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TOC & LEAN

But why this mixture TOC and LEAN?

As it turns out, lean manufacturing is the right thing to do – even if you have started for the wrong reasons! To quote Dr. Eli Goldratt, author of The Goal, “The problem with a cost reduction strategy is that there is a finite limit. You can only get to zero. With a throughput (sales) driven strategy, there is no limit!” Lean is not about cost reduction and retrenchment; it is about growth, opportunity and competitiveness.

Most companies have barely scratched the surface of lean. In order to understand the potential of lean, we need to understand not only the tactics, we need to understand the strategy behind lean. And there is such a quantitative strategy which links each and every step you take directly to the bottom line. TOC AND LEAN shows the basic construct of our approach to lean, based on the theory of constraints.

THEORY OF CONSTRAINTS (TOC) STRATEGY

In The Goal, first published in 1984, Goldratt says that the goal of the business is to make money – and to make more money over time. We know that a company is making more money if the following three financial measures are increasing:

  • Net profit: the difference between money received and money paid out
  • Return on investment: Net profit relative to the investment required to produce it
  • Cash flow: The timing of money in vs. money out

In order to make sure our operating decisions support the goal, we need to translate the financial measures to operational measures. The operational measures which support the goal are:

  • Increased throughput: The rate at which money is generated through sales
  • Decreased inventory: The investment in items intended for sale
  • Decreased operating expense: The money spent to turn inventory into throughput

As long as these three operational conditions occur at the level at which ownership exists, cash flow, net profit and return on investment will increase, and the enterprise will make more money.

LEAN MANUFACTURING STRATEGY

What does this have to do with lean? A strategy is worthless without tactics. And lean provides those tactics.

From Womack and Jones’ Lean Thinking, the five steps of lean are as follows:

– Specify value: Value is what the customer is willing to pay for. All non-value-adding activities are considered waste.

– Identify the value stream: Understand the steps required to produce, from raw material to the customer, including all value-adding and non-value-adding steps.

  • Establish flow: Wherever possible flow material from one step to the next, one piece at a time, with no inventory in between.
  • Pull: Where flow is not established, pull material from upstream steps based on the downstream operations ‘actual consumption.
  • Perfection: Continually work towards reducing waste and improving flow.

So, the lean strategy supports the goal of making more money in two ways. The first is by improving flow, or the ratio of sales to inventory. The second is by reducing waste, or the ratio of sales to spending. This is the clear, quantitative connection between TOC and Lean. If the ratio of sales to inventory does not increase, or if the ratio of sales to spending does not increase, you are not making more money. Simple as that!