Chapter TenAfter explaining everything, Alex and his staff (Bob from production, Lou from accounting and Stacey from inventory control) hammered out the meaning of throughput, inventory and operational expense until satisfied. Lou, states the relationships as follows. "Throughput is money coming in. Inventory is the money currently inside the system. And operational expense is the money we have to pay out to make throughput happen." Bob is skeptical that everything can be accounted for with three measurements. Lou explains that tooling, machines, the building, the whole plant are all inventory. The whole plant is an investment that can be sold. Stacey says, "So investment is the same thing as inventory." Then they decide that something drastic is needed to be done with the machines. But how can they do that without lowering efficiencies? Another call to Jonah is placed and Alex is off to New York that night.
In this chapter Jonah introduces Alex to the concept of bottlenecks and
non-bottlenecks. Jonah defines these terms as follows. "A bottleneck is any
resource whose capacity is equal to or less than the demand placed upon it.
"A non-bottleneck is any resource whose capacity is greater than the demand
placed on it." Jonah explains that Alex should not try to balance capacity
with demand, but instead balance the flow of product through the plant.
Later, Alex and his team recognize the bottlenecks, the areas where capacity
doesn’t equal demand, like the slow kid Herbie on the hike. With this discovery goes
the ideas related to reorganizing the plant like Alex did with the hike. Production is a
process and it cannot be moved around so easily. Many processes rely on the
previous one to be able to complete the next. Alex would need more machines,
which takes more capital, and division is not going to go for that.
Well, Jonah makes a visit to the plant. Jonah tells Alex that a plant without bottlenecks would have enormous excess capacity. Every plant should have bottlenecks. Alex is confused. What is needed is to increase the capacity of the plant? The answer is more capacity at the bottlenecks. More machines to do the bottleneck operations might help, but how about making them run more effectively. Jonah tells them that they have hidden capacity because some of their thinking is incorrect. Some ways to increase capacity at the bottlenecks are not to have any down time within the bottlenecks, make sure they are only working on quality products so not to waste time, and relieve the workload by farming some work out to vendors. Jonah wants to know how much it cost when the bottlenecks (X and heat treat) machines are down. Lou says $32 per hour for the X machine and $21 per hour for heat treat. How much when the whole plant is down? Around $1.6 million. How many hours are available per month? About 585. After a calculation, Jonah explains that when the bottlenecks are down for an hour, the true cost is around $2,735, the cost of the entire system. Every minute of downtime at a bottleneck translates into thousands of dollars of loss throughput, because without the parts from the bottleneck, you can’t sell the product. Therefore, you cannot generate throughput.
Alex organizes the bottlenecks to work on only overdue orders from the most overdue to the least. He then finds his wife. She is at her parent’s house. Through their conversation it is learned that she still needs to be away from everybody, even the kids.
The crew works out some of the details for keeping the bottlenecks constantly busy. In the process they find that they need another system to inform the workers what materials have priority at non-bottlenecks. Red and green tags are the answer. Red for bottleneck parts to be worked on first as to not hold up the bottleneck machine, and green for the non-bottleneck parts. That concludes another week. The true test will be next week.
Great, twelve orders were shipped. Alex is pleased, but he definitely needs more. He puts his production manager on it. His production manager rounds up some old machines to complement what one of the bottlenecks does. Things are looking up.
They are becoming more and more efficient, but lag time arouse with the two bottlenecks because of workers being loaned out to other areas and not being at the bottlenecks when needed to process another order. It seems there was nothing to do while waiting for the bottleneck machine to finish the batch. Therefore, in keeping with the notion that everybody needs to stay busy, workers were at other areas between batches. Alex decides to dedicate a foreman at each location all the time. Then one of those dedicated foreman, the night foreman, discovers a way to process more parts by mixing and matching orders by priority, increasing efficiency by ten percent. Finally, one process being sent through a bottleneck could be accomplished through another older way and therefore free up time on the bottleneck.
Now that the new priority system is in place for all parts going through the bottlenecks, inventory is decreasing. That’s a good thing right? But lower inventory revealed more bottlenecks. This intrigues Jonah so he’s coming to take a look.
"There aren’t any new bottlenecks", says Jonah. What actually has
happened is a result of some old thinking. Working non-bottlenecks to maximum
capacity on bottleneck parts has caused the problem. All parts are stacked up in
front of the bottlenecks and others are awaiting non-bottleneck parts for final
assembly. There needs to be balance. The red and green tags need to be modified.
It seems as if the bottlenecks will again control the flow, by only sending them
exactly what they need and when they need it.
Ralf, the computer wiz, says he can come up with a schedule for bottleneck parts and when they should be released. This will alleviate any excess inventory in front of the bottlenecks, but what about the non-bottlenecks? Jonah says with the same data out of the bottlenecks to final assembly, you should be able to predict non-bottleneck parts as well. This will make some time, but there are enough parts in front of the bottlenecks to stay busy for a month.
There is another corporate meeting. Mr. Peach doesn’t praise Alex like Alex thinks he should. Alex decides to talk with him in private. Mr. Peach agrees to keep the plant open if Alex gives him a fifteen percent improvement next month. That will be hard because that relies heavily on demand from the marketplace.
Fifteen Percent!! Fifteen Percent!! Just then Jonah called to let Alex know that he will not be available to speak with in the next few weeks. Alex informs him of the new problem of more inventories and less throughput. Jonah suggests reducing batch sizes by half. Of course, this will take some doing with vendors, but if it can be done, nearly all costs are cut in half. Also, they get quicker response times and less lead times for orders. Sounds good.
Alex is propositioned with a test. They can greatly increase sales, current and future, if they can ship a thousand products in two weeks. Impossible without committing the plant to nothing but the new order? Wrong! How about smaller batch sizes. Cut them in half again. Then promise to ship 250 each week for four weeks starting in two weeks. The customer loved it.
Seventeen percent!! That’s great, but it’s not derived from the old cost accounting model. The auditors sent down to the plant from Division find just 12.8% improvement. Most of it accounts from the new order. Which by the way, the owner of the company that placed the order came down personally to shake everybody’s hand in the plant and to give a contract to them for not a thousand parts but ten thousand. Anyway, tomorrow is the day of reckoning at division.
Well the meeting at Division started out rough. Alex thought he would be meeting with Mr. Peach and other top executives. Instead, he met with their underlings. He decides to try and convince them it doesn’t work. Just before leaving he decides to see Mr. Peach. It’s a good thing he did, because he just got promoted to Mr. Peach’s position. Now Alex has to manage three plants as the whole division. He calls Jonah desperately and asks for help. Jonah declines until he has specific questions.
Alex has a nice dinner with his wife. Through the veal parmesan and cheese cake it is decided that Alex should ask Jonah how he can get other people to understand these techniques that his team has discovered without being condescending.
Now is the time to assemble Alex’s team for Division. Surprisingly the accountant with two years to retirement is on board, but the production manager isn’t. He wants to be plant manager to continue their efforts. Everything is totally into place at the plant but more is needed for division.
Alex is firmly engrossed with the problems of taking over the division. With advice from his wife he decides to enlist the help of his team at the plant. Every afternoon they will meet to solve the problem. After the first day it is obvious , they will need them all.
The second day they are led in a discussion about the periodic table of elements, and how the scientists actually got a table of any sort. Maybe that is how they will solve the massive problems of division, by understanding how the scientists started with nothing and achieved order. A way to define them by their intensive order is needed.
The team finally comes up with the process: Step one – identify the system’s bottlenecks; Step two- decide how to exploit those bottlenecks; Step three- subordinate everything else to step two decisions; Step four- evaluate the systems bottlenecks; Step five- if, in a previous step, a bottleneck has been broken, go to step one. It seems so simple, just different.
The team decides to revise the steps: Step one – identify the systems constraints; Step two – decide how to exploit the systems constraints; Step three – subordinate everything else to step two decisions; Step four – evaluate the systems constraints; Step five- warning!!! If in the previous steps a constraint has been broken, go back to step one, but don’t allow inertia to cause a system constraint. It also has been discovered that they have been using the bottlenecks to produce fictitious orders in an effort to keep the bottlenecks busy. That will free up twenty percent capacity, which translates in to market share.
Talking with the head of sales. Alex finds out that there is a market order to fill the capacity. It’s in Europe, so selling for less there will not affect domestic clients. If it can be done, will open a whole new market. Then Alex ponders Jonah’s question, to determine what management techniques should be utilized. Alex determines how a physicist approaches a problem. Maybe this will lead to an answer.
Alex experiences a problem at the plant. It seems all the new orders have created new bottlenecks. After analyzing the problem, they agreed to increase inventory in front of the bottlenecks an tell sales to not promise new order deliveries for four weeks, twice as much as before. This will hurt the new relationship between sales and production, but it is needed. Production is an ongoing process of improvement, and when new problems arise they need to be dealt with accordingly.
Finally, struggling with the answer to Jonah’s question, Alex comes up with some questions on his own: What to change? What to change to? How to cause the change? Answering these questions are the keys to management, and the skills needed to answer them are the keys to a good manager and ultimately the answer to Jonah’s question.