Theory of Constraints

Theory of Constraints (TOC) is an overall management philosophy. Dr. Eliyahu M. Goldratt introduced the theory of constraints in his seminal 1984 book entitled ‘The Goal’. It is based on the application of scientific principles and logic reasoning to guide human-based organizations. The publicity and leadership behind these ideas has been dominated by Dr. Goldratt through a series of books, seminars and workshops.

According to TOC, every organization has – at any given point in time – at least one constraint which limits the system’s performance relative to its goal. These constraints can be broadly classified as either an internal constraint or a market constraint. In order to manage the performance of the system, the constraint must be identified and managed correctly (according to the Five Focusing Steps below). Over time the constraint may change (e.g., because the previous constraint was managed successfully, or because of a changing environment) and the analysis starts anew.

The Five Focusing Steps

One of the most important process of the Theory of Constraints is based on the premise that the rate of goal achievement is limited by at least one constraining process. Only by increasing throughput (flow) at the bottleneck process can overall throughput be increased.

The key steps in implementing an effective process of ongoing improvement according to TOC are:

0. (Step Zero) Articulate the goal of the organization. Frequently, this is something like, “Make money now and in the future.”

1. Identify the constraint (the thing that prevents the organization from obtaining more of the goal)

2. Decide how to exploit the constraint (make sure the constraint is doing things that the constraint uniquely does, and not doing things that it should not do)

3. Subordinate all other processes to above decision (align all other processes to the decision made above)

4. Elevate the constraint (if required, permanently increase capacity of the constraint; “buy more”)

5. If, as a result of these steps, the constraint has moved, return to Step 1. Don’t let inertia become the constraint.

Liebig's Law of the Minimum

Liebig’s Law of the Minimum, often simply called Liebig’s Law or the Law of the Minimum, is a principle developed in agricultural science by Carl Sprengel (1828) and later popularized by Justus von Liebig. It states that growth is controlled not by the total of resources available, but by the scarcest resource. This concept was originally applied to plant or crop growth, where it was found that increasing the amount of plentiful nutrients did not increase plant growth. Only by increasing the amount of the limiting nutrient (the one most scarce in relation to “need”) was the growth of a plant or crop improved.

Liebig used the image of a barrel—now called Liebig’s barrel—to explain his law. Just as the capacity of a barrel with staves of unequal length is limited by the shortest stave, so a plant’s growth is limited by the nutrient in shortest supply.

Six Sigma

Six Sigma is a business management strategy, originally developed by Motorola, that today enjoys wide-spread application in many sectors of industry.

Six Sigma seeks to identify and remove the causes of defects and errors in manufacturing and business processes. It uses a set of quality management methods, including statistical methods, and creates a special infrastructure of people within the organization (“Black Belts” etc.) who are experts in these methods. Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified financial targets (cost reduction or profit increase).

DMAIC is used to improve an existing business process; DMADV is used to create new product or process designs.

DMAIC

The basic methodology consists of the following five steps:

* Define process improvement goals that are consistent with customer demands and the enterprise strategy.
* Measure key aspects of the current process and collect relevant data.
* Analyze the data to verify cause-and-effect relationships. Determine what the relationships are, and attempt to ensure that all factors have been considered.
* Improve or optimize the process based upon data analysis using techniques like Design of Experiments.
* Control to ensure that any deviations from target are corrected before they result in defects. Set up pilot runs to establish process capability, move on to production, set up control mechanisms and continuously monitor the process.

DMADV

The basic methodology consists of the following five steps:

* Define design goals that are consistent with customer demands and the enterprise strategy.
* Measure and identify CTQs (characteristics that are Critical To Quality), product capabilities, production process capability, and risks.
* Analyze to develop and design alternatives, create a high-level design and evaluate design capability to select the best design.
* Design details, optimize the design, and plan for design verification. This phase may require simulations.
* Verify the design, set up pilot runs, implement the production process and hand it over to the process owners.

5S

5S is a method for organizing a workplace, especially a shared workplace (like a shop floor or an office space), and keeping it organized. It’s sometimes referred to as a housekeeping methodology, however this characterization can be misleading because organizing a workplace goes beyond housekeeping (see discussion of “Seiton” below).

The key targets of 5S are workplace morale and efficiency. The assertion of 5S is, by assigning everything a location, time is not wasted by looking for things. Additionally, it is quickly obvious when something is missing from its designated location. 5S advocates believe the benefits of this methodology come from deciding what should be kept, where it should be kept, and how it should be stored. This decision making process usually comes from a dialog about standardization which builds a clear understanding, between employees, of how work should be done. It also instils ownership of the process in each employee.

In addition to the above, another key distinction between 5S and “standardized cleanup” is Seiton. Seiton is often misunderstood, perhaps due to efforts to translate into an English word beginning with “S” (such as “sort” or “straighten”). The key concept here is to order items or activities in a manner to promote work flow. For example, tools should be kept at the point of use, workers should not have to repetitively bend to access materials, flow paths can be altered to improve efficiency, etc.

The 5S’s are:

Seiri – Sorting. Refers to the practice of going through all the tools, materials, etc., in the work area and keeping only essential items. Everything else is stored or discarded. This leads to fewer hazards and less clutter to interfere with productive work.

Seiton
: Set in Order. Focuses on the need for an orderly workplace. “Orderly” in this sense means arranging the tools and equipment in an order that promotes work flow. Tools and equipment should be kept where they will be used, and the process should be ordered in a manner that eliminates extra motion.

Seisp: Sweeping, Systematic Cleaning, or Shining. Indicates the need to keep the workplace clean as well as neat. Cleaning in Japanese companies is a daily activity. At the end of each shift, the work area is cleaned up and everything is restored to its place, making it easy to know what goes where and to know when everything is where it should be are essential here. The key point is that maintaining cleanliness should be part of the daily work – not an occasional activity initiated when things get too messy.

Seiketsu: Standardising. This refers to standardized work practices. It refers to more than standardized cleanliness (otherwise this would mean essentially the same as “systemized cleanliness”). This means operating in a consistent and standardized fashion. Everyone knows exactly what his or her responsibilities are. In part this follows from Seiton where the order of a workplace should reflect the process of work, these imply standardised work practice and workstation layout.

Shitsuke: Sustaining. Refers to maintaining and reviewing standards. Once the previous 4S’s have been established they become the new way to operate. Maintain the focus on this new way of operating, and do not allow a gradual decline back to the old ways of operating. However, when an issue arises such as a suggested improvement or a new way of working, or a new tool, or a new output requirement then a review of the first 4S’s is appropriate.

Dinu Lipatti

Dinu Lipatti (March 19, 1917, Bucharest – December 2, 1950, Geneva) was a Romanian classical pianist and composer whose career was tragically cut short by his death from Hodgkin’s disease at age 33. Despite his short career and a relatively small recorded legacy, Lipatti is considered one of the finest pianists of the 20th century.

Lipatti gave his final recital, which was recorded, on 16 September 1950 in Besançon. Despite severe illness, he gave unmatched performances of Bach’s B flat major Partita, Mozart’s A minor Sonata, Schubert’s G flat major and E flat major Impromptus, and thirteen of Chopin’s 14 Waltzes. He excluded No. 2, which he was too exhausted to play; he offered instead Myra Hess’s transcription of Bach’s Jesu, Joy of Man’s Desiring. As his wife Madeleine recalled, this was the only way Lipatti could bear to take his leave of the world, since, “For him a concert was a pledge of his love to Music.”

Choral “Jesus bleibet meine Freude” from Cantata “Herz und Mund und Tat und Leben”, BWV 147 (arr. Hess) recorded in Geneva, 1950,
Siciliana from Sonata No. 2 for Flute and Harpsichord, BWV 1031 (arr. Kempff) recorded in Geneva, 1950.

Cognitive restructuring

Cognitive restructuring in cognitive therapy is the process of learning to refute cognitive distortions, or fundamental “faulty thinking,” with the goal of replacing one’s irrational, counter-factual beliefs with more accurate and beneficial ones.

The cognitive restructuring theory holds that your own unrealistic beliefs are directly responsible for generating dysfunctional emotions and their resultant behaviors, like stress, depression, anxiety, and social withdrawal, and that we humans can be rid of such emotions and their effects by dismantling the beliefs that give them life. Because one sets unachievable goals — “Everyone must love me; I have to be thoroughly competent; I have to be the best in everything” — a fear of failure results.

Cognitive restructuring then advises to change such irrational beliefs and substitute more rational ones: “I can fail. Although it would be nice, I didn’t have to be the best in everything.” [Ellis and Harper, 1975; Ellis 1998]

This is accomplished by leading the subject to:

* Gain awareness of detrimental thought habits
* Learn to challenge them
* Substitute life-enhancing thoughts and beliefs

The rationale used in cognitive restructuring attempts to strengthen the client’s belief that 1) ‘self-talk’ can influence performance, and 2) in particular self-defeating thoughts or negative self-statements can cause emotional distress and interfere with performance, a process that then repeats again in a cycle.

Credit crisis far from over: expert

Credit crisis far from over: expert

Geoffrey Newman | May 02, 2008

A DERIVATIVES expert who two years ago warned of a potential meltdown in global credit markets has cautioned that the crisis is far from over, and has endorsed recent calls to relax controls on inflation and allow higher prices to help markets trade their way out of their problems.

Longtime critic of derivatives markets, Satyajit Das, says those who believe the US sub-prime loans crisis, and the drought in credit markets it triggered, are nearly over are wrong.

“I think the cycle has some way to run yet,” he told a Financial Services Institute of Australasia function in Sydney yesterday. “It’s a matter of years, not a matter of months.”

In particular, investors in the US stock market, which has climbed off its lows amid a growing mood that the worst of the crunch was over, were being too optimistic, he said.

The author of Traders, Guns & Money warned that many of the problem financial instruments were still hidden and the total amount of debt attached to them largely unknown.

Losses incurred by US banks were certain to rise as $US1 trillion ($1.06 trillion) in sub-prime housing loans was due to reset to higher interest rates in the next two years.

The use of credit card debt — now totalling $US915 billion — was cushioning US home owners. But, in an ominous sign, card issuers were rapidly increasing their provisions for bad debts, by as much as 500 per cent in the case of one bank.

The use of sub-prime debt structures was also a feature of other markets, such as private equity, where $US300 billion in loans were due to be refinanced in the next two years.

Mr Das said another $US1-$US5 trillion of assets would have to come back on to US bank balance sheets as a result of defaults on housing and other debts, and it was unclear how the banks could fund them — issuance of preference shares by US banks was already at a record high. He said losses at financial institutions from the credit crunch were likely to almost double to $US400 billion.

There were also second-round effects to come as the damage done to the real economy from financial sector losses fed back into further bank losses.
Mr Das said there needed to be a massive reduction in debt levels globally or a “nuclear deleveraging” before the crisis could be said to be over. That could be achieved through an economic crash “on the scale of 1929” but allowing inflation to rise would help to avoid that scenario. Higher inflation was a legitimate policy option since it reduced the real value of debt and gave companies and individuals breathing space to reduce their leverage by helping to put a floor under asset prices.

His comments come as some economists urge Australia’s Reserve Bank to relax its inflation targeting policy to help avoid a severe economic downturn.

He acknowledged that as inflation rose higher it was more difficult to control it, but noted the global economy was moving into a period of higher inflation anyway. “It could be the lesser of two evils,” he said.

http://www.theaustralian.news.com.au/story/0,25197,23631137-643,00.html