but this doesn’t lead to extra costs. Rather it creates time for workers to conduct process improvement and opportunities for cross training workers to do more than one step. The student is encouraged to read the referenced books by Eliyahu Goldratt.

Lecture 26 explains that statistical variation is present in the actual values of all parameters relating to an organization’s processes. Measuring this variation and understanding the resulting information is essential to effective management. Managers and workers must know the difference between common cause variation (the manager’s responsibility) and special cause variation (the worker’s responsibility). An activity, the “system” in process improvement language, must be stable, i.e. exhibit only common cause variation, before attempting to improve the process by reducing the variation and/or changing the mean value of a parameter. A system is brought into stability by fixing the special cause variation revealed by data measuring the variation. Control charts are a visual means of evaluating variation to determine common cause and special cause.

Effective process improvement is achieved via several different approaches. Total Quality Management and Six Sigma are two popular approaches proven to be effective. Implementing any effective process improvement approach requires that all or a subset of workers and managers receive comprehensive training in statistical process control. Only after such training should workers, or specially trained facilitators, be empowered to execute process improvement.

Lecture 27 provides guidelines for learning and using statistical methods. Learning to think statistically is discussed and approaches to learning this useful skill are outlined. This lecture also describes two of W. Edwards Deming’s famous experiments and one that I developed that help managers understand variation and how to manage in the presence of variation. The funnel experiment demonstrates dramatically the things that go wrong when inappropriate actions are taken in the presence of variation. The red bead experiment demonstrates how hard workers try to carry out manager’s directions, even when the goals a manager sets are obviously impossible due to the effects of variation. Watching a video of this experiment is an experience beneficial for all managers. It provides vivid demonstration of the “goodness of intent” of most workers and of the damage managers cause via arbitrary, and often unrealistic, slogans and exhortations. The productivity experiment teaches the value of reducing variation.

Lecture 28 concludes the discussion of variation and process improvement by giving some simple examples that illustrate the typical steps in a process improvement activity. Visual tools, including fish bone diagrams, flow charts, work flow diagrams, deployment charts and control charts are described. These examples teach enough of the methodology of statistical process control to enable the student to begin improving simple work processes. It is important for the student to undergo more thorough training before applying statistical methods to complex work processes. Complex processes can have subtleties that are not covered in the simple examples discussed in lecture 28.

Lecture 29 deals with leading the team, which is the main function of an organization’s manager. Developing an effective organization, as described in the first 28 lectures, can be viewed as necessary to free the manager from being so bogged down with problem solving related to personnel or processes that there is no time to lead the organization in achieving its strategic objectives. Key to leading the team is effective planning. Lecture 29 summarizes a planning process called Process Quality Management (PQM) that focuses on the fundamentals of planning. I and many others have found this process effective in helping the manager lead his organization in achieving strategic objectives. PQM facilitates the planning for achieving strategic objectives in a one or two day concentrated session.

There are no exercises for this review session as the last lecture is your most important exercise.

If you find that the pace of blog posts isn’t compatible with the pace you  would like to maintain in studying this material you can buy the book “The Manager’s Guide for Effective Leadership” in hard copy or for Kindle at:

http://www.amazon.com/Managers-Guide-Effective-Leadership-Organizations/dp/1449000673/ref=sr_1_2?ie=UTF8&qid=1346946310&sr=8-2&keywords=Joe+Jenney

or hard copy or for nook at:

http://www.barnesandnoble.com/s/Joe-Jenney?keyword=Joe+Jenney&store=book

or hard copy or E-book at:

http://bookstore.authorhouse.com/Products/SKU-000269270/The-Managers-Guide-for-Effective-Leadership.aspx

25 Overview of Theory of Constraints

The theory of constraints involves techniques for improving processes that have to be learned independently of the material we address in subsequent lectures. This theory should be applied to business processes before beginning the process improvement methods that are discussed in the following lectures. If the student understands the theory of constraints and if this theory is being applied to the business processes the student is concerned with then this lecture can be skipped. If not, this overview introduces the theory and gives the student some feeling for the necessity for learning and using this theory.

Theory of constraints deals with aspects of control often neglected or wrongly presented in standard texts. I suspect the likely reason is that theory of constraints as applied to business organizations was made popular outside of business schools by a physicist, Eliyahu M. Goldratt. Theory of constraints is described by Goldratt via his books The Goal, The Race, Critical Chain & other process oriented management books. These books are “business novels” and enjoyable reads as well as being excellent self-training books. Theory of constraints is appropriate to processes associated with manufacturing operations, back and front office service operations and projects. I distinguish between back and front office service operations because although theory of constraints applies to front office service operations it shouldn’t be the main focus when dealing directly with customers. This is because it is better to be effective with customers than to be highly efficient at the expense of some effectiveness.

Theory of constraints is based on the fact that the throughput of a process can be no greater than the throughput of the slowest step in the process, i.e. the constraint. It is a simple and seemingly obvious concept but having seen many offices with desk after desk stacked with paper work waiting to be processed and many factories with work in process stacked around machine after machine I can tell you that it isn’t obvious to many managers in spite of the fact that violating this theory leads to inefficient operations and excessive costs.

A basic work process, applicable to any organization, is shown in figure 12.

Figure 12 A basic work process has suppliers, inputs, outputs and customers.

This chain is often called SIPOC after the initials of each element in the chain. Manufacturing, project and back office service processes are typically many step processes, each with suppliers, inputs, outputs, & customers. A simple example with ten steps is shown figure 13. Each circle with an S is a SIPOC chain in which the preceding S is the supplier of inputs to the S and the following S is the customer for its outputs. Note that a process can have more than one supplier, as S4 is supplied by S3 and S8 in this figure. Similarly a process can have more than one customer. A more complex, but typical process might have loop backs where material or paperwork not meeting standards is sent back to an earlier process for rework.

Figure 13 Typical business processes integrate many individual SIPOC processes.

If we assume that each of the steps shown in figure 13 has a different through put then the theory of constraints states that the through put of the overall process cannot be any larger than the through put of the slowest step. If the manager in charge of an overall process like that illustrated in figure 13, with each step having a different through put, expects the workers to stay busy you can imagine what results. Work in process (WIP) builds up in from of all steps that are slower than the previous step. This excess WIP can lead to several problems, including:

·       In manufacturing operations and in some project operations the WIP leads to excess inventory costs.

·       Associated with excess WIP is excess cycle time, i.e. the time from the first step to the final step in the overall process.

·       If a worker at one of the non-constraining step begins to make errors in paperwork or if a machine at a non-constraining step begins to produce defective parts then excess costs result from the extra rework required on all the defective material produced before the problem is detected at some subsequent step

·       Eventually expediters and/or overtime are added to ensure that time critical work is located and processed at the expense of other less critical work, leading to excess labor costs.

A second, and again often overlooked, result of the theory of constraints is that there are no additional costs incurred if workers at non-constraining steps are idle as long as there is material available for the worker or machine at the next step. This means that if such workers are cross trained then they can do other productive work when there is a buffer of output work after their step. The value of workers doing other work justifies paying premium wages to workers that are cross trained and the cost of cross training.

Most important is that workers at non-constraining processes have time to spend on process improvement and, since total productivity is not reduced, there is no additional cost for the process improvement labor. This is one reason theory of constraints should be applied to work processes before initiating other process improvement activities.

Figure 14 illustrates how to control processes with a constraining step.

Figure 14 Adding buffer inventories and controlling work material release controls work in process for processes with constraining steps.

In the example shown in figure 14 step 3 is assumed to be the constraining step. Buffer inventory is maintained in front of step 3, indicated by the small rectangle, so that it can never be idle due to lack of input. The size of the buffer in front of step 3 is controlled by the rate of work material released to the input of step 1, indicated by the dotted line from the input of step 1 to the buffer inventory at the input to step 3. It is also correct practice to add a buffer in front of step 4 and regulate the input to step 5 to control the size of this second buffer. The reason for the second buffer is to ensure that step 4 does not become the constraining step due to material not being available from step 8. Note that this process control approach applies to any type of business that involves material, i.e. paper, electronic media or parts, moving from step to step to accomplish an overall work objective.

A personal experience is a good illustration of the problems caused by not applying the theory of constraints. I was asked to consult for a factory that was in danger of being shut down and the work moved out of the country because the corporate office was not satisfied with the factory’s performance. A quick tour showed that there was excess WIP nearly everywhere. In fact a special material handling system had been installed just to deal with the partially finished goods throughout the factory. A few questions revealed that the constraining process was the final process before the products were boxed and shipped.

I held a Saturday training system for the managers. I asked them what the cycle time was for their products. They answered that it was about 35 days from first material release to shipping products made with that material. I then asked what the cycle time would be if material moved from process to process with no waiting time in front of each process. They thought awhile and answered that it would be 7 days. A few more leading questions and I could see light bulbs coming on in a few minds and excited expressions on faces. Incidentally, the first person that comprehended what they had been doing wrong was a woman doing administrative work in the front office. By Monday they had plans worked out to change their methods and were starting to implement the plans.

I called the general manager a couple of months later and asked if the cycle time had changed. They had two products going through the same production line. He said the cycle time for one product had been reduced to the ideal 7 days by applying theory of constraints. They began releasing material into the line at the rate of the final constraining process and maintained buffer work in process only in front of the constraining process. Unfortunately, he was not allowed to control the release of material for the second product and its cycle time was still about 35 days. Corporate marketing people controlled the release of material for the second product and they released it according to their sales instead of the factory capabilities. I never learned if the general manager was able to convince corporate management that marketing’s control of material release for the second product was the cause of the factory’s excess cycle time, excess WIP and associated excess costs.

This short introduction to the Theory of Constraints illustrates the principle. Managers of manufacturing or back office service operations should study Theory of Constraints, just in time (JIT) inventory control and Lean techniques and understand the value of small lot size in controlling the cost of poor quality. Project managers should study critical path scheduling as well as the theory of constraints. I recommend project managers read Goldratt’s book Critical Chain, which addresses scheduling for projects.

Exercise

Like lecture 23 this lecture is only an introduction and no exercises are required unless the student isn’t familiar with the theory of constraints and using it already. If the student isn’t knowledgeable in these techniques and isn’t already using them then additional self-study is necessary to learn how to put them into practice for real business processes, which tend to be more complex than the simple example used here to illustrate the principles involved. I recommend reading Goldratt’s books because they are fun reads as well as excellent for self-training.

If you find that the pace of blog posts isn’t compatible with the pace you  would like to maintain in studying this material you can buy the book “The Manager’s Guide for Effective Leadership” in hard copy or for Kindle at:

http://www.amazon.com/Managers-Guide-Effective-Leadership-Organizations/dp/1449000673/ref=sr_1_2?ie=UTF8&qid=1346946310&sr=8-2&keywords=Joe+Jenney

or hard copy or for nook at:

http://www.barnesandnoble.com/s/Joe-Jenney?keyword=Joe+Jenney&store=book

or hard copy or E-book at:

http://bookstore.authorhouse.com/Products/SKU-000269270/The-Managers-Guide-for-Effective-Leadership.aspx

23 B Risk Management, Theory of Constraints and Process Improvement

I include risk management in this course because poor risk management is the second highest contributor to failure in projects or in major changes in operations for manufacturing and service organizations. (Don’t forget that team dynamics is the primary contributor to failure in such activities.) A second reason for including risk management is that inexperienced managers are the ones that typically ignore risk management or just give it lip service. If you are going to be an effective leader you must understand and practice sound risk management. Risk management is the topic of the following lecture.

I include theory of constraints because it is often left out of treatments of control and in some traditional approaches to manufacturing this failure leads to promoting techniques that are inappropriate and cause inefficiencies. The lecture following risk management is an introduction to theory of constraints and I hope it leads the student to further study of this important topic.

The remainder of this course addresses that portion of control that deals with what is typically called process improvement or quality improvement. The objective of the process improvement part of control is to assess work processes and to make continuous improvements to these processes so that employees’ jobs are easier and more cost efficient due to fewer and fewer quality problems and to reduced use of resources; including labor, materials and maintenance.

There are many versions of process improvement in use. Six Sigma and total quality management (TQM) are two popular versions. Kaizan is a Japanese term for continuous improvement and many organizations use this term to describe their process improvement work. Sometimes Kaizan is used to simplify processes without gathering data and some quality gurus are critical of non-data driven process improvement. Another term used by manufacturing organizations is Lean. Lean is using a set of tools or methods that improves manufacturing processes by eliminating waste and errors. Some organizations combine Lean and Six Sigma into Lean Six Sigma. Whereas both Six Sigma and TQM are proven to be effective I favor TQM, or data driven Kaizen if you prefer the Japanese term. Let me give short descriptions of the two approaches and then discuss the reasons I favor TQM.

Six Sigma thoroughly trains a small number of people and then empowers these trained specialists to work with other workers and managers to improve processes throughout the enterprise. These specialists get titles according to the amount of training they have received, e.g. those with extensive training are usually called black belts or master black belts. An experienced manager is selected to manage the specialists and their process improvement activities. Other managers are given overview training so that they know what to expect and what is expected of them.

In the version of TQM that I have practiced all employees in the enterprise, workers and managers, receive about 50 hours of basic training in process improvement techniques. A very few receive additional training in special techniques and serve as a resource to all the workers and managers. After training, all workers and managers are empowered to work on process improvement of the processes they own, i.e. the processes they use in their day to day work. There is a coordinator to authorize teams and facilitate access to any data needed by the teams or to the specialists that provide analysis beyond the capabilities of the team. The authorization is necessary to prevent workers from getting involved in several teams at once and impacting productivity by spending too much time on process improvement at the expense of process execution.

Either of these approaches is effective and if your enterprise is already involved in one of these or a related approach then stick with it. If your enterprise is not yet involved in process improvement then I strongly recommend the TQM approach. The advantage of TQM is that it empowers every employee to control processes they own. This empowerment results in two benefits compared to approaches like Six Sigma that empower only a few specially trained personnel. First, empowering employees to have control over their own processes is highly motivating. It is one of the things required for employees to reach Maslow’s highest level of needs fulfillment, i.e. self-actualization. Second, employees at any level know more about the processes they own than their supervisors, or any specialist, because they are more intimately involved with the processes. They feel, smell, hear and experience details of their process that supervisors or specialists do not experience. They are better at recognizing what aspects of their processes need improvement first, second and so on. They are also better at developing improvement approaches because often they have been thinking about better ways to do their job for a long time. They are inclined to look for improvements that make their job easier as well as more cost effective.

The disadvantages of the Six Sigma type approaches from my experience are that sometimes the workers resent outside experts coming to change their work processes and the outside experts aren’t as familiar with the work processes as are the employees that own the processes. I have observed that the process owners tend to create simple and effective improvements whereas the highly trained experts tend to go for elegant and expensive improvements, but not necessarily any better improvements. Another disadvantage is that the experts attack the most important processes first and work their way through enterprise processes a few at a time, depending on how many experts there are. With TQM all processes are subject to attention at any time. The process owners naturally prioritize processes they own but even simple processes get attention that are unlikely to be addressed in a Six Sigma approach until all higher priority processes have been addressed.

An apparent disadvantage of TQM is that all employees must be trained and therefore the training costs tend to be higher than for Six Sigma, assuming only a few employees are given the full Six Sigma training. I believe this extra cost is more than offset by the more comprehensive attack on process improvement that TQM achieves and from the increase in employee motivation that results from empowering employees to have control over their own processes. TQM also requires a more careful introduction to empowering employees after they have been trained. There must be boundaries to the empowerment and these boundaries must be carefully communicated to the employees as they are empowered. Otherwise employees adapt their individual definitions of empowerment and some naturally expand the boundaries beyond what is acceptable in an efficient enterprise that is under control. Obvious examples of items employees are not empowered to change include recipes, standards and accounting rules; changes of which must be handled very carefully and usually with management involvement.

Exercise

This is an introductory lecture and no exercise is required unless the student is unfamiliar with text book methods of control for manufacturing, projects and service organizations and with the differences between financial accounting and management accounting. If you aren’t familiar with these methods of control and cost management then take the time now to learn the basics. It is important to effective process improvement that changes to processes do not violate sound basic principles. It may be frustrating to put this course on hold while you study other subjects for several weeks but it is beneficial in the long term. If you are familiar with these basics then go on to the next lecture.

If you find that the pace of blog posts isn’t compatible with the pace you  would like to maintain in studying this material you can buy the book “The Manager’s Guide for Effective Leadership” at:

http://www.amazon.com/Managers-Guide-Effective-Leadership-Organizations/dp/1449000673/ref=sr_1_2?ie=UTF8&qid=1346946310&sr=8-2&keywords=Joe+Jenney

or hard copy or for nook at:

http://www.barnesandnoble.com/s/Joe-Jenney?keyword=Joe+Jenney&store=book

or hard copy or E-book at:

http://bookstore.authorhouse.com/Products/SKU-000269270/The-Managers-Guide-for-Effective-Leadership.aspx