23rd International Conference of the TOC Practitioners Alliance - TOCPA www.tocpractice.com
21-22 March, 2016, Tennessee, USA
Decision support in the TOC Way DSTOC Combining Intuition with Numerical Analysis Eli Schragenheim www.elischragenheim.com
[email protected] March, 2016
Supporting TOC implementations worldwide
Eli Schragenheim Eli Schragenheim stands with both his feet on the TOC ground Eli Schragenheim is keen to support TOC implementations worldwide, by:
guiding those who look for guidance
Place for the photo of the presenter
Eli believes the capability of every manager and consultant can be significantly improved by learning TOC This kind of learning can be done from afar, using the current technology
Contact info
Eli email is:
[email protected]
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
A decision to be made • ChocoCat is a local producer of chocolate in Masitania • No such country and no such producer, but suppose there is • ChocoCat is doing OK, making just 1.45% profit from the turnover • 2.5% from the total T
• The VP of Business Development suggests to start exporting to the neighbor country of Gimil • This move would require investment and operating expenses to maintain the activity at Gimil • After the investment part has been converted to annual payments plus the annual operating expenses the total fixed expense per year is 504K Lira
• How should ChocoCat make the decision? • What information should ChocoCat look for? • What about information that is impossible to get? www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Hard data and intuition • It is pretty obvious that we need a certain idea of the expected demand in the export market • How can we obtain that information? • Suppose we know the overall size of the chocolate market in Gimil • And we know the local competitors and that their quality is only “so-so”
• But, we cannot be certain how many would like to pay the same basic price we sell in here in Masitania • Our sales managers, who know Gimil from frequent visits, have quite different estimation of the potential size of the market
• The VP of Operations is concerned with capacity issues • The VP of Logistics claims that transport to Gimil plus customs would cost 3 Lira per package • This reduces the T per unit of every package www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Current load on Critical Resources
• The Packing Line is loaded to almost 98% of the capacity • We should never allow to go beyond 98%
• Line 2, one of four lines, each produces a family of products, is loaded 95% • MaterialA is a key material that is relatively scarce and ChocoCat can buy only certain quantity per month, but right now ChocoCat needs only 92% of the available quantity • Three lines have enough excess capacity www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Some key new concepts • Capacity Buffer – All the means to temporarily and quickly increase capacity for a certain cost
• Critical Resources – The resources that MIGHT run out of available capacity when an idea to increase sales is considered • Available capacity: the amount of capacity that can be used without extra cost (delta-OE)
• T-generators – While ‘product’ is any output of operations, the unit of what is sold is a T-generator • Every T-generator is built from product(s), a price and possibly also services (like transport or warranty) www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
How to proceed with the decision athand? • Do we know enough to override the suggestion? • Viewing the capacity profile the CEO suggested the following: • Sales would submit a product-mix of 10 products from each of the lines that have spare capacity as a pilot for the first year of export • Sales would come up with a pessimistic estimation of the annual sales for every product • Operations would check the possible capacity limitations caused by the additional demand • If there are capacity limitations then – Either we reduce some of the domestic sales – Or find a way to increase capacity
• If the overall predicted financial result would be positive then we start to export for one year and then decide whether to continue or stop www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Going through the exercise using DSTOC
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
Are we sure we know what to do? • Is now the decision clear? • We know that if the pessimistic assessment comes true then ChocoCat will make somewhat higher profit • The only action required: prepare special additional days of packing • Using the capacity buffer of an old packing line with temp workers • No need to know ahead of time how many special days of packing are required
• The VP of Finance was still concerned • The additional profit is small – if the demand will be lower we might lose • And if the demand will be higher then delta-OE might go up more than the profit
• The CEO likes to see what happens when an optimistic assessment is carefully checked www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Going through the exercise using DSTOC
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
Are we sure now? • When both pessimistic and optimistic simulations show additional profit then a decision to start exporting is reasonable • The details of implementing the decision need further thought: • The optimistic scenario might require reduced sales of products and/or additional capacity for delta-OE • Should we prepare those actions ahead of time? • We don’t really know what the actual capacity requirements are going to be
• What if more ideas to improve the financial state would emerge? • We need to check each one of them • And we need to check also ALL the decisions together!!!
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
Combining intuition with hard analysis • The essence of the solution is fast calculation of the net impact of any suggestion on the profit • Where the intuitive impact on sales is translated to pessimistic and optimistic predictions • Capacity calculations coupled with checking whether the protective capacity is maintained to keep the level of delivery expected • Penetration into the protective capacity leaves two ways to handle: • Reduce sales of products in order to free capacity, while controlling delta(T) • Increase capacity when possible, for delta(OE), making sure delta(T) – delta(OE)>0
• Calculations of T and delta(OE) lead to predicted delta(T) – delta(OE) • Any intuitive reservations can be quickly checked
• Eventually the decision is made by all the managers together www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Decision Support the TOC Way • This is a link between regular Operations, or regular Sales in isolation, and achieving as much of the goal in both the short and long term • Providing direct linkage to Strategy
• It is similar to Sales and Operations Planning (S&OP), but with the right simulation tools to include finance • It includes considerations for uncertainty • It put pressure on both Sales and Operations to look for more flexible options to increase sales and to use additional capacity when truly needed
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
