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This paper seeks to examine and discuss the application of a Theory of Operations Management in an organisation. I have selected a former employer, a commercial printing company, as the company to conduct a critical review of its operations.
I have indentified numerous problems throughout the company's operations, but for this exercise, have decided to focus primarily on the manufacturing process. In doing so, I was able to clearly identify a specific area of concern within the operations process and apply an applicable Theory of Operations Management.
In my discussion I not only applied the relevant theory, but also justified the selection of such based upon the potential improvements in the manufacturing process. The recommended changes if applied will ultimately bring about a more efficient entity and an improvement in the quality of the products and customer focus. Profitability would be realized and the measurements of which can be done with the use of the theory as it enables for the calculations of the associated implementation risk.
The company that has been selected for this assignment is Press-Box Printers Limited; a family owned and operated commercial printery. The company has been in operation for over 35 years and is one of the leading manufactures of printed materials in the local industry.
Press-Box Printers Limited has approximately 85 staff who are employed throughtout the four departments namely Administration, Sales and Marketing, Production and Ancillary.
The core products manufactured includes books, magazines, and stationery for a wide cross section of other local Jamaican businesses and individuals. The manufacturing process incorporates the inputs of labour, electricity, paper, inks, chemicals and other applicable raw materials and transforms them to produce full service printing solutions (See Appendix 1.).
The company uses Offset Lithography (See Appendix 2.), Letterpress and Digital printing techniques, each of which produces a unique result depending on the requirements of its diverse customer base.
The large substantive jobs are those that require the use of Offset Lithographic printing and over the past fifteen years, the company has lots its bid to retain or to acquire such contracts. It was discovered that the tendered bids for lucrative contracts were unsuccessful as they are being instead given to entities that are either new or have invested in new technology and equipment.
Press-Box Printers' price points are deemed to be uncompetitive. A major contributing factor is that the printing presses are antiquated and can reproduce only a maximum of two colours at a time. Major jobs require a minimum of five colours. Therefore, for Press-Box to manufacture such a job, it would have to pass through the printing press at least three times. This is deemed to be very inefficient. The input costs of labour, electricity and material to produce a single five colour job has been proven to be extremely high. Further, other internal as well as external costs have been identified.
The internal costs includes; (i) scrap cost of poor quality as parts must be discarded, (ii) the re-work cost of fixing defective products, and (iii) downtime cost due to the repairing of equipment or replacing defective product(s). External costs identified were; (i) the cost of responding to customer complaints, (ii) the cost of handling and replacing poor-quality product(s), and (iii) lost sales incurred because of customer goodwill affecting future business.
In light of the above issues of concerns, I have selected to use the Theory of Constraints (TOC) to critique the current manufacturing practice of Press-Box Printers Limited. By applying the theory, I will be able to provide detailed analyses and to recommend the way forward.
Discussion of relevant theory
The evolution of the methodology of TOC can be traced to the development by Dr. Eliyahu Moshe Goldratt of a commercially successful software-based manufacturing scheduling program known as optimized production Timetables (OPT), but this was however changed in 1982 to Optimized Production Technology (OPT) (Jacobs 1983). With the publication of The Goal, Goldratt used his influential teaching style to educate the world about managing bottlenecks (constraints) and his new ideas about performance (Goldratt and Cox 1984).
Several early implementations brought about the revelation of the importance of; (i) identifying resources as bottleneck and non-bottleneck, (ii) having idle time or protective capacity on non-bottleneck resources, (iii) making global performance measures an integral component as opposed to efficiency based measures that are considered local and (iv) formulating a focused improvement process.
Theory of Constraints (TOC) has evolved over the past two decades from a simple production scheduling technique to a systems approach which is primarily concerned with managing change. Klein & DeBruine (1995) state that originally set out to devise a systematic approach to identifying what was preventing a company from achieving its goal of maximizing profit for its stakeholders.
The approach was first used in a manufacturing environment and reported at an American Production and Inventory Control Society (APICS) conference in 1980. Hrisak (1995) informs that TOC is now being used worldwide by companies of varied industries and sizes. He further states that managers who routinely use TOC were convinced they got a better understanding of the operations of their respective businesses and are able to achieve a sense of control and take action. He says that TOC allows managers to be empowered by providing a reliable and consistent framework for diagnosing problems. The TOC methodology encompasses a wide range of concepts, principles, solutions, tools and approaches.
The Theory of Constraints has two expansive positions; (i) the business system and (ii) a continuing enhancement of the process itself. From the business system perspective, TOC emphasises three dimensions that of mindset, measurements, and methodology (3Ms).
(Boyd and Gupta 2004) explains that; Mindset is often referred to as determining the system's global goal. A most important assumption of TOC is that every for-profit business has the objective of 'making more money now as well as in the future' (Goldratt and Cox 1984) without violating certain essential conditions. Two such conditions conferred in Goldratt (1994) are that: (i) present current as well as future satisfying work environment for employees, and (ii) supply value and satisfaction to the market. Highlighting the difference between the goal, the objective of which is to continuously enhance profits, and the necessary conditions which is to bring to a specific threshold value, TOC distinguishes itself from other management models as it presents a system that when implemented, makes for a more robust framework.
The measurement of a system's performance is to assume that a firm's goal is to become more profitable and in so doing, TOC proposes a set of global operational measures. These measures are throughput, inventory and operating expenses. The operational measures are said to be: (i) financial in nature, as they can be translated to measures such as net profit, and return on investment (3708 M. Gupta and D. Snyder) (ii) they are easily applied at any level of an organisation, and (iii) guarantee that local decisions are in keeping with the profit goal of the firm (Goldratt1990a, Goldratt and Fox 1993, Noreen et al. 1996). This aspect of TOC, termed 'throughput accounting', has been discussed extensively in accounting literature (Corbett 1999, Dugdale and Jones 1996, Noreen et al. 1996) and compared, contrasted, and incorporated with activity-based cost accounting.
The methodology, the last of the 3m's, speaks to the continuous improvement of the system. Ever since the launch of optimized production technology (OPT) as a production planning and control methodology, TOC has developed into a continuous improvement methodology. TOC states that every business system has at least one constraint and for the most part, very few. A constraint is defined as that which limits the system from achieving greater level of performance relative to its stated goal. Goldratt proposed a five-step focusing process for managing constraints and continuously improving the system. Fundamental to this focused process are the concepts of V-A-T process structure analysis, drum-buffer-rope, and buffer management which are used to develop the constraint's schedule, regulate and manage buffer inventories within an organization.
TOC is perhaps not usually considered by systems modelers to be part of the systems literature, but it is a systems methodology in that it strives to ensure that any changes embarked upon as part of a continuous process of enhancement will be of benefit to the system as a whole, rather than just an isolated segment of the system. Even at the fundamental level of operations, TOC provides managers with a set of tools that will steer them to uncover answers to the basic issues relating to change. The issues are; (i) what to change, (ii) what to change to, and (iii) how to effect the change.
Goldratt (1990b), Klein & DeBruine (1995) & Dettmer (1997) states that TOC views an organisation as a chain composed of many links, or networks of chains. Often times viewed as a constrained system, a chain's links all contribute to the over-arching goal and each link is very much dependent on the other links. However, the chain itself is only as strong as its weakest link. With this in mind, Goldratt's TOC states that the overall performance of an organisation is limited by its weakest link. He further argues that if an organisation wants to improve its performance, the first step must be to identify the system's weakest link, or constraint.
Steps in the process of on-going improvement
Goldratt (1990b, Goldratt and Cox 1992) introduced a technique called the five focusing steps (See Appendix 3.) for tackling system problems on a continuous improvement basis. The steps are; (i) to identify the constraint in the process that is limiting the efficiency of the system. This could be a physical as well as a policy constraint (ii) make use of the constraint to achieve the best possible output from the constraint by eradicating inadequacies that inhibit the flow, and reduce non-productive time, so that the constraint is used in the most effective way possible (iii) subordinate other activities to the constraint by linking the productivity of other operations to be fitting the constraint. This should result in an unproblematic workflow and avoid build up of work-in-process inventory. A critical point however, is to prevent the constraint from having to wait for work (iv) elevate the constraint and in situations where the system constraint still does not have satisfactory levels of output, an investment in new equipment or an increase in staff is recommended to increase output (v) if change has occurred, go back to step one and assess whether another procedure or policy has turn out to be the system constraint. Goldratt (1990b) states that this step is consistent with a process of ongoing improvement.
Preceding the Five Focusing Steps, Goldratt (1986, 1990b) prescribes two extra steps, which Coman and Ronen (1994) include in the focusing steps, therefore redefining them as a seven-step method. The two extra steps included at the beginning are; (i) defining the system's Goal and (ii) determine proper, global and simple measures of performance.
Scheinkopf (1999) describes these as prerequisite steps for any improvement in the process. As is indicated, a chief principle of TOC is that all systems have constraints that prevent it from achieving its goal. The emphasis therefore, is to focus efforts on having those constraints produce more, either by acting on the constraints directly, or on the other operations that interact with them.
TOC's Five Focusing Steps provide a straightforward but successful method to continuous improvement in instances where the constraint can be easily identified. Conversely, if the constraint is caused by instances of policies or behaviours, or further completed situations, the constraint may be more difficult to identify, thus making the formulation of a solution difficult. If this were the case, the TOC Thinking Processes are more useful in deciding what to change, what to change to, and how to bring about such a change.
Similar to the Five Focusing Steps in that it focuses on the constraint, the Thinking Processes focus on the factors that are currently preventing the system from achieving its goals. The Thinking Processes achieves this by first identifying the symptoms within the system, which present confirmation that the system is not performing as well as is desired. From this position, the various TOC Thinking Process tools are then applied to infer the causes of those symptoms, what needs to be done to correct those causes, and how such remedial actions could be carried out. By doing this, the TOC approach is to map the system from the position of the current difficulty, rather than try to model the whole system. A very faint but major variance, this allows for complex problems to be addressed without having to completely model the entire system.
The TOC Thinking Process begins with a Current Reality Tree, which detects what in the system, needs to be changed. The Evaporating Cloud is then used to gain a deeper understanding of the conflict within the system environment. Additionally, the Evaporating Cloud provides ideas of what can be changed to break the conflict and resolve the focal issue of concern. The Future Reality Tree uses these ideas for change and ensures that the newly established reality would in fact resolve the unsatisfactory systems conditions and not bring about new ones. The Prerequisite Tree identifies obstacles to the implementation and approaches to prevail over them. The Transition Tree can be seen as the creation of a detailed implementation plan.
Goldratt's tools are designed to overcome resistance to change as a logical path is created that can be easily followed. The five tools can be used separately or as a whole but this all depends however on the complexity of the situation. Many applications of the Thinking Processes have been published since its debut in Goldratt (1994); and there have been many illustrations presented in the APICS Constraints Management Symposiums, and in books such as Noreen et al (1995), and Kendall (1998).
Recommendation and Justification
Having identified the constraint in Press-Box Printers' operational process, the following recommendation is being made; the organization should acquire a newer more efficient five colour printing press.The machine being proposed and the specifications are as follows:
Model: Heidelberg SM 74-5-H
Impressions: 74 million (approx.)
Sheet size: Width 52 cm
Height 74 cm
Colours: multi-colour (5)
Auto plate loading
The above machine is deemed idle for the nature and scope of the printing production process at Press-Box Printers (See Appendix 4). The acquisition would replace at least three Heidelberg, two colour printing presses currently in use which have a combined average age of 28 years.
In applying TOC to the organisation's operational and systems challenges will require the risk of investment capital. The Rate of Return (ROI) on such an investment can however be adequately measured by applying TOC. In measuring the ROI, the specifications of the recommended printing press should include its production capacity, cost to operate inclusive of maintenance (OE), net profit (NP) obtained from the machine over a specific time period, and investment (I) that was made to obtain the machine and generate the net profit. If these quantities are known, return on investment (ROI) can be calculated as follows:
ROI = NP
The net profit (NP) can be calculated from the difference between all the money generated, called per definition the throughput (T) of the machine, and the operating expenses (OE) of the machine:
NP = T - OE
ROI = T - OE
The definitions of the TOC measurement parameters are as follows: Throughput: The rate at which the organisation generates 'goal units'; Operating Expense: All the money the organisation spends in generating 'goal units'; and Investment: The money tied up in the organisation".
It should be noted that throughput is a cash measure and therefore sales on credit or debtors on the books should be included in the investment. However, Throughput is only recognised when cash has been received for the sale generated. This is a very different concept from normal accounting practices which identifies a sale, be it cash or credit.
Another measurement of corporate performance is that of cash flow. Cash flow (CF) is the amount of money of net profit left after changes in investment have been accounted for: CF = T - OE -I. Negative investment, or a decrease in inventories/investment, therefore increases the cash flow of the business.
Managed a company as per TOC principles, the Economic Value Added (EVA), which is a financial performance method to calculate the true economic profit of a company, will improve. This is so as the fact that net profit (NP), return on investment (ROI) and cash flow (CF) will increase due to the focus on the constraints of the company. Simultaneously, the asset risk, operating risk, size and diversity risk and the strategic risk of the company will be reduced. For that reason, the risk factors that impact the cost of capital of the company will be reduced, leading to a reduction in the cost of invested capital. Collectively; return on investment and cost of capital, which form part of the EVA equation are hence influenced positively by the application of TOC management principles.
By acquiring the above recommended Heidelberg printing press, the efficiency of the manufacturing process will be greatly improved. This improvement will be realized through the reduction of; (i) inventory, (ii) production time, and (iii) direct inputs such as labour and electricity. Improvements will be realized in: (i) cycle time, (ii) on time delivery / due date performance, and (iii) financial position (throughput).
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The Transformation Process
Source: Figure 13. Transformation process model (Armistead, Harrison et al. 1996, 118)
The Offset Lithography Printing Process
Five Focusing Steps
Source: Industrial research Institute http://www.iriweb.org/Public_Site/RTM/free/Whats_Constraining_Your_Innovation.aspx