12 - Oded Cohen - 32 TOCPA - Italy - 23 March 2017

32nd International Conference of the
TOC Practitioners Alliance - TOCPA

www.tocpractice.com 23 March, 2017 Milan, Italy
Handling Interactive
Constraints in a Small
Manufacturing Company
Oded Cohen
tocExpert
Israel, Estonia
23rd March, 2017
Oded Cohen
Oded has over 38 years of experience in developing, teaching
and implementing TOC methodology, solutions and
implementation processes working directly with Dr. Goldratt
all over the world. Among the countries to which Oded brings
his expertise are the USA, Canada, Japan, India, China, the
UK, Poland, Russia, Ukraine, Colombia, Chile, Peru, Turkey
and many others.
Oded has authored multiple TOC articles and contributed to
numerous TOC books.
Oded in the is the author of Ever Improve A Guide to
Managing Production the TOC Way, published in June 2010.
Oded co-authored the book Deming & Goldratt: The Theory
of Constraints and the System of Profound Knowledge The
Decalogue.
Together with Jelena Fedurko Oded has co-authored the
book Theory of Constraints Fundamentals.
oded.cohen.gs@gmail.com
Oded is International Director of TOC Strategic Solutions Ltd www.tocexpert.com
and Founder and Co-President of TOCPA. www.toc-strategicsolutions.com
www.tocpractice.com
www.tocpractice.com 32nd International Conference of the TOC Practitioners Alliance - TOCPA
Small does not mean
Simple
Managing small businesses may not be that simple!

It is even more challenging when a small company has been
shrinking for several years. Some companies do not survive
but some may be determined to continue and want to flourish
again.
Usually, management turns to TOC practitioners when the
company is already losing money.
There is huge amount of experience demonstrating that
engaging TOC in medium and large companies produces
outstanding results.
Yet, introducing TOC to small companies may be challenging
due to the existence of several interactive constraints
3
Current State of a small
company in trouble
An Example
Sales: (2016) 6 million Euro (was 7m. In 2014)
Net Profit: (2016) -600K (2014) -100K
About 35 employees (50 people in 2014)
Core competences: Production, Engineering
Market Share: Domestic <10%, Export countries < 3%
Competition:
Import from the Far East and from EU countries that have
cheaper labor
Larger domestic companies 4 companies each with 15-
25% market share
In-house capabilities within the customers 4
Understanding the
Situation
Sales Analysis: sales of the last 5 years show continued loss.
Net Profit was also on continued fall
10
Year Sales Net Profit POS

8
2011 9 1 11%
6 2012 7 0.5 7%
2013 8 -0.4 -5%

Sales
4 2014 7 -0.1 -1%
Net Profit
2015 6 -0.3 -5%
2
2016 6 -0.6 -10%
0
2011 2012 2013 2014 2015 2016
-2
By the end of 2016, the company decided to ask the help of

a TOC Expert in order to get out of the red.
5
Understanding the
Situation
The situation at the beginning of 2017 is the outcome of the
evolution that the company has gone through in the recent
years.
The company was built in the 1980s. It was profitable and
grew nicely until the 2008. Thereafter, sales stagnated and
profits started to go down.
In order to be able to suggest what to do it is important to
understand the managerial thinking that has been taking place
in the recent years.
Warning: It is risky to copy ideas that were successful
elsewhere without understanding the conditions in which they
are likely to provide the expected results and benefits.
This is true also for TOC ideas! TOC operates on very clear
and specific conditions. 6
So, What is the Constraint?
It is obvious that the primary constraint is the Market! -

It has been for several years.
What has been the reaction of top management to the falling
sales?
Increased the pressure on the sales department
Increased prices
Reduced manpower production and office people
Started selling third parties products
Some of the actions had positive impact for short term but
were not enough to take the company out of the red!
7
Analyzing through TOC
Was Step 2 of Focusing followed?
Increasing pressure on the sales department (from Jan 2013)

This is traditional reaction.
Based on the perception that sales people are not making
enough efforts and that putting ambitious targets will generate
more sales.
Results: 2013: +14% sales but NP = -5% (down from +7%)
Reasons:
Accepting orders will low throughput.
Making commitments that are difficult to deliver
Continuous reduction in sales suggests that the company has
been losing its competitive edge in the markets it operates.
Sales people were complaining that the prices were too high.
8
Increasing prices (Jan 2014)

This is traditional reaction:
Due to increase of TVC and /or OE, trying to maintain
margin or prevent loss (while using traditional costing)
Assumption is that customers will agree. Yes? All? For how
long?
Results 2014: Sales down 8.75% but Loss is down to 1.4%

Reasons:
Lack of qualified and
Some customers stopped buying experienced sales director
Better throughput created a Capacity
Constraint in Sales
Less OE - due to starting layoffs
The sales director resigned in 2014!

9
Reducing manpower (from mid 2014)

This is traditional reaction:
An attempt to balance expenses with income
Usually, decisions are based on cost saving.
Many times experienced people are urged to go as they are
close to retirement age.
Usually, there is no analysis of the expected outcome of the
operational performance of the company
Results for 2015: Sales -14% and Loss grew to 5%
Reasons:
Loss of some big accounts (lack of confidence?)
Emerging capacity constraint resources CCRs
Creating one or more
Capacity Constraint
in production & engineering
Resource(s) - CCRs
10
Reselling third parties products (from mid 2015)

This is traditional reaction diversification / opportunity
Some customers were in need of products and were willing
to buy from the company
Buying in large quantities provided the company with price
advantage
Purchasing department could do it without extra manpower
There was ample space for storage
Results for 2016: Sales remain the same. Loss grew to 10%
Reasons: Creating Cash Constraint
Third party sales have smaller throughput (a type of Capacity
Cash reserves went down Constraint )
The company had to borrow money for operating capital
11
Offering DTO Design to Order

Using the capabilities of the engineering department to
modify existing products and/or design new products
according to the needs of the customers.
This direction allowed the company to get new orders with
potentially better throughput.
DTO demanded extending the sales process by adding more
activities such as: initial design, quotation and negotiation.
These activities have been performed by engineering
resources.
Positive outcome: orders to replace lost sales Capacity Constraint
Resource CCR in
Negative: Engineering became a constraint Engineering
12
Managing an environment
with Several Constraints
Situation by the end of 2016:

Even though Market has been the Primary Constraint the
decisions how to Exploit it must consider the other constraints
as they may not be able to subordinate.
This situation makes the system to be subject to Interactive
Constraints:
Market
Constraint
CCR in CCR in
Sales Engineering
Cash CCRs in
Constraint Production
13
So, What shall be done?
Dealing with Interactive constraints means that Step 2 and Step 3

should be performed through careful synchronization between
the constraints:
Each one of the function should have its own flow
management system based on TOC principles
The company should be managed through a central system.
The Central system is for ascertaining relevant input from the
critical functional systems in order to ensure that all
commitments given to the market are: Realistic, Provide
Financial Benefits and are protected against murphy.
Management is provided with a TOC dashboard stating:
The financial position of the company (current & projected)
The status and trends of all relevant TOC buffers
Suggested areas for management interventions
14
Managing
Interactive Constraints
Reducing the negative impact of the interdependencies

between the constraints through synchronization.
Market
Constraint
CCR in CCR in
Central
Sales System Engineering
Pipeline DTO Capacity

Mng mng
Cash MTO/
Stock
Flow MTA
Mng CCRs in
Cash Mng
Constraint Capacity Production
mng
15
Conclusion
TOC has good solutions for every critical function of the

company: Sales, Production, Engineering, Finance, Purchasing
(stock management)
Generally, building a decisive competitive edge (DCE) can
provide the overall synchronization to support the growth of the
company
When a company is too small or does not have the time to build
DCE, the company may consider to use the approach of this
presentation, which is based on the 5 steps of focusing.
The Central System for managing interactive constraints should
be simple and practical, while utilizing existing computerized or
manual systems and expanding gradually to incorporate more IT
modules.
There is no need to make it into a major IT project
it is possible to start with an Excel file! 16

12 - Oded Cohen - 32 TOCPA - Italy - 23 March 2017

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32nd International Conference of the

TOC Practitioners Alliance - TOCPA

Managing small businesses may not be that simple!

Year Sales Net Profit POS

2013 8 -0.4 -5%

By the end of 2016, the company decided to ask the help of

It is obvious that the primary constraint is the Market! -

Increasing pressure on the sales department (from Jan 2013)

Increasing prices (Jan 2014)

Results 2014: Sales down 8.75% but Loss is down to 1.4%

The sales director resigned in 2014!

Reducing manpower (from mid 2014)

Reselling third parties products (from mid 2015)

Offering DTO Design to Order

Situation by the end of 2016:

Dealing with Interactive constraints means that Step 2 and Step 3

Reducing the negative impact of the interdependencies

Pipeline DTO Capacity

TOC has good solutions for every critical function of the

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