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Establishing the goal of the system, the units of measurement and the operating measurements |
| Step One |
If we want to achieve continuous improvement, we have to understand that an organization is a system. We can define a system as a set of interdependent components that work together to achieve the goal of the system.
Production
seen as a system (W.Edwards
Deming, The New Economics for Industry, Government, Education)
When an organization is managed systemically, managers have very precise responsibilities:
There is no system without a goal. Managers must therefore communicate
the goal of their organization both internally, to staff,
and externally, to customers and competitors. Communicating the goal is
not sufficient, however. Managers have to create a common vision.
Managers have to be able to govern the present and the future, not just
put out fires. The goal allows managers to create a long-term management
policy.
On a day-to-day basis, managers need to be able to manage the interdependencies
among the components of the system. That means solving conflicts and removing
barriers that prevent or complicate cooperation between individuals and
functions.
We have to optimize our system and be able
to measure how much the system is achieving its goal. To do this we need
to establish appropriate units of measurement. We also need a set of measurements
to assess the impact every local decision has on the goal.
In a system, results do not come from
the sum of individual efforts, but from coordinated activities. The only
efforts that make sense are those that help achieve the goal. As this is
the case, it makes no sense to reward people for their local, individual
efforts, but only for how much they have contributed to achieving the goal
of the organization. Otherwise we only undermine the common and shared
vision we established before.
What measurements do we need?
We can measure a system very simply in terms of input, output, and what we spend to make the system work. In other words:
Throughput (T): The pace at which the system generates units of
the goal
Inventory – Investment (I): all the money the system invests to
purchase goods
Operating Expenses (OE): all the money the system spends to transform
inventory into Throughput.
The more we generate Throughput, the closer
we are to the goal of our system. Clearly, investment and operating expenses
should tend toward minimum as money is a scarce resource. Actions which
are positive for the system increase Throughput, reduce Inventory and Investment,
and reduce Operating Expenses.
A manager needs to know the connection
between his actions and the bottom line results of the company. If we can
assess the impact actions have on our three measurements T, I,
OE, then we will know if our decision brings us closer to our goal
or not. TOC has a simple way of analyzing this. In for-profit organizations
there are two relevant relationships between the three measurements:
T minus I minus OE. The difference between T and
OE can be considered a close and accurate approximation of Net Profit.
Any system can be considered healthy if
Throughput exceeds Operating Expenses, irrespective of the type of financial
reporting the system is subject to. Here are the two assessment mechanisms
we suggest for guiding an organization in the right direction:
1) Net Profit (TOC definition) = T (Throughput) - OE (Operating Expenses)
Net Profit
Throughput – Operating Expenses
2) ROI (TOC definition) = -----------
= -----------------------------------------------------
Investment
Investment
Summary
In Step
One we have defined the goal of the system
and the operational measurements for guiding the system in the right direction.
