Abstract Number: 003-0063

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Abstract Number: 003-0063

Title of the Paper:Organizational Structures and Systems for Implementing Theory of Constraints: An Action Research.

Sixteenth Annual Conference of POMS, Chicago, IL, April 29 - May 2, 2005.

Fabio Muller Guerrini

University of Sao Paulo – EESC – School of Engineering of Sao Carlos

Avenida Trabalhador Sãocarlense, 400 - São Carlos-SP - Brazil - 13566-590

Phone 55-16-3373-9382 / Fax 55- 16 - 3373-9425

Rogerio Ceravolo Calia

University of Sao Paulo – EESC – School of Engineering of Sao Carlos

Rua Comendador Eduardo Saccab, 333, São Paulo, 04601-071, Brazil

Phone 55-19-9612-7332 / Fax 55- 16 - 3373-9425

ORGANIZATIONAL STRUCTURES AND SYSTEMS FOR IMPLEMENTING THEORY OF CONSTRAINTS: AN ACTION RESEARCH

ABSTRACT

It is possible to achieve significant performance improvement in the Production Planning, Scheduling and Control even in complex manufactures. However, the effectiveness and efficiency of the improvement depends on the organizational structures and systems for implementing and maintaining the change.
This paper describes an action research that compares two implementations of Theory of Constraints in plants with a complex demand environment (a majority of make-to-order products and high demand variability in the make-to-stock products).
Both implementations decreased delays, reduced inventory and decreased lead-time. However one of the implementations was much faster than the other, because of a structured project team, clear performance metrics and data driven validation of actions and results.

Keyword: Production Planning and Control, Management Methodologies Implementation, Theory of Constraints.

ORGANIZATIONAL STRUCTURES AND SYSTEMS FOR IMPLEMENTING THEORY OF CONSTRAINTS: AN ACTION RESEARCH

1 – INTRODUCTION

Theoretically, manufacture managers may choose a Production Planning and Control approach between many different methodologies available. However, it is not trivial to effectively change the work method of the order fulfillment process and of the production scheduling procedures (WOEPPEL, 2000).

Some obstacles observed in implementations of new methodologies in production planning are similar to the barriers observed in many other organizational change situations. Thus, theories and practices on change management in general are potentially useful to explain production-planning changes in particular.

The present paper first analyses the theory about organizational causes that disturb the efficiency and effectiveness of organizational changes in general. Then it describes theoretical solutions for improving organizational structures and systems supporting the change process. And finally, this paper confronts the theory above, with and action research describing the author’s team progress in implementing Theory of Constraints algorithms in the production planning and control procedures of an American company located in Brazil.

To assess the applicability of the theory of change management in a Theory of Constraints algorithms implementation action research, the following questions are to be answered here:

• Are the concepts of change management theory suitable for explaining the organizational pre-requisites for implementing Theory of Constraints?
• Which organizational structures and systems are appropriate for improving the implementation effectiveness and efficiency?
• Which is the role and contribution of each agent inside the organizational structure for causing efficient change?
• How does each agent contribute to the organizational knowledge base that enables the new methodology implementation?

This paper results from two action researches that analyze Theory of Constraints implementations in two different plants of a same company.

2 – THEORETICAL REVISION OF STRUCTURES AND SYSTEMS FOR ORGANIZATIONAL CHANGE

It is not trivial to change organizational procedures in business processes. The assimilation of a new management methodology may be frustrated due to corporate core rigidities or due to inflexible and closed intra-firm networks. Moreover, even when organizational changes are effective, implementation projects may last longer and consume more resources than necessary, because employees assigned to perform the tasks are not able to find technical advice or because they are naive dealing with the corporate political aspects.

Therefore, the implementation of a new management methodology requires, in one hand, organization structures for overcoming corporate core rigidities and inflexible intra-firm networks, but it also requires, in the other hand, organizational systems for ensuring that the new know-how is absorbed and maintained.

2.1. Barriers for Organizational Change

For LEONARD-BARTON (1992) organizations feature not only core competencies, but also core rigidities. If core competencies enable organizational innovations, core rigidities inhibit organizational changes. The author analyses a big range of different industries and concludes that the core competencies and the core rigidities incorporate in the employees’ knowledge and skills, and also incorporate in the technical systems of the company.

KRACKHARDT and HANSON (1993) found that the internal networks determine the corporate efficiency for organizational change. Internal networks are defined by the actual communication flow in the organization independently from formal positions in official hierarchies. In order to execute a certain organizational change task quickly, employees search their advisors network. In order to share delicate information about organizational politics, employees search their network of trust. And finally, in order to exchange information about routine work, employees search their communication network.

Intra-firm networks structure also affects managers’ ability to coordinate complex tasks for promoting employees cooperation toward corporate goals. GARGIULO and BENASSI studied an American computer company located in Italy, which needed intensive cooperation of trans-functional project teams for creating a new corporate division. The authors concluded that closed intra-firm networks were more resistant to change, decreasing the managers’ coordination effectiveness. In this case study, the more a certain manager was familiar to his or her team, the less he or she succeeded to promote the required organizational change, because cohesive groups were more inertial. Therefore, the management ability depends from a flexible network structure for supporting employees’ cooperation to organizational change.

2.2. Structures for Organizational Change

In 1971, ALLEN, an MIT researcher, analyzed project teams for corporate change and concluded that the key element for high performance was the “gatekeeper”. Gatekeepers are project team members that intensively communicate with the rest of the organization.

RENTES (2000) developed a methodology for change management, the “Transmeth”, together with the Virginia Tech. This methodology is supporting efficiently the organizational change process for implementing the Lean Manufacturing methodology (NAZARENO, 2003).

The Transmeth focus is specially on creating the infrastructure for change by defining teams for leading the change and teams for implementing the change. For this purpose, this methodology defines performance metrics for the teams, the team member roles, the communication mediums and clear employees time distinction between time for routine and time for projects. The author recommends multifunctional adhoc teams, composed by motivated and well-capacitated individuals with effective authority to conduct the change process.

2.3. Systems for Organizational Change

The Japanese research stream focused on the organizational process responsible for the continuous development of the knowledge base that generates innovations and organizational changes.

To analyze the business procedures for knowledge creation in the Japanese companies, NONAKA and TAKEUCHI (1995) first described two kinds of very different organizational knowledge: Explicit and tacit knowledge.

Explicit knowledge is formalized in books, formulas, handbooks, and trainings, while tacit knowledge is the non verbalized know-how that results from practical experience of the individuals in the organization. (NONAKA and TAKEUCHI, 1995)

Given this knowledge typology, the authors describe four business processes for knowledge generation in organizations:

1. The internalization process occurs, when the explicit knowledge is transmitted through formal written or verbal presentations. The employee assimilates concepts and utilizes them in his or her practical work until he or she develops the correspondent skills.
2. The combination process consists of the systematic relationship between different domains of explicit knowledge resulting in a new explicit knowledge verbalization.
3. The socialization process refers to the direct experience sharing, which occurs in the master-pupil relationship. In the socialization, tacit knowledge is developed, when the inexperienced employee observes and imitates the more experienced and skilled professional without utilizing verbal language as the main mean for knowledge transfer. This socialization process depends from common work experiences. Those experiences are the key element for the pupil to obtain access to the master’s mental model. Nonaka and Takeuchi even state that, in Japanese companies, the information transfer during the socialization process is modulated by the emotions associated to the specific shared experiences.
4. Finally, as an individual is able to communicate his or her tacit knowledge and skills in a clear and systematic manner by the externalization process, then he or she generates new explicit knowledge. For NONAKA and TAKEUCHI, the externalization process is the most important knowledge process in the Japanese companies, because it creates new knowledge for innovation.

To Tacit Knowledge / To Explicit Knowledge

From Tacit Knowledge

/ Socialization / Externalization
From Explicit Knowledge / Internalization / Combination

Table 1: Four Types of Knowledge Conversion (NONAKA and TAKEUCHI, 1995)

3 – THEORETICAL REVISION OF THEORY OF CONSTRAINTS FOR PRODUCTION PLANNING, SCHEDULING AND CONTROL

3.1. Introduction

In order to understand how the organizational structures and systems were organized in this action research, it is necessary to describe first the main characteristics of the Theory of Constraints algorithms for Production Planning and Control (GOLDRATT, 1991; GOLDRATT and COX, 2004).

3.2. Theory of Constraints for Production Planning and Control

The Israeli physicist, Eliyahu Goldratt, created the Theory of Constraints after concluding his PhD on liquids flow optimization and obtaining patents in this field. With the purpose of improving the on-time delivery, of increasing productivity and of decreasing inventories, Goldratt systemized a method for production schedule: the “Drum-Buffer-Rope” algorithms (GOLDRATT, 1984).

Academic researches proved the effectiveness of the Theory of Constraints also in manufactures located in Brazil (CSILLAG and CORBETT, 1998).

3.3. Production Planning and Control by the “Drum-Buffer-Rope” algorithms

Goldratt published the operational details of the “Drum-Buffer-Rope” algorithms, as he decided to focus his company on management education (GOLDRATT, E. “The Haystack Syndrome: Sifting Information Out of the Data Ocean”, 1991).

The “Drum-Buffer-Rope” is composed by the following algorithms:

a)Drum– The definition of the viable production rhythm.

The production schedule by the Theory of Constraints aims to align the rhythm of the whole production flow to the rhythm of real demand, the rhythm of sales. In order to achieve this synchronization only one resource or work center is scheduled.

In the business scenario, in which demand is bigger than production capacity, some client orders will not be delivered on time and the overall production volume and production flow will be determined by the resource with the smallest capacity, the “bottleneck”. Therefore, the production sequence that will maximize on-time delivery for clients’ orders will be the production sequence in the bottleneck respecting its actual capacity limit.

Both the release of materials to the plant and the production sequence in the non-bottleneck resources must be subordinated to the bottleneck production schedule, in order to ensure that the constraint is the single driver for the production rhythm in the whole production flow. This is the concept of the “Drum”, in analogy to the army that marches synchronously by the rhythm of a drum.

However, in the opposite business scenario, in which demand is smaller than production capacity, the rhythm for the production flow as a whole – the drum – should be determined by the sequence in the expedition.

b)Buffer– The protective time to immunize the flow against unpredictable stoppages.

In a manufacture shop floor, not everything occurs as planned. Client orders may delay due to raw materials or packaging shortages, failures in the information system, quality defects, operators’ absence, etc… Moreover, production batches, re-schedules and last moment addition of key accounts requirements in the production schedule are frequent causes for excessive increase in the production queue in manufacture, which increases the complexity to manage the production system.

Although it is not possible to know exactly what will fail, it is still possible to analyze the frequencies and time period of the unpredictable stoppages occurred in the last months, in order to schedule the release of materials and the resource with constrained capacity in advance. This time in advance is parameterized in the production schedule with the purpose to compensate for the current stoppages occurrence. This simple procedure avoids excessive re-scheduling.

c)Rope– Controlled work in process limitation.

In order to build the time protections parameterized by the time buffers, the material release schedule must be subordinated by the schedule in the expedition and in the bottleneck. The ‘Rope” controls those ties between schedules in different points of the production flow.

Thus, the sequence for material release first respects the production capacity of the bottleneck and then, is anticipated by the duration of the Time Buffers.

d)Buffer Management - Production Control procedures for managing exceptions

Buffer Management is the set of routines for Production Control by the Theory of Constraints. It is the follow-up of the actual time buffer status for each client order in the plant. The time buffer control provides a clear and practical criterion for prioritizing production expediting by risk of delay.

Finally, the follow-up of risk of delay also supports the improvement efforts to solve the causes for unpredictable time buffer consumption. The prioritization of those causes defines the focus for process improvement projects for lead-time reduction.

4 – METHODOLOGY

For the purpose of this study, the Action Research methodology was chosen.

Coughlan and Coghlan (2002), state that the Action Research is a suitable utilization form of the scientific approach for studying the resolution of important organizational issues directly with the individuals that experience these issues routinely. The action research cycle includes the action planning, the action execution, the action evaluation and a new action planning. During this cycle, the action research aims to reach two objectives simultaneously: to increase the effectiveness of the action researched and also to contribute to the development of a body of scientific knowledge, improving a theory.

The action research is appropriate for describing a sequence of actions in an organization during a certain time period, in order to elucidate how and why the researched action can improve the system. In addition, the action research aims to document the organizational learning process that occurs during the change process (COUGHLAN and COGHLAN, 2002).

In the present study, the action research was conducted in two different manufactures of the Brazilian subsidiary of an US$ 18 billons American multinational company of diversified technology and present in circa of forty different markets.

This action research aims to validate the theories of organizational structures and systems for organizational change. The theory will be confronted with actual implementation projects of Theory of Constraints algorithms in the production planning and control.

5 – THE ACTION RESEARCH

5.1.Implementation in Manufacture I

The analyzed company defined its biggest and most complex manufacture as pilot and hired a Theory of Constraints consultant to teach to the manufacture team the Drum-Buffer-Rope methodology and to plan the implementation. In sequence, the company also bought specialized Theory of Constraints software, in which the manufacture employees were trained.

5.1.1. First Implementation Phase

The first implementation phase aimed to decrease delays and to improve productivity. The high number of delays was jeopardizing the business unit supplied by this manufacture to the extent that some clients were decreasing the number of orders. The marketing managers claimed that market share was decreasing due to these delays.

The main reasons for the production capacity constraint were:

a)Increase in exportations;

b)Intensive new products launching, in order to satisfy the specific needs of different segments in the internal market;

c)The clients’ intensive outsourcing of their operations for different suppliers, so that the same revenue once generated by a single client order, was now divided into many different orders with different specifications.

In addition, the demand variability for stocked products was very high. For more than half of those products, the standard deviation of the weekly demand was more than 120% of the average weekly demand.

All those factors resulted in a high manufacturing complexity. Even though, the implementation of Theory of Constraints improved make-to-order products on-time delivery from 65% to 87,6%. (Figure 1)