4. Bryan E Logan - NEW MANAGEMENT THINKING - Increasing Productivity

It has been my experience that very few managers, senior executives or even company directors fully understand the concept of productivity. In particular they fail to comprehend how productivity is affected by the way in which their organisation is managed. Most managers seem to associate productivity solely with working harder or faster, or both.

Yet productivity has to be better understood, as it is the crucial element in the performance of any economy. Virtually every report on the economy that I have read over the past ten years highlights productivity as the top issue needing to be addressed.

In a speech to the CBI in 1998 the then Chancellor of the Exchequer, Gordon Brown, confirmed that the UK had a ‘productivity gap’ of 20% - 30% with France and Germany and of 40% with the USA. The new Labour government, a year earlier had stated that:-

“Closing the ‘productivity gap’ was a key priority.”

A recent ‘policy analysis’ by The Centre for Economic Performance shows that whilst the productivity gaps have narrowed, they are still significant. In their conclusion they state:-

“Recent evidence suggests that the factors behind the UK ‘productivity gap’ include deficits in innovation, skills and management practices. Tackling these problems together is likely to remain a challenge.”

The new Northern Ireland Executive in a recent document; ‘Programme for Government, Growing a Dynamic, Innovative Economy’ state:-

“A successful economy is characterised by high productivity, a highly skilled and flexible workforce and employment growth. We have much to do in terms of building our skills base, increasing prosperity and improving our productivity.”

A common feature in all of these reports is that they are clear on what needs to be addressed, but are then woefully short on any practical advice on how these shortcomings might be tackled or solved.

Regrettably far too many executives remain firmly convinced that the only way to increase productivity is for their employees to work harder or faster. A chief executive in Northern Ireland was quoted in his company magazine as saying; “Any employee not producing value-added work all the time is a waste”. This attitude stems from the continued misunderstanding of productivity and a lack of any real appreciation of how it can be managed. In turn this has resulted in a complete failure to see any need for change, which unfortunately persists to the present day.

If the reasons for this misunderstanding are not exposed and rectified, then nothing else will matter in the search for a answer to the future economic well being of the UK.

The reputation of any country and its desirability as a location for investment are closely correlated with its prevailing level of productivity. A few years ago I was presenting a paper to the IPICS conference in Dublin on the morning when it was announced that the Republic of Ireland had just gone ahead of the UK in the world productivity league table. I believe the Republic had reached eleventh whilst the UK had slipped to thirteenth. The sense of excitement in the room was palpable. Productivity is probably the single most important factor in the industrial standing of any country.

Low productivity and corresponding poor performance can be traced almost exclusively to the way organisations are managed. The problem begins with the issues discussed and answered in the paper on ‘measurements’. Organisations need to be managed as a whole system and not by attempting to optimise the efficiency of each individual department, often referred to as maximising the ‘local optima’. Those organisations that are managed according to their ‘local optima’ will exhibit a range of adverse symptoms, or ‘undesirable effects’, which have the nasty habit of continually recurring. For example, managers involved in manufacturing will be all too familiar with constantly fire-fighting the following issues:-

• Trying to keep everybody busy,

• Priorities that are constantly changing,

• A lot of expediting,

• High levels of work-in-progress,

• Working a lot of overtime,

• Queues in front of most resources,

• Lead times that are highly variable, unpredictable and too long,

• Some products get through the factory more easily than others,

• Delays on things that customers do want

• High stocks of finished goods that customers don’t want.

Managing according to the ‘cost world’, or trying to maximise the ‘local optima’ in a futile search for efficiency, causes all of these. The prospects for improving productivity in such circumstances are virtually non-existent. Productivity depends on how the system and its processes are managed, not on the efforts of individual employees or machines. It is essential that every manager fully understand this and the factors that really affect productivity.

Improving productivity simply means achieving more throughput from the same resources. It can also mean achieving the same throughput from fewer resources, but more of that in the next paper. The factors that directly govern and influence productivity are:-

1. The combined efforts of the organisation as a whole. If any department or function fails to perform its part properly, in other words drops the ball, then the throughput and thus productivity of the entire organisation will be compromised,

2. The resources that currently exist within the organisation and how they are configured. This dictates and constrains the maximum output that the system as a whole can achieve,

3. The form of operational process that is used to manage the resources within the system,

4. The scheduling of this process, and how the resources are managed within the upper limit or constraint, mentioned in 2 above,

5. Variability within the system and how it is handled.

Many different techniques and management processes have been attempted in trying to improve productivity. In addition to the traditional ‘cost world’ approach, with everybody striving for local efficiencies, other more recent techniques have included JIT, Kanban, Lean, Agile and Cell Manufacturing. The best and most successful approach that I have encountered is ‘Drum-Buffer-Rope’, DBR. Despite its unusual name it is yet another ‘silver bullet’ that will increase productivity by at least 20%, and often much more.

‘Drum-Buffer-Rope’ is an operational process for managing the throughput of any system, commercial or otherwise, and was developed by Dr E M Goldratt, who describes the concept in his book, ‘The Goal’. DBR produces excellent results and outperforms all other production methods in terms of productivity and every other competitive metric.

‘Drum Buffer Rope’ is based on the concept of identifying and then managing the constraint or scarce resource within a system.

“Every real system, such as a business, must have at least one constraint. If this was not the case, then the system could produce an unlimited amount of whatever it was striving for, profit in the case of a business. Because a constraint is a factor that limits the business from making infinite profit, then a business manager who wants more profit must manage the constraint. There really is no choice in the matter, either you manage the constraint or it will manage you. Constraints determine the throughput of a system whether they are acknowledged or not; therefore managing the constraint determines the rate of return a company will experience on any investment.”

I first came across this fundamental statement in; ‘The Theory of Constraints and its implications for Management Accounting’, published by The North River Press in 1995. This was an independent research study into the ‘Theory of Constraints’, commissioned and funded by the Institute of Management Accounting in America.

Yet, as I mentioned in an earlier paper on ‘measurements’: “What organisation, business or other managed system, even knows its constraint or scarce resource, let alone manages its performance around such knowledge.” Managing the constraint in conjunction with the ‘throughput world’ measurement system can have a truly dramatic effect on improving the performance of any organisation.

In ‘Drum Buffer Rope’, the drum is the constraint, or the resource that determines the maximum throughput available from the system, as it currently exists. All other resources within the system must maintain some spare, or protective, capacity to enable the constraint to operate at 100% of its capacity. This spare capacity allows the other resources to subordinate their activities to the operation of the constraint, which is dictating the throughput and hence the performance of the whole system. (The concept of DBR is shown as a diagram in an addendum to this paper).

To protect the constraint and ensure that there is no interruption to its operation, a buffer is maintained in front of the constraint. This enables the constraint to continue operating at its full capacity, whilst interruptions, such as breakdowns, to resources elsewhere in the system are sorted out. Protective capacity at all other resources is essential so that the buffer, having been temporarily depleted in support of the constraint, can be rebuilt to meet further interruptions, whilst at the same time continuing to supply the constraint at its optimum capacity.

The rope, which is an imaginary concept, means that raw materials are drawn into the system at a rate sufficient only to keep the constraint working at its maximum capacity. The effect of this is that all other resources, with their protective capacity, are operating at less than 100% of their potential capacity, much lower in some cases. This is anathema to most of today’s managers.

DBR has the unique advantage that only the constraint or scarce resource needs to be scheduled, as all other resources are subordinating to the constraint to ensure that it is kept fully operational at all times. The result is that the system only does those things that should be done and doesn’t do those things that should not be done. At times this means people being available to work, but not actually working. Remember the comment of the chief executive; “any employee not producing value-added work all the time is a waste”!! How many organisations are producing things merely in order to keep the workforce busy, things that are not actually required to meet the current schedule but are getting in the way of things that are needed more urgently? How many production schedules are delayed and frustrated as a result of the weak excuse that the unnecessary items will be needed at some time in the future?

Even a rudimentary application of DBR to any organisation, once the concept has been understood and accepted, will result in a minimum improvement of 20% in productivity. A more comprehensive implementation, allied to what is called ‘buffer management’ and the ‘throughput world’ system of measurement, can add substantially to this level of improvement.

Other effects that will automatically flow from implementing DBR include:-

• Levels of work-in-progress will fall,

• Lead and cycle times will reduce,

• Scheduling becomes simpler and easier,

• Finished goods levels can be cut,

• Batch sizes can be reduced,

• Excess capacity will be revealed,

• Cash flow will improve, as less money is tied up in w-i-p.

Not only will productivity increase, but also these additional benefits can be used to provide other significant competitive advantages. Today, lead times and reliability of delivery are as important, if not more so, than price.

Further, the DBR approach has the advantage of acting as its own process of ongoing improvement; constantly looking for ways to improve the system. This is achieved through applying a repeating process known as the five focusing steps:-

1. Identify the current constraint,

2. Exploit the constraint,

3. Subordinate everything else to the above,

4. Elevate or increase the capacity at the constraint,

5. Check that the constraint is still the constraint, and if not go back to step 1.

These five steps provide a powerful process for managing and constantly improving any system. By focusing on the constraint you can achieve huge leverage on the system, greatly magnifying the effects of otherwise minor changes. Techniques such as ‘lean’ and ‘six sigma’ suddenly blossom and produce real tangible bottom line results when allied to the focus and leverage provided by the use of this constraint-based process.

Any organisation implementing DBR will experience an almost immediate gain in productivity of at least 20%. What organisation can afford to forego such an advantage, especially when it is there just for the asking? Such a gain in productivity would have a real impact on the performance and competitiveness of any organisation, let alone on the future economic prospects of the Country as a whole, if widely applied.

However, what if the constraint is not internal to the organisation, but is the market for the organisation’s products or services? The next paper details a ‘silver bullet’ that enables organisations to increase their market share, whilst often charging higher prices!