Scott Wlaschin
March 15, 2014
330

# The Theory of Chains

The Theory of Chains presents some basic concepts in efficiency, effectiveness and process improvement, with a dash of humor.

For more, read "The Goal" by Eliyahu M. Goldratt, and search for "the theory of constraints"

March 15, 2014

## Transcript

2. ### The Theory of Chains Some (possibly overly simplistic but hopefully

not too condescending) stories to help us think about what we are here for…

4. ### The fable of the two mules Let’s start with the

famous fable of two mules who were tied together.
5. ### The fable of the two mules They each wanted grass,

but neither could get any because they were pulling in opposite directions.

10. ### The fable of the two mules What were they doing

wrong? What is the solution?

harder!

harder!

harder!

harder!
16. ### The fable of the two mules They need to be

more efficient!
17. ### The fable of the two mules They need to be

more efficient!
18. ### The fable of the two mules They need to be

more efficient!
19. ### For anyone who doesn’t know this story... The moral is

that co-operation is better than struggle. The fable of the two mules
20. ### But that’s not my moral... The fable of the two

mules For anyone who doesn’t know this story... The moral is that co-operation is better than struggle.

34. ### Efficiency vs. Effectiveness “Efficiency is doing things right; effectiveness is

doing the right things.” “There is surely nothing quite so useless as doing with great efficiency what should not be done at all.” “The most serious mistakes are not being made as a result of wrong answers. The true dangerous thing is asking the wrong question.” -- Peter Drucker.

42. ### The chain The links are wasting metal and heavier than

they need to be.
43. ### The chain I replaced my steel with aluminium I reduced

my diameter by 2mm A more efficient chain!
44. ### The chain I replaced my steel with aluminium I reduced

my diameter by 2mm
45. ### The chain I replaced my steel with aluminium I reduced

my diameter by 2mm

48. ### The chain We cut costs by 10% We were 15%

more efficient We saved £100K Fulfilment IT Sales Finance ??? A more efficient business!
49. ### The chain We cut costs by 10% We were 15%

more efficient We saved £100K Fulfilment IT Sales Finance ??? A more efficient business!
50. ### The chain Help the weakest link get stronger. Me too!

I’ll lend you some of my metal
51. ### The chain Me too! I’ll lend you some of my

metal There is no point making other links efficient until the weakest link is strengthened.. Help the weakest link get stronger.

To be strong
54. ### The chain • What is the goal of a chain?

• Is there always a weakest link?
55. ### The chain • What is the goal of a chain?

• Is there always a weakest link? Yes!
56. ### The chain • What is the goal of a chain?

• Is there always a weakest link? • What is the most effective action to take?
57. ### The chain • What is the goal of a chain?

• Is there always a weakest link? • What is the most effective action to take? Make the weakest link stronger

Mr Green.

68. ### The bucket brigade Water input Water output ... And goes

out the other.

70. ### The bucket brigade Water input Water output ... if Mr

Blue is faster than Mr Pink?
71. ### The bucket brigade Water input Water output ... if Mr

Blue is faster than Mr Pink? A big puddle coming soon.

73. ### The bucket brigade Water input Water output ... if Mr

Green is faster than Mr Pink?
74. ### The bucket brigade Water input Water output ... if Mr

Green is faster than Mr Pink? Mr Green does a lot of waiting. He is quite bored now. Even Twitter has lost its charm.
75. ### The bucket brigade Water input Water output • What is

the goal of a bucket brigade?
76. ### The bucket brigade Water input Water output • What is

the goal of a bucket brigade? To move as much water as possible in as little time as possible. Throughput, not efficiency.
77. ### The bucket brigade Water input Water output • What is

the goal of a bucket brigade? • What (or rather who) determines the throughput?
78. ### The bucket brigade Water input Water output • What is

the goal of a bucket brigade? • What (or rather who) determines the throughput? The slowest person
79. ### The bucket brigade Water input Water output • What is

the goal of a bucket brigade? • What (or rather who) determines the throughput? • Is there always a weakest link?
80. ### The bucket brigade Water input Water output • What is

the goal of a bucket brigade? • What (or rather who) determines the throughput? • Is there always a weakest link? Yes! There is always a slowest person
81. ### The bucket brigade Water input Water output • What is

the goal of a bucket brigade? • What (or rather who) determines the throughput? • Is there always a weakest link? • What is the most effective action to take?
82. ### The bucket brigade Water input Water output • What is

the goal of a bucket brigade? • What (or rather who) determines the throughput? • Is there always a weakest link? • What is the most effective action to take? Make the weakest link stronger
83. ### The bucket brigade Water input Water output • What is

the goal of a bucket brigade? • What (or rather who) determines the throughput? • Is there always a weakest link? • What is the most effective action to take? Make the weakest link stronger Make the slowest person faster
84. ### The bucket brigade Water input Water output Question: Which person

never gets a rest? What happens if he does rest?
85. ### The bucket brigade Water input Water output Question: Which person

never gets a rest? What happens if he does rest? Hint
86. ### The bucket brigade Water input Water output Question: Which people

always get a chance to be idle? What happens if you insist that they always keep working?
87. ### The bucket brigade Water input Water output Question: Which people

always get a chance to be idle? What happens if you insist that they always keep working? Hint

90. ### Part V What is the goal of a business?

we sell Inventory/Investment Operating expenses
92. ### The goal of a business Inventory/Investment Operating expenses Our business

Throughput Goal: Try to increase this bit
93. ### The goal of a business Inventory/Investment Operating expenses Our business

Throughput These numbers are related, often in unobvious ways. Changing one affects all the others. It’s a balancing act!
94. ### The goal of a business Inventory/Investment Operating expenses Our business

Throughput Some common metrics to help you relate the numbers and do the balancing act...
95. ### The goal of a business Inventory/Investment Operating expenses Our business

Throughput Net profit (NP) = Throughput (T) - Operating expense (OE) Some common metrics to help you relate the numbers and do the balancing act...
96. ### The goal of a business Inventory/Investment Operating expenses Our business

Throughput Return on investment (ROI) = Net profit (NP) ÷ Investment (I) Some common metrics to help you relate the numbers and do the balancing act...
97. ### The goal of a business Inventory/Investment Operating expenses Our business

Throughput Productivity = Throughput (T) ÷ Operating Expense (OE) Some common metrics to help you relate the numbers and do the balancing act...
98. ### The goal of a business Inventory/Investment Operating expenses Our business

Throughput Investment Turns = Throughput (T) ÷ Investment (I) Some common metrics to help you relate the numbers and do the balancing act...

101. ### If the bucket brigade were a business... Water input Water

output What is the throughput?
102. ### If the bucket brigade were a business... Water input Water

output What is the throughput? How long does it take a bucket to move through the system (“flow time”)? a.k.a "latency"
103. ### If the bucket brigade were a business... Water input Water

output What is the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory?
104. ### If the bucket brigade were a business... Water input Water

output What is the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? What are the operating expenses?
105. ### Real Numbers Mr Pink can do 1 Bucket/hour Mr Blue

can do 2 Buckets/hour Mr Green can do 3 Buckets/hour Let’s look at some real numbers! Each bucket sells for a markup of \$24 Each worker costs \$12/hour
106. ### Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is

the throughput? \$12/hour \$24 \$24 \$24 \$24 \$12/hour \$12/hour
107. ### Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is

the throughput? \$12/hour \$24 \$24 \$24 \$24 \$12/hour \$12/hour 1 bucket/hour (Mr Pink is to blame)
108. ### Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is

the throughput? How long does it take a bucket to move through the system (“flow time”)? \$12/hour \$24 \$24 \$24 \$24 \$12/hour \$12/hour
109. ### Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is

the throughput? How long does it take a bucket to move through the system (“flow time”)? \$12/hour \$24 \$24 \$24 \$24 \$12/hour \$12/hour Mr Blue takes 30 min per bucket, and Mr Green takes 20 min, so it takes a bucket 1h 50m to go through the system.
110. ### Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is

the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? \$12/hour \$24 \$24 \$24 \$24 \$12/hour \$12/hour
111. ### Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is

the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? \$12/hour \$24 \$24 \$24 \$24 \$12/hour \$12/hour Little’s law: inventory = throughput * flow time. So inventory = 1 bucket/hour x 1.83 hours => 1.83 buckets
112. ### Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is

the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? What are the operating expenses? \$12/hour \$24 \$24 \$24 \$24 \$12/hour \$12/hour
113. ### Real Numbers What is the throughput? How long does it

take a bucket to move through the system (“flow time”)? What is the current inventory? What are the operating expenses? 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour \$12/hour \$24 \$24 \$24 \$24 \$12/hour \$12/hour \$12/hour x three people = \$36/hour
114. ### Real Numbers Throughput (buckets/hr) (money/hr) Flow time Inventory (buckets) Opex

(money/hr) Net Profit (money/hr) = T - OE Inventory turns = T/I 1/hr or \$24/hr 1h 50m 1.83 \$36/hr -\$12/hr 0.54 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour \$12/hour \$24 \$24 \$24 \$24 \$12/hour \$12/hour Here are all the numbers.... Oh noes.... We’re losing money!

116. ### Real Numbers We’re losing money – what should we do?

Let’s step back and look at the problem...
117. ### Real Numbers We’re losing money – what should we do?

Let’s step back and look at the problem... Mr Pink is working flat out but look at all the idle people! Mr Blue is only working ½ time. And Mr Green is working only a third of the time. Lazy sod!
118. ### Real Numbers We’re losing money – what should we do?

Let’s step back and look at the problem... Mr Pink is working flat out but look at all the idle people! Mr Blue is only working ½ time. And Mr Green is working only a third of the time. There’s your problem right there!

120. ### Real Numbers What to do? Option 1: Panic! Option 1:

Reduce wages or staff (helps with operating expenses) Especially the lazy ones like Mr Pink...
121. ### Real Numbers What to do? Option 1: Reduce wages or

staff (helps with operating expenses) Option 2: Hire extra people (helps with throughput, maybe?)
122. ### Real Numbers What to do? Option 1: Reduce wages or

staff (helps with operating expenses) Option 2: Hire extra people (helps with throughput, maybe?) Option 3: Change the process (but how?)
123. ### Fixing the problem by reducing staff Let’s start with option

1: “Reduce staff on the non-bottlenecks” 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour \$12/hour \$24 \$24 \$24 \$24 \$12/hour \$12/hour A.k.a. Don’t pay people to be idle.
124. ### Fixing the problem by reducing staff As it happens, around

this time, Mr Blue had a very unfortunate industrial accident – he was cut in half.
125. ### Fixing the problem by reducing staff As it happens, around

this time, Mr Blue had a very unfortunate industrial accident – he was cut in half. Luckily he can still work at 2 buckets/hour, But since there is only half of him, his average throughput is now 1 bucket/hr.
126. ### Fixing the problem by reducing staff As it happens, around

this time, Mr Blue had a very unfortunate industrial accident – he was cut in half. Luckily he can still work at 2 buckets/hour, But since there is only half of him, his average throughput is now 1 bucket/hr. As a result, the cruel capitalists who employ him have decided to slash his salary in half as well -- to only \$6/hr.
127. ### Fixing the problem by reducing staff By coincidence Mr Green

also had a very unfortunate industrial accident – he was cut into one third.
128. ### Fixing the problem by reducing staff By coincidence Mr Green

also had a very unfortunate industrial accident – he was cut into one third.
129. ### Fixing the problem by reducing staff By coincidence Mr Green

also had a very unfortunate industrial accident – he was cut into one third. His productivity is only a third now. Just like Mr Blue, his average is now 1 bucket/hr. The cruel capitalists have decided to slash his salary even more -- to only \$4/hr.
130. ### Fixing the problem by reducing staff Here is the new

setup. Mr Blue and Mr Green have been rehired at lower wages, corresponding to their lower throughput. 1 Bucket/hour 1 Bucket/hour 1 Bucket/hour \$6/hour \$24 \$24 \$24 \$24 \$12/hour \$4/hour
131. ### Fixing the problem by reducing staff What is the throughput?

Still 1 bucket/hour 1 Bucket/hour 1 Bucket/hour 1 Bucket/hour \$6/hour \$24 \$24 \$24 \$24 \$12/hour \$4/hour
132. ### Fixing the problem by reducing staff What is the throughput?

How long does it take a bucket to move through the system (“flow time”)? Mr Blue and Mr Green have lower throughputs, but their latency is still the same. so the flow time is unchanged at 1h 50min. 1 Bucket/hour 1 Bucket/hour 1 Bucket/hour \$6/hour \$24 \$24 \$24 \$24 \$12/hour \$4/hour
133. ### Fixing the problem by reducing staff What is the throughput?

How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? Same as before. 1 Bucket/hour 1 Bucket/hour 1 Bucket/hour \$6/hour \$24 \$24 \$24 \$24 \$12/hour \$4/hour
134. ### Fixing the problem by reducing staff What is the throughput?

How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? What are the operating expenses? \$6 + \$12 + \$4 = \$22/hour 1 Bucket/hour 1 Bucket/hour 1 Bucket/hour \$6/hour \$24 \$24 \$24 \$24 \$12/hour \$4/hour
135. ### Fixing the problem by reducing staff Throughput (buckets/hr) (money/hr) Flow

time Inventory (buckets) Opex (money/hr) Net Profit (money/hr) = T - OE Inventory turns = T/I 1/hr or \$24/hr 1h 50m 1.83 \$22/hr +\$2/hr 0.54 Here are the new numbers... 1 Bucket/hour 1 Bucket/hour 1 Bucket/hour \$6/hour \$24 \$24 \$24 \$24 \$12/hour \$4/hour
136. ### Fixing the problem by adding staff Now try option 2:

“Adding extra staff on the bottleneck” That is -- bring the weakest links up to speed 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour \$12/hour \$24 \$24 \$24 \$24 \$12/hour \$12/hour
137. ### Fixing the problem by adding staff We’ll hire 2 people

to help Mr Pink. This team’s throughput is now 3 buckets/hour! 3 Buckets/hour 2 Buckets/hour 3 Buckets/hour \$12/hour \$24 \$24 \$24 \$24 \$36/hour \$12/hour
138. ### Fixing the problem by adding staff But now Mr Blue

is the bottleneck. 3 Buckets/hour 2 Buckets/hour 3 Buckets/hour \$12/hour \$24 \$24 \$24 \$24 \$36/hour \$12/hour
139. ### Fixing the problem by adding staff But now Mr Blue

is the bottleneck. Luckily he has a half-brother who can help. 3 Buckets/hour 2 Buckets/hour 3 Buckets/hour \$12/hour \$24 \$24 \$24 \$24 \$36/hour \$12/hour
140. ### Fixing the problem by adding staff But now Mr Blue

is the bottleneck. Luckily he has a half-brother who can help. Literally! 3 Buckets/hour 2 Buckets/hour 3 Buckets/hour \$12/hour \$24 \$24 \$24 \$24 \$36/hour \$12/hour
141. ### Fixing the problem by adding staff Mr Blue’s throughput is

now 3 buckets/hour as well. 3 Buckets/hour 3 Buckets/hour 3 Buckets/hour \$18/hour \$24 \$24 \$24 \$24 \$36/hour \$12/hour
142. ### Fixing the problem by adding staff Throughput (buckets/hr) (money/hr) Flow

time Inventory (buckets) Opex (money/hr) Net Profit (money/hr) = T - OE Inventory turns = T/I 3/hr or \$72/hr 1h 50m 5.5 \$66/hr +\$6/hr 0.54 Here are the numbers for this approach. 3 Buckets/hour 3 Buckets/hour 3 Buckets/hour \$18/hour \$24 \$24 \$24 \$24 \$36/hour \$12/hour
143. ### Fixing the problem by adding staff Moral: Adding staff can

be more profitable than reducing staff – if you know where to add them. Adding also gives economies of scale, because there are other fixed costs like buildings, etc., which don’t need to be scaled at the same rate.
144. ### Fixing the problem by adding staff Moral: Adding staff can

be more profitable than reducing staff – if you know where to add them. Adding also gives economies of scale, because there are other fixed costs like buildings, etc., which don’t need to be scaled at the same rate. Question: Under what circumstances can you NOT add staff?
145. ### Fixing the problem by adding staff Moral: Adding staff can

be more profitable than reducing staff – if you know where to add them. Adding also gives economies of scale, because there are other fixed costs like buildings, etc., which don’t need to be scaled at the same rate. But can we do even better?
146. ### Fixing the problem by changing the process Option 3 is

“changing the process”. What does that look like? 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour \$12/hour \$24 \$24 \$24 \$24 \$12/hour \$12/hour
147. ### 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour \$12/hour \$24 \$24 \$24

\$24 \$12/hour \$12/hour Fixing the problem by changing the process What happens if we get rid of the second step in the process and merge it into the first?
148. ### Fixing the problem by changing the process What happens if

we get rid of the second step in the process and merge it into the first?
149. ### Fixing the problem by changing the process Mr Blue and

Mr Pink now work together on step 1. Their combined throughput is now 3 buckets/hour.
150. ### Fixing the problem by changing the process Mr Blue and

Mr Pink now work together on step 1. Their combined throughput is now 3 buckets/hour. \$12/hour \$24 \$24 \$24 \$12/hour 3 Buckets/hour 3 Buckets/hour \$12/hour
151. ### Fixing the problem by changing the process Mr Blue and

Mr Pink now work together on step 1. Their combined throughput is now 3 buckets/hour. \$12/hour \$24 \$24 \$24 \$12/hour 3 Buckets/hour 3 Buckets/hour \$12/hour
152. ### Fixing the problem by changing the process What is the

throughput? 3 buckets/hour \$12/hour \$24 \$24 \$24 \$12/hour 3 Buckets/hour 3 Buckets/hour \$12/hour
153. ### Fixing the problem by changing the process What is the

throughput? How long does it take a bucket to move through the system (“flow time”)? Mr Blue and Mr Pink have a combined latency of 40 mins so the total flow time is now 1 hour. \$12/hour \$24 \$24 \$24 \$12/hour 3 Buckets/hour 3 Buckets/hour \$12/hour
154. ### Fixing the problem by changing the process What is the

throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? Little’s law: inventory = throughput * flow time. So inventory = 3 bucket/hour x 1 hours => 3 buckets \$12/hour \$24 \$24 \$24 \$12/hour 3 Buckets/hour 3 Buckets/hour \$12/hour
155. ### Fixing the problem by changing the process What is the

throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? What are the operating expenses? \$12 x three = \$36/hour \$12/hour \$24 \$24 \$24 \$12/hour 3 Buckets/hour 3 Buckets/hour \$12/hour
156. ### Fixing the problem by changing the process Throughput (buckets/hr) (money/hr)

Flow time Inventory (buckets) Opex (money/hr) Net Profit (money/hr) = T - OE Inventory turns = T/I 3/hr or \$72/hr 1h 3 \$36/hr +\$36/hr 1 \$12/hour \$24 \$24 \$24 \$12/hour 3 Buckets/hour 3 Buckets/hour \$12/hour
157. ### Summary of different approaches Option Throughput (buckets/hr) (money/hr) Flow time

Inventory (buckets) Opex (money/hr) Net Profit (money/hr) = T - OE Inventory turns = T/I Original 1/hr or £24/hr 1h 50m 1.83 £36/hr -£12/hr 0.54 Reduce Staff 1/hr or £24/hr 1h 50m 1.83 £22/hr +£2/hr 0.54 Increase Staff 3/hr or £72/hr 1h 50m 5.5 £66/hr +£6/hr 0.54 Change Process 3/hr or £72/hr 1h 3 £36/hr +£36/hr 1.0
158. ### Summary of different approaches Option Throughput (buckets/hr) (money/hr) Flow time

Inventory (buckets) Opex (money/hr) Net Profit (money/hr) = T - OE Inventory turns = T/I Original 1/hr or £24/hr 1h 50m 1.83 £36/hr -£12/hr 0.54 Reduce Staff 1/hr or £24/hr 1h 50m 1.83 £22/hr +£2/hr 0.54 Increase Staff 3/hr or £72/hr 1h 50m 5.5 £66/hr +£6/hr 0.54 Change Process 3/hr or £72/hr 1h 3 £36/hr +£36/hr 1.0
159. ### Summary of different approaches Moral: Changing the process can have

much greater impact than just tweaking efficiencies.
160. ### Summary of different approaches Moral: Changing the process can have

much greater impact than just tweaking efficiencies.
161. ### Summary of different approaches Moral: Changing the process can have

much greater impact than just tweaking efficiencies.

163. ### What is the goal of IT? Sales IT Supply Chain

What is the most effective action for IT to take?

166. ### What is the goal of IT? Sales IT Supply Chain

IT should not be a cost centre

171. ### What is the goal of your team? Sales Your team

Supply Chain What is the most effective action for your team to take?

174. ### What is the goal of your team? For example, how

might an HR team add value?
175. ### What is the goal of your team? For example, how

might an HR team add value? How can HR help throughput? • Reduce purchase costs by hiring or training expert purchasers. • Better throughput by encouraging employee feedback and learning. • Promoting and managing continuous improvement. How can HR help capex? - Reduce need for facilities by helping people work remotely. How can HR help opex? • Reduce turnover with better working conditions, training, employee morale.
176. ### What is the goal of your team? For example, how

might an HR team add value? How can HR help throughput? • Reduce purchase costs by hiring or training expert purchasers. • Better throughput by encouraging employee feedback and learning. • Promoting and managing continuous improvement. How can HR help capex? - Reduce need for facilities by helping people work remotely. How can HR help opex? • Reduce turnover with better working conditions, training, employee morale.

178. ### What next? “The Goal” by Eliyahu M. Goldratt & Jeff

Cox And find out about • Value Streams • The “Theory Of Chains” • Lean Enterprise/Lean Accounting • The Toyota Way
179. ### What next? “The Goal” by Eliyahu M. Goldratt & Jeff

Cox And find out about • Value Streams • The “Theory Of Chains” • Lean Enterprise/Lean Accounting • The Toyota Way