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The Theory of Delays (TOD)
Improving Performance and Profitability in Job Shops
& Custom Manufacturing Environments
Delta Dynamics, Inc.
The two leading methodologies for improving performance and profitability in manufacturing environments are lean manufacturing and the theory of constraints (TOC), both have problems of �fit� when applied to job shops and custom manufacturing companies. This article explains why, and introduces the Theory of Delays (TOD), an alternative more suitable for these types order-driven businesses.
The Problem with Lean: Lean does not fit custom manufacturing very well because the focus of the methodology is on reducing inventory. This is not a problem in a make to order business where no finished goods inventories exist (by definition). Lean works best in mass production manufacturing facilities that build finished goods inventories to stock. This is where the money is... a $1,000,000 reduction in inventory saves the company the "cost to carry" which often runs 25% or more per year, so there are big savings in inventory when lean programs are successfully implemented.
The Problem with TOC: TOC, on the other hand, focuses on eliminating constraints that impede the flow of work through the shop (throughput). The problem here is that constraints or bottlenecks are moving targets in a job shop environment. Bottlenecks are created and disappear hourly with changes in customer priorities and schedules. An operator fails to show up for work�a bottleneck is created. A customer changes a specification�an existing bottleneck may disappear, and a new one may or may not be created. The progress of an order through a shop often has any number of starts and stops that have nothing to do with constraints. The drum-buffer-rope technique, central to the theory of constraints, is not particularly useful in the dynamic world of the job shop vs. a more stable volume production environment where a constraint is more likely to stay put.
The Theory of Delays: Some have argued that a combination of these two approaches would somehow provide the conceptual framework and methodologies that would work in a job shop environment. This does not make any sense�why try to cobble together two ill-fitting methods in the hopes that the negatives of each will cancel each other out? A better solution is a job shop specific theory and methodology I call the Theory of Delays (TOD). Its central premise is that cutting lead time�or more accurately customer wait time�is the key to performance improvement. The objective is to eliminate delays in the overall business process from "quotes to cash" that prevent a company from serving customers faster. Shorter lead times will increase sales, reduce costs, accelerate cash flow, and increase effective capacity all at the same time. Applying the theory of delays is the single most powerful strategy you can follow to improve productivity, increase profits, and position a job shop or custom manufacturing company for future growth.
Perspective is Important: Few people understand that job shops are different. A job shop is a service business first, and a manufacturing company second. When a job shop makes something to order for a customer, that customer is buying a service. It just happens to come in the form of a manufactured item.
Recognizing this difference is very important because if you approach the challenge of improving the performance and profitability of a job shop with the idea of it being a manufacturing company, you will naturally look for ways to improve how it produces products. On the other hand, if you approach it recognizing it as a service company, you will look for ways to improve how it satisfies market and customer demand. This is a different level perspective, and a different paradigm.
Another way to illustrate this distinction is this: If you adopt a manufacturing perspective (lean and TOC), you will see the shop in the context of the organization. If you adopt a service perspective, you will see the organization in the context of its environment. The perspective you adopt will greatly influence what you see, and what you see determines how you will act if your task is to improve organizational performance and profitability.
Delays vs. Constraints: Before jumping to the conclusion that "delay" is just another word for "constraint," recognize there are many delays that occur in the process of converting quotes to cash that are not created by bottlenecks or constraints. Delays mostly occur between process steps when information or work is not moved along. For example, you can have a delay in submitting a quote to a customer because the owner wasn't available to OK the price, not because a bottleneck exists in the production of estimates. Likewise, you can have a delay on the floor that results from the failure to move work to the next workstation, or when a last minute schedule change means you have to reset the tooling on a machine.
Measuring Results: In addition to broadening the system scope and focusing attention on delays, the theory of delays uses two operational measures that are meaningful. One is similar to that used by TOC�throughput efficiency which is measured in sales dollars per payroll hour. The problem with only using this metric is that customer service can be sacrificed to throughput efficiency. Therefore, it is necessary to measure lead time (and on-time ship performance) as well.
An accurate and informative method for measuring lead time is velocity. Velocity is the speed at which an order moves through a business from order entry to ship, and is measured in days. Velocity is calculated by determining the number of days between the order entry date and the ship date. The fewer the days, the faster the velocity; the faster the velocity, the more successfully a job shop can serve its customers.
Summary: Both lean manufacturing and the theory of constraints have problems of fit in job shops and order-driven businesses. Rather than trying to integrate two ill-fitting methods in the hope that the negatives of each will cancel each other out, a better approach is to use the theory of delays (TOD), which is specifically applicable to custom manufacturing environments. TOD focuses on continually eliminating delays in the business process in order to cut lead time and service customers faster. This, not manufacturing efficiencies, is the key to profitable growth in these types of businesses. In today's just in time, lean manufacturing environment, faster service is more valuable than slow service. Companies that can respond to customers' needs more quickly than their competitors will survive and prosper. Those that cannot will fall by the wayside. It's that simple.
The Theory of Delays (TOD)
- Part II
Improving Performance and Profitability in Job Shops
& Custom Manufacturing Environments
Delta Dynamics, Inc.
Introduction: There are a number of types of theories in science, each of which has a different function or purpose. For example, models are simplified representations of the real thing that allow us to conceptualize phenomena that are too complex to understand in their entirety. Heuristic theories provide an organized method for exploration and learning, generally for problem solving. Predictive theories involve making a statement, or forming of an opinion about what will happen in the future, often based on taking some action in the present.
Science develops theories through inductive logic (from the specific to the general and built on a sound data base), and then tests the theory by generating predictions through deductive logic. The test of the validity of a theory is accomplished by empirically verifying those predictions.
The Theory of Delays (TOD) is a predictive theory based on a business model specific to job shops and custom manufacturing businesses. The principal hypothesis (from the Greek hypothesis �foundation, base�) is that continuously reducing lead time is the single, most powerful strategy a business owner or manager can pursue to bring about profitable growth in these types of businesses.
The Logic is Straightforward:
� Companies that can bid and ship an order more quickly will realize a competitive speed advantage and so increase sales. The company that can deliver in 2 weeks has a significant advantage over one that requires a 12 week lead time.
� Faster service can command a premium price and produces winning bids. Our research shows, for example, that getting your quote in front of a buyer before your competitors gives you a huge advantage in getting that order.
� Because custom manufacturers are �order driven,� additional sales (order backlog) creates momentum and greater efficiency. When the backlog is down, work has a tendency to get stretched out as employees want to make the existing work last, and management wants to maintain the skill base. There is less pressure to produce when the backlog is low than when it is high.
� It is a �law� of production that the longer an order remains on the shop floor, the more it costs to get out the door. Orders accumulate costs as they wend their way through a shop. Thus, the less time an order stays on the floor, the less opportunity for costs to add up.
� Although some people believe that quality and productivity are opposites that cannot co-exist, this is not true. A company does not have to sacrifice quality to meet output goals. In fact, the opposite is more often the case. A shop that is operating at a productive pace will generally be able to meet quality goals more consistently than one in which the pace is disjointed, lackadaisical, or chaotic.
� The greater the volume of orders through a company, the lower the fixed overhead that must be carried by each order. This creates an opportunity for overall profit improvement and/or improved price competitiveness.
� Cash flow is improved. Less working capital is required when the time from order entry to shipping is compressed (e.g., when the time from �money out� to �money in� is shortened, less working capital is required.)
A Note on Terminology: Although the term �job shop� is often construed to mean �machine shop,� job shop is used more broadly here to refer to businesses that:
� Produce on an order-by-order basis to meet customers� specifications.
� Secure work through a bidding process, and thus tend to be highly competitive.
� Serve other companies and/or distributors as opposed to consumers or end users.
� Are highly specialized. Product differentiation is generally limited to variations within a basic product category as opposed to product variety.
� Are extremely diverse in terms of output, technology, operations, and size. Output can range all the way from single parts to complex sub-assemblies. Materials can include metals, plastics, paper, rubber, cloth, ceramics� virtually any material with commercial applications. Production technologies are equally diverse.
� Are not all manufacturers. Printing, engineering services, architectural design, advertising agencies, construction companies, and others, all operate on a similar order-driven business model.
Evidence in Support of TOD: There are innumerable case studies of companies that have achieved profitable growth by applying TOD. Hyde Tools, which is my primary �laboratory,� has seen their business double in the last 3 years and their profits grow fourfold since they reduced their lead time from sixteen to two weeks on average. The Center for Quick Response Manufacturing, which operates on the same theory, has reported outstanding results in their client base as well. There is no question about the predictive validity of the theory.
Application of TOD: A number of changes in perspective and thinking are required in order to apply TOD effectively in practice.
1. Management must recognize the difference between managing the processes that produce results vs. managing activities, which is more typical (e.g., learn horizontal management).
2. Management must recognize the difference between task time and chronological time, and refocus its perspective. For example, whereas businesses have traditionally concentrated on reducing task time because it is paid by the hour, and productivity (more output per hour) has a direct bearing on profitability, the objective of TOD is to reduce chronological time in the business process from quotes to cash. Eliminating or reducing delays in this process accomplishes cutting lead time.
3. A delay can be caused by a physical constraint in the production system (TOC), but not all delays are the result of constraints. The large majority of delays result between process steps, not within a step.
4. Management must recognize that it is in a service business first, and a manufacturing business second. Applying performance improvement programs and techniques from the mass production world will not bring about significant improvement in a job shop environment.
5. Management must recognize that faster service is more valuable than slower service in today�s just-in-time, lean manufacturing world. Speed to market has value.
6. It is often necessary to reconceptualize the business in order to achieve better alignment with markets and customers, especially when there is more than one value stream or conversion process involved.
7. This requires management to learn to see their business in the context of the larger environment, as opposed to the more commonly held, restricted view of the shop in the context of the business.
Methods: There are three primary methods. One involves perspective, insofar as this can be considered a �method.� However, it is extremely important to be view a particular business in a way that enables the overall conversion process to be viewed in the proper context. This perspective is necessary for managing the process, and for improving it at the same time. TOD also requires the ability to change perspectives and levels of abstraction as required. (We have a conceptual tool we use�Organization Improvement Strategies by Level of Impact�that serves this purpose.)
A second dimension of the TOD methodology involves plain old process improvement. We have a number of tools and techniques we use to make organizational processes explicit, a necessary first step before redesigning and streamlining can take place. Again, the focus is primarily on chronological time, although task time and elimination of unnecessary activities are not ignored.
TOD is not something that you do�it is something that you keep doing, hence the third dimension involves the design and implementation of what we call a non-bureaucratic continuous improvement infrastructure. This operates on two levels�on the business process as a whole via the weekly management report and associated activities; and on the production level via closing the loop�comparing planned (estimated) to actual results in conjunction with a performance improvement team (PIT). Modifications are made to the organizational design, as well as establishing new routines so that performance data can be converted into information with meaning, and acted upon appropriately.
Measuring Results: In addition to broadening the system scope and focusing attention on delays, TOD uses two operational measures that are meaningful. One is similar to that used by TOC�throughput productivity which is measured in sales dollars per payroll hour. The problem with using this metric by itself is that customer service can be sacrificed for throughput efficiency. Therefore, it is also necessary to measure lead time (and on-time ship performance) to ensure improvement is happening in these central areas as well.
Summary: The Theory of Delays recognizes that job shops are service businesses, and is specific to these types of businesses. It is based on the proposition that cutting lead time, which equates to faster service, is the most effective strategy management can employ to bring about profitable growth in these types of businesses. Why? Because faster service is more valuable than slow service in today�s lean, just-in-time manufacturing world. Identifying and eliminating delays in the total business process from quotes to cash accomplish this objective. There is no question about the validity of the hypothesis.
TOD is not something you do, such as a program: rather, it is something you keep doing, and so requires changes in organizational structure, management systems, concepts in use, and behavioral routines. TOD is not a way to study organizations as an academic theory; it is a way to manage them. And although TOD shares a kinship with lean manufacturing and TOC, it is distinctly applicable to job shops and so stands apart from these more general approaches. (See the white paper, The Theory of Delays: A Tool for Improving Performance and Profitability in Job Shops for more on this, as well as Speed to Market: Lean Manufacturing for Job Shops, AMACOM, New York: 2001.)