THE MAJOR COMPONENTS OF ANY ORGANIZATION
SUBSYSTEM 1: OPERATIONS — THE UNIVERSAL CORE PROBLEM
Have you heard about companies where some managers spend a lot of time trying to control costs and prevent unnecessary overtime, while at the same
*Dr. Eliyahu M. Goldratt, from the Goldratt Satellite Program broadcast live in March–
May, 1999.
The Eight Major Subsystems 95 time other managers are spending excessive money to expedite products to angry customers? Or have you heard about companies where, all during the quarter, the finance people are screaming, “absolutely no overtime.” Yet at the end of the quarter, just before the financial results will be calculated, the same executives are screaming, “I don’t care how much overtime you have to pay. Get the product shipped before the end of the quarter!” These con- flicting messages are very common in the lifeblood of every organization
— operations.
“Operations” is a term that has several different meanings in business.
We describe operations as including those functional areas responsible for the logistics of producing a product or service and delivering it to the next link in the supply chain. For example, in a manufacturing company, opera- tions includes the scheduling and production activities in the plant — all of the logistics required to produce and ship products. In a hospital, operations includes the scheduling and conducting of surgery and patient care (pre- and post-operative). In a bank, operations includes all of the services pro- vided to customers, including those conducted in the bank and those pro- vided through Web sites and mail.
Functions associated with operations are looked on as “cost centers.”
Therefore, many “improvement” projects in these areas are designed to re- duce costs and increase efficiency. The philosophy that often guides man- agers of these areas is that the more products you can produce with the same fixed overhead, the lower will be the cost per product. This philoso- phy falls apart when the product or service is available but the customer does not want it. It also falls apart when product cost is calculated based on predicted volume, and the predicted volume does not occur.
For cost centers that produce or provide products or services, we often encounter metrics such as “performance to budget” or “efficiencies.” For example, in a manufacturing environment, parts produced per hour per work center or machine is a common measurement. In a consulting firm, utiliza- tion of the consultant’s hours is a common measurement.
EFFICIENCY MEASUREMENTS — EXAMPLE
These types of efficiency measurements are often in conflict with achieving flow (getting just the right products out to customers on time). This places the operations function in direct and constant conflict with sales, engineer- ing and finance. For example, in one medical products company we worked with, there was a division that assembles medical kits for surgical proce- dures. The efficiency measurement in this plant is the number of kits the assembly teams can put together per shift.
In order to assemble kits for any one procedure, each item (sometimes numbering in the dozens) must be staged so that the assemblers can pick the items and place them appropriately in the surgical tray. This requires some time to set up for each different kit. Some kits have long set up times and are short runs (small quantities being ordered). Other kits have shorter set up times with larger quantities.
If you were the foreman of one of these teams, being measured on how many kits per shift you could assemble, would you want to set up for 3 hours and be able to assemble only for 1 hour? Of course not! You would look for orders with the shortest set up times and largest quantities ordered.
Typically, supervisors in this situation will look beyond firm orders and add quantities for “future orders.” This increases the amount of production they can achieve with the same set up time.
With such a measurement, you can imagine that some kits (the ones with long set up times and small quantities ordered) end up being backordered for long periods of time, while other kits are in an oversupply situation.
While this phenomenon looks wonderful on the efficiency reports, the organization’s bottom line is suffering in two ways — missed sales for some kits and excessive inventory carrying costs for other kits. This situation is real, not imagined.
If the typical hospital orders a variety of kits, and finds that some kits are backordered for long periods of time, they may find another supplier, not just for the backordered kits, but for all their surgical kits.
Eventually, when the customer or the salesperson screams loudly enough, the plant will expedite the “inefficient” production of the low volume kits, only to go through the same conflict repeatedly every few days or weeks.
CHRONIC CONFLICT BETWEEN EFFICIENCY AND FLOW Goldratt suggests that the existence of a chronic conflict such as this (pro- duce for efficiency vs. produce to meet customer demand) is a sign that the system is broken. In operations, the reason for this chronic conflict is the efficiency measurement(s) and associated practices trying to squeeze every resource to its fullest.
This philosophy is often counter to achieving good flow of products and services. In operations, we often see managers focus on idle resources, as- suming that any resource standing idle is a waste. In reality, managers do more harm to their organization when they try to utilize every resource 100%.
OPERATIONS — THE SOLUTION
An organization can actually achieve much better results by having protec- tive capacity and flexibility — some resources deliberately standing idle,
The Eight Major Subsystems 97 but available to protect other more critical resources. For example, in NASCAR races, while the driver is the critical resource, his or her mechan- ics will stand idle for most of the race, ready to act if and when needed to help the driver win the race.
In order for operations people to work as a team with the rest of the organization, they must accept that the primary purpose of their organiza- tion is not to be efficient. Of course, if too much waste exists in the system, then the products are often priced out of the market by competition. At the same time, the rest of the organization needs to understand that constant disruption to operations can hurt flow.
What operations needs is a system that allows it to meet two different operations goals — minimize waste and good flow. The system must be predictable, according to Deming’s standards. This means that the product or service must be delivered consistently on time to customers, meeting quality and other expectations, better than 95% of the time.
For the PMO, the significance of having a predictable operation is in the number of projects required. The more predictable the operation, the fewer the projects required to make the system work.
Goldratt invented such a system that applies widely to many types of operations. The system typically simplifies operations and implements the relay runner approach. It is called Drum, Buffer, Rope*, and it assumes that Murphy exists in operations. It provides a method of distinguishing easily between common and special cause variation, and tells managers when to investigate problems and when to ignore them. The system also lends itself to ongoing improvement and integration with other techniques such as TQM, Lean Manufacturing, and Six Sigma.
By having executives understand how efficiency measurements hurt them, and by seeing one example of an operations system with predictabil- ity, executives are prepared to discuss their own environment, the inherent measurements, the behaviors of people, and to what extent they have a sys- tem with predictable results. This lays the groundwork for good strategy.