Sanet - ST - The New Beginning

The New Beginning
The New Beginning

A Business Novel on How
to Successfully Implement
the Combination of the Theory
of Constraints, Lean, and Six Sigma
to Drive Profit Margins
Bob Sproull & Matt Hutcheson

First published 2021
by Routledge
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© 2021 Bob Sproull & Matt Hutcheson
The right of Bob Sproull & Matt Hutcheson to be identified as author of this work has been asserted by them
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Library of Congress Cataloging-in-Publication Data

Names: Sproull, Robert, author. | Hutcheson, Matt, author.
Title: The new beginning : a business novel on how to successfully implement the combination of the theory
of constraints, lean, and six sigma to drive profit margins / Bob Sproull & Matt Hutcheson.
Description: Boca Raton, FL : Routledge, 2021. | Summary: “This book is a sequel to the business novel,
The Secret to Maximizing Profitability - A Business Novel on How to Successfully Combine the Theory
of Constraints, Lean, and Six Sigma to Drive Profit Margins to New Levels. In The New Beginning, Tom
Mahanan, Tires for All’s former Director of Finance, who learned how to combine the Theory of Constraints
with Lean and Six Sigma, and then applied it to Tires for All, to take his company to levels of profitability
they had never experienced before. As a reward for his work, Tom was given a permanent seat on the Board
of Directors, as long as he continued his improvement work at the remaining portfolio of companies owned
by the Board of Directors. Tom performed extremely well, but one day he receives a life-changing phone
call from his former mentor, Bob Nelson, the man who he had worked with at Tires for All to make amazing
improvements. Bob asks him to play golf with him and two others, Jeff Johnson, from Toner International,
and Pete Hallwell, the CFO at Maximo Health Center Complex. Pete and Tom share a golf cart during the
round and begin chatting about the work Tom had done at Tires for All and the other portfolio of companies.
Pete, who works for a healthcare complex of hospitals, is so impressed with the results Tom had achieved,
that he invites him to lunch the following week. Tom accepts his offer of lunch and ultimately, Tom signs a
consulting agreement with Pete. Tom had provided an example from a previous improvement effort where he
worked with a hospital in Chicago to improve their Emergency Department time for STEMI-type heart attack
patients. In his explanation, Tom presents a variety of improvement tools which includes the integration of
the Theory of Constraints, Lean, and Six Sigma. Tom then meets with his current employer and specifically,
the Chairman of the Board of Directors, Jonathan Briggs, to let him know that he will be resigning to form
his own consulting firm. Jonathan then surprises Tom by offering him a consulting agreement to improve all
of their portfolio companies. The remainder of the book is all about teaching companies how to combine the
Theory of Constraints, Lean, and Six Sigma to obtain optimal results. In the final two chapters, a new problem
surfaces, which is the Corona Virus. Essentially, this book teaches the reader how to successfully combine
and implement the Theory of Constraints, Lean, and Six Sigma to produce results that many companies only
dream of having. It covers a variety of different company types including manufacturing and healthcare”—
Provided by publisher. Identifiers: LCCN 2020043209 |
ISBN 9780367688370 (paperback) | ISBN 9780367688387 (hardback) | ISBN 9781003139263 (ebook)
Subjects: LCSH: Theory of constraints (Management)—Case studies. |
Production management—Case studies. | Lean manufacturing—Case studies. |
Six sigma (Quality control standard)—Case studies.
Classification: LCC HD69.T46 S673 2021 | DDC 658.4/013—dc23
LC record available at https://lccn.loc.gov/2020043209
ISBN: 9780367688387 (hbk)

ISBN: 9780367688370 (pbk)
ISBN: 9781003139263 (ebk)
Typeset in Minion Pro

by codeMantra
As we progress through our lives, we meet people who have an impact on
our lives. Sometimes the impact is negative, but those people who made a
really positive impact are the ones that truly matter. In my life, the most
positive impact has been from my wonderful, loving and supportive wife,
Beverly. Why has she been the person who had had the most positive
influence on my life? The answer to that question could fill many pages
but let me zero-in on just a few very apparent things. Beverly has been
the most supportive person I have ever met. Her unconditional love is
beyond what I ever expected before I met her. When we first got married,
back in 1968, I truly didn’t know what to expect from a wife. But what I
did get was the most loving person I have ever met! Beverly gave me three
wonderful children and as they were growing up, she taught them how
to love others which has carried on in each of their marriages. She also
taught each of them how to be great parents, by teaching them the value of
listening, loving, and being devoted to their wonderful spouses. I dedicate
this book to you Beverly and hope we have many more years together!
Bob Sproull
I would like to dedicate this book to Jesus Christ Our Savior, because
without him nothing would be possible. To my loving wife Emily and
daughters Ally and Madison without whom I would not be a father
or husband. Thank you for always being supportive and encouraging
in anything I strive to achieve. Also, to my father-in-law and author
of many books (including this one). Thanks Bob for allowing me to
be part of this book and most importantly part of your family. Your
consistent love for not only our family, but for every human. You
inspire me to be a better father, husband, and overall human being.
Matt Hutcheson
Contents
Foreword ................................................................................................ix
Preface ................................................................................................. xiii
Authors .................................................................................................xxi
Chapter 1 Tom’s New Beginning ........................................................ 1

Reference.....................................................................................10
Chapter 2 The Phone Call ................................................................. 11
Chapter 3 The Meeting...................................................................... 23
Chapter 4 A New Direction .............................................................. 35
Chapter 5 Maximo Health Center Complex .................................... 45
Chapter 6 Simpson’s New Beginning ............................................... 53
Reference.....................................................................................72
Chapter 7 Maximo Health Center Complex’s New Beginning ...... 73
Chapter 8 Simpson Water Heaters’ Next Meeting ........................... 95
Chapter 9 The Next Step at Maximo Health Center Complex ..... 113
Chapter 10 Drum Buffer Rope at Simpson Water Heaters ............. 131
Chapter 11 Maximo’s Goal Tree ....................................................... 139
Reference...................................................................................156
Chapter 12 Developing an Improvement Plan at Simpson ............. 157
Chapter 13 The Expanded Case Study at Simpson Water Heaters ... 175
Reference...................................................................................179
Chapter 14 Maximo’s Improvement Plan ........................................ 181
Chapter 15 More Training at Maximo ............................................. 197
Reference.................................................................................. 208
vii
viii • Contents
Chapter 16 Simpson Water Heaters’ Goal Tree ............................... 209

Chapter 17 The Board Meeting ........................................................ 219
Chapter 18 Maximo’s Improvement Effort ...................................... 225
Chapter 19 Drum Buffer Rope at Maximo ...................................... 237
Chapter 20 Simpson Water Heaters’ New Initiative ........................ 257
Chapter 21 The End of the New Beginning ..................................... 273
Chapter 22 The Virus ........................................................................ 287
Chapter 23 The Webinar ................................................................... 295
Index .................................................................................................... 315

Foreword
The New Beginning as in Bob Sproull’s previous books recommends
using a procedure that combines the three main operational excellence
approaches of Lean, Six Sigma, and the Theory of Constraints. The Theory
of Constraints will tell you where to act—on the constraint—and then you
use focused and prioritized Lean and Six Sigma. This manner of doing
things is getting more and more pertinent year by year.
The world in which we operate is constantly becoming more volatile and
less predictable, and this tendency will continue. Yet we are still using
management practices that were designed for a much more stable environ-
ment. Companies still use annual budgets. When they sign off a budget,
management claims that it has distributed the work equitably throughout
the organization. Therefore, conveniently, they can ask everybody to work
all the time. They will measure local efficiencies, and they will get upset
when they see an idle resource, especially if it is expensive. They have yet
to understand that their organization is now made up of just a few con-
straints surrounded by resources with excess capacity. They have yet to
understand that one of the key challenges of modern operational manage-
ment is learning to sensibly stop resources from over-producing.
“The sum of local optimums is not equal to the global optimum,” Eliyahu
Goldratt, the founder of the Theory of Constraints, said back in the 1970s,
50 years ago. Very few companies have taken this into account. Goldratt
also said that the goal of an (for-profit) organization was to make more
money now and in the future. In this book, the sequel to The Secret to
Maximizing Profitability, Bob Sproull and Matt Hutcheson address those
two interconnected goals.
To make more money now is ensuring sales and efficiency in the short
and medium terms. Let’s say that it is all about honoring the client orders
that you have. To do this Lean and Theory of Constraints both seek to
improve flow. So, the authors explain, among many other things, the
Theory of Constraints’ Drum Buffer Rope scheduling solution and the
important notion of protective capacity. They also present the Distribution
and Replenishment Solution that improves the management of the supply
chain.
ix
x • Foreword
Beware if you think that you are already doing things this way. This
approach is not daily or weekly bottleneck hunting. It is about finding
the underlying structural constraint in the system. Too often people are
hunting wandering bottlenecks. They are managing the waves of work.
They are managing in the noise. The wandering bottlenecks will hide the
underlying “true” bottleneck if you don’t “learn how to see” the Theory of
Constraints’ way.
To make more money in the future, the second part of the goal is all
about how your company should grow and become more profitable and
more robust year after year. The New Beginning addresses this challenge,
and (obviously?) it is important. Too many companies are flounder-
ing here. They have a high-level “vision” that is usually no more than a
sentence or two about having good products, happy clients, a motivated
work force, and so forth, but it doesn’t define what you must do. So, and
this is especially true of large corporations, most companies have some
form of transformational roadmap and associated action plan. But these
are usually built by top management in such a way that every department
contributes. The “project” ends up having ten to twenty key top priority
initiatives. This unfocused approach yields numerous steering commit-
tee meetings, very few departmental results because of managerial multi-
tasking, and very few, if any, overall bottom-line results. Here the authors
recommend using a “Goal Tree” and the Logical Thinking Process which
it is part of. Having personally used this approach for many years I can
vouch for its (extraordinary?) capacity to determine the few key actions
an organization needs to do to quickly to move ahead and see the impact
on the bottom line. So, let Bob and Matt explain to you, using the novel
format story-telling of this book, all about: the Goal Tree, Critical Success
Factors, Necessary Conditions, injecting solutions, span of control and
sphere of influence, necessity-based logic and sufficiency-based logic. If
your journey resembles mine, you will discover what I did—I thought I
was logical because I was a successful engineer and I was wrong. This book
does a great job of showing you how to apply some practical logical sys-
tems thinking to build for your company a beautiful, focused action plan
that makes sense and enables you to improve much faster and go further
than you thought possible.
The New Beginning also highlights the tendency companies have of
spending too much time trying to save money and not enough time trying
to make more money (increasing sales). It repeatedly emphasizes why you
Foreword • xi
should move from a Cost World to a Throughput World. After you have
read this book warning bells should resound whenever anyone talks to
you about saving money.
The novel format of this book also facilitates the understanding of the
problems inherent in the dry, but important subject of Cost Accounting.
You will enjoy learning about Theory of Constraints’ Throughput
Accounting and the impact it can have on the bottom line through a new
appraisal of your product mix.
For those who have read the last three books that Bob Sproull has
authored or co-authored starting with the best-seller Epiphanized: A
Novel on Unifying Theory of Constraints, Lean, and Six Sigma, you will
be familiar with the business novel format he uses. Like the international
blockbuster The Goal by Eliyahu Goldratt, you will be carried along by the
storyline hardly noticing what you are learning. But in The New Beginning
you will be skipping from one organization to another, thereby highlight-
ing how this combined use of Theory of Constraints, Lean, and Six Sigma
can be applied in any situation, whether a manufacturing company or a
complex of hospitals.
I wish you all the best on your journey of open minded, focused, rapid,
collectively motivating, logical, and systemic improvement and growth.
Have fun.
Philip Marris
CEO Marris Consulting, Paris, France
Over 30 years of combining Theory of Constraints, Lean, and Six Sigma
Preface
This book is a sequel to Bob’s book, The Secret to Maximizing Profitability –
A Business Novel on How to Successfully Combine the Theory of Constraints,
Lean, and Six Sigma to Drive Profit Margins to New Levels. Several of the
readers of Bob’s last book asked him to write a sequel as he had previ-
ously done by making Focus and Leverage the sequel to Epiphanized: A
Novel on Unifying Theory of Constraints, Lean, and Six Sigma, two of his
other books. This book will, once again, deliver a strong message on the
impact the Theory of Constraints can have on all improvement initiatives,
no matter what type of company you work in.
Chapter 1, entitled “Tom’s New Beginning,” is all about Tom Mahanan,
the former Finance Director of Tires for All, who learned how to combine
the Theory of Constraints with Lean and Six Sigma, and then applied it to
Tires for All, to take his company to levels of profitability they had never
experienced before. As a reward for his work, Tom was given a perma-
nent seat on the Board of Directors, as long as he continued his improve-
ment work at the remaining portfolio of companies owned by the Board
of Directors. Tom performed extremely well, but one day he receives a life-
changing phone call from his former mentor, Bob Nelson, the consultant
who he had worked with at Tires for All to make amazing improvements.
In Chapter 2, entitled “The Phone Call,” Tom receives a phone call from
Bob Nelson, a former mentor and consultant with whom Tom had worked
at Tires for All to achieve outstanding success. Bob invites Tom to play
golf with him and two others, Jeff Johnson, from Toner International,
and Pete Hallwell, the CFO at Maximo Health Center Complex. Pete and
Tom share a golf cart during the round and begin chatting about the
work Tom had done at Tires for All and the other portfolio of companies.
Pete is so impressed with the results Tom had achieved that he invites
him to lunch the following week. Tom accepts his offer of lunch and lets
Pete know that he wants to teach him about the Theory of Constraints
version of accounting known as Throughput Accounting.
In Chapter 3, entitled “The Meeting,” Tom presents the details of
Throughput Accounting to Pete and two of his employees who both work
in accounting. The meeting goes well as they discuss other subjects related
xiii
xiv • Preface
to the Theory of Constraints. In fact, the meeting went so well that Pete
surprises Tom with an exclusive consulting offer with Maximo Health
Center Complex of six different hospitals.
In Chapter 4, entitled “The New Direction,” Tom returns home from his
meeting with Pete Hallwell and discusses the consulting opportunity with
his wife, who is fully supportive. Tom then contacts Bob Nelson to get his
input into his decision on whether or not to accept Pete’s consulting offer.
Bob Nelson reassures him and lets Tom know that if he has consulting
offers that he can’t take on himself, he will refer them to him. Tom decides
to accept the consulting offer, but when he “attempts” to resign from his
Board seat, he gets a huge surprise.
In Chapter 5, entitled “Maximo Health Center Complex,” Tom signs
his consulting agreement and then discusses the need to develop a list of
performance metrics that they would track as they proceed through their
improvement journey. In this chapter, Tom provides an example from a
previous improvement effort where he worked with a hospital in Chicago
to improve their Emergency Department time for STEMI-type heart
attack patients. In his explanation, Tom presents an improvement tool
known as the Interference Diagram. Tom also meets with the Chairman
of the Board of Directors, Jonathan Briggs, about a new list of portfolio
companies for Tom to work with as part of his consulting agreement. One
company, Simpson Water Heaters, stood out from the others because, in
addition to their other poor performance metrics, their profit margins
were negative.
In Chapter 6, entitled “Simpson’s New Beginning,” located in Detroit,
Michigan, Tom meets with the new Plant Manager, Matt Maloney. Tom
presents the basics of the Theory of Constraints and then a detailed pre-
sentation on Theory of Constraints’ version of accounting known as
Throughput Accounting. In this presentation, everyone in attendance gets
to see how, by using this form of accounting, a different product mix can
change the company’s profitability. They also discussed the basics of Lean
and Six Sigma, or at least how both had been used to improve Simpson’s
profitability, but not at the level they wanted or expected. Simpson’s
attempt to use Lean and Six Sigma was, of course, prior to having received
assistance from Tom. The chapter ends with Matt asking Tom if there was
a way to combine Lean and Six Sigma with the Theory of Constraints.
Tom explained that they will see exactly how to combine the best of all
three methods when he returns for another visit.
Preface • xv
Chapter 7, entitled “Maximo Health Center Complex’s New Beginning,”

begins with a review of potential performance metrics that they might use
at this complex of hospitals to track their improvement results. Tom plans
a visit to Maximo Health Center Complex to present the basics of Theory
of Constraints, the importance of identifying the system constraint, plus
a detailed look at Throughput Accounting to a group of leaders from each
of the six hospitals within this complex. His presentation of Throughput
Accounting includes a case study, of all things, a sock making company.
At the conclusion of this training session, Tom invites Pete to a presenta-
tion on how to combine Lean, Six Sigma, and the Theory of Constraints,
to be held at Simpson Water Heaters in Detroit, Michigan. Pete agrees to
attend along with two LSS Black Belts from his complex of hospitals.
In Chapter 8, entitled “Simpson Water Heaters Next Meeting,” Tom pres-
ents how best to combine Lean, Six Sigma, and the Theory of Constraints
which will result in major improvements to profits. Tom explains that too
many companies believe that the key to improving profits is through how
much money can be saved, when in reality profit improvement should be
based upon how much money can be made. Tom then presents a detailed
look at how to combine these three improvement methodologies, the
necessary tools, actions, and focus, and finally the expected deliverables.
This chapter ends with Tom explaining that he would be back to Simpson
Water Heaters to present several other key methodologies, namely Theory
of Constraints’ scheduling and replenishment methodologies, as well as
something called the Goal Tree.
Chapter 9, entitled “The Next Step at Maximo Health Center Complex,”
begins with Tom going to Maximo Health Center Complex to present
Theory of Constraints’ Parts Replenishment Solution and the Goal Tree.
He then explains the basics of how the Min/Max methodology works and
why it typically results in excessive inventory with high levels of stock-outs.
He then presents Theory of Constraints’ Replenishment Solution and why
it typically results in a 50% reduction in inventory while virtually eliminat-
ing stock-outs. Because of the length of time it takes to present this mate-
rial, he reschedules his session on the Goal Tree for the following week.
In Chapter 10, entitled “Drum Buffer Rope at Simpson Water Heaters,”
Tom flies to Detroit to present the details of Drum Buffer Rope which
Tom describes as a production planning and scheduling methodol-
ogy. Tom explains that DBR is designed to regulate the flow of work-in-
process inventory through a production line based upon the pace of the
xvi • Preface
slowest resource. Tom explains that there are three schedules that must be
maintained, namely shipping, the constraint, and material release. Tom
finishes his presentation by describing the importance of something he
refers to as protective capacity.
In Chapter 11, entitled “Maximo’s Goal Tree,” Tom presents a simple
strategic tool used to create improvement plans. He explains that the Goal
Tree is a logic diagram that helps companies understand why they are not
achieving their goal. He then defines the span of control and sphere of
influence that must both be defined before construction of a Goal Tree.
Tom then presents the basic structure of the Goal Tree by defining the
Goal, Critical Success Factors, and Necessary Conditions and then walks
the team through the step-by-step process of how to create one. The team
of high-level executives from Maximo then creates a high-level Goal Tree
including lead and lag measures. Tom then explains the process of using
the Goal Tree to assess their organization, which the leaders do. The chap-
ter ends with Tom instructing the leaders to go back to their hospitals and
create individual hospital Goal Trees.
In Chapter 12, entitled “Developing an Improvement Plan at Simpson,”
Tom explains that there is another part of the Theory of Constraints
known as the Logical Thinking Tools. He explains that many people who
have gone through training on these tools have come away not knowing
how to use them. He then explains that the Goal Tree is a short-cut that
can be used to assess a company’s weak points. He then describes two
types of logic, which are necessity-based logic and sufficiency-based logic.
He then explains that the Goal Tree uses necessity-based logic. He goes
on to explain the basic structure of a Goal Tree and then presents a case
study of a manufacturing company creating a Goal Tree and then uses it
to assess their company.
In Chapter 13, entitled “The Expanded Case Study at Simpson Water
Heaters,” Tom begins by discussing the value of performance metrics
and defines them as feedback mechanisms that tell a company how well
they’re performing. Tom then completes the case study presented in
the previous chapter, by inserting target levels for a company’s Goal,
Critical Success Factors, and many of the Necessary Conditions. The
case study company then goes through an assessment of their company
and then Tom describes how to insert various solutions at the base of
the Goal Tree that should resolve most of the issues facing the company
in question.
Preface • xvii
In Chapter 14, entitled “Maximo’s Improvement Plan,” Tom sets up a

meeting at Maximo to review the individual Goal Trees from each hospi-
tal. The team from Maximo Oncology Hospital presents their Goal Tree,
and Tom is impressed, especially with their use of lead and lag measures.
The same team then presents their assessment results and completely
surprises Tom by explaining that Maximo has decided to use the same
Goal Tree at all of their hospitals. Tom then presents a healthcare case
study involving a hospital that dealt with a STEMI-type heart attack that
impresses everyone in attendance and then instructs the team on how to
insert improvement initiatives onto the base of their Goal Tree. He fin-
ishes the discussion by explaining how to use several improvement tools,
which includes a new tool, the Interference Diagram.
In Chapter 15, entitled, “More Training at Maximo,” Tom introduces
the team to Drum Buffer Rope, which includes the basic thinking behind
how it works. He explains that organizations must focus on the system as a
whole, rather than as isolated parts. He goes into detail on what a system is
and why it’s very important to think in terms of systems. Tom then briefly
describes variation and how it can negatively impact any organization.
He goes into detail summarizing Goldratt’s Five Focusing Steps as well as
the basics of Drum Buffer Rope. Tom then describes three different types
of DBR which are traditional DBR, Simplified DBR, and Multiple Drum
Buffer Rope. It is the concept of M-DBR that he believes Maximo should
pursue and then schedules another meeting at Maximo.
In Chapter 16, entitled “Simpson Water Heaters’ Goal Tree,” before leav-
ing their facility the last time, Tom had instructed Matt Maloney, the Plant
Manager, to lead a team to create their own Goal Tree. When Tom arrived
in the conference room to hear about Simpson’s Goal Tree, he saw it on
the screen in front of him. The team began presenting, but started with a
review of their performance metrics, which were dreadful to say the least,
especially with a negative profit margin. The team then presented their
completed Goal Tree with each entity tying directly into their performance
metrics. They then presented their assessment and listed two potential
improvement initiatives. The team then presents another assessment of
what they believed would happen if they successfully implemented both of
the improvement initiatives. Based upon their implementation they then
presented a future look at their performance metrics. Tom was impressed
and decided to contact the other three portfolio companies for an update
to their metrics.
xviii • Preface
In Chapter 17, entitled “The Board Meeting,” Tom attends a meeting

with the Board of Directors with his intention to provide an update on the
four company’s performance metrics. He presents the update and clearly
there have been improvements to all of them. He then presents Simpson’s
Goal Tree, their assessment, future improvement efforts, and then a future
assessment. The four improvement efforts included implementation of
Drum Buffer Rope, Theory of Constraints’ Replenishment Solution,
Throughput Accounting, and, his very own, Ultimate Improvement Cycle
methodology. The Board then surprises Tom by offering him a new con-
sulting agreement whereby he would assist the Board on whether or not
they should purchase new companies.
In Chapter 18, entitled “Maximo’s Improvement Effort,” Tom intends
to follow up on two presentations he has already made, namely Drum
Buffer Rope and possibly Theory of Constraints’ Replenishment Solution.
Although he had already presented both of these improvement initiatives,
he wanted to do a follow-up session, especially on Drum Buffer Rope, just
to make sure the teams understood everything necessary to do, in order
to successfully implement both parts. In this session, Tom presented new
details of Drum Buffer Rope and sent the team on a fact-finding mission
to answer some unresolved questions.
In Chapter 19, entitled “Drum Buffer Rope at Maximo,” Tom had sched-
uled another follow-up meeting to discuss more on Drum Buffer Rope. As
he was ready to begin, Dr. Samuels entered the room and asked for per-
mission to say a few words. To everyone’s surprise, Dr. Samuels let every-
one know that the hospital Board had decided to implement the team’s
recommendations on discharge policy changes and their housekeeping
efforts, which pleased everyone. The team then presented three more rec-
ommendations on how to reduce hospital wait times. Tom finished the day
with a new idea on Multiple Drum Buffer Rope for a hospital’s Emergency
Department and presented a drawing of his idea.
In Chapter 20, entitled “Simpson Water Heaters’ New Initiative,” Tom
flies into Detroit to present the Theory of Constraints Replenishment
Solution. Even though he had touched on this solution in another visit,
in this trip he would present the details of how it works. He explains the
pitfalls of using the Min/Max system which Simpson currently uses, with
these pitfalls being excessive amounts of inventory while seeing regular
examples of part’s stock-outs. He then delivers the key messages associ-
ated with Theory of Constraints’ Replenishment Solution with results
Preface • xix
being fifty plus percent reduction in inventory volume while stock-outs

fall to nearly zero.
In Chapter 21, entitled “The End of the New Beginning,” as Tom
was driving home from Detroit, he began thinking about the offer the
Chairman of the Board, Jonathan Briggs, had made to him about a new
consulting agreement based upon helping them select future companies
to purchase. Since Tom was a huge fan of the TV show, Shark Tank, you
can only imagine what he would offer the Board as his payment structure.
Prior to his trip to Chicago to present the latest performance metrics, Tom
had an on-line meeting with each of the four portfolio companies to get
an update on what they had implemented, and the results achieved. In this
chapter Tom also requests and receives updates from all six hospital lead-
ers and has a meeting to hear about them. The results presented were very
good. He then flies to Chicago to meet with the Board of Directors and
present the latest metrics. The results were astounding to the Board and
needless to say, they were very happy. They were so happy that they offered
to meet Tom’s proposed payment structure for assisting the Board on new
purchases, which surprised Tom. But what surprised Tom even more was
an announcement his wife made to him on the phone.
In Chapter 22, entitled “The Virus,” as Tom is excited about all of the
great things happening around him, he learns about a new virus called the
Corona Virus, or COVID-19, which is spreading rapidly across the globe.
Tom researches the virus to find testing is a major issue in helping with
the slow of the spread. His wife Beverly is also not feeling well and decides
to see a doctor, since she is experiencing symptoms of this new virus. Tom
decides to contact Chairman of the Board, Jonathan Briggs, to see if he
had any contacts out in the field where the virus was starting to spread.
Jonathan provides contact information for two doctors who are directly in
the hot spots. Tom learns that along with testing for the virus, the short-
ages on ventilators to treat patients and masks to help protect against the
spread had major issues with availability. He reaches out to two suppliers
of these very important items to offer his free consulting services.
Chapter 23, entitled “The Webinar,” begins with Tom presenting a webi-
nar on the Theory of Constraints to Jefferson Ventilators and The Mask
Makers. After presenting and implementing, both companies see an
immediate increase (triple the rate) in production to the point of parts
shortages effecting availability. Tom then presents how the Theory of
Constraints’ Parts Replenishment Solution can help resolve this issue.
Authors
Bob Sproull is an Independent Consultant and the co-owner of Focus

and Leverage Consulting. Bob is a certified Lean Six Sigma Master Black
Belt and a Theory of Constraints Jonah. He has served as a Vice President
of Quality, Engineering, and Continuous Improvement for two different
manufacturing companies, has an extensive consulting background in
Healthcare, Manufacturing, and Maintenance and Repair Organizations
(MRO), and focuses on teaching companies how to maximize their
profitability through an integrated Lean, Six Sigma, and Constraints
Management improvement methodology. Bob is an internationally
known speaker and author of numerous white papers and articles on con-
tinuous improvement. Bob’s background also includes nine years with the
Presbyterian University Hospital complex in Pittsburgh, Pennsylvania,
where he ran the Biochemistry Department at the Children’s Hospital,
performed extensive research in breakthrough testing methods, and
assisted with the development of organ transplant procedures. Bob com-
pleted his undergraduate work at the University of Pittsburgh, PA, USA,
and University of Rochester, NY, USA, with a dual Math/Physics major.
A results-driven Performance Improvement Professional with a diverse
healthcare, manufacturing, MRO, and technical background, he has sig-
nificant experience appraising under-performing companies and develop-
ing and executing highly successful improvement strategies based upon
the integration of Lean, Six Sigma, and Constraints Management method-
ology. Bob is the author of six books, The Secret to Maximizing Profitability;
The Problem-Solving, Problem Prevention, and Decision Making Guide;
Theory of Constraints, Lean, and Six Sigma Improvement Methodology;
The Focus and Leverage Improvement Book; The Ultimate Improvement
Cycle: Maximizing Profits Through the Integration of Lean, Six Sigma,
and the Theory of Constraints; and Process Problem-Solving: A Guide for
Maintenance and Operation’s Teams. Bob is the co-author of Epiphanized:
A Novel on Unifying Theory of Constraints, Lean, and Six Sigma, First and
Second Edition, and Focus and Leverage: The Critical Methodology for
Theory of Constraints, Lean, and Six Sigma (TLS). Degrees, certifications,
xxi
xxii • Authors
and memberships: Bachelor of Science Equivalent in Math and Physics,

University of Rochester, Rochester, NY, USA; Certified Lean Six Sigma
Master Black Belt; Kent State University Certified Six Sigma Black Belt;
Sigma Breakthrough Technologies, Inc. TOCICO Strategic Thinking
Process Program Certificate; TOC Thinking Processes (Jonah Course)
L-3 Communications; Critical Chain Expert Certificate; Realization
Technologies Lean MRO Operations Certificate, University of Tennessee,
Knoxville, USA.
Matt Hutcheson is a Senior Logistics Administrator in the manufactur-

ing field, with 17+ years’ experience in warehousing, logistics, and sup-
ply chain. Degrees, certifications, and memberships: Associate’s Degree
CIS (Networking Emphasis), Trenholm Technical College, Montgomery,
AL, USA; Masters Certificate in Supply Chain Management and Logistics,
Michigan State University, East Lansing, MI, USA.
1
Tom’s New Beginning
“Wow, I never dreamed I would get a check this big!” Tom Mahanan said,
as he continued looking at his check and couldn’t believe that he was hold-
ing his “royalty check” for $400,000! When Tom received his new role
with the Board of Directors, he had done so without a major raise in his
salary, but rather an agreement on a royalty check based upon profits. He
was a big fan of the TV show Shark Tank and liked Kevin O’Leary’s royalty
offers. Tom Mahanan was the former Finance Director for Tires for All,
and along with his royalty check, he had just been given a permanent seat
on the Board of Directors from the Chairman of the Board, Jonathan
Briggs. Over the past year, Tom had directed improvement efforts at six of
the Board’s portfolio companies and the improvement results were aston-
ishing! Tom was on his way home to Western, PA, and as he sat in his
first-class seat, he began thinking about all that he had accomplished over
the past year.
Tom’s leadership throughout the portfolio of companies had resulted in
amazing results as evidenced in Table 1.1. On the six Portfolio Companies
that Tom had fostered, the average % Profit Margins had increased from
8.3% to an astounding 27.6%! And the improvement had occurred in a
relatively short period of time, which very much excited the Board of
Directors. The other key metrics that had improved were the average
% On-Time Delivery for the six portfolio companies listed in Table 1.1,
which improved from 77.6% to 94.6%!
Other performance metrics that demonstrated improvement under
Tom’s leadership were average % Scrap for the six portfolio companies,
which had improved from 5.9% down to 2.1%. In addition, the aver-
age % Rework improved from 9.4% down to 2.9%! Surprisingly, the
average % Stock-Outs for the six portfolio companies had decreased
1
TABLE 1.1
Improvement Results
2 • The New Beginning
% On-Time %Profit
Delivery % Scrap % Rework Stock-Out % Efficiency % Margins
Company Name Before After Before After Before After Before After Before After Before After
Board of Directors
Portfolio Companies
Terox Automotive 79.6 91.6 4.1 2.1 8.8 3.2 10.7 1.1 91.9 62.1 4.9 27.9
Sweeney Automotive 69.5 94.3 3.8 1.5 7.6 2.1 11.7 0.9 93.4 71.2 6.1 22.2
Johnson Electronics 78.3 92.2 7.2 2.2 13.3 4.2 10.9 1.8 90.6 65.7 7.7 30.4
Westin Incorporated 80.4 96.5 9.5 1.3 11.4 2.7 8.8 0.7 85.6 69.3 8.8 25.6
Watson Steel Products 77.8 95.5 4.3 2.2 8.8 3.2 9.9 1.6 90.4 70.5 10.9 30.8
Semena Rubber 80.2 97.7 6.6 3.0 6.7 1.8 8.3 0.2 86.2 71.1 11.4 28.8
Products
Tom’s New Beginning • 3
from 10.1% to 1.1%. And finally, the metric that surprised the Board
Members the most was what happened to the average Efficiency % which
dropped from an average of 89.7% to 68.3%! And these numbers did not
reflect what had happened at Tires for All! Based upon these results and
more, the Board gave Tom a permanent seat on the Board of Directors
with one caveat. And that caveat was that Tom had to continue his con-
tinuous improvement work on all of their portfolio companies.
As he was flying home, Tom continued reviewing the results he had pre-
sented to the Board earlier that day. One metric that brought back happy
memories for Tom was Tires for All’s discovery relative to percent effi-
ciency. Before he had begun his improvement learning journey, percent
efficiency was considered a key metric that should be driven higher, espe-
cially by the Board of Directors. He thought to himself, “I’ll never forget
the look on the faces of the Board Members when I presented a run chart
for this metric. This metric had been hovering around 95% before their
improvement efforts had begun, but at the end of the day, it had dropped
to nearly 60%!”
Tom reflected back to their Board meeting. Mark Roder, the General
Manager at Tires for All, and Tom had walked inside the hotel restaurant
and, to their surprise, were quickly greeted by several of the Board mem-
bers. He remembered how they were led to a small conference room within
the restaurant and were greeted by the Board Chairman, Jonathan Briggs.
“Welcome to Chicago gentlemen,” the Chairman said, and they all shook
hands. “We’re very happy you are here tonight, and we thought it might be
a good idea if we discussed your performance metrics prior to our board
meeting tomorrow.” Jonathan had explained. “So, tell us Roger, why has
your performance metric efficiency taken such a nose-dive?” Jonathan
asked. Roger turned to Tom and whispered, “Tom, why don’t you present
this.” Fortunately, Tom had decided to bring his laptop with him to din-
ner, just to practice his presentation, so Mark said, “I’d like to have Tom
answer your question.” And with that, Tom got out his laptop and began.
“I think the first thing I’d like to do is show you the history of our
metric efficiency,” Tom explained and brought up the plot of efficiency
onto his screen (Figure 1.1). He remembered how surprised Mark was
that he would start with this performance metric. Tom remembered that
the Board members were shocked to see this graphic that demonstrated
such a rapid decline in Tires for All’s efficiency. Tom then explained, “At
FIGURE 1.1
Performance Metric Efficiency %.
first glance, when you see this graphic image, you might be thinking that
Tires for All is in serious trouble, but such is not the case.”
Tom remembered how Jonathan had immediately responded and said,
“That’s exactly what I am thinking, but why are you saying you’re not in
trouble?” Tom had anticipated this response from the board and remem-
bered putting his hand over his mouth to hide a smile. He then put up
his next graph onto his screen (Figure 1.2) and said, “Contrary to what
you might believe would be happening, here are our Profit Margins dur-
ing the same time period,” he explained. “How can that be?” Jonathan
exclaimed! Tom remembered answering Jonathan’s question very
abruptly saying, “Because the belief that efficiency is a good performance
metric is a false belief!”
His response stunned Jonathan who asked, “But, what about your met-
ric for On-Time Delivery? How does it look?” And with that request, Tom
flashed this graph (Figure 1.3) onto his laptop’s screen.
Tom remembered exactly what Jonathan said after seeing this graphic.
“I am totally confused by these graphs! You’ve got efficiencies nose-
diving, while at the same time your profits and delivery metrics are
FIGURE 1.2
Tires for All’s profits.
FIGURE 1.3
Tires for All’s On-Time Delivery by month.
sky-rocketing upward? What’s going on at Tires for All?” he asked. Tom

remembered that this was a true turning point for him, as he responded
to Jonathan’s question and his ensuing conversation. “Remember I told
you that believing that efficiency is a good performance metric is a false
belief?” Tom responded. “Yes, I remember,” said Jonathan. “Would you
like me to explain why I told you that?” Tom asked Jonathan. “Yes, abso-
lutely I would!” Jonathan responded.
Tom remembered, like it was yesterday, how he had used this opportu-
nity to explain the basics of the Theory of Constraints. “First of all, I need to
explain something referred to as the Theory of Constraints. Have you ever
heard of this?” he remembered asking the Board Members. He remembered
how Jonathan and the other Board Members responded and told him no,
so he continued on. “The Theory of Constraints was developed by a man
named Eli Goldratt and made popular in his widely read and quoted book,
[1] The Goal,” Tom explained. “In this book, Goldratt developed what he
referred to as the ‘Five Focusing Steps’ for continuous improvement.” Tom
loaded a slide on his screen and said, “These five steps were:
1. Identify the system constraint.

2. Decide how to exploit the system constraint.
3. Subordinate everything else to the system constraint.
4. If necessary, elevate the constraint, but don’t let inertia create a new
system constraint.
5. When the current constraint is broken, return to Step 1.”
Tom then loaded a figure of a piping system used to transport water onto
his screen (Figure 1.4) and continued. He remembered explaining in detail,
“What you see on my screen is a simple piping system used to transport water.
Water, which in this case is gravity fed, enters this piping system, flows into
Section A, then flows to Section B and so forth until it collects in a receptacle
at the base of the system. If the demand for water increased, tell me what you
would do and why you would do it?” he recollected asking Jonathan.
He remembered Jonathan looking at the diagram and saying, “Based
upon the various diameters of the pipes, my guess is that you would need
to modify the piping system by adding a larger diameter pipe in Section E.”
“Absolutely correct Jonathan!” he recalled responding to Jonathan. Tom
then said, “So, you just completed the first two steps of Goldratt’s Five
FIGURE 1.4
Piping diagram with constraint at Section E.
Focusing Steps. You identified the system constraint and then decided
how to exploit it,” Tom remembered saying. Tom then said, “The rest of
the pipes were subordinated to the constraint, because they could only
deliver water, based upon the output of the constraint.”
Tom remembered continuing his explanation by asking, “Suppose there
is another increase in demand for water from this system? What would
you do and why would you do it?” he had asked Jonathan. Jonathan looked
closely at the piping system and said, “In this case, once you opened up
the diameter of Section E, the constraint moved to Section B of the pip-
ing system,” he explained. “Basically, as you explained, you completed the
first four steps of Goldratt’s Five Focusing Steps, namely, identify the con-
straint, decide how to exploit it, and then everything else will be at the
mercy of the constraint. Since we opened up Section E’s diameter, we have
completed Steps 4 and 5, because we have elevated the current constraint.
We now have to move back to Step 1,” he explained.
“The new constraint is Section B, so if we need more water, like Section

E, we need to increase the diameter of Section B,” Jonathan explained in
detail. “The bottom line is, it’s a continuous improvement process where
new constraints pop-up and you have to be prepared to take action,” he
concluded.
Tom recalled that Jonathan’s response was a true turning point for the
Board Members. Tom then complimented Jonathan and flashed Figure 1.5
onto the screen.
Tom then remembered Jonathan asking him, “So, Tom, what was the
purpose of this exercise and how does it apply to what has happened at
Tires for All?” “Great question Jonathan!” Tom responded, and with that
he posted a new figure (Figure 1.6) on his laptop’s screen.
FIGURE 1.5
Piping system with a new constraint.
FIGURE 1.6
Simple 4-step process.
Tom then remembered how he had explained Figure 1.6, which was,
“What you see here is a simple 4-step process with raw materials enter-
ing Step 1, are processed for 5 minutes and are then passed on to Step 2
and so on until the product exits Step 4 as finished product.” “Thinking
back to the piping diagram, what is the total processing time of the very
first part through this process?” he had asked Jonathan. “The total time
of the first part would just be the sum of the individual cycle times, for
a total of 105 minutes,” Jonathan responded. “Correct, now assuming
this process has been up and running for a while, what is the output
rate of this process?” Tom asked. Jonathan studied the drawing and
said, “Since Step 3, at 60 minutes, is the longest cycle time, it seems to
me that it would control the rate that products are made?” he asked in
a question format. “You’re right again Jonathan, Step 3 is this system’s
constraint,” said Tom.
Tom chuckled to himself as he recalled what Jonathan said next, “I know
what you’re going to ask me next Tom, and the answer is, if we wanted
to produce at a faster rate, we would need to reduce Step 3’s cycle time
because it is the system constraint.” “Very good Jonathan, you’re correct
again,” Tom had responded and then remembered asking, “So, here’s a
new question for you Jonathan. Assuming this company is measured by
manpower efficiency, like Tires for All is, what happens to this process
if every step is run to its full capacity?” Jonathan studied the drawing of
this simple process and simply said, “Holy crap! Why didn’t I learn this
sooner?” he said openly. The rest of the board members were confused by
what Jonathan had just said and one of them finally spoke up and said,
“What did you mean Jonathan?”
Tom remembered smiling as Jonathan turned to the group and said,
“Think about it everyone. If you run every step to its capacity, there’s
only one thing that will happen. The process simply becomes full of
work-in-process inventory!” he exclaimed. “Does your next figure dem-
onstrate this Tom?” he asked. “It most certainly does Jonathan,” he replied
and posted the figure (Figure 1.7) onto his laptop’s screen.
FIGURE 1.7
Process with excess work-in-process (WIP).
And then Tom remembered how this had become a true turning point
moment for his career as Jonathan, without hesitation turned directly
to Tom and began speaking, “What you have explained to us today, is
mind boggling Tom! To think that all of the holdings in our portfolio
are being run according to a metric like efficiency, is simply wrong!” he
had stated emphatically. “Wow, to think that in less than thirty minutes,
you have changed my thinking just blows me away Tom! And I want to
thank you for sharing this very simple, but very valuable lesson with us!”
he said. “Could you present this same material tomorrow to our Board of
Directors Tom?” he asked. “Yes, of course, it’s what I had planned to do
anyway,” Tom replied.
So, this was the start of Tom’s new career as an “Improvement Consultant”
that would change Tom’s life forever. In effect, it was his new beginning.
Over the course of the next year, Tom continued working to improve more
of the Board’s Portfolio Companies. The results he achieved were astound-
ing to say the least! And then one day, Tom received a telephone call that
would, once again, change the course of Tom’s work life forever.
REFERENCE
1. Eliyahu M. Goldratt and Jeff Cox, The Goal, 1984, Great Barrington, MA: North
River Press.
2
The Phone Call
“Hello, Tom Mahanan here,” Tom said when he answered the phone. “Hi
Tom, Bob Nelson here,” Bob said. Bob Nelson, the owner of Focus and
Leverage Consulting, was the man responsible for changing Tom’s view of
how companies can increase their profits to levels than most companies
had never experienced! “Well hello Bob, it’s so good to hear from you!”
Tom responded. “How have you been Bob?” Tom asked. “I’m doing very
well Tom and thanks for asking,” Bob responded. “Well, what’s up Bob?”
Tom asked. Bob then said, “Tom, I was calling to ask you if you’d be inter-
ested in playing golf with me today? Two of my friends are going golfing
today and we needed someone to complete our foursome,” Bob added.
Tom responded by saying, “I’d be happy to play today…what time are
you going?” “We have a tee time set up for 1:00 this afternoon,” Bob said.
“What course are you playing on Bob?” Tom asked. “I’m happy to say that
we were able to get on Oakmont Country Club,” Bob replied. “Oakmont,
wow!” Tom exclaimed. “How were you able to get a round of golf on such
a prestigious golf course?” Tom asked. Bob replied and said, “One of the
guys we’ll be playing with is a member there.” “Jeff Johnson is the guy’s
name,” Bob added. “Sounds great Bob, so you want me to meet you there?”
Tom asked. “No Tom, I’ll come pick you up about 12:15,” Bob said. “Okay,
see you then Bob,” Tom replied.
Right on schedule, Bob pulled into Tom’s driveway, and they loaded Tom’s
clubs into the car and off they went. Tom was very excited to be playing his
first round ever on Oakmont Country Club. After all, Oakmont Country
Club has hosted more major Championships than any other course in the
United States, including eight U.S. Opens, five U.S. Amateurs, three PGA
Championships, and two U.S. Women’s Opens. Tom knew that Oakmont
is perhaps the most difficult course in North America. It has 210 deep
11
bunkers (personified by the Church Pews), hard and slick greens that slope
away from the player, and tight fairways requiring the utmost driving
precision. Tom has been an avid golfer for many years and remembered
going to the 1973 U.S. Open. That year, Johnny Miller shot a final round
63 to win, and Golf Digest ranks Oakmont #4 in its most recent version of
America’s Top 100 courses. Tom was very excited so say the least!
“So, Bob, what have you been up to lately?” Tom asked. “I’ve been con-
sulting as usual,” Bob replied. “How about you Tom?” Bob asked. Tom
then proceeded to tell Bob that he had been awarded a permanent seat on
his company’s Board of Directors, plus he told him about his huge royalty
check. Bob just smiled and told him that he was very deserving of both the
promotion and the large royalty check.
“You told me about Jeff Johnson, but who else are we playing golf with
today Bob?” Tom asked. “The other guy’s name is Pete Hallwell,” Bob
replied. “So who are these two guys Bob…how do you know them?” Tom
asked. “Jeff Johnson is the CEO of a company I consulted for a few years
ago,” Bob replied. “I’ve never met Pete Hallwell,” Bob added. “All I know
is that he is the CFO of a Hospital complex located in Pittsburgh,” said
Bob. “What company does Jeff work for Bob?” Tom asked. “Jeff works for
Toner International, a company that makes dry ink (toner) for copiers,”
Bob replied.
A short while later Tom and Bob arrived at Oakmont Country Club,
ready for their round of golf. They walked into the club house, checked
in, and attempted to pay for their round of golf. To their surprise, the
round had already been paid for by Jeff Johnson. They both loaded their
golf clubs onto a golf cart and then decided to go to the putting green to
practice putting before their round began. As they were practicing, Jeff
and Pete joined them on the putting green. “Good morning Bob,” said Jeff
as they shook hands. “Bob, I’d like you to meet Pete Hallwell,” and the two
of them shook hands. “Jeff and Pete, I’d like you to meet Tom Mahanan,”
and they both shook Tom’s hand. After sharing a few pleasantries, it was
time to go to the first tee.
They decided that Pete and Tom would ride together in one cart and Jeff
and Bob would be in the other cart. They also decided to play team golf,
with each team being the cart occupants. That is, Pete and Tom would
be one team and Jeff and Bob would be the other team. Since apparently,
they all averaged about the same scoring average when playing, the team
with the lowest total score would be the winner. They all agreed that each
The Phone Call • 13
player would put up $50 for the winning team to collect. The first hole was
a 482-yard, par four hole, with numerous sand bunkers along the fairway.
They flipped a coin to see which team would tee off first, and Pete and
Tom won the toss.
Pete was the first to tee off and hit his drive down the center of the
fairway, right around 285 yards. Tom was next to hit and hooked his
drive into one of the fairway sand traps. Jeff was next to tee off and hit
a beautiful drive down the center of the fairway about 20 yards ahead of
Pete’s drive. Bob’s drive sliced and like Tom’s drive went into one of the
many bunkers. As they drove to their next shots, Tom asked Pete what
kind of work he was involved in, and Pete responded by telling him that
he was employed as the Chief Financial Officer at the Maximo Health
Center Complex. He then explained that the Health Center Complex was
a conglomeration of six different hospitals. He then asked Tom, “What
do you do for a living?” Tom responded by saying that he was originally
a Finance Director at a company named Tires for All, but that in recent
years, he had become deeply involved in continuous improvement activi-
ties. He also explained that recently, he had been given a permanent
board seat on his company’s Board of Directors, provided he continued
his continuous improvement work.
Tom and Pete arrived at Tom’s ball which was buried in the sand trap.
Tom estimated the yardage, took out his club, and struck the ball, which
sailed to the front edge of the green. “Nice shot Tom!” Pete said. They then
arrived at Pete’s ball, and he managed to hit it within 3 feet of the pin.
Meanwhile, Bob and Jeff had also played their second shots, and both had
managed to hit the green. Bob was about 25 feet from the pin, and Jeff was
within 15 feet for his birdie. Tom chipped up close to the pin and tapped
in his par putt. Bob lined up his putt and rolled it to with 2 feet which he
tapped in for his par. Jeff putted next and lipped out and then tapped his
in for a par. Pete was last to putt, and although his putt was only 3 feet, he
took his time reading his putt and then, like Jeff he lipped out his putt and
had to settle for par. So, after one hole the match was tied.
As they continued playing, Tom and Pete kept chatting about their jobs
as did Bob and Jeff. Pete was interested in learning why Tom had changed
his career path from finance to consulting and asked him why he had
made this change. “Good question Pete. For quite a few years I had been
working in the finance arena for three different companies. In all of the
companies I worked for, I had been using traditional Cost Accounting to
make all of my company’s financial decisions,” Tom explained. “In my last

job, we brought in an outside consultant, to help us improve our profit-
ability, and it was this move that changed my entire approach to making
financial decisions,” Tom explained. “What do you mean that it changed
your approach to making financial decisions?” Pete asked.
Before Tom could answer, they had arrived at the second hole which
was a 340-yard par four, with, once again, numerous sand traps along the
fairway. Tom was the first to tee off, and this time hit his drive down the
middle of the fairway right around 290 yards. Pete was next and hit and he
hit his drive right around 300 yards, again down the middle of the fairway.
Jeff and Bob both hit their drives in the middle of the fairway right around
300 yards. Tom and Pete left the tee box, and Tom began answering Pete’s
last question about how he had changed his approach to making financial
decisions. Tom began, “As I said, for years, probably just like you Pete, I
had been using Cost Accounting to make my company’s financial deci-
sions. The fact is, I didn’t know any other way to make financial decisions.
But as I mentioned, at Tires for All we had decided to bring in an outside
consultant to help us improve our profit levels,” Tom explained.
Pete was listening attentively, and Tom continued. “We had tried both Six
Sigma and Lean Manufacturing to improve our profits, but our profit levels
still weren’t high enough to satisfy our Board of Directors,” Tom explained.
“What were your profit levels Tom?” Pete asked. “When we started our
improvement journey, our profits were right around ten percent,” Tom
stated. “And that wasn’t good enough to satisfy your Board of Directors?”
Pete asked. “Not even close!” Tom replied. Tom continued, “The Board of
Directors actually was looking for Tires for All to double our profits to
twenty percent!” He exclaimed. “Wow! That was a daunting task to say the
least!” Pete responded. “Yes, it was, or at least I thought it was at the time,”
Tom said. “What do you mean, you thought it was?” Pete asked.
Just then, they arrived at Tom’s ball. Tom pulled out a six iron and hit a
beautiful shot to within 10 feet from the pin. “Nice shot,” said Pete. Bob
was next to hit, and he managed to hit it in one of the sand traps beside
the green. Pete was next to hit, and like the first hole, he hit another great
shot to within 4 feet from the pin. Jeff hit next and landed the ball about
20 feet from the pin. As they headed to the green, Pete repeated his ques-
tion to Tom, “Tom, what did you mean when you said at the time, you
thought improving your profit levels from ten percent to twenty percent
was a daunting task?”
“What I meant was that, as you know, the overwhelming message from
Cost Accounting is that if you want to improve your profit levels you need
to look for new ways to save money,” Tom stated. “What’s wrong with that
Tom?” Pete asked. “The bottom line is that there is only so much money
that can be saved in any company,” Tom explained. “The consultant we
brought in explained that the key to improving profits is not through how
much money you can save, but rather we should be looking for ways that
will “make us money,” and the two approaches are dramatically different,”
Tom said. “I’m confused,” said Pete. “Please tell me more,” he added. The
foursome arrived at the second green with Bob checking his ball in the
sand trap while the other three lining up their putts. Bob pulled out his
sand wedge and hit it to within 10 feet from the pin. Jeff was next and hit
a beautiful putt that dropped into the hole for a birdie. Tom was next, and
like Jeff, he nailed his birdie putt. Pete then took his time and lined up his
four-footer, but like the first hole, he missed his birdie opportunity. So,
after two holes, the match remained all square.
The third hole was another par four at 428 yards with numerous sand
traps on either side of the fairway. Tom was the first to tee off and man-
aged to hook his drive into a massive sand trap along the left side of the
fairway. Jeff was next to hit and once again hit a beautiful drive up the
middle of the fairway estimated to be 305 yards. Pete then hit his drive
around 290 yards, again in the center of the fairway. Bob was last to hit
and pushed his drive into a trap along the right side of the fairway.
Tom and Pete climbed into their cart, and Pete repeated his question,
“Tom, why did you say that saving money is different than making money?”
Tom responded and said, “Pete, in order to explain this difference, I need to
explain something referred to as the Theory of Constraints.” “The theory of
what?” Pete asked. “It’s called the Theory of Constraints and it was devel-
oped by Dr. Eliyahu Goldratt back in the 1980s,” Tom explained. “Let me try
to explain the basics of this theory,” Tom said. “The Theory of Constraints
is basically a management paradigm that states that in any manageable
system, you are limited on how much of your goal you can achieve, by a
very small number of constraints, or as they’re also known, bottlenecks.
Goldratt explained that there is always at least one constraint, and the
Theory of Constraints uses what he sometimes called, a focusing process.
The first thing you must do is identify your constraint and then exploit it to
maximize its throughput potential. You must then subordinate the rest of
the organization to it. When Goldratt introduced the world to the Theory of
Constraints, he used a chain analogy to explain this concept and explained

that a chain is no stronger than its weakest link,” Tom explained. “Are you
with me so far Pete?” Tom asked. “I’m not sure Tom,” Pete responded.
They arrived at Tom’s ball, and by the look on Tom’s face, you could tell
that he wasn’t happy with where his ball was. It seems that his ball was
buried in the sand as he could only see the top of it. He pulled out his
three iron, took a huge swing, but only managed to move the ball about
50 yards. Bob was next to hit, and like Tom, he was in a sand trap. He man-
aged to move the ball just off the edge of the third green. Pete was next to
hit, and once again, he hit a beautiful shot to within 7 feet from the pin.
Jeff was last to hit and landed on the green about 15 feet from the pin. Tom
and Pete began driving toward the third green until they came to Tom’s
ball. Tom was about 75 yards from the pin, so he used his pitching wedge
and nearly holed the shot, but because the greens were so fast, his ball
rolled 20 feet past the pin.
Everyone putted well except for Pete, as like the first two holes, he
missed another opportunity for a birdie. In fact, he ended up three-put-
ting from 7 feet for a bogey. Pete and Tom were now two shots behind as
they moved to the fourth hole’s tee box. Hole number four was playing at
over 600 yards with a severely undulating green. So, when you take into
account the speed of these greens and then add undulations, this was seen
as the hardest hole on the golf course. Jeff was the first to tee off, and like
the first three holes, he hit a beautiful drive up the center of the fairway.
Bob hit next and hit a nice drive up the right-hand side of the fairway. Tom
also hit a good drive up the left-hand side of the fairway. Pete was the last
to hit and nailed his longest drive of the day, well over 300 yards in the
center of the fairway.
As Tom and Pete drove their cart, Tom tried once again to explain the
Theory of Constraints. “Pete, I want to try a different approach to explain
the Theory of Constraints,” he said. “Pete, if I were to ask you what your
goal is when you play golf, what would you say it is?” Tom asked. Pete,
with a quizzical look on his face, said, “I think it would be to shoot even
par? So after the first three holes today, what would you say is preventing
you from reaching your goal?” Tom asked. “That’s easy, if I could make
a putt or two, or at least make my short putts, I could have been at even
par,” Pete said. “So, the factor that is preventing you from making pars is
your putting?” Tom asked. “Yes, that’s pretty obvious,” Pete replied. “Pete,
then putting is your constraint,” Tom said. “If you want to move closer
to your goal of shooting even par, you have to come up with a way to
make more putts, right?” Tom asked. “I see your point Tom, my putting is
my constraint,” Pete replied. “If I want to make more pars, I need to cor-
rect or improve my putting,” he added. “That’s correct Pete,” Tom replied.
“Your focus doesn’t need to be on driving or iron shots. It needs to be on
your putting,” Tom added. “I truly do understand your point Tom,” Pete
replied. “So, can you tell me more about this Theory of Constraints Tom?”
Pete asked. “I mean, I understand about the constraint as it applies to my
golf game, but how does it apply to our jobs?” Pete added.
And with that request, Tom began his explanation again. Tom pulled
out his cell phone from his pocket and loaded a diagram onto his screen
(Figure 2.1). “What you see here is a simple cross section of a piping sys-
tem used to deliver water through a series of pipes using only gravity for
the water to flow. Water enters into Section A, then flows into Section B
and continues flowing until the water reaches and collects in the recep-
tacle at the base of the piping system. So Pete, if you wanted more water
FIGURE 2.1
Piping system with Section E as the constraint.
to flow through this system, what would you do and why would you do
it?” Tom asked.
Pete looked at Tom’s drawing and then said, “Well based on what you
explained about my golf game, it seems to me that the only way to get
more water to flow would be to insert a wider diameter pipe in Section E.”
“And why do you think this would be the way to get more water flowing
through this piping system?” Tom asked. “Because Section E’s diameter is
the smallest diameter pipe, so water tends to back up in front of Section E,”
Pete responded. “That’s correct Pete,” replied Tom.
They were now ready to hit their second shots on this very long par five
hole. Both Jeff and Bob hit their shots and managed to stay out of any
sand traps, but unfortunately, Bob hit his drive into the rough with the
grass being about 4 inches long. Tom hit next and hit a very good three
wood up the center of the fairway. Pete was last to hit and hit an excellent
three wood up near the green. Pete and Tom got back into their cart and
without hesitation, Pete said, “Can you please tell me more about what
you call the Theory of Constraints?”
With that, Tom loaded another figure on his cell phone’s screen
(Figure 2.2). “What you see here is the same piping system, only this time
we have taken your suggestion and inserted a larger diameter pipe in
Section E and as you can see, more water is now flowing. So Pete, tell me
what you see now,” Tom said. Pete reviewed this new image and then said,
“Well for me, it appears as though the constraint has moved to Section B?”
he said in a question-like statement. “That’s absolutely correct Pete!” Tom
said emphatically.
“So, Tom, how does this piping system example relate to our everyday
jobs?” Pete asked. And with that question, Tom again loaded a new image
onto his phone (Figure 2.3). “So, Pete, here is a very simple process with
four steps and the time required to complete each of the four steps. In this
example we are looking at a simple manufacturing process. Raw materials
enter into the process at Step 1 which takes 5 minutes to complete. The
work at Step 1 is completed and then the semi-finished material is passed
on to Step 2, which takes 30 minutes to complete. When completed, Step
2 passes its semi-finished product on to Step 3. Step 3 requires 60 minutes
to process the in-coming material and then passes it on to Step 4, which
takes 10 minutes to transform the material into a finished product,” Tom
explained. “With the piping system example in mind, where is the con-
straint in this process?” he asked. Pete then studied the new image on
FIGURE 2.2
Piping system with Section B as the constraint.
Tom’s phone and said, “I think because Step 3 takes 60 minutes to com-
plete, it would have to be the constraint.” “Good job Pete!” said Tom.
They now arrived at Tom’s ball, and after studying the yardage to the
pin, he pulled out a seven iron and hit it onto the green about 30 feet from
the pin. Jeff and Bob both hit their shots, and both had birdie putts. Not
close putts, but birdie putts none the less. Pete, who was just off the green,
studied his next shot as though he was lining up a putt. He decided to use
his putter for this shot and stroked the ball, and to his surprise, he made
the putt for an eagle! Everyone else two-putted for pars, but because of
Pete’s eagle, the match was all square again. Needless to say, Pete was very
excited about his eagle, especially since it was considered the hardest hole
on the golf course!
FIGURE 2.3
Simple 4-step manufacturing process.
When Tom and Pete were back in their cart, Tom pulled up the image
on his phone again and began speaking. “Pete, in this image of a manu-
facturing process (Figure 2.3), if you were now forced to produce product
at a faster rate, what would you have to do and why would you do it?” Tom
asked. Pete studied Tom’s sketch again and said, “Well just like the pip-
ing diagram, if we needed more product to satisfy more orders, we would
have to reduce Step 3’s time.” “And why did you say that Pete?” Tom asked.
“Because it is the constraint, and the constraint controls the output of any
process?” he said in a question-like manner. “Exactly correct Pete!!” said
Tom enthusiastically.
Tom continued, “Goldratt presented the world with what he referred to
as the Five Focusing Steps which are:
• Step 1: Identify the system constraint.

• Step 2: Decide how to exploit the system constraint.
• Step 3: Subordinate everything to the system constraint.
• Step 4: If necessary, elevate the system constraint.
• Step 5: When the constraint is broken, return to Step 1, but don’t let
inertia create a new constraint.”
“What do you mean by subordinate, Tom?” Pete asked. “Let me ask you
another question Pete,” Tom replied. “Thinking back to our simple four
step process presented earlier, what would happen to this process if every
step ran at its full capacity?” Tom asked. “I’m not sure what you mean?”
Pete replied. Tom loaded a new image onto his cell phone of the same four-
step process and added work-in-process inventory to it (Figure 2.4).
“What you see here is what happens to the same 4-step process if the
steps in front of the constraint are permitted to run at their full capacity.
The system becomes clogged with WIP inventory which encumbers the
process and needlessly ties up excessive cash,” Tom explained. “So, the con-
cept of subordination simply means, in real terms, that non-constraints
should never outpace the system constraint. You can imagine what this
FIGURE 2.4
Simple 4-step process with excessive WIP inventory.
process might look like if it ran for three shifts at maximum capacity at
each step,” Tom explained. “That is the essence of the basics of the Theory
of Constraints Pete,” Tom added. “But having said that, some time I’d
like to show you a different form of accounting known as Throughput
Accounting,” Tom said. “Why don’t we get together for lunch one day
next week Tom?” Pete asked. “Just let me know what day and time works
for you Pete,” Tom replied.
“Before we finish today, I see how this works for a manufacturing pro-
cess, but what about a service industry like my hospitals?” Pete asked. “The
bottom line is that exactly the same principles apply to service industries
that apply to manufacturing,” Tom explained. “How could that be Tom?”
Pete asked. “Pete, your hospitals have processes just like a manufacturing
company does,” Tom explained. “And each step in your processes have a
cycle time to complete each of the steps,” Tom continued. “When we get
together next week, I’ll get into this in more detail,” Tom added.
The rest of the day was spent playing the remaining holes, and in fact,
as they approached the 18th hole, they were all tied. This is by far the most
picturesque hole at Oakmont and perhaps the greatest finishing par 4 in
golf. If you want to score well, you have to drive the ball in the fairway
to avoid what they call the “chip out” bunkers on the left and right. The
yardage on this hole was 484 yards and Pete was the first to hit his driver.
He hit it really well and kept it out of the bunkers. Jeff hit next, and he too
hit an excellent drive right down the middle of the fairway. Bob hit next,
and he too kept it out of the bunkers and in the fairway. Tom stepped up
next and hit his best drive of the day, nearly 320 yards down the center of
the fairway.
As they drove up the fairway toward their balls, Tom and Pete reflected
on their day. Pete was very appreciative of all that Tom had taught him
and told him he was very anxious to hear about Throughput Accounting.
Both Jeff and Bob hit their second shots, and both landed on the green,
with both about 20 feet from the pin. Pete hit next and hit a very high shot
that landed very close to the pin, but then because it had so much spin on
it, it had backed up about 15 feet from the pin. Tom was the last to hit and
hit his best approach shot of the day that ended up 4 feet from the hole.
Jeff and Bob both two-putted for par, as did Pete. Tom asked Pete to help
him read his putt, which he did. Tom knew that if he made this putt, he
and Pete would be one hundred dollars richer. He stood over his putt and
stroked it, and it went around the cup before it fell into the hole for the
match winner. Pete and Tom hugged each other in celebration and then
collected their winnings.
It was a good day for Pete and Tom, but especially for Pete. He felt a
new-found desire to learn more about the Theory of Constraints, but more
importantly, Throughput Accounting. Like Tom, Pete had always spent
his days working in the financial field, and he was anxious to learn more
from Tom. And that day would come one day next week.
3
The Meeting
Pete contacted Tom early Monday morning and told him that if he could
meet on Wednesday at 9:00 am, he would free up that day and time to
meet with him. He also reiterated how excited he was to learn about
Throughput Accounting. Tom agreed on the date and time, and decided
to create a slide deck on Throughput Accounting. He decided to use the
same slide deck that he used at Tires for All since it seemed to resonate
with everyone and they were able to take it and use it in their financial
decision-making.
It was now Wednesday morning, and Tom left for his appointment
with Pete. He arrived right on schedule, and the security guard called
Pete to let him know that Tom was in the lobby. Shortly thereafter Pete
arrived in the lobby and signed in Tom. They took the elevator to the
seventh floor and shared pleasantries with each other. “Tom, I want you
to know how much I enjoyed playing golf with you,” said Pete. “In addi-
tion to winning, I just learned so much during our round,” he added. “I
enjoyed it too Pete,” Tom replied. The two of them went to a conference
room, and Pete let Tom know that he had invited a couple of his employ-
ees to join them, so they could learn about Throughput Accounting as
well. The two employees arrived and introduced themselves to Tom. “I
am Cindy McPherson and I am a Cost Accountant,” she said. “And I
am Bruce Johnson and I am the Accounting Manager here at Maximo
Health Center Complex.”
Tom began, “Before I begin, I want you all to know that I had been a
Director of Finance for quite a few years and I was a strong advocate for
the principles of Cost Accounting. I had never been exposed to the Theory
of Constraints or Throughput Accounting, but after I heard about both, it
absolutely changed my approach to financial decisions as soon as I learned
23
what it had to offer. So, since all of you are involved in financial decisions,
I want you to pay close attention to what I have to say today. I truly believe
that if you listen to what I have to say, with an open mind, it will absolutely
change your approach to making money for your hospital complex. But
before I begin, I think it’s important for both Cindy and Bruce to hear a
bit about the Theory of Constraints,” Tom explained.
Tom took his time and presented the same graphics that he had shown
Pete on the golf course. He began with his piping system and asked the
same kind of questions he had asked Pete. He then presented the simple
4-step process and, again, asked questions similar to what he had asked
Pete. He then presented Goldratt’s Five Focusing Steps, and both Cindy
and Bruce seemed to “get it” like Pete had. They both asked good ques-
tions along the way, and when Tom was satisfied that they both under-
stood the basics of the Theory of Constraints, he began his discussion on
Throughput Accounting.
Tom began again, “The primary focus of Cost Accounting, as you all
know, is per part or per unit cost reductions. Because perceived cost
reductions are viewed so favorably, is it any wonder why there is so much
emphasis on measuring the performance metric efficiency? I assume you
use that metric here, correct?” They all indicated that it was one of their
key metrics. Tom began again, “And yet cost reductions don’t seem to be
the answer for most companies. There have been very many highly effi-
cient companies that have come close to going out of business or have
actually gone out of business. Have you ever heard of a company that has
saved themselves into prosperity?” he asked rhetorically, and he noticed
heads bobbing up and down in agreement.
“Many companies will categorically state that the primary goal of their
company is to make money, and yet they spend the largest portion of their
time trying to save money. It would almost appear as if they’ve forgot-
ten what their goal really is. I’m here to tell you that the strategy you use
to make money, is infinitely different than the strategy you would use
to save money,” he explained. He continued, “For most companies, the
assumption is that the actions required to save money are the same actions
required to make money. That is, if you somehow save enough money, it’s
believed in many cases to be the same as making money, but believe me
this is absolutely not true,” he explained. “Any questions so far?” he asked,
but there weren’t any, so he continued.
The Meeting • 25
“These two approaches to making a profit are opposite in their thinking,

and each one takes you in a very different direction with absolutely differ-
ent results. If the goal of your company is to save money, then probably the
best way to accomplish your goal might be to just go out of business. Think
about it, wouldn’t this action save you the maximum amount of money!”
Everyone chuckled at what Tom had just said. “However, if the goal of your
company is to make money, then a much different strategy must be used
and that is by maximizing throughput through the system, or in your case
maximizing the number of patients you see and treat,” Tom explained.
Cindy raised her hand and said, “I’m confused Tom. If you save enough
money, won’t you end up making money?” Tom responded and said, “I
used to think along those same lines Cindy when I worked in Finance,
but what I learned changed my approach completely. Stay with me and I’ll
show you why,” he said.
“Maybe it’s possible that some of the Cost Accounting rules and meth-
ods might be wrong and might mislead you into thinking some results are
better than they really are. Is it possible that there might be another way
to look logically at the practice of Accounting, that will truly get us closer
to our goal of making money? What if there was another way? A way that
provides an alternative accounting method that allows us to consider
abandoning or even ignoring the Cost Accounting rules that are causing
so much trouble? I want to now present a look at Throughput Accounting,
but before I do, I want everyone to understand that we can’t totally aban-
don Cost Accounting, simply because it’s required by law when we report
our results. What I’m about to explain though is a better way to make
real time financial decisions,” he explained to a very captive audience,
especially Pete. “Any questions before I explain Throughput Accounting?”
Tom asked. There weren’t any, so Tom began again.
“As I mentioned, Throughput Accounting is not an attack on Cost
Accounting, but rather a different way to look at the accounting measures
and manage the company at a much higher success and profitability level.
In its basic form, Throughput Accounting uses primarily three basic per-
formance metrics which are Throughput (T), Investment/Inventory (I), and
Operating Expense (OE). These three metrics are a simplified methodology
that removes all of the mystery of Accounting and rolls it into three simple
measures. So, let’s look at the definition of these three, primary metrics,” he
said and posted a new overhead on the screen (Figure 3.1).
Throughput is the rate at which inventory, or in your case patients, is converted into sales
or revenue. If you make lots of products and put them in a warehouse, or in your case, see
lots of patients and have them wait in waiting rooms, that is not throughput, it’s just
inventory. The products or services only count as Throughput if they are sold to the
customer and you receive fresh money back into the business system.
Investment/Inventory is the money an organization invests in items that it intends to sell
or treat. This category would primarily include inventory, both raw materials and finished
goods. It also includes things like buildings, machines and other equipment used to make
products for sale, knowing that any, or all of these investments, could at some point in
time, be sold for cash.
Operating Expense is all of the money spent generating Throughput. This includes things
like, rent, utilities, phone, benefits, wages, etc. It is any money spent that does not fit
within one of the first two Throughput Accounting categories.
FIGURE 3.1
Definitions of T, I, and OE.
Tom then said, “When you read and understand these definitions, it
seems likely that all the money within your company can be categorized
to fit within one of these three measures.” He then asked if there were any
questions or comments, but again, there were none. This audience was
captivated by what Tom was saying.
Tom then explained, “In thinking about Throughput Accounting, it’s
important to consider the following thoughts. Throughput Accounting is
neither costing nor Cost Accounting. Instead, Throughput Accounting is
focused on cash without the need for allocation to a specific product, which
is very different than Cost Accounting.” He continued, “This concept
includes the variable and fixed expenses for a product or service. The only
slight variation would be the calculation for Total Variable Cost (TVC). In
this case the TVC is a cost that is truly variable to a product or service, such
as raw materials, paying a sales commission or shipping charges.”
The Meeting • 27
Tom continued, “The sum total of these costs becomes the Totally
Variable Costs or TVC. TVC is only the cost associated with each product
or service. Some would argue that labor should also be added as a variable
cost per product, but this is simply not true! Labor is no longer a variable
cost, it’s a fixed cost. Think about that! In terms of hourly labor measures,
you pay employees for vacation, holidays and sick leave. You even pay
them while they are making nothing or servicing no one! The employees
cost you exactly the same amount of money, whether they are at work or
not. Using this example, labor is an Operating Expense and not a vari-
able cost associated with products or services, which is a vastly different
concept than how Cost Accounting treats labor,” Tom explained and then
inserted a new slide onto the screen (Figure 3.2).
Throughput (T) = Product Selling Price (SP) – the Total Variable Cost (TVC). Or simply
T = SP – TVC.
Net Profit (NP) = Throughput (T) minus Operational Expense (OE). Or NP = T – OE
Return on Investment (ROI) = Net Profit (NP) divided by Inventory (I).
Or ROI = NP/I
Productivity (P) = Throughput (T) divided by Operating Expense (OE).
Or P = T/OE
Inventory Turns (IT) = Throughput (T) divided by Inventory Value (IV).
Or IT = T/IV
FIGURE 3.2
Throughput Accounting definitions.
“Are there any questions about what I’ve presented so far?” he asked.
Cindy raised her hand and asked, “Where did all of this come from Tom?”
Tom responded, “Throughput Accounting was proposed by Dr. Eliyahu
M. Goldratt as an alternative to traditional Cost Accounting in his and
Jeff Cox’s classic novel, [1] The Goal.” “Okay, thank you.” Cindy responded.
Tom added, “I would encourage you to get a copy of their book or a book
entitled, Epiphanized by Nelson and Sproull.”
He continued his explanation, “Some would argue that Throughput
Accounting falls short because it is not able to pigeon-hole all of the cate-
gories of Cost Accounting into Throughput Accounting categories. Things
like interest payments on loans, or payment of stock-holder dividends, or
even depreciation of machines or facilities. However, this argument is
invalid. Ask yourself, which one of those specific categories can’t be placed
into one of the Throughput Accounting categories?” Tom said.
“The baseline Throughput Accounting concept is really very simple.
Think of it this way. If you have to write a check to somebody else, it’s either
an Investment (I) or it’s an Operating Expense (OE). It’s an Investment,
if it is something you can sell for money at some point in time. It’s an
Operating Expense if you can’t. Just put this debt in the category that
makes the most sense. On the other hand, if somebody is writing a check
to you, then it’s probably Throughput (T). Cost Accounting rules have
made it much more complicated than it needs to be. And when you make
it that complex and difficult, the stranglehold that Cost Accounting has on
your thinking becomes even more obvious,” Tom explained.
“Throughput Accounting is really focused on providing the necessary
information that allows your decision-makers, like all of you, to make bet-
ter decisions in real time. If the goal of your company is truly to make more
money now, or make more money in the future, then any decisions being
considered should get your company closer to the goal and not further
away. Effective decision-making is well suited for an effective Throughput,
Inventory, and Operating Expense analysis. This analysis can show the
impact of any local decisions on the bottom line of the company,” Tom
explained. Bruce Johnson then asked, “Why has this form of Accounting
not been made more well-known? I mean, based on what you’ve explained
so far, why isn’t it taught more in graduate schools?” he asked. “I wish I
had a good answer for you Bruce, but I don’t. All I know is that when I
learned about it, it changed my whole approach to how companies should
go about making better profits,” he responded.
The Meeting • 29
He then said, “Ideally good business decisions should cause these three
things to happen. First, Throughput (T) should increase while, at the
same time, Investment/Inventory will either decrease or stay the same.
It is possible that Investment/Inventory can go up as long as the effect on
Throughput is exponential. In other words, sometimes a very well-placed
investment can cause the Throughput to skyrocket. The third thing that
will happen when a good decision is made is that Operating Expenses will
either decrease or stay the same. It is not always necessary to decrease
Operating Expenses in order to have a dramatic effect on Throughput and
ultimately profits. Consider the situation where the Throughput actually
doubles and you didn’t have to hire anyone new to do it, nor did you have
to lay anyone off.”
“The decision-making process becomes much easier when these factors
are considered. The movement either up or down, of these three measures
should provide sufficient information for good strategy and much better
decisions. Any good decision should be based on global impacts to the
company, and not just a single unit or process in isolation. If your think-
ing is limited to the lowest level of the organization, and you are focused
on the wrong area, then the positive impact will never be seen or felt by the
entire organization,” Tom explained.
And again, Tom continued, “If we compare these two concepts at the high-
est level, then Cost Accounting is all about the actions you take to try and
save money, while Throughput Accounting is all about the actions you take
to make money. Once you’ve made the cost reductions and you still need
more, what do you do next? Where else can you reduce costs? On the other
hand, making money, at least in theory, is infinite. What is the limit on how
much money your company can make now?” Tom asked rhetorically.
“In conclusion, the Throughput Accounting cost model contains only
Total Variable Cost (TVC) and Throughput (T). The calculation is sim-
ple: Throughput = Selling Price – Totally Variable Costs. Throughput, in
essence, equals the dollars remaining from selling the product, or deliv-
ering the service, after you have subtracted the Totally Variable Cost.
Nothing is allocated, nothing is assumed, it’s just a simple cash calcula-
tion from the sale,” he explained. “The bottom line is this, if you have sales
that you can’t meet, or services you can’t deliver, it’s time to focus on your
constraint and drive Throughput higher and higher. When Throughput
increases and Operating Expenses decrease or remain the same, your
profit margins will increase proportionally,” Tom stated.
Tom continued and explained, “this is what we did at Tires for All and
our margins increased dramatically. Before I conclude, I want to show you
several run charts of our key performance metrics, and with that said, he
posted these run charts (Figures 3.3–3.6). Here are our run charts for Profit
Margins, Efficiency, On-Time Delivery, and Stock-Out Percentage and as
you can see everything improved over time except for our Efficiency. In
fact, if you compare our profit margins to our efficiency numbers, they
are polar opposites. That is, as our efficiency decreased, our profit margins
increased at the same time. What conclusions can you draw?”
With all this being said about the accounting method comparison, Tom
recommended that everyone take a break, but to be back in fifteen min-
utes. Before they left, he asked if there were any questions, and Pete raised
his hand. “In your last graph, you show stock-outs decreasing dramati-
cally. Why did this happen?” “Hold that question until we come back,”
Tom said.
Pete stayed behind to speak with Tom. “Tom, I have to tell you, that
was one of the finest presentations I have ever heard!” “Well thank you
Pete, can I ask what you liked about it?” Tom asked. “So many things
Tom. You took a very difficult subject and made it seem so easy, but what
I really liked is that you have convinced me that our company needs to
FIGURE 3.3
Profit Margins.
The Meeting • 31
FIGURE 3.4
Efficiency.
FIGURE 3.5
On-time Delivery.
FIGURE 3.6
Stock-out Percentage.
implement Throughput Accounting!” Pete replied. “It’s as though we have

been tripping over dollars to pick-up pennies!” he added.
“Like I told this group, throughout my career, I have been working in
the financial world in some capacity, but once I heard about Throughput
Accounting, and what it can do for a company, I was convinced imme-
diately that Tires for All needed to apply this method to our financial
decision-making process!” Tom explained. “And the good news is, once
we focused on increasing Throughput, our profitability dramatically
improved to the level we now have,” he added. “When everyone comes
back from break, I want to say a few words to Cindy and Bruce, before you
begin speaking again,” Pete said.
When Cindy and Bruce were back in the conference room and seated,
Pete began speaking. “I don’t know about everyone else, but once I heard
what Tom had to say about Throughput Accounting, I was convinced that
this has to be embraced by our company. I say this, not because I want
everyone to abandon Cost Accounting, but rather because I am convinced
that in terms of real-time financial decisions, Throughput Accounting is
much superior to it. So, with this in mind, I want our company to begin
using Throughput Accounting to this end. I truly believe that by coupling
The Meeting • 33
our decision to eliminate driving efficiencies higher in non-constraints,

with driving Throughput higher, the profitability of our companies will
skyrocket!” And with that, he turned the podium back over to Tom.
“Thank you, Pete for your kind words about my presentation on
Throughput Accounting,” Tom said. “Do any of you have any questions for
me about anything I presented to you today?” Tom asked. Pete raised his
hand and said, “Before I met you, I had never heard about the Theory of
Constraints, and I must say, it has changed my thinking going forward. My
question is a general one in nature. What else can the Theory of Constraints
do for our company?” he asked.
Tom looked at the audience and said, “The Theory of Constraints has so
many facets to it. For example, earlier I presented run charts for on-time
delivery and stock-out percentage. The Theory of Constraints version of
its parts replenishment solution is completely different than what you are
probably using. Imagine, for example, that you could very easily imple-
ment a procedure that could reduce your medical products inventory by
fifty percent, while virtually eliminating stock-outs,” he explained. “The
Theory of Constraints also has its own version of a scheduling system that
is far superior to what you’re probably using now. This system is known
as Drum Buffer Rope,” Tom said. “In addition, the Theory of Constraints
has a logic-based method that will help you plan your future improvement
initiatives,” Tom added. “The list goes on and on as to what the Theory of
Constraints can do for you,” Tom said.
“So, Tom, would you be interested in helping us learn more about the
Theory of Constraints and all that it has to offer?” Pete asked. “What are
you suggesting Pete?” Tom asked. “I was thinking that our company,
Maximo Health Center Complex, could offer you an exclusive consult-
ing agreement to come in and change our approach to running our busi-
ness,” Pete replied. “To be honest Pete, I had never considered working as
a freelance consultant before,” Tom said. “We think you’d be a fantastic
consultant Tom, so please consider my offer,” Pete said. “Would you at
least consider my offer?” Pete asked. “I’ll have to give this some thought
Pete,” Tom replied, and with that, Tom said that he had to leave to go to a
meeting with my Board of Directors.
4
A New Direction
On his way back home from Maximo Health, Tom kept thinking about
the offer he had just received from Pete Hallwell. Tom was very happy with
his current role and had never considered becoming a consultant before.
As he drove home, he thought that maybe he should call Bob Nelson, the
owner of Focus and Leverage Consulting just to discuss this opportunity
with him. Tom had so many unanswered questions in his mind about this
potential opportunity, so he thought maybe Bob Nelson could help him
answer some of his questions.
Tom pulled into his driveway, and his three children came running
out of his house to greet him. Tom’s three kids were named Tom Junior,
Robert, and Susie, and he loved them dearly. His lovely wife Beverly was
inside cooking dinner. Tom and his three children went into his home,
and Susie shouted, “Mommy, Daddy’s home!” Tom went over and kissed
her on the cheek and whispered in her ear, “Honey, after dinner, I have
something we need to talk about, and I need your advice.” “Is it some-
thing serious honey?” she asked. “No, nothing serious, just an opportunity
I want to talk to you about,” Tom replied. They all sat down to dinner, and
when dinner was over, the kids went into the family room to watch TV.
Tom and Beverly went into Tom’s home office, and Tom began. “Honey,
today I met with one of the men I played golf with on Saturday,” Tom said.
“I went there because, during our round of golf, we had talked about the
Theory of Constraints and more specifically, Throughput Accounting,”
Tom explained. Beverly was well aware of both the Theory of Constraints
and Throughput Accounting because she and Tom had talked about both
subjects many times. “Anyway, this man works as the CFO of Maximo
Health Center Complex, and he wanted me to come there and explain
35
Throughput Accounting in more detail,” Tom said. “So, what’s the prob-
lem Tom?” Beverly asked.
“There’s no problem, but there may be an opportunity that I had never
considered before,” Tom replied. “An opportunity?” Beverly asked. “Yes,
after I made my presentation, the CFO, Pete Hallwell, asked me if I would
be interested in coming to Maximo Health Center Complex and become
their exclusive consultant,” Tom explained. “So, what’s your issue Tom?”
she asked. “Honey, the job I have is a great job and it pays so well,” he
explained. “And?” she asked. “The fact of the matter is that I love consult-
ing and I see this as an opportunity to go off on my own and try some-
thing new, just like Bob Nelson,” Tom said. “Honey, no matter what you
decide to do, I will support your decision,” Beverly added. “Here’s what
I was thinking honey,” Tom said. “I thought it might be a good idea if I
had a conversation with Bob Nelson about the pros and cons of becoming
an independent consultant,” Tom added. “I think that’s a great approach
Tom, so I would do it if I were you. As I said, no matter what you decide to
do, I will support your decision,” Beverly said.
After talking with his wife, he decided to call Bob Nelson and set up a
meeting with him. “Hi Bob, it’s Tom, how are you?” Tom asked. “I’m fine
Tom, what’s up?” he asked. “Do you have time to meet with me to chat
about an opportunity I’ve been given that could change my whole direc-
tion in my work life?” Tom asked. “Well sure I do. When would you like to
meet?” Bob asked. “Are you free tomorrow maybe for lunch?” Tom asked.
“Where would you like to meet Tom?” Bob asked. “I was thinking that we
could meet at Feroni’s Restaurant around 12:00? Does that work for you
Bob?” Tom asked. “It sure does Tom, I’ll meet you there,” Bob replied.
Right on schedule Bob and Tom arrived at the same time, got a table, and
ordered lunch. “So, Tom, what is it you wanted to talk about?” Bob asked.
“Well, remember when we played golf on Saturday?” Tom asked. “Yes, I do
Tom, you shared a cart with Pete Hallwell and collected fifty dollars from
each of us,” Bob replied. “During our round of golf, we got on the subject of
the Theory of Constraints and more specifically, the basics of Throughput
Accounting,” Tom explained. “After the round, Pete asked me to come to
his company to share my knowledge of Throughput Accounting. When we
were all finished, Pete offered me an opportunity to come consult for his
company,” Tom said. “That’s great Tom, you must have really impressed
Pete for him to make an offer like that!” Bob said. “Apparently I did Bob, but
here’s my question for you,” Tom replied. “Should I take advantage of this
A New Direction • 37
opportunity?” he asked. “Tom, is it something you want to do?” Bob asked.

“I’m not sure Bob, that’s why I wanted to meet with you today,” Tom said.
“Tom, this has to be your decision,” Bob said. “I know that Bob, but
I have many unanswered questions floating through my mind,” Tom
replied. “Such as?” Bob asked. “Well, I’m a pretty practical person,” said
Tom. “Having a regular paycheck and knowing where I’m going everyday
gives me a sense of security,” Tom said. “I’m not sure it’s something that I
want to give up,” Tom explained. “If it makes you feel any better, I had the
same concern before I started consulting,” Bob replied. “What else are you
concerned about Tom?” Bob asked.
“I’m thinking that giving up a steady paycheck might be intimidat-
ing. But regardless of how strong my consulting skills might be, I would
think that every business owner has to embrace some level of uncertainty.
I would also think that it can be very difficult to predict how many new
clients I can bring on board, and exactly how much and when they’ll pay
you,” Tom explained. Bob interjected, “You also have to factor in expenses
like home office equipment, software and even things like insurance. As
an independent consultant, you also need to get comfortable with the dif-
ference between gross revenue and net pay.” “It seems like there are so
many uncertainties by going independent,” Tom replied.
Bob then said, “To account for the increased expenses, when I first
started my business, I created a business checking account, and every two
weeks, I paid myself a relatively conservative salary from that account. At
the end of my first year, I even gave myself a ‘bonus’ with the money I had
accumulated in my business account. I did all this just to make my transi-
tion from employee to independent consultant less stressful.” “I really like
that idea Bob!” Tom exclaimed. “What else?” Tom asked.
“When you’re working on your own, your throughput is directly
responsible for your paycheck. One thing I did was to use a VIP email
address for my clients so that I could respond as quickly as possible. The
other reason for doing this is because I wanted to set the expectation that
I would always be available. You would also have to keep track of the
necessary accounting tools, in order to make sure you always account
for billable time. When I started, I set up a simple Excel file to make this
easier. I then made the jump to QuickBooks in order to cut down on my
time to update my Excel spreadsheets,” Bob explained. “I like that idea
too Bob!” Tom replied. “The flip side of the increased overhead is that
you will then have control over your own schedule. I remember when my
daughter was born, I gave myself a very generous paternity leave. What
you end up with is a very flexible schedule and trust me, this flexibility is
absolutely worth the extra effort required to keep your business running
smoothly,” Bob explained.
“If I take this opportunity, do you think I should work from home or
should I rent an office space?” Tom asked. “When I first started, I abso-
lutely worked from my home, and the good news is, your office space is
tax deductible,” Bob explained. “How about hiring someone to do things
like take care of your books or scheduling your work?” Tom asked. “In
time, I did hire help and that help was my wonderful wife,” Bob said with
a smile. “Nice idea Bob and I think my wife would enjoy working with
me,” Tom replied.
“One of the great benefits of working for yourself is the ability to take on
more or less work, hire or not hire, keep a home office or rent an office—it’s
all up to you. My recommendation is that you take it one step at a time,
just to make sure that you maintain your sanity. You may be wondering
how you go about getting more clients, after your first assignment runs
out?” Bob asked rhetorically. “Yes, how do you go about getting more cli-
ents Bob?” Tom asked.
“One of the first things you need to do is create a website. Your website
should include things like your list of accomplishments, past and pres-
ent clients, testimonials from past clients, you’re approach to continuous
improvement, any training you can provide, and anything else you can
use to market yourself,” Bob explained. “When I first started, I created a
flyer that summarized all of the things I just mentioned and then mailed
it out to numerous potential clients. And here’s something else as you’re
making your decision, because I know you and what you’re capable of. If
I get requests that I can’t honor, because of time constraints, I will send
them your way,” Bob said. “You will send me potential clients?” Tom asked.
“Yes, I would be happy to do that!” Bob said with a touch of emotion.
“So, based on everything we’ve talked about today, what do you think
your final decision will be Tom?” Bob asked. “Well, I feel much more confi-
dent that I can make this work, so right now I’m leaning toward accepting
his offer,” Tom responded. “I think that is a wise decision for you Tom,
simply because I think you will absolutely succeed,” Bob replied. And so,
with their lunch meeting completed, they said their goodbyes. As they were
walking out, Bob turned to Tom and said, “And Tom, if you need any help
creating your website, I’m always available to assist you in any way that
I can.” “Thank you so very much for everything today Bob, and I will prob-
ably take you up on your offer to help me with my website,” Tom replied.
Tom went home and let his wife Beverly know that he had made his
final decision to accept Pete’s offer to consult for his company. He also told
Beverly that he would not be immediately quitting his current position on
the Board of Directors, as he had things to do before that happens. Beverly
was fully supportive of his decision and even told him that if he needed
help getting ready for his transition that she would be ready and willing to
help in any way she can.
The next morning, Tom put in a call to Pete, just to let him know that he
would accept Pete’s offer. Pete didn’t answer the phone, so he left a voice
mail for Pete to return his call. Later that day, Pete returned his call and
they worked out the details of his contract. His contract was to be paid on
an hourly rate of $300/hour, with an average of forty hours per month that
he must work. Pete agreed to it, so what they set up was a monthly pay-
ment of $12,000. The contract was guaranteed for one year, so, in effect,
Tom’s annual “salary” would be $144,000. In addition to the hourly rate,
Tom also negotiated that he would receive “five percent” of the improve-
ment in profit margins and that the margins would be calculated based
upon Throughput Accounting and not Cost Accounting. The good news
for Tom was that there was no exclusivity on his part, so he was free to
take on other clients throughout the year. All he had to make sure of was
that he gave Pete’s company a total of 480 hours of work for the entire year.
Both Pete and Tom were very happy with this contract.
After the phone call, he let his wife know what he had negotiated, and
she was very happy with the contract he had agreed to honor. He then
called Bob Nelson to get his opinion on his contract, and Bob told him
that he thought it was a very reasonable contract. So, the stage was now
set for Tom to let Jonathan Briggs, the Chairman of the Board, know what
his plans were going forward. To that end, he scheduled a meeting with
Jonathan for the next day. Tom was very curious as to what the reaction
might be when he told the Board of Directors that he would be leaving.
Jonathan asked him what the meeting would be about, so he told him that
he had been offered a new position as an independent consultant. Needless
to say, Jonathan was flabbergasted when he heard this news.
The next day Tom arrived for his meeting with Jonathan and perhaps
some of the other Board Members. He went directly to Jonathan’s office
and after exchanging a few words, Jonathan told Tom that they needed
to go to the Board Room to have this meeting. Surprisingly, when they

walked into the Board Room, the entire Board of Directors were seated
and ready to hear what Tom had to say. After reintroducing Tom to the
Board, Jonathan handed the floor over to Tom and Tom began.
“It is with great reluctance that I am announcing my resignation and
will be starting my own consulting firm effective in two weeks,” Tom
said. To Tom’s surprise, what he heard next was applause from the Board
Members. He thought to himself, “Were they happy to see me leaving?”
Jonathan then stood up and said, “We, the members of the Board of
Directors, want to thank you for the amazing work you have done for our
portfolio of companies!” And then the applause started again. “And in
appreciation for the work you have done for us, we would like to offer you
a contract to continue consulting for us, not as an employee, but as an
independent contractor,” Jonathan said. “And with that, this meeting is
adjourned,” Jonathan said. “Tom, let’s you and I go to my office to work
out the details of your new contract,” Jonathan said.
“So, Tom, let’s hear about the contract conditions you just signed?”
Jonathan said. Tom laid out the conditions of the contract he was to sign
with Maximo Health Center Complex. Jonathan then said, “Rather than
having lots of negotiations, let’s say we use the same contract details for
you with our Board of Directors?” “You mean the same number of hours,
for the same pay, with the same bonus?” Tom asked. “Yes, that’s exactly
what I mean,” Jonathan replied. “But if you work more hours than the
agreed upon forty hours, we’ll just add that onto your bonus check,”
Jonathan added. “I’ll take that offer Jonathan,” Tom replied. “I’ll have
our legal department write up your contract so we can sign it tomorrow,”
Jonathan said. “Sounds like a plan Jonathan,” Tom replied. “Oh, and one
other thing,” said Jonathan. “As a token of our appreciation for the work
you have done for us over the years, as part of our consulting agreement,
you get to keep your health insurance!” Jonathan said.
Tom returned home, full of excitement about his new venture. While he
had originally been worried about the financial end of his consulting ven-
ture, at the end of the day, he would actually be making close to what he
had been making for the past year. Actually, if he did his math correctly,
he had the potential to make more money consulting. Plus, he still has
health insurance! He couldn’t wait to get home to his wife and share the
good news. “Honey, you’re not going to believe the two consulting agree-
ments I made today! I told you about the one with Maximo Health Center
Complex, but today I went in to resign my current role with the Board of
Directors. They shocked me by first giving me a round of applause, which
at first, I thought they were happy to see me resign. But I was so very
wrong!” He explained the details of his new deal, and she put her arms
around him and kissed him on the cheek. “Tom, I am so very proud of
you!” she said. “So, when do you start honey?” she asked. “With the Board
of Directors, I start tomorrow and with Maximo Health Center Complex,
I start in two weeks!” he said with excitement.
Tom reported to work with the Board of Directors the next day and it
seemed as though nothing had changed since he had the same office that
he always had. He had a list of projects that he had been working on and all
were doing very well. As he was sitting at his desk, there was a knock on his
door and in came Jonathan. “Welcome back Tom,” Jonathan said. “What
are you working on today?” he asked. “I’m looking at the list of improve-
ment projects I have going on at Semena Rubber Products,” Tom replied.
“I see that their profit margins are now up over 30% as of last week,” he
added. “Tom, I have a list of other companies that you haven’t worked with
yet, so I’d like to go over some of these with you,” said Jonathan. “Sounds
good Jonathan,” Tom replied.
Jonathan showed Tom a list of four companies, owned by the Board of
Directors, along with six key metrics these companies have been track-
ing and the person in charge (Table 4.1). Tom looked at the list and said,
“Not surprisingly, these metrics are very close to the six companies I have
worked with in the past year, except for Simpson Water Heaters.” “Yes,
you’re absolutely right Tom,” Jonathan replied. “Simpson Water Heaters
is so bad, it’s on the verge of shutting down!” he added. “The Board of
Directors met yesterday afternoon and we all decided that these com-
panies are where you should focus your improvement efforts,” Jonathan
explained. “And we’d like you to start with our water heater company,”
he added. He continued, “We’re very confident that the other companies
you’ve already ‘fixed’ will not need your input any longer, simply because
you have given them the right kind of training, mindset, and controls to
be able to continue performing.” “I do understand Jonathan, and I will get
to work on them right away,” Tom replied. “Alright Tom, and good luck
with your new consulting business,” Jonathan said.
So, the stage was set for Tom’s new venture with four new companies
added to his list. Tom spent the rest of the day reading about these four
companies and imagining what he would need to do to turn them into
TABLE 4.1
Four New Portfolio Companies
% On-Time % % Efficiency % Profit Person
Company Name Delivery Scrap Rework Stock-Out % % Margins in Charge
Tamsen Auto Parts 68.9 4.8 10.1 11.2 95.4 5.7 Bill Dawson
Simpson Water Heaters 68.1 8.8 15.6 19.1 94.7 −1.2 Matt Maloney
Watson Rubber Articles 70.9 6.8 8.8 9.9 88.7 7.8 Sarah Johnson
Jackson Electronics 75.4 4.9 14.2 13.4 89.9 9.1 Tim Selsa
much more profitable companies. He thought to himself, “The good news

is, these new companies probably will be performing the way his other six
companies were when he began his improvement efforts.” So, with this in
mind, he made a series of phone calls to each of these new companies to
introduce himself and to set the stage for a visit to each one.
Tom also searched the internet for information on Maximo Health Center
Complex, looking for what type each of the six hospitals were. He found
that one of the hospitals specialized in children, one focused on pregnant
women, one specialized in elderly people, and the remaining three hospi-
tals were general hospitals, with one of them being affiliated with a local
university, which meant there were probably many interns there. One thing
Tom was sure of, and that was that he would be very busy over the next
year, especially with the portfolio company that’s losing money!
5
Maximo Health Center Complex
Bright and early, Monday morning, Tom called Pete Hallwell, the CFO at
Maximo Health Center Complex. “Hello, this is Pete Hallwell, how can
I help you?” Pete said when he answered the telephone. “Good morning
Pete, this is Tom Mahanan,” Tom said. “Well hi Tom, what can I do for
you?” Pete asked. “One thing I was calling about was to find out if you
have my consulting contract ready for me to sign?” Tom said. “Yes, I have
it right here on my desk, whenever you’re ready to come and sign it,” Pete
replied. “Great, I’ll come in later today,” Tom said.
“The other thing I was calling about was to ask you if you could have
someone put together a list of performance metrics that your hospitals
track on a regular basis?” he asked. “Are you talking about things like effi-
ciencies, profit margins, etc.?” Pete replied. “Yes, that’s exactly what I’m
referring to Pete,” Tom said. “Do you want to see all of our metrics, or are
you more interested in those that relate to patient flow through our various
hospital segments?” Pete asked. “I think as a starting point, just those met-
rics that tie into patient flow, but of course, I’m interested in profit margins
as well,” Tom replied. “I’ll have someone put together the list of metrics
and when you come in to sign your consulting agreement, we can look at
the list and see if we’ve covered everything,” Pete said. “Sounds good Pete,
what time would you like me to come in?” Tom asked. “How about 1:00
pm?” Pete replied. “Sounds like a plan Pete, I’ll see you then,” Tom replied.
Later that day, Tom arrived at Maximo Health Center Complex, signed
in and the security guard called Pete to let him know that Tom was in
the lobby. Moments later, Pete arrived, and the two of them went to Pete’s
office. “Here is your contract Tom, so take a minute to look it over and if it
looks good to you, go ahead and sign it,” Pete said. Tom took several min-
utes to look it over and said it looked good to him, so he signed it.
45
Pete then reached in his desk drawer and pulled out a document that
summarized some of the performance metrics tracked by the Maximo
Health Center Complex. Tom looked it over and said, “Tom, while these
are no doubt important metrics for you company, what I’d like to do is
simplify this list and boil it down to just a few key metrics that focus on the
flow of patients through your hospitals,” Tom explained. The list presented
by Pete included five different categories as follows:
• Volume Metrics
• Revenue Leakage Metrics
• Utilization Metrics
• Quality Metrics
• Financial Metrics
Pete then pulled out a different sheet of eight key metrics that Maximo
Health Center Complex tracked on a regular basis. Tom reviewed this list,
and once again, he indicated that he wanted to simplify the list of key met-
rics that he believed would be better to track (Table 5.1).
“Let me review this list of metrics and I’ll give you my thoughts on what
simple metrics we can track to measure the impact of our improvement
efforts,” Tom said. “Just off the top, I’m thinking that one of the metrics
TABLE 5.1
Key Hospital Performance Metrics
Metric Metric Description
Average Hospital Stay Appraise the amount of time your patients are
staying in your hospital after admission?
Treatment Costs Calculate what a patient costs your facility?
Hospital Readmission Rate Calculate how many patients are coming back after
they are discharged?
Patient Wait Time Calculate your patient satisfaction score by assessing
their average wait time.
Patient Satisfaction How patients felt while being taken care of in your
hospital?
Patient Safety Identify any incidents happening in your hospital
and reduce the patients’ exposure to further risk?
ER Wait Time to See a Doctor Evaluate the time patients spend from checking in
to the ER until they see a doctor.
Costs by Payer Evaluate which type of health insurance they have
and what it costs.
Maximo Health Center Complex • 47
we will use is % Profit, but we’ll use Throughput Accounting’s calculation

to get your margins,” Tom added. “I think another metric we could track
would be your average hospital stay, since if we could reduce that number,
it would be the equivalent of an increase in Throughput. Maybe another
metric we could track would be patient wait times, simply because if we
could reduce that, it would translate into your hospitals ability to see more
patients in a given period of time,” he added.
“Another metric that I’m certain you track is efficiency or some deriva-
tive of it. We want to be able to drive this metric lower, simply because
the only place it matters is in the system constraint,” Tom explained. “As
a matter of fact, I think one of the things you should do in advance of our
improvement efforts, would be to put together a process map on several of
your key processes. Maybe something like your surgical process, or maybe
even you Emergency Department process. If we can shorten these, the net
result is being able to see more patients, which translates into increased
revenue, and therefore, improved profit margins. Let me get back to you on
a final list, but until I do, have someone create some process maps on some
of your key processes,” Tom explained. “For example, I once consulted
for a hospital Emergency Department, where we were looking at Door to
Balloon (D2B) Time for patients with STEMI type heart attacks. So, if you
could get someone to map out this process and include cycle times for each
of the major steps in this procedure, we could set up a team on this one,”
Tom explained. “I remember we were able to reduce the D2B Time from a
median of 66, down to a median of around 53 minutes, which in this type
of heart attack was a very significant improvement, simply because the lon-
ger the duration of this type of heart attack, the more damage is done to the
heart,” Tom added. Tom continued, “One day I will give you the details of
this case study and discuss several of the tools that this team used.”
As Tom was driving home, he began thinking about what should be
included in Maximo Health Center Complex’s list of performance met-
rics. He thought to himself, “Maximo Health Center Complex’s profits are
all tied to the number of patients they can see and treat, so there has to
be a metric centered around this.” He continued thinking, “One of the
keys to increasing the number of patients seen and treated revolves around
patient wait times, and I know they already measure patient wait time, so
this should be one of the key metrics to track. I think another metric that
ties into both of these metrics is another metric they already measure and
that is, average hospital stay, so that should be another one.
Just like Saint Mary’s hospital that he had worked with to reduce,
STEMI heart attack treatment time, and maybe even other Emergency
Department repetitive conditions, he believed that one of the key metrics
should be focused there. One thing Tom knew for sure was that hospitals
have many different opportunities that could be addressed to drive profit-
ability upward. “There are numerous treatment clinics that would benefit
from my integrated Theory of Constraints, Lean, and Six Sigma,” Tom
thought to himself. Tom made mental notes of all he had considered dur-
ing his drive home until he pulled into his driveway.
Tom grabbed his briefcase and walked in his front door. His wife Beverly
was in the kitchen making dinner and said, “Hi honey, how did your meet-
ing go with Maximo Health Center Complex?” “It actually went very well,
and I was able to sign my contract with them,” Tom replied. “What are
you making for dinner honey?” Tom asked. “Your favorite meal, Chicken
Divan,” she replied. “Oh, thanks honey, I’m in the mood for that,” Tom
said. “Need help with anything honey?” he asked. “Nope, I have every-
thing under control,” she said. “OK, I’ll be in my office, so let me know if
you need anything,” Tom said.
Tom recollected his thoughts on Maximo Health Center Complex’s per-
formance metrics and decided to make a list that he could review with
Pete Hallwell. After thinking through his list, Tom’s final list was con-
densed to the following five metrics:
1. % Profit Margins
2. Average Hospital Stay
3. Patient Wait Times
4. Patient Satisfaction
5. Efficiency % or Utilization
He thought to himself, “These metrics are the global metrics that we can
track for the entire company, but I’m certain that there will be many more
specific metrics which will be tied to each of the improvement projects as
the teams attack different problems within each of the hospitals.”
Tom now turned his attention to one of the portfolio companies he had
discussed with Jonathan Briggs, Simpson Water Heaters. Tom thought to
himself, “I really don’t know anything about water heaters and how they
are produced, so I’m going to need some help with this one.” Tom decided
to call Jonathan and ask him some questions about this company. Tom
dialed Jonathan’s number, and within two rings, his call was answered,
“Hello, Jonathan Briggs here, how can I help you?” “Hi Jonathan, it’s Tom
Mahanan,” Tom replied. “Hi Tom, what’s up?” Jonathan asked. “I want to
get started on Simpson Water Heaters right away, so I need a contact at
their location, and by the way, where are they located?” “They’re located
in Detroit, Michigan, and I think the best contact would be their Plant
Manager, Matt Maloney,” Jonathan said.
“Can you tell me something about his background Jonathan?” Tom
asked. “Matt is a relatively new hire for Simpson Water Heaters and prior
to coming on board, his background was in Logistics,” Jonathan replied.
“I’ve met Matt and, as you will see, he is very impressive!” Jonathan added.
“Why do you say he’s very impressive Jonathan?” Tom asked. “For one
thing, he is always looking for better ways to do things,” Jonathan said.
“One of the reasons he was hired was that he has some experience with
the Theory of Constraints, so that alone qualified him for this position,”
Jonathan added. “That’s great Jonathan, we both know that this will be a
quality that will ‘speed-up’ their improvement,” Tom said. “How long has
he been there at Simpson Water Heaters and do you have his phone num-
ber?” Tom asked. “Just three weeks, and his phone number is on our web-
site,” Jonathan replied. “OK, thanks Jonathan,” Tom said and with that he
ended the phone call.
Tom decided that he might as well contact Plant Manager, Matt Maloney,
now, so he got on the Board’s website and got his phone number. He dialed
the number and within three rings, someone answered the phone. “Hello,
Simpson Water Heaters, this is Emily Johnson, how can I help you?” she
asked. “Hi Emily, this is Tom Mahanan, and I’m trying to reach Matt, is
he available?” Tom asked. “He’s out on the production floor somewhere,
do you want me to go find him?” asked Emily. “No, just tell him to call
me today when he gets a chance,” Tom replied and gave Emily his phone
number. “I will do that Tom,” she said, and the call ended.
An hour later, Tom received a call from Matt Maloney that Tom answered
and said, “Hello, this is Tom Mahanan.” “Hi Tom, this is Matt Maloney
returning your call,” Matt said. “Hi Matt, thanks for returning my call,”
Tom replied. “Matt, not sure if you know me or not, but I am working
with the Board of Directors for Simpson Water Heaters. I called Jonathan
Briggs and asked him for a contact at your company and he gave me your
name,” Tom explained. “Just so you know, I worked directly with the
Board of Directors and had been in charge of the portfolio’s continuous
improvement efforts. Within the last week, I resigned that position and
became an independent consultant, but to my surprise, the Board hired
me right back for consulting purposes,” Tom explained. “Because of your
company’s dreadful numbers, especially the % Profit Margins, I will be
coming to Detroit to start a continuous improvement effort,” Tom added.
“I know you’ve only been there a short period of time, but I also know
you have some experience with the Theory of Constraints and Theory
of Constraints plays a big part in my improvement methodology,” Tom
explained. “So Matt, tell me about your experience with the Theory of
Constraints?” Tom asked. “Well, my experience is somewhat limited, in
that I tried to implement it at the company I worked for and it was flat-
out rejected by the leadership,” Matt explained. “Do you know why they
rejected it Matt?” Tom asked. “The CEO of that company told me that,
based upon what he had heard about the Theory of Constraints, their
company’s Efficiency % would take a nosedive and he wanted nothing
to do with it!” Matt exclaimed. Tom just chuckled and said, “Does not
surprise me one single bit Matt.” “What I’d like to do is come visit your
company and explain my method to you,” Tom said. “And for the record,
Jonathan Briggs, the CEO of the Board of Directors is solidly behind my
method,” Tom added. “Great news Tom, so when would you like to come
here?” Matt asked. “Next week some time, so look at your schedule and get
back to me on the best day to come,” Tom said. “Will do Tom,” Matt said.
Later on, in the day, Tom received an email from Matt Maloney, and in it,
he had suggested that Tuesday would be the best day for him to meet with
Tom. Tom looked at his schedule and returned Matt’s email indicating that
Tuesday works for him and that he would be there Tuesday morning around
8:00 am. Tom also suggested that they should meet in their conference room
and that he should invite anyone he feels should be there. Tom also let Matt
know that one of the things he wanted to do was present his methodology
which he referred to as the Ultimate Improvement Cycle which should take a
couple of hours to present. Later in the day, Tom received a reply from Matt,
indicating that he would set everything up for their meeting.
So, the stage was set to hopefully turn Simpson Water Heater’s negative
profits into positive ones. Tom then thought about all he wanted to do with
Matt while he was there, but at least he knew he didn’t have to convince
Matt of the power of the Theory of Constraints, and that was a good thing.
Tom thought about what else he should present, so he reviewed their key
metrics in Table 5.2.
TABLE 5.2
Performance Metrics for New Companies
%
On-Time % % Stock-Out Efficiency % Profit
Company Name Delivery Scrap Rework % % Margins
Tamsen Auto 68.9 4.8 10.1 11.2 95.4 5.7
Parts
Simpson Water 68.1 8.8 15.6 19.1 94.7 −1.2
Heaters
Watson Rubber 70.9 6.8 8.8 9.9 88.7 7.8
Articles
Jackson 75.4 4.9 14.2 13.4 89.9 9.1
Electronics
It was clear to Tom, after reviewing these metrics, that there was much
work to do. For each of the six key metrics, Simpson Water Heaters was
performing the worst of the four companies. Their % On-Time Delivery
was right around 71%, their scrap stood at almost 9%, and their rework was
approaching 16%! In addition, their Stock-Out % was 19% which prob-
ably tied directly into their abysmal % On-Time Delivery. Their Efficiency
% was almost 95% which clearly was tied to their −1.2% Profit Margins!
After reviewing these metrics, Tom knew that these were clearly a part of
a broken system!
Tom thought about how he might present this opportunity to the
employees in the conference room and he decided that he would pres-
ent the before and after results for the original portfolio of companies as
depicted in Table 5.3. He believed that once they saw these results, they
would most likely buy-in to his improvement methodology. At least he
hoped that it would have this affect.
Tom knew that in order for Simpson Water Heaters to reach the improve-
ment levels seen in Table 5.3, they had to learn about things like Theory
of Constraints’ version of accounting known as Throughput Accounting,
plus the Theory of Constraints Replenishment Solution, and Theory of
Constraints’ scheduling system referred to as Drum Buffer Rope. He
decided that during his visit, he would at least touch on these three meth-
ods. But to him, the most important point he must deliver was the basic
concept of a system constraint. In fact, Tom decided that he would begin
his presentation with this subject. So, with these thoughts in mind, Tom
was ready for his trip to Detroit the following week.
TABLE 5.3
Before and After Results
% On-Time %Profit
Delivery % Scrap % Rework Stock-Out % Efficiency % Margins
Company Name Before After Before After Before After Before After Before After Before After
Board of Directors
Portfolio Companies
Terox Automotive 79.6 91.6 4.1 2.1 8.8 3.2 10.7 1.1 91.9 62.1 4.9 27.9
Sweeney Automotive 69.5 94.3 3.8 1.5 7.6 2.1 11.7 0.9 93.4 71.2 6.1 22.2
Johnson Electronics 78.3 92.2 7.2 2.2 13.3 4.2 10.9 1.8 90.6 65.7 7.7 30.4
Westin Incorporated 80.4 96.5 9.5 1.3 11.4 2.7 8.8 0.7 85.6 69.3 8.8 25.6
Watson Steel Products 77.8 95.5 4.3 2.2 8.8 3.2 9.9 1.6 90.4 70.5 10.9 30.8
Semena Rubber 80.2 97.7 6.6 3.0 6.7 1.8 8.3 0.2 86.2 71.1 11.4 28.8
Products
6
Simpson’s New Beginning
Right on schedule, Tom arrived at Simpson Water Heaters and was met in
the lobby by Matt Maloney. “What time have you scheduled our session
for Matt?” Tom asked. “We’re scheduled to start at 9:00,” Matt replied. “It’s
only 8:00 now, so could you show me your manufacturing process?” Tom
asked. “Be happy to, where would you like to start, Tom?” Matt asked.
“Let’s start at your raw material receiving department and work our way
through your process all the way to shipping,” Tom replied. The two of
them walked to the back of the plant to receiving. “I’m not interested in
the details Matt, just the flow from raw materials to shipping,” Tom said.
The two of them walked the process with Tom making notes as he pro-
gressed through the entire process. When they arrived at the warehouse
and shipping, Tom was amazed at the level of inventory of finished and
semi-finished water heaters existed in the storage racks. Tom asked Matt,
“Do you have orders for all of these tanks?” “No, we do not Tom and as
you can see, many of them are not even complete,” Matt responded. “Why
do you have such a mountain of inventory if you don’t have sales?” Tom
asked. “That was one of the first questions I asked when I started this job
and the response floored me,” Matt said. “It seems that everyone is so
focused on keeping their efficiencies high, that they just continue making
water heaters,” Matt added. Tom made a note on his iPad, and it was now
time to move to the conference room for his presentation.
When everyone was seated, Matt introduced Tom and Tom began.
There were seven people seated, so Tom’s first question was for everyone
to introduce themselves and state their role at Simpson Water Heaters.
“I am Nancy Watson and I am the Accounting Manager.” The intro-
ductions continued, “I am Greg Thompson and I am the Production
Manager.” “I am Cynthia Eberstein and I am the Quality Manager.”
53
“I am Bill Gregory and I am the Shipping Manager.” “I am Ted Russell

and I am the Purchasing Manager.” “I am Terry Jones and I am the
Engineering Manager.” “I’m very happy to meet everyone, so let’s get
started. I want everyone to listen with an open mind on what I have to
say today,” Tom said. With the introductions complete, Tom opened his
laptop, pulled up a file, and began.
“The figure you see on my screen (Figure 6.1) is the cross section of a
simple, gravity fed, piping system used to transport water. As you can see,
water enters into this system through Section A, then flows into Section
B, then Section C and so forth until it exits Section I and is collected in a
receptacle at the bottom of this system.” “So, here’s my first question for
you,” said Tom. “If you were asked to increase the flow of water through
this system, what would you need to do to make this happen?” Tom
asked. The group studied the drawing until Terry Jones raised his hand
and said, “Couldn’t you just turn the pressure up higher?” “No Terry, as
FIGURE 6.1
Piping system used to transport water.
Simpson’s New Beginning • 55
I explained, this system is a gravity fed system,” Tom replied. “Look closer,
he said to the group,” he added.
Greg Thompson, the Production Manager, raised his hand and said,
“It seems to me that if you wanted more water to pass through this
piping system, you would need to open-up the diameter of the pipe in
Section E.” “And why is it that you think this, Greg?” Tom asked. “Well,
for me the reason is that Section E is what is limiting the flow of water
because it’s the smallest diameter pipe in the system?” he said in a ques-
tion. “Greg, you’re absolutely correct in your assessment of this system!”
Tom exclaimed. “Does everyone see what Greg explained?” he asked, and
it appeared as though everyone did.
“So, Greg, one more question for you. What would determine how large
the new diameter of Section E should be?” Tom asked. Greg looked at the
drawing again and said, “I think it would depend on how much more water
is required?” again responding in a question-type format. “Once again you
are correct Greg, it would depend upon the new demand requirement,”
Tom replied. “So, based upon what Greg has instructed us to do, the new
system might look like this,” and Tom flashed a new figure (Figure 6.2) on
his laptop screen.
“Here you see the same piping system, but it now has Section E’s new
diameter,” Tom explained. “So, my next question for the group is, if
there was another increase in demand for water, what would you have
to do and why would you do it?” Tom asked. Nancy Watson raised her
hand and said, “Clearly, based upon what we learned on Section E, you
would now have to enlarge Section B’s diameter.” And then she added,
“And the new diameter would be based upon the new demand require-
ment.” “Very well said Nancy!” Tom exclaimed. “Any questions so far?”
Tom asked the group.
Ted Russell, the Purchasing Manager, raised his hand and asked, “With
all due respect, what has this piping system got to do with how we make
water heaters?” “Great question,” Tom said as he flashed a new figure on
his laptop screen (Figure 6.3). What you see here is a very simple, 4-step
manufacturing process used to make something. Raw materials enter
Step 1 are processed for 5 minutes and then passed on to Step 2, which
takes 30 minutes to process, before passing it on to Step 3, which requires
60 minutes to complete before passing the semi-finished product on to
Step 4, where it’s completed as a finished product in 10 minutes.
FIGURE 6.2
Piping system with Section E’s diameter enlarged.
Raw Step 1 Step 2 Step 3 Step 4 Finished

Materials 5 Minutes 30 Minutes 60 Minutes 10 Minutes Product
FIGURE 6.3
Simple manufacturing process.
“Using the piping system as a reference guide, what if there was a surge
in demand?” he asked. “What would you do and why would you do it?” he
added. Matt Maloney, the Plant Manager spoke up and said, “Well, based
upon what we just heard about the piping system, it seems obvious to me
that we would have to reduce the cycle time on Step 3, because it is the
equivalent to Section E of the piping diagram. And how much time we
would have to reduce the cycle time would be completely dependent upon
how much more finished product would be required. “Absolutely correct
Matt!” Tom responded.
“So, one more question for you Matt,” Tom said. “How fast should Steps
1 and 2 be running and why?” Tom asked. “Well, in order to avoid a build-
up of work-in-process inventory, Steps 1 and 2 should be producing at the
same rate as Step 3,” Matt explained. “But Matt, what would happen to the
efficiencies of Steps 1 and 2 if they stopped producing at their capacity?”
asked Nancy Watson, the Accounting Manager. Tom put his hand over his
mouth to avoid anyone seeing his smile. Matt then said, “Nancy, it would
seem to me that efficiency is not a good metric for us!” “Why Matt, we’ve
been tracking efficiencies for as long as I’ve worked here and based upon
what I’ve seen from the Board’s reports, our efficiencies are one of the best
in their portfolio of companies?” Nancy responded. “Yes, that’s true, but
our profit margins are the absolute worst of all the portfolio companies,”
Matt responded with emotion.
Tom suggested that everyone take a brief break, while he loads the next
part of his presentation. Matt stayed behind and said, “Tom, I have never
seen this material presented in this way before, and I have to tell you, it
was impressive and so easy to understand!” “I’m happy you are enjoying it
so far Matt, but I think the next part will also be enjoyable as well,” Tom
responded. “What is it the you’re going to be presenting next Tom?” Matt
asked. “The next section will be Goldratt’s Five Focusing Steps and then
on to Throughput Accounting,” Tom explained.
When everyone was back from their break, Tom began again. “I know the
material I presented so far is new for most of you, but I want to expand on what
I’ve explained so far. Back in the 1980s a man named Dr. Eliyahu Goldratt
introduced the world to what he referred to as his Five Focusing Steps.” Tom
flashed another overhead on his laptop screen (Figure 6.4) and said, “Here are
the five steps that Goldratt presented to the world,” Tom explained.
Step 1: Identify the system constraint.
Step 2: Decide how to exploit the system constraint.
Step 3: Subordinate everything else to the system constraint.
Step 4: If necessary, elevate the system constraint.
Step 5: When the constraint is broken, return to Step 1, but don't let inertia create a new
constraint.
FIGURE 6.4
Goldratt’s Five Focusing Steps.
Tom began again, “I want everyone to think about how these five steps
apply to both the piping system and the simple four-step process we just
discussed. In both examples, we were able to identify the system con-
straint, or that step that limits the output of the remaining steps. You were
able to come up with a way to exploit the identified constraint, by increas-
ing the diameter of Section E of the piping system and reducing the cycle
time of Step 3 of the 4-step process. You were also able to decide how to
subordinate the other steps to the system constraint. In the case of the pip-
ing system the subordination step was automatic because the throughput
of water was controlled by the smallest diameter pipe. In the case of the
4-step process, you forced Steps 1 and 2 to operate at the same rate as the
constraint, which is the essence of subordination,” Tom explained.
Tom continued, “Step 4 of Goldratt’s Five Focusing Steps tell us that if it
is necessary, we should elevate the system constraint. What this means, in
reality, is that if we need to reduce the cycle time of the constraining step,
we might have to spend some money to improve the capacity of the system
constraint. But having said this, normally we will be able to ‘break’ the
constraint of the system by doing things like reducing excess waste within
the constraint. This includes things like removing wait times or even
transferring some of the work from the constraint to a non-constraint
step in the process.” “Breaking the constraint simply means that we will
have improved its capacity to the point where another step in our pro-
cess becomes the new system constraint. And when this happens, we
need to immediately move our improvement efforts to the new constraint.
Remember in the piping diagram, Section E was the original system con-
straint, but when we increased its diameter, the next smallest diameter
pipe became the new system constraint, which was Section B of the piping
system. Any questions so far?” he asked the group.
Nancy Watson, the Accounting Manager, raised her hand and said, “I’m
a little confused about the subordination step?” “What are you confused
about Nancy?” Tom asked. “I remember the argument you made earlier
about the negative impact of trying to drive efficiencies higher, but could
you explain this step a different way with regards to the negative impact
of non-constraints producing to capacity?” she asked. “I’d be happy to
Nancy,” he replied. “Let’s take another look at a different process exam-
ple,” Tom suggested as he flashed Figure 6.5 onto his screen.
“Here we see that Step 3 is the system constraint, because it has the lon-
gest cycle time,” Tom explained. “Nancy, what happens to this process if
FIGURE 6.5
Simple four-step process.
you are measuring efficiencies and trying to drive this metric higher and
higher?” Tom asked. “I’m not sure I understand your question Tom?” she
replied in a question like manner. “What I mean is that from a physical
perspective, what happens to the flow of product through this system?” he
asked Nancy. “In other words, considering the capacity of Steps 1 and 2,
which are obviously higher than Step 3, what would this process look like
after eight hours, in terms of work-in-process inventory?” Tom added.
“Well, since both Steps 1 and 2 can produce product at a faster rate than
Step 3, I would guess that work-in-process inventory would accumulate in
front of Step 3,” She replied. “That’s exactly what would happen Nancy and
it would look something like this,” Tom said as he flashed another drawing
on his screen (Figure 6.6).
“Alright, I understand this, but what’s so negative about having WIP
in the process?” Nancy asked. “Let’s now look at this same process, after
three 8-hour shifts of work,” he explained as he inserted a new slide onto
his screen (Figure 6.7). “It should be obvious that the longer the non-con-
straints continue to produce at their maximum capacity, the amount of
WIP within this process will continue to increase,” Tom said.
“I understand that Tom, but what’s so bad about having excess WIP
within your process?” she asked. Just then, Matt raised his hand and said,
FIGURE 6.6
Process with excessive WIP.
FIGURE 6.7
Process WIP after 3, 8-hour shifts.
“Tom, can I take a shot at answering Nancy’s question?” “You sure can
Matt,” Tom replied. “One of the most important reasons for avoiding
excessive amounts of WIP in any process, is what it does to the overall
cycle time of individual parts. That is, each of the individual parts in
front of Steps 2 and 3, just sit there and wait to be processed until Step
3 completes a part and passes it on to Step 4. The ultimate effect of this
is that it needlessly ties up cash that can be used elsewhere in our com-
pany,” Matt explained. “Alright, I see your point Matt, excessive WIP in
any process negatively impacts things like on-time delivery and our cash
flow,” Nancy said. “Thank you for your explanation Matt,” she added.
“Good explanation Matt, but I plan on getting into this question in more
detail shortly,” Tom said.
Tom then suggested that the group take another brief break while he pre-
pares for his next subject to be discussed. Once again, Matt stayed behind
and asked, “So, Tom, what are we going to discuss next?” “Now that we’ve
discussed the basics of the Theory of Constraints, I want to turn our atten-
tion to Theory of Constraints’ version of accounting known as Throughput
Accounting,” Tom explained. “Matt, I do have a question for you,” Tom
said. “As a company, what level of experience does Simpson Water Heaters
have with Lean Manufacturing or Six Sigma?” he asked. “Based upon my
research since I got here, they have tried both Lean and Six Sigma, but
apparently not with much success,” Matt responded. “Alright, just check-
ing for future reference,” Tom said.
When everyone had returned from their break, Tom began again. “In
any improvement initiative, the person responsible for the financial well-
being of your business plays a pivotal role in assuring that the initiative
stays focused on the primary goal of most companies which is to make
money now and in the future. Within the confines of an improvement

methodology known as the Theory of Constraints, I’m going to present
an alternate form of accounting, known as Throughput Accounting (TA),
that is intended to be used for real-time financial decisions rather than
basing decisions on what happened last month.”
Many businesses will emphatically state that the primary goal of their
business is to make money and yet they spend the largest portion of
their time trying to save money, which is what I am sure I will see here
at “Simpson Water Heaters,” Tom explained. Tom continued, “The key
to profitability is by focusing on that part of the system that controls and
drives revenue higher and higher, rather than through cost-cutting. It mat-
ters not if you are a service provider, a small business owner, a distributor,
or a manufacturer. What you need is a way to sell more product which
increases revenue and, ultimately, profitability. In this session I will sys-
tematically compare two accounting methods and demonstrate the supe-
riority of Throughput Accounting in terms of profitability improvement.”
“Much of what I’m going to explain in this session is taken from the
book, Reaching the Goal – by John Ricketts, and I highly recommend that
you purchase and read this book!” Tom exclaimed. “Because traditional
Cost Accounting is so complicated, in this discussion, and because most
of you are familiar with Cost Accounting, I won’t go into great detail,
but I will cover the highlights of it so that a comparison to Throughput
Accounting can be made. Before I start, have any of you ever heard of
Throughput Accounting?” Tom asked the group. All of them, except Matt,
shook their heads as if to say no, so he began his discussion. “If you have
any questions as I present this, stop me and ask them,” Tom said.
“The figure (Figure 6.8) on the screen illustrates selected elements of
Cost Accounting (CA). When Cost Accounting arose in the early 1900s,
FIGURE 6.8
Selected elements of Cost Accounting.
labor costs dominated manufacturing and workers were paid by how

many parts they produced. Back then, it was absolutely reasonable to allo-
cate overhead expenses to products on the basis of direct labor costs for
purposes of preparing financial statements. But since automation now
dominates manufacturing, and workers are paid by the hour, allocation of
large overhead expenses on the basis of small labor costs has created some
very real distortions,” Tom explained.
Tom continued, “When re-aggregated at the enterprise level, product
cost distortions do not affect financial statements very much. Yet, if prices
are computed as product cost, plus standard gross margin, which is the
prevailing method used in Cost Accounting, product cost distortions
carry into product pricing. The net effect is that some products appear to
be profitable when they aren’t and some products that appear unprofitable
really are,” Tom explained. “Any questions so far?” he asked. Since there
weren’t any, he continued.
“A second problem with Cost Accounting is that it encourages facto-
ries to produce excess inventory. To refer back to Nancy’s earlier question
about why having excessive WIP is a bad thing, this happens because of
Cost Accounting’s push for higher levels of efficiencies in non-constraints.
Inventory accumulation can be driven by the counterintuitive effect it
has on earnings. Rather than being expensed on the income statement
in the period they were incurred, the cost of inventory goes on the bal-
ance sheet as an asset. Consequently, an inventory profit may be reported,
which a business can use to smooth reported earnings, even though it has
absolutely nothing to do with real income. If that inventory can’t be sold,
then inventory on the balance sheet turns into depreciation expense on
the income statement and an inventory loss results,” Tom explained. “Any
questions?” he asked, but there weren’t any.
“A third problem with Cost Accounting concerns management priori-
ties. Operating Expense tends to be managed closely because it is well-
known and under direct control. Revenue, on the other hand, tends to be
viewed as less controllable because the perception is that it is dependent
upon the markets and customers. Inventory is a distant third in man-
agement priorities because reducing it has an adverse effect on reported
income,” Tom continued.
“Here is a very important point for all of you to consider. Even though
most businesses practice it, the key to profitability is not through how
much money you can save! The key to profitability is through how much
money you can make! And these two approaches are radically different!
Let’s now look at a different accounting method referred to as Throughput
Accounting (TA) in order to answer this question,” Tom said. “And again,
if you have questions about the material I am presenting, stop me and ask
away,” Tom added.
“Throughput Accounting (TA) addresses all of the problems associ-
ated with Cost Accounting (CA) that we just saw, by not using product
costs. Instead Throughput Accounting eliminates incentives for excess
inventory. It’s important for all of you to understand that Throughput
Accounting cannot be used in place of conventional financial reporting,
simply because publicly traded companies, like Simpson Water Heaters,
are required by law to comply with GAAP requirements. But having said
this, Throughput Accounting does provide a way to make much better
‘real time’ financial decisions. Throughput Accounting will tell you which
products combine to deliver the most profitable mix of products, and trust
me, Throughput Accounting’s mix will be different than what traditional
Cost Accounting would give you,” he explained. “Are you telling us that by
using Throughput Accounting, the mix of products will change the level
of profitability that is different than Cost Accounting?” Nancy asked. “Yes,
and I will give you an example of that shortly,” Tom responded.
Tom began again, “Throughput Accounting uses three basic financial
measures, which are, Throughput (T), Inventory or Investment (I), and
Operating Expense (OE). So, let’s look at each of these in a bit more detail.
Throughput (T) is simply the rate at which your system generates money
through sales of products or services, or interest generated. If you pro-
duce something, but don’t sell it, it’s not Throughput, it’s just Inventory.
Throughput is obtained after subtracting the Totally Variable Costs
(TVC). That is, the cost of raw materials, or those things that vary with
the sale of a single unit of product or service from your revenue. Are you
following me?”
Tom asked, and they all nodded their heads in agreement.
“The next basic financial measure is Inventory or Investment (I) and it
represents all of the money that the business has invested in things that
it intends to sell. Primarily it includes the dollars tied up in WIP and
Finished Product Inventory. The third measure is Operating Expense (OE)
and it represents all the money the system spends to turn Inventory into
Throughput, and it includes all labor costs. It also includes rent, plus sell-
ing, General and Administrative (SG & A) costs. This point of including
all labor costs is a huge departure from traditional Cost Accounting. Are
you still with me?” he asked and again they all nodded in the affirmative.
Tom continued his explanation of Throughput Accounting, “Through
put is maximized by selling goods or services with the largest difference
between price (revenue) and Totally Variable Cost (TVC) and by mini-
mizing the elapsed time between spending money to produce prod-
uct and receiving money from sales. It’s important to understand that
Throughput Accounting does not use labor costs to allocate Operating
Expense. Unlike traditional Cost Accounting, direct labor is not treated
as a variable cost.”
Nancy immediately asked why, and Tom immediately responded,
“Because just like Simpson Water Heaters, businesses do not adjust their
workforce every time demand varies,” Tom replied and Nancy understood
his reply.
Tom continued, “From these three basic elements of Throughput
Accounting, namely T, I, and OE, we can calculate several other key met-
rics as shown on this screen:
• Net Profit = Throughput – Operating Expense or NP = T – OE

• Return on Investment = Net Profit ÷ Inventory or ROI = NP/I
• Productivity = Throughput ÷ Operating Expense or P = T/OE
• Inventory Turns = Throughput ÷ Inventory or i = T/I”
“In all of my years in Finance, I have never even heard of Throughput

Accounting Tom,” Nancy said. “And the funny thing is, it all looks so
simple,” Nancy added. “Okay, let’s continue,” Tom said. “An ideal deci-
sion using Throughput Accounting would be one that increases T, and
either decreases or does not change both I and OE, while a good deci-
sion increases NP, ROI, P, and i. It’s very important to remember that Net
Profit is net operating profit before interest and taxes. Under Throughput
Accounting, there are no product costs, but instead there are constraint
measures that should also be tracked as follows,” and he flashed another
slide onto his screen.
• Throughput per Constraint Unit: T/CU = (Revenue – Totally Variable

Cost)/units
• Constraint Utilization: U = time spent producing/time available
to produce
Tom then explained, “The way to maximize T is to maximize these

constraint measures. Constraint utilization is very important because
every hour lost on the constraint, is an hour lost for the entire business
that you can’t get back. On the other hand, utilization of non-constraints
is not tracked, simply because it encourages excess inventory.” “Like our
plant does,” Matt added. Tom responded, “Yes, just like you guys have
been doing.”
“So, typical decisions based on the metric, T/CU include things like pri-
oritizing use of the constraint. For example, choosing the best product
mix; deciding whether to increase the constraint’s capacity through invest-
ment; selecting products to introduce or discontinue and pricing products
based on the opportunity cost of using the constraint,” Tom explained.
“Therefore, for normal product decisions, T/CU is used to determine the
best mix that results in maximizing Throughput. If, for example, produc-
ing less of one product in order to produce more of another product would
increase Throughput, then that is a good decision. But for major decisions
that might shift the constraint or forfeit some Throughput on current
products, then Throughput Accounting uses the following decision-sup-
port measures,” and he displayed the following on his screen.
• Change in Net Profit: ΔNP = ΔT – ΔOE. In this case, the Δ symbol

stands for the difference or change in or a comparison between alter-
natives. Likewise, to show the impact of these investment decisions,
the metric Payback: PB = ΔNP/ ΔI should be used.
• To minimize unfavorable deviations from plans, Throughput Account
ing advocates these control measures that should be minimized:
• Throughput Dollar Days: TDD = Selling price of late order
x days late
• Inventory Dollar Days: IDD = Selling price of excess inventory
x days unsold
Tom then explained, “Throughput Dollar Days measures something that

should have been done but was not, like shipping orders on time, while
Inventory Dollar Days measures something that should not have been
done but was, like creating unnecessary inventory.” “Are you guys still with
me?” Tom asked, and again, they all nodded their heads in the affirmative.
“Tom, this is all starting to make perfect sense to me,” Matt said.
“And I really like the way you are presenting all of this,” he added.
TABLE 6.1
Manufacturing Requirements
A B C Have Need
Products
Demand 100 100 100
Price $105 $100 $95
Raw Material $45 $50 $55
Step 1 Time 3 6 9 2,400 minutes 1,800 minutes
Step 2 Time 15 12 9 2,400 minutes 3,600 minutes
Step 3 Time 2 2 2 800 minutes 600 minutes
Total Time 20 20 20
Tom responded and said, “Well, most of what I presented today is

from John Ricketts classic book [1], Reaching the Goal – How Managers
Improve a Services Business Using Goldratt’s Theory of Constraints and,
as I said earlier, I strongly encourage all of you to get this book and read
it. Ironically, as you can see in the title, it was written to apply to service
companies, but it equally applies to production-based companies like
Simpson Water Heaters.”
“Throughput Accounting is used to identify constraints, monitor per-
formance, control production, and determine the impact of your deci-
sions,” and with that, Tom presented a new table on his screen (Table 6.1).
“The table you see here is a manufacturing situation consisting of just
three parts, with each part requiring the same three steps. Each product
requires a different number of minutes per step, but the total time required
for each part is the same. Labor costs per minute are the same across all
steps,” Tom explained.
Continuing Tom explained, “As you can see, Part A clearly has the
highest price and the lowest raw material cost per part while part C has the
lowest price and highest raw material cost per part. Because the same work-
ers will be used to produce any product mix, it would seem that the best
mix would be to produce as much of part A as demanded, then B, then C.
Following this priority order, the factory will produce 100 units of A, 75 of
B, and none of C. Note that Step 2 limits enterprise production regardless
of whether it’s actually recognized as the constraint. Operating Expense
includes rent, energy and labor.” “Let’s look at an example c omparing Cost
Accounting (Figure 6.2) to Throughput Accounting’s (Figure 6.3) product
mix decision,” Tom said.
TABLE 6.2
Cost Accounting Product Mix Products
A B C Have Need Cost Accounting A B C Total
Products Product Cost $100 $111 0
Demand 100 100 100 Mix 100 75 0
Price $105 $100 $95 Step 2 Used 1,500 900 0 2,400
Raw Material $45 $50 $55 Revenue $10,500 $7,500 0 $18,000
Step 1 Time 3 6 9 2,400 minutes 1,800 minutes Raw Material $4,500 $3,750 0 $8,250
Step 2 Time 15 12 9 2,400 minutes 3,600 minutes Gross Margin $6,000 $3,750 0 $9,750
Step 3 Time 2 2 2 800 minutes 600 minutes Operating Expense $5,455 $4,545 0 $10,000
Total Time 20 20 20 Net Profit $545 ($795) 0 ($250)
Tom continued, “When Cost Accounting allocates operating expense

to products based on their raw material costs, the resulting product
costs confirm the expected priority: A has a lower product cost than B.
Unfortunately, with this product mix, this business generates a net loss of
$250. Because Part A appears to be profitable while Part B generates a loss,
it’s tempting to conclude that producing none of B would stop the loss.
However, the OE covered by B would then have to be covered entirely by A,
which would yield an even larger loss. If additional work were started, in
an effort to keep the workers at Steps 1 and 3 fully utilized, or to maximize
their efficiency, work-in-process inventory would grow. The inevitable
conclusion, using Cost Accounting, is that this business is not profitable!”
Tom explained. “Let’s now look at this same company using Throughput
Accounting and see if the results tell us the same things or not,” Tom said
as he flashed a new table onto his screen. “As you can see in this table,
Throughput Accounting provides an entirely different perspective when
looking at this business and its potential product mix,” Tom explained.
Tom then explained, “Throughput Accounting ranks product profit-
ability according to Throughput on the constraint per minute (T/CU/t).
And it does not allocate OE to products. So, based upon this, Product A
yields $4 per minute on the constraint, B yields $4.17, and C yields $4.44.
Throughput Accounting says the priority should be to produce as much
of C as capacity will allow, then B, then A, which is the exact opposite
priority of Cost Accounting. Because Step 2 is the constraint, producing
100 units of C, 100 of B, and 20 of A is all that can be done. But the good
news is, with this product mix from Throughput Accounting, instead of
a $250 loss when using Cost Accounting, this business now generates a
net profit of $200. The only difference being the product mix!” “What?”
Nancy exclaimed. “Could it be that we have been using the wrong product
mix here in our plant?” Nancy asked. “It certainly appears that we might
have been!” Matt added.
Tom continued, “Effective use of Throughput Accounting requires differ-
ent information than from Cost Accounting, so new report formats must
be developed and implemented. For example, a Throughput Accounting
earnings statement shows T, I, and OE relative to the constraint, while
conventional Cost Accounting reports are oblivious to the constraint. Just
as Cost Accounting and Throughput Accounting rank product profitabil-
ity differently, they may also rank customer profitability quite differently.
Several Throughput Accounting outcomes are worth emphasizing,”
TABLE 6.3 Products
Throughput Accounting Product Mix
Throughput Accounting A B C Total
A B C Have Need T/CL $60 $50 $40
Products T/CU/t $4.00 $4.17 $4.44
Demand 100 100 100 Mix 20 100 100
Price $105 $100 $95 Step 2 Used 300 1,200 900 2,400
Raw Material $45 $50 $55 Revenue $2,100 $10,000 $9,500 $21,600
Step 1 Time 3 6 9 2,400 minutes 1,800 minutes Raw Material (TVC) $900 $5,000 $5,500 $11,400
Step 2 Time 15 12 9 2,400 minutes 3,600 minutes Throughput (T) $1,200 $5,000 $4,000 $10,200
Step 3 Time 2 2 2 800 minutes 600 minutes Operating Expense (OE) $10,000
Total Time 20 20 20 Net Profit (NP) $200
Tom explained as he flashed another slide on his screen (Figure 6.9).

Financial measures reverse management priorities from OE, T, and I for
Cost Accounting to T, I, and OE for Throughput Accounting.
• Performance measures for Throughput Accounting are not distorted

by cost allocations for Cost Accounting.
• Constraint measures eliminate conflict between local measures, like
machine utilization or operator efficiency and global measures or
performance of the business.
• Control measures remove the incentive to build excess inventory and
replace it with the incentive to deliver products on time.
Tom began again, “Let’s now review the primary components of Throughput
Accounting, starting with Throughput. Throughput at your company
is achieved by processing parts, selling or delivering them to custom-
ers and receiving payment for all goods you sold. Again, inventory is not
Throughput! Inventory or Investment (I) is primarily the amount of WIP
and finished goods inventory, but it also includes all purchased parts for
sales or the equipment, buildings and other assets required to produce parts,
if you’re a manufacturer. The real key to reducing ‘I’ is to stop the practice
of pushing orders through your processes and replace it with pulling orders
through your processes. Use the concept of nothing comes into your pro-
cess until something exits the constraint or synchronizing flow. Too much
WIP at one time leads to extending the productive cycle time of every part,
causing late deliveries of parts and unhappy customers,” Tom explained.
• Financial measures reverse management priorities from OE, T, and I for Cost
Accounting to T, I, and OE for Throughput Accounting.
• Performance measures for Throughput Accounting are not distorted by cost
allocations for Cost Accounting.
• Constraint measures eliminate conflict between local measures, like machine
utilization or operator efficiency and global measures or performance of the business.
• Control measures remove the incentive to build excess inventory and replace it with
the incentive to deliver products on time.
FIGURE 6.9
Throughput Accounting outcomes
Tom continued, “And finally, Operating Expense is all the money the
system spends in order to turn Inventory into Throughput including all
labor costs. The key for your company to reduce labor costs is by improving
Throughput at a much faster rate by removing waste and variation within
the constraint. In doing so, this will reduce the dependence on overtime
to play catch-up and reduce overall dollars spent on overtime. It will also
improve the morale of the workforce because you have eliminated the fear
of layoffs. Think about it, if you can generate additional Throughput with
the same Operating Expense, you will return much more to your com-
pany’s bottom line,” Tom explained.
“So, there’s your comparison of these two markedly different account-
ing methods. It should be clear to you that, if you continue using tra-
ditional Cost Accounting to make your key financial decisions, like
product mix, your company could be missing an opportunity to
make more money. And since the goal of most companies is to make
money now, and in the future, doesn’t it make sense to use Throughput
Accounting to make your real time financial decisions?” Tom said as he
finished his presentation on accounting methods. “So, what do you guys
think?” Tom asked.
Nancy was the first to comment, “I am truly amazed at what we heard
today! I just never dreamed that with such a simple set of metrics, profit
numbers could be enhanced dramatically just by changing the mix!”
Nancy then added, “I have been searching for a way to dramatically
increase profitability and thanks to the Theory of Constraints, I’m cer-
tain we have found our way!” Matt then added, “I know I can speak for
everyone here today when I say, thank you Tom for such an enlightening
discussion.” Tom then added, “Guys, there’s a lot more to the Theory of
Constraints and as we progress, you’ll see new ways of doing business. One
thing I want everyone to do, is that I want you to present what you learned
today to other key members of your staff!” Tom stated emphatically.
“I do have a question for you Tom,” Matt said. “And what question is that
Matt?” Tom asked. “When we first started our improvement journey, we
began by implementing Six Sigma and we did see improvement in our prof-
its and on-time delivery. We then tried implementing Lean Manufacturing
and again, we saw additional improvements using this method,” he added.
“My question for you is this. Is there a way that we can combine both
of these improvement methods with the Theory of Constraints?” Tom
responded by asking a question, “What do you think Matt?” “I would think
there would be, and I think the outcome would be major improvements in
things like profits and on-time delivery,” Matt said. Tom responded, “Well
Matt, as we go forward, you will see exactly how to combine the best of all
three methods.” And with that, Tom looked at the clock and said goodbye
to everyone in the room. On his way out the door to the airport, he turned
to Matt and told them he would be back sometime soon.
REFERENCE
1. John Ricketts, Reaching the Goal – How Managers Improve a Services Business
Using Goldratt’s Theory of Constraints, 2008, Westford, MA: IBM Press.
7
Maximo Health Center
Complex’s New Beginning
During Tom’s flight home from Detroit, he decided that he needed to start
planning for his next trip to the Maximo Health Center Complex. While he
had already created a list of performance metrics that he would track during
his improvement efforts, he decided to take another look at the list to final-
ize it. His initial list of metrics included the following metrics in Table 7.1.
As he was reviewing his ideas for performance metrics, he thought to
himself, “Have I included everything that will tell me how the hospital is
doing?” He realized that there would be other performance metrics that
would be used during the improvement effort, but what he was trying to
do was create a list of those metrics that would, in effect, tell the story of
how successful the overall improvement effort had been. As he looked over
his list, he felt alright with the metrics he had chosen. He then pulled out
his i-Phone, reviewed his schedule, and decided that he would contact Pete
TABLE 7.1
Key Performance Metrics for Each Hospital
Performance Metric Metric Description
% Profit Margin Appraisal of the percentage profit for each hospital using
Throughput Accounting.
Average Hospital Stay Appraise the amount of time your patients are staying
in your hospital after admission.
Patient Wait Times Calculate the average length of time patients have to wait
to receive treatment or have tests run.
Patient Satisfaction Calculate how patients felt while being taken care of
in each hospital and/or how they felt about the results.
Efficiency % or Utilization Calculate the percent efficiency for key processes within
each hospital, including surgeries and testing.
73
Hallwell to schedule a visit to begin the improvement effort at Maximo

Health Center Complex. And with that, he decided to take a brief snooze
on his way to the Pittsburgh Airport.
Tom returned home around 10:00 pm and went directly to bed. The next
morning Tom woke up early, showered, and ate breakfast. He dialed Pete’s
number and after several rings, Pete answered the phone. “Hello, this is
Pete Hallwell, how can I help you?” he said as he answered the phone. “Hi
Pete, it’s Tom here,” Tom replied. “I was wondering if I can come in and
meet with you about our upcoming improvement effort?” Tom asked. “Yes,
absolutely!” Pete replied. “When would you like to come in Tom?” Pete
asked. “Are you free tomorrow?” Tom asked. “I’m actually free today, if that
works for you Tom?” Pete responded. “That would be great Pete, how soon
can I come in?” he asked. “Why don’t you jump in your car and come right
now?” He replied. “I’ll be there shortly Pete,” he replied, and he hung up.
Shortly thereafter Tom arrived, and Pete was outside waiting for him.
They shook hands and went up to Pete’s office. “So, Tom, what is it that
you want to talk about?” Pete asked. “Next week I’m supposed to start
my consulting gig here and I wanted to give you an idea of what I’d like
to do on the first day,” Tom explained. “One of the things I want to do
is have a general meeting with the people who run each of the hospitals,
just to give them an idea of what we’ll be doing going forward. So, one
thing I need you to do is to invite each member of the hospital to be in
your conference room on Monday morning,” Tom said. Pete made notes
as Tom was explaining what he wanted to do. “What time would you
like this first meeting to be Tom?” Pete asked. “I think we need to start
at 8:00 am and then plan on it lasting until early afternoon some time,”
Tom explained.
“What do you plan on covering at this meeting Tom?” Pete asked.
“Similar to what I explained to you and your two Accounting employees. I
want to explain the basics of the Theory of Constraints and how we can go
about combining it with both Lean and Six Sigma. I’ll also cover things like
Throughput Accounting, Theory of Constraints’ version of scheduling, and
how to avoid high levels of inventory while totally avoiding stock-outs,” he
explained. “Wow, that seems like a lot of new ideas to share in one setting!”
Pete replied. “Not really Pete, as they’re all tied together under the heading
of the Theory of Constraints,” Tom responded. “Okay, I’ll set up the meeting
for 8:00 Monday morning Tom,” Pete replied. And with that meeting, Tom
said, “Okay Pete, I’ll see you on Monday.”
Maximo Health Center’s New Beginning • 75
Tom spent the weekend putting together his slide decks for his Maximo
Health Center Complex meeting on Monday. As he was working on his
presentation, he thought to himself, “I really need to know more about the
individual hospitals that make up the Maximo Health Center Complex.”
He got on the internet to search for the make-up of Maximo Health Center
Complex and found what he needed to know. The list of hospitals and
their specialties included the following:
1. Maximo Children’s Hospital, specializing in children’s ailments.

2. Maximo Women’s Hospital, specializing in pregnancies.
3. Maximo Veteran’s Hospital, specializing in military veterans.
4. Maximo Oncology Hospital, specializing in cancer treatments.
5. Maximo Surgical Hospital, specializing in surgical operations.
6. Maximo Emergency Hospital, specializing in emergency patients.
As he was reading about each of the hospitals, he found that in addition

to each of the individual hospitals, Maximo also owned and operated a
variety of clinics throughout the city, which included facilities like dental,
allergy, psychiatric and others. “Not sure where I should start my con-
sulting effort? I guess I’ll probably have a much better idea of the intrin-
sic order after my meeting on Monday?” Tom thought to himself. Tom
worked all day on his presentation and finally completed his slide decks.
On Monday morning, Tom arrived at Maximo Health Center Complex’s
corporate office. He signed in, and the security contacted Pete to let him
know that Tom had arrived and was in the lobby. Shortly thereafter Pete
arrived, and they both went to the seventh floor conference room. The
room as full of people who were there to hear Tom’s presentation. Tom set
up his equipment, and Pete introduced Tom to the audience.
One by one, they introduced themselves to Tom, along with their posi-
tions at Maximo Health Center Complex. “Good morning Tom, I’m Tom
Jones, the CEO from Maximo Children’s Hospital, and we specialize in all
children’s ailments,” he said. “Hi Tom, I’m Philip Zagst, and I’m the Chief
Quality Executive from Maximo Women’s Hospital. We are specialists in
pregnancy deliveries,” Philip explained. “Good morning Tom, I’m Marie
Thomas and I’m the CFO at Maximo Veteran’s Hospital, specializing in
military veteran’s ailments,” she said. “Hi Tom, I’m Terry Sample, the
COO at Maximo Oncology Hospital where we specialize in cancer treat-
ments,” he explained. “Good morning Tom, I’m Patricia Smith, the COO
at Maximo Surgical Hospital and we specialize in surgical operations,” she

said. “And I’m Ted Simpson, the COO at Maximo Emergency Hospital,
and we specialize in emergency patients,” he explained.
And with the introductions complete, Tom began his presentation. “Good
morning everyone, I’m happy to meet all of you,” Tom said. “Today is a mon-
umental day for Maximo Health Center Complex, simply because you’re
going to hear about an improvement methodology that most, or all of you,
have never seen before. I know you have tried using Lean Manufacturing
with some improvements in profitability, but not what you had hoped for.
I know that you also attempted to implement Six Sigma without much suc-
cess. Today I’m going to provide the missing link in virtually all improvement
initiatives. How many of you have heard of something called the Theory of
Constraints?” Tom asked the group. The audience members looked at each
other, but none of them raised their hands indicating that they had never
heard of the Theory of Constraints.
Tom then said, “It’s not surprising to me that you’ve never heard of
this methodology before, simply because it hasn’t been used much in the
healthcare arena.” Tom continued, “Without further delay, that’s where
FIGURE 7.1
Piping system with Section E as the constraint.
we’re going to start,” and he flashed his infamous piping system onto the
screen (Figure 7.1). “What you see here is a simple piping system used to
deliver water. Each section of the piping system has a different diameter
with water entering into Section A, then flows into Section B and con-
tinued downward until it enters the receptacle at the base of this system.
The demand for water has increased and you have been asked to increase
the volume of water flowing through this system. My question to you as
a group is what would you do and why would you do it?” he asked.
The group studied the drawing until Philip Zagst, the Chief Quality
Executive, said, “I think the only way to increase the amount of water
flow would be to increase the diameter of Section E of the piping system. I
say this, because, since it is the smallest diameter pipe, this section limits
the flow of water through the entire piping system.” “That is absolutely
correct Philip, the water flow is being constrained because of Section E’s
small diameter pipe,” Tom replied. “Does everyone see this?” Tom asked
the group, and they all indicated that they did.
“Let’s say we did increase the diameter of Section E’s pipe. What do you
think would happen?” he asked the group. Marie Thomas, the CFO at
Maximo Veteran’s Hospital, raised her hand and said, “Well based upon
the diameters of the different pipes in this system, I would think that the
flow of water would now be limited by Section B, because it would now
have the smallest diameter pipe in this system?” “You are absolutely cor-
rect Marie and it would now look like this,” he said and flashed a revised
piping system drawing on the screen (Figure 7.2).
“What you see here is the revised piping system, just as Marie described,”
Tom explained. “Here’s another question for you,” Tom said. “Would
changing the diameter of any other pipe have resulted in an increased
flow of water through this system” he asked the group. In unison, they all
said no, only by increasing the diameter of Section E would have resulted
in increased flow of water. “What you have just learned is the basic concept
of a system constraint,” Tom explained. “So, you’re probably wondering,
how does a piping system apply to our hospitals?” Tom stated and with
that, he loaded his next slide onto the screen (Figure 7.3).
“What you see on the screen, is a simple example of the treatment of a
patient for some form of cancer,” Tom explained. “The patient arrives at
the hospital, signs in and is escorted to the treatment area which takes
approximately 10 minutes. The patient then waits in line to receive the spe-
cific treatment which takes roughly 30 minutes. The patient then receives
FIGURE 7.2
Piping system with Section B as the new constraint.
Patient Signs In Patient waits to Treatment Patient meets

Patient Arrives and is escorted begin treatment. completed on with
at Hospital for to patient. Doctor after Patient is
Treatment. treatment area. treatment. released
from hospital.
10 Minutes 30 Minutes 60 Minutes 15 Minutes
FIGURE 7.3
Flow of patients for cancer treatment.
the specific treatment which in this example takes 60 minutes. And finally,
after the patient receives his or her treatment, they then meet with the
doctor for about 15 minutes. After meeting with the doctor, the patient
is released.” “So, here’s my question for you. If you wanted to increase the
number of patients this hospital could see and treat, what would you do
and why would you do it?” Tom asked.

Patient Arrives and is escorted to begin treatment. completed on with Doctor
at treatment area. patient. after treatment. Patient is
Hospital for released
Treatment. from hospital
FIGURE 7.4
Patient flow after improvement.

Patient Arrives and is escorted to begin treatment. completed on with Patient is
at treatment area. patient. Doctor after released
Hospital for treatment. from hospital.
Treatment.
FIGURE 7.5
New oncology treatment times.
Terry Sample, the COO at Maximo Oncology Hospital, immediately

raised his hand and said, “Based upon what we just learned from the pip-
ing system, the constraint is when the patient receives treatment. I say this
because this step has the longest cycle time at 60 minutes.” “Correct Terry,
so if you wanted to increase the number of patients you were to treat, what
would you have to do?” Tom asked. “Clearly, you would have to reduce the
time for this step,” Terry replied. “Correct again Terry,” Tom said. “Let’s
say you were able to reduce this step by 20 minutes, where would your new
constraint be located then?” He asked as he flashed a new figure on his
screen (Figure 7.4).
Terry responded and said, “Clearly this step would still be the constraint
because it still takes the longest time to complete. But the good news is, we
would still be able to see more patients.” “That is absolutely correct Terry!”
Tom exclaimed. “And what would happen if we were able to remove 10
more minutes from this step Terry?” Tom asked as he flashed the new
drawing on his screen (Figure 7.5).
“If this were to happen, the new constraint would be patients waiting
to begin treatment,” Terry replied. “Actually, you would end up with a
duel constraint,” Tom interjected. “But how would it be possible to reduce
the treatment time down to 30 minutes, if it now takes 60 minutes to
complete?” Terry asked. “Good question Terry, and I’ll answer that ques-
tion in a few minutes,” Tom responded. “The Theory of Constraints was
created by a man named Dr. Eliyahu Goldratt. He wasn’t a medical doc-
tor, but rather a PhD type doctor. When he first developed the Theory of
Step 1: Identify the System Constraint.
Step 2: Decide how to exploit the System Constraint.
Step 3: Subordinate everything else to the System Constraint.
Step 4: If necessary, elevate the System Constraint.
Step 5: When the constraint is broken, return to Step 1 to locate the new constraint.
FIGURE 7.6
Constraints, he presented what he referred to as Theory of Constraints’

Five Focusing Steps, which were as follows (Figure 7.6),” as he flashed a
new overhead on his screen.
“So, based upon our example, you have identified the System Constraint
and have come up with a way to exploit it to the point where you’re able to
treat more patients,” Tom explained. “So, let’s now look at Step 3, subor-
dinate everything else to the System Constraint,” Tom added. “Thinking
back to our original drawing of this process (Figure 7.3), how fast do you
think the steps in front of the constraint should be running?” has asked
the group. Ted Russell, the Purchasing Manager, responded and said,
“They should be running at maximum speed so that more patients can be
treated.” “Does everyone agree with what Ted has just said?” Tom asked
the group. Three people in the audience said yes that they agree, while the
others remained silent.
“Let’s take a look at what might happen if the first two steps were to run
at maximum capacity,” Tom said as he flashed a new overhead onto the
screen (Figure 7.7) and said, “What you see here is the negative impact of
not ‘subordinating Steps 1 and 2’ to the system constraint.” “Because the
system constraint controls the flow of patients, by running the first two
steps to their maximum, we end up with a ‘stack-up’ of patients in front of
the system constraint. We haven’t treated any more patients, but we have
filled up our waiting room with more patients. This is the end result of not
subordinating everything to the system constraint,” Tom explained. “Does
everyone see my point here?” he asked, and it seemed like they all did.
“Now let me get back to the question Terry asked, which was ‘How would
it be possible to reduce the treatment time down to 30 minutes?’” Tom said.
“Goldratt’s fourth step says, ‘If necessary, elevate the system constraint,’”
Tom explained. “During the first two steps, very little if any money needs

Patient Arrives at and is escorted to begin treatment. completed on with Doctor Patient is
Hospital for treatment area. patient. after treatment. released
Treatment. from hospital.
FIGURE 7.7
Steps 1 and 2 running at maximum capacity.
to be spent to improve the capacity. I say this because most of the time you
will find excessive waste in your processes and you will be able to reduce the
cycle time. But let’s say you have removed all of the waste that you can, and
the same step is still not fast enough to see and treat more patients. Goldratt’s
Step 4 says, if necessary, elevate the system constraint,” Tom explained.
“In our example, we had removed so much time from our system con-
straint, that Terry didn’t think it would be possible to reduce the time
down to 30 minutes,” Tom said. “But what if we added another treatment
area, so that we virtually cut the treatment time in half. This would be the
equivalent of cutting the treatment time from 60 minutes down to 30 min-
utes,” Tom explained. “You’re probably all thinking that this would cost
too much for the hospital to do this, but after you hear about the Theory
of Constraints version of accounting, known as Throughput Accounting,
I think you’ll see that the belief that it would cost too much to add another
treatment area, is not correct,” Tom explained.
Tom began again, “Goldratt’s Step 5 tells you that once the constraint
has been broken, return to Step 1 and identify the new system constraint.
I have been using the Theory of Constraints for a number of years now
and the results achieved have been simply amazing. This concludes the
first part of my presentation, so let’s take a fifteen-minute break and when
you return, you’ll learn about Throughput Accounting,” Tom said. Pete
approached Tom and said, “Tom, what you presented so far today was
so very easy to follow and based upon what I learned about Throughput
Accounting from you, this next session will be well accepted by the group.”
When everyone was back from break, Tom began his session on
Throughput Accounting. “The way I want to explain Throughput
Accounting is by relating a fictitious story of a sock maker,” he began. “In
the early 1900s, Cost Accounting (CA) was in its early stages and begin-
ning to be widely accepted and used. For a business owner, there were many
things to consider in the day-to-day operation of the business. One of the
most important functions of the business owner was tending to the daily
needs of the business financial situation. Keeping the books, calculating cost
for raw materials, calculating labor cost, and making sales were all impor-
tant issues to be dealt with on a daily basis,” he explained.
He began again, “It was understood by business owners that, in order
to stay in business and make money, the cost they paid for the products
or services rendered had to be less than the selling price of their products
or services. If it wasn’t, then they would quickly go out of business. Then
and now, the needs of businesses haven’t changed much, but other things
have changed.”
“The ideas and concepts about what was important to measure, and how
to measure them, were starting to form and were being passed from one
generation to the next. This was considered important information that
you needed to know, in order to be successful. Without this understand-
ing, it was assumed that you would fail. Back then, the business structure
and methods were different than they are today. The labor force was not
nearly as reliable, and most workers did not work 40 hours a week. When
they did work, they were not paid an hourly wage, but instead were paid
using the piece-rate pay system,” Tom explained.
“As an example, suppose you owned a knitting business, and the product
you made and sold was socks. The employees in your business would knit
socks as their job. With the piece-rate pay system, you paid the employees
based on the number of socks they knitted in a day, or a week, or whatever
unit of time you used. If an employee knitted ten pairs of socks in a day,
and you paid a piece rate of $1.00 for each pair knitted, then you owed
that employee $10.00. However, if the employee didn’t show up for work
and didn’t knit any socks, then you owed the worker nothing. In this type
of work environment, labor was truly a variable cost and deserved to be
allocated as a cost to the product. It just made sense in a piece-rate pay sys-
tem. The more socks the employees knitted, the more money they could
make. Also, as the business owner, your labor costs were very precisely
controlled. As I mentioned, if employees didn’t make any socks, then you
didn’t have to pay them,” Tom continued.
“In time, metrics for calculating labor costs changed and the labor rates
changed as well. Many employees were now paid a daily rate, instead of
a piece rate. Labor costs had now shifted from a truly variable cost per
unit, to a fixed cost per day. In other words, the employees got that same
amount of money per day, no matter how many pairs of socks they knit-
ted or didn’t knit. As time went by, the employee labor rates shifted again.
This time, labor rates shifted from a daily rate to an hourly rate. With the
new hourly rate came the more standardized work week of forty hours, or
eight hours a day, five days a week. With the hourly rate, the labor costs
now became fixed,” he explained.
Before Tom continued, he scanned the audience to make sure everyone
was following what he had to say. When he was comfortable that they
were, he began again, “With these changes, it became apparent to the
sock-knitting business owner that, in order to get the biggest bang for the
labor buck, the owner needed to produce as many pairs of socks as he
could in a day, in order to offset the rising labor costs. The most obvious
way to do that was to keep all of your sock knitters busy all of the time
making socks. In other words, efficiency was a key ingredient, and needed
to be increased. If the owner could make more pairs of socks in the same
amount of time, then his labor cost per pair of socks would go down. This
was the solution the business owner was looking for, reducing his costs.
This had to be the answer, or so he thought.”
Tom continued with his story, “With these new-found levels of high effi-
ciency came another problem. The owner quickly noticed that he had to
buy more and more raw materials just to keep his employees working at
such high efficiency levels. The raw materials were expensive, but he had to
have them. The owner knew that his past success was directly linked to his
ability to maintain such high efficiencies and keep his cost low. More and
more raw materials were brought in and more and more socks were made.
The socks were now being made much faster than he could sell them. What
he needed now was more warehouse space to store all of those wonderfully
cheap socks! So, at great expense, the owner built another warehouse to
store more and more cheap socks. The owner had lots and lots of inventory
of very cheap socks. According to his numbers, the socks now were costing
next to nothing to make. He was saving lots of money, or so he thought.”
Tom continued, “Soon the creditors started to show up wanting their

money. The owner was getting behind on his bills to his raw material sup-
pliers. He had warehouses full of very cheap socks, but he wasn’t selling
his socks at the same rate he was making them. He was just making more
socks. He rationalized that he had to keep the costs down, and in order to
do that, he had to have the efficiency numbers high. The business owner
soon realized that he had to save even more money. He had to cut his costs
even more, so he had to lay people off to reduce his workforce to save even
more money. He wondered how he ever get into a situation like this? His
business was highly efficient and his cost per pair of socks was very low.
He had saved the maximum amount of money he could, and yet he was
going out of business!”
“Reality had changed, and labor costing had changed (labor shifted
from a variable cost to a fixed cost), but the Cost Accounting rules had
not changed. The owner was still trying to treat his labor cost as a vari-
able cost. Even today, many businesses still try to treat their labor cost as a
variable cost and allocate the labor cost to individual products or services.
When the labor costs are allocated to a product or service, then companies
try and take the next step—they work hard to improve efficiency and drive
down the labor costs per part, or unit of service,” Tom explained.
Tom stopped and said, “This erroneous thought process is ingrained in
many business owner’s minds, and they believe that this action will some-
how reduce their labor costs. And if you could reduce labor costs, then
you are making more profit. But take just a moment and reflect back on
the consequences of the sock maker’s experience with cost savings and
the high efficiency model. Are these end results anywhere close to what
the business owner really wanted to have happen?” Tom asked in general.
Tom continued, “The efficiency model, when measured and imple-
mented at the wrong system location, will have devastating effects on your
perceived results. The end results will actually be the opposite of what you
expected or wanted to happen. I wonder why, with all of the technology
improvements accomplished throughout the years, it is still acceptable to
use Cost Accounting rules from the early 1900s? So, let’s look more into
the ‘rules’ of Cost Accounting.”
He began again, “The primary focus of Cost Accounting is per part or
per unit cost reductions. Because perceived cost reductions are viewed so
favorably, is it any wonder why there is so much emphasis on efficiency?
And yet cost reductions don’t seem to be the answer. There have been many
highly efficient companies that have come close to going out of business
or have actually gone out of business. Have you ever heard of a company
that has saved themselves into prosperity? Think about it, any perceived
savings that the sock maker thought he was getting, were quickly eroded
by buying more raw materials. In fact, it ended up costing the sock maker
much more money than he realized and not saving him anything! He was
doing all of the recommended practices and yet he was failing.”
“Many companies will emphatically state that the primary goal of their
company is to make money, and yet they spend the largest portion of their
time trying to save money. It would appear they’ve forgotten what their
goal really is. The strategy you employ to make money is vastly different
than the strategy you would employ to save money. For most companies,
the assumption is that saving money is equal to making money. That is, if
you somehow save some money, it’s the same as making money, and this
is simply not true!” Tom emphasized.
These two concepts are divergent in their thinking with each taking you
in a different direction with different end results. If the real goal of your
company is to save money, then the very best way to accomplish your goal
is to go out of business. This action will save you the maximum amount
of money. However, if the goal of your company is to make money, then
a different strategy must be employed which is maximizing through-
put through the system. Let’s now look at a different form of account-
ing known as Throughput Accounting, Tom explained. “Any questions so
far?” he asked. There weren’t any questions, so he continued on with his
presentation.
“Suppose we consider again the same example using the sock maker.
Suppose the sock maker wants to make three times as many socks as he is
making now. What would he have to do? Using the piece-rate pay system, he
would have to hire three times as many employees to be sock makers and pay
them a piece rate of $1.00 per pair. So, in order to make three times as many
pairs of socks, the labor rate must go up and he then has to hire three times
as many people. In the piece-rate world, getting three times as much through
the system will cost him three times as much in labor,” Tom explained.
“Now let’s suppose that our sock maker is paying an hourly wage, rather
than a piece rate. Further suppose he figures out a way to make three more
pairs of socks, per worker, per day. By being able to make three times as
much, how much do his labor costs go up? They do not go up at all! He
still pays the workers an hourly rate, whether they make one pair of socks
or ten pairs of socks. He only has to pay the employees once, not a rate
based on the number of socks made. His only increase in cost comes from
buying more raw materials to make the socks. So, why does modern day
Cost Accounting still try to allocate a labor cost per unit of work, and then
claim that increased efficiency drives down the cost per part? The fact is, it
does no such thing! In today’s reality, labor costs are fixed, not variable!”
Tom continued his explanation.
“Throughput Accounting is not a frontal attack on Cost Accounting,
it is just a different way to view the accounting measures, solve issues,
and manage the company at a much higher success and profitability level.
It’s an update of the accounting rules, if you will, that is much more in
line with current business reality. It is my contention that understanding
Throughput Accounting will be your company’s lever to success,” Tom
interjected. “The bottom line is that Throughput Accounting is a much
better way to make real time financial decisions!” Tom added.
“Throughput Accounting uses primarily three performance met-
rics, namely Throughput (T), Investment/Inventory (I), and Operating
Expense (OE). These metrics are a simplified methodology that removes
all of the mystery of accounting and rolls it into three simple measures,”
Tom explained and flashed a new overhead on his screen (Figure 7.8).
Tom then said, “When you read and understand these definitions, it
seems likely that all the money within your company can be categorized
to fit within one of these three measures.” “Any questions?” Tom asked.
There weren’t any questions, so Tom continued, “In thinking about
Throughput Accounting (TA) it is important to consider the follow-
ing thoughts. Throughput Accounting (TA) is neither costing nor Cost
Accounting (CA). Instead, Throughput Accounting is focused on cash,
without the need for allocation to a specific product or service. This con-
cept includes the variable and fixed expenses for a product or service.
The only slight variation would be the calculation for Total Variable Cost
(TVC). In this case the Totally Variable Cost is a cost that is truly vari-
able to a product or service, such as raw materials, paying a sales com-
mission, or shipping charges. The sum total of these costs becomes the
product TVC.”
Tom continued, “Totally Variable Cost is only the cost associated
with each product or service. Some would argue that labor should also
be added as a variable cost per product or service, but this is not true!
Labor is no longer a variable cost, it’s a fixed cost. With the hourly labor
1. Throughput is the rate at which inventory is converted into sales. If you make lots of
products and put them in a warehouse, that is not throughput, it’s inventory. The
products or services only count as throughput if they are sold to the customer and fresh
money comes back into the business system.
2. Investment/Inventory is the money an organization invests in items that it intends to sell.
This category would include inventory, both raw materials and finished goods. This
includes buildings, machines, and other equipment used to make products for sale,
knowing that any or all of these investments could at some point in time, be sold for cash.
3. Operating Expense is all of the money spent generating the Throughput. This includes,
rent, electricity, phone, benefits, and wages. It is any money spent that does not fit within
one of the first two TA categories.
FIGURE 7.8
Three performance metrics of Throughput Accounting.
measures, you pay employees for vacation, holidays and sick leave. The
employees cost you exactly the same amount of money whether they are
at work or not. Using this example, labor is an Operating Expense, and
not a variable cost associated with products, and this is a key point to
remember.”
“The following definitions apply to Throughput Accounting, Tom
explained as he loaded a new overhead on his screen (Figure 7.9),” Tom
explained.
Tom continued, “Some would argue that Throughput Accounting falls
short because it is not able to pigeon-hole all of the categories of Cost
Accounting into Throughput Accounting categories. Things like interest
payments on loans, or payment of stock-holder dividends, or depreciation
of machines or facilities. However, this argument appears to be invalid.
Ask yourself, which one of those specific categories can’t be placed into
one of the Throughput Accounting categories?”
Throughput (T) = Product Selling Price (SP) – the Total Variable Cost (TVC). Or T = SP –
TVC
Nett Profit (NP) = Throughput (T) minus Operational Expense (OE). Or NP = T – OE
Return on Investment (ROI) = Net Profit (NP) divided by Inventory (I). Or ROI = NP/I
Productivity (P) = Throughput (T) divided by Operating Expense (OE). Or P = T/OE
Inventory Turns (IT) = Throughput (T) divided by Inventory Value (IV). Or IT = T/I
FIGURE 7.9
TA definitions.
“The baseline Throughput Accounting concept is really very simple. It

you have to write a check to somebody else, it’s either an Investment (I)
or an Operating Expense (OE). It’s an Investment if it is something you
can sell for money at some point in time. It’s an Operating Expense if you
can’t. Put this debt in the category that makes the most sense. On the other
hand, if somebody is writing a check to you, and you get to make a deposit,
then it’s probably Throughput (T). Cost Accounting rules have made it
much more complicated and difficult than it needs to be. When you make
it that complex and difficult, and intently argue about the semantics, the
stranglehold that Cost Accounting has on your thinking becomes even
more obvious,” Tom explained.
“Throughput Accounting is really focused on providing the necessary
information that allows decision makers to make better decisions. If the goal
of the company is truly to make money, then any decisions being considered
should get the company closer to the goal and not further away. Effective
decision-making is well suited to an effective T, I, and OE analysis. This anal-
ysis can show the impact of any local decisions on the bottom line of the
company. Ideally good business decisions will cause three things to happen,”
Tom explained as he loaded another slide on his screen (Figure 7.10).
After explaining these three points, Tom suggested that the group take
a small break.
When everyone was back from their break, Tom began again, “The
decision-making process becomes much easier when these three factors
are considered. The movement either up or down, of these three measures
should provide sufficient information for good strategy and much better
decisions. Any good decision should be based on global impacts to the
company and not just a single unit or process in isolation. If your thinking
1. Throughput (T) to increase.
2. Investment/Inventory to decrease or stay the same. It is also possible that investment can
go up, as long as the effect on T is exponential. In other words, sometime a very well-
placed investment can cause the T to skyrocket.
3. Operating Expenses decrease or stay the same. It is not always necessary to decrease
Operating Expense to have a dramatic effect. Consider the situation where the T actually
doubles, and you didn't have to hire anyone new to do it, nor did you have to lay anyone
off.
FIGURE 7.10
Three outcomes good business decision will cause.
is limited to the lowest level of the organization, and you are focused on
the wrong area, then the positive impact will never be seen or felt by the
entire organization.”
Tom continued, “If we compare these two accounting methods at the
highest level, then Cost Accounting is all about the actions you take to try
and save money, while Throughput Accounting is all about the action you
take to make money. Once you’ve made the cost reductions and you still
need more, what do you do next? Where else can you reduce costs? On the
other hand, making money, at least in theory, is infinite. What is the limit
on how much money your company can make now?” and Tom loaded a
new overhead onto his screen (Figure 7.11).
This figure compares the top-level priorities of these two accounting
approaches. With these differences in priorities, it is easy to see why Cost
Accounting is focused on saving money, while Throughput Accounting
is focused on making money. So, consider the real goal of your company
before you decide which path to take.
“You can pick up the newspaper or watch TV almost any day of the
week and see the effects of these priorities. You can read about or hear
about company XYZ that is going to lay off 500 employees, in order to
reduce costs and become more efficient and align themselves to be more
vertical with the customer and . . . blah, blah, blah! What these compa-
nies are really saying is they have forgotten how to make money or maybe
they really never learned how to make money. They are so focused on sav-
ing money that they have forgotten what the real goal of the company is,
which is clearly making money!” Tom explained.
FIGURE 7.11
Comparison of cost and Throughput Accounting.
“So, how did all of this come about? Why are things happening the way
they are? If all of this Cost Accounting and saving money is so good, then
how come so many companies seem to be in financial trouble or worse yet,
going bankrupt! There are many reasons, and some could be debated for
months, but no matter how many reasons there may be, all of them are not
equal. Some reasons are bigger players than others, and as such, have had
a far greater impact.” Tom explained.
“Let’s now look at the cost model associated with both the Cost Accounting
and Throughput Accounting concepts. It provides an interesting history
about why things are the way they are,” Tom said and loaded another over-
head on his screen (Figure 7.12). “This overhead defines the cost model con-
cept for both Cost Accounting and Throughput Accounting. The product
depicted in this overhead is exactly the same for both models. It indicates
the same selling price, same manufacturing process, same everything. In
the Cost Accounting model, you’ll notice the layers of allocated cost that are
applied to each product, as some percentage of the cost, or allocated rate. The
sum total of all of these costs, whatever it may be, equal what Cost Accounting
considers to be the cost to manufacture. Let’s look at each layer,” Tom said.
“Raw Materials represents the total cost of all the raw materials used in
the product you produce. An average raw material cost for most compa-
nies might be around 40%, but some can, and will, go much higher. Labor
Costs are the allocated labor cost per parts. It is usually calculated based
FIGURE 7.12
Different layers of CA and TA.
on some type of total parts per hour, or day, or production batch, or order,
or some other value. Then the total labor cost is divided by the number
of parts produced to arrive at the percent of labor to be allocated to each
part,” Tom explained.
Since everyone seemed to be following him, he continued, “Overhead
Costs, represent the allocated percentage per part to pay for all of the
overhead costs. These include items like the management staff, adminis-
trative jobs, training and so on. Usually these types of overhead assign-
ments, cover many types of parts, but also no part in particular. Human
Resources or even Finance are examples of organizations that fit in the
overhead category. You need to have some place to charge and collect
your overhead costs. Corporate General and Administrative is the allo-
cated cost that pays for all of the corporate staff and everything they
provide. Profit is the location where you add the percentage of profit you
want to receive for your product while the Selling Price (SP) is the selling
price for your product or service, once you’ve gone through and added
together all of the manufacturing cost categories and the percentage of
profit.”
Tom continued his explanation, “There very well could be more layers
in your company, but in the end, the hope is that when you add up all of
the costs and sell to the market, or consumer, or the next guy in the supply
chain, your selling price is always greater than your manufacturing costs.
If it is, then you have made a profit. But in reality, the selling price is not
determined by the manufacturer, but rather by the customer. If the price is
too high, customers simply won’t buy your product or use your service and
will look elsewhere. So, if that happens, what are your options? Somehow
you have to lower your cost and selling price, in order to make your prod-
uct or service more attractive to the consumer. So how do you do that? You
could cut your profit margins, but most organizations do not like to do
that. If you can’t do that, then what else can you look for?”
Tom could see that most of the attendees were taking prolific notes, so
he continued his lengthy explanation, “How about overhead cost? You can
slow down or stop doing some of the things associated with overhead,
for example, training. You could cut your raw materials expense. Perhaps
you could find a different a vendor, or maybe buy cheaper parts. If you do
that, then what about the quality risk? How about cutting labor costs? If
you could just get more efficient, then your labor costs would go down. If
labor costs go down, then you can make more profit – correct? I think that
by now you understand the cycle of chaos that takes place when you focus
on efficiency. Disaster usually follows in short order and such is life in the
cost model cycle.”
“In your company, if you do not pay your employees using the piece-
rate pay system, then the assumption of using allocated labor costs, or any
costs, is invalid! Why is the stigma of allocated costs so strong in Cost
Accounting? The assumption that higher efficiency will reduce the cost
per part is also invalid. In today’s reality of the per hour rate, the cost
remains the same,” Tom explained.
“The Throughput Accounting cost model contains only Total Variable
Cost (TVC) and Throughput (T). The calculation is simple: Throughput
equals Selling Price minus Totally Variable Costs or T = SP − TVC.
Throughput, in essence, equals the dollars remaining from selling the
product or delivering your service, after you have subtracted the TVC cost
and received payments. Nothing is allocated, nothing is assumed, it’s just
a simple cash calculation from the sale,” Tom explained. “I hope after our
discussion today you have a good idea of why Throughput Accounting is
a superior accounting method for making real-time financial decisions.
There is more to Throughput Accounting than what I presented today, but
for now, I’m open for questions,” Tom said.
Pete raised his hand and asked, “It seems apparent to me that our com-
pany should be using Throughput Accounting to make our financial
decisions going forward. My questions is actually a simple one and that
is why in the world have we not heard about this method before today?”
“That’s a great question Pete, and I wish I had a good answer for you,” Tom
replied. “Cost Accounting has had a ‘death grip’ on companies for many
years, but I promise you, if you begin using Throughput Accounting to
make your financial decisions, your profitability will improve dramati-
cally. The key takeaway from today’s session is that there is a huge differ-
ence between trying to improve profitability by saving money, compared
to making money. In future sessions, we will use your own companies to
demonstrate why this difference matters,” Tom explained.
“Pete, I know we had planned on covering other subjects in today’s ses-
sion, but because of the length of time spent comparing these two account-
ing systems, I think we need to schedule the other subjects for another
day,” Tom suggested. “That works for me Tom, how soon would you like
to schedule the next session?” Pete asked. “How about Thursday of this
week?” Tom suggested. “I think we can arrange that Tom,” Pete replied
and told Tom he would call him with the details of when the next session
would be. And with that, the session ended, but before Tom left, he had a
proposal for Pete.
“Pete, I know you at Maximo have spent a lot of money training people
on both Lean and Six Sigma and if you’re like many other companies who
have done the same thing, you didn’t see an acceptable return on your
investment. Next week, I’m planning on traveling to Detroit to present
something I refer to as the Ultimate Improvement Cycle, which is the
integration of Lean, Six Sigma, and the Theory of Constraints. I think it’s
something that would be of profound interest to you at Maximo. I’d like
to invite you to come to Detroit to sit in on this session, because eventually
we need to implement this at Maximo,” Tom explained. “I would love to
attend this session, but I have one request,” Pete replied. “And that is?” Tom
asked. “I’d like to bring a couple other people with me who will ultimately
be responsible for implementing this within our Hospital Complex,” Pete
said. “I’m sure that will be fine. The session will hopefully start at 8:00 am
and will last all day. I’ll send you the address tomorrow, as well as the date
and time for the session,” Tom replied and then he left.
When he returned home, he called Matt and let him know what he had
planned, and Matt was perfectly fine with the date and time, which was
the following Monday, as well as having several of Maximo’s personnel

join them for this training session. Tom then emailed Pete and let him
know that everything was set, and he attached the location of the training
session as well as the date and time.
8
Simpson Water Heaters’ Next Meeting
The last time Tom was at Simpson Water Heaters, he had delivered the basics
of the Theory of Constraints as well as Throughput Accounting and things
went well during his presentation. Prior to him leaving, Matt Maloney,
Simpson’s Plant Manager, had asked him if there was a way to combine
Lean, Six Sigma, and the Theory of Constraints. Tom had explained to him
that there was and that he would return to Simpson Water Heaters to discuss
that very subject. On his way home from Maximo Health Center Complex,
Tom decided to give Matt a call and confirm the meeting on his combina-
tion of improvement initiatives, as well as Maximo’s people attending.
After Tom hung up from his call with Matt, he called the airlines and
was able to make flight arrangements for Sunday evening to Detroit. He
texted Matt and let him know he would be coming to make his presenta-
tion on Monday and that he should set it up for 8:00 am. Matt responded
back to Tom to confirm the time. Tom decided to work on his presenta-
tion the rest of the day on how best to combine the three improvement
initiatives. He let his wife know that he would be flying to Detroit Sunday
evening to make his presentation the following day. Tom’s flight was at
7:00 pm, so at 5:30 pm on Sunday, he left for the airport. He checked in and
boarded the airplane. The flight to Detroit was uneventful, and after they
landed, he picked up his rental car and drove to his hotel.
The next morning Tom woke up around 6:00 am, got dressed, and had
breakfast. He then drove to Simpson Water Heaters and arrived around
7:45 am. In addition, the three representatives from Maximo Health
Center Complex had arrived and Pete introduced his two counterparts to
Tom. “This is Jimmy Thompson and he’s a Lean Six Sigma Blackbelt. This
is Susie Wong and she is also a Blackbelt.” Matt met them all in the lobby,
and they all walked to the conference room. Matt then said, “Tom, I don’t
95
think I’ve ever looked more forward to hearing a presentation on how to

combine these three methodologies.” Tom responded and said, “I think
you’ll find this to be not only interesting, but helpful to your company.”
At 8:00, everyone was seated, and Tom began his presentation. “One
question I always ask, when consulting for a new company is, ‘How’s your
improvement effort working for you?’ The majority of companies that I
have worked with had invested lots of money in training, but they weren’t
seeing enough profit hitting the bottom line to justify the money they
had spent. Like any other investment, they expected a rapid and suitable
Return on Investment (ROI), but it just wasn't happening the way they
imagined or at least hoped that it would. Like Simpson Water Heaters,
some had invested in Six Sigma and had trained many of their employees
to become Green Belts and/or Black Belts? Some may have even gone out
and hired a Master Black Belt?” Tom explained.
Tom continued, “Some of the companies I have helped, have invested a
large sum of money training people on Lean Manufacturing, while oth-
ers had tried going the Lean Six Sigma route. So, if you were one of the
companies, the question you may have asked yourself was probably some-
thing like, ‘Why aren't we seeing a better return on our investment?’ You
knew improvements were happening, because you were seeing all of the
improvement reports, but you just weren’t seeing these same improve-
ments positively impacting your bottom line at a high enough rate, again
to justify all of the money you had spent on training. ‘Is that the case here
at Simpson Water Heaters?’” he asked. Matt replied, “Yes, absolutely it is.”
Tom then said, “In my position with Tires for All, I too experienced this
same dilemma. We had tried both Lean and Six Sigma, and although we
did see improvements to our profitability, the level of improvement was
not good enough to satisfy our Board of Directors. And then I had an
epiphany of sorts. At Tires for All we had hired a consultant to help us and
in so doing, it absolutely changed the course of history for Tires for All and
for myself. What I discovered was that it was all about having the correct
focus and leverage. By knowing where to focus my improvement efforts
absolutely transformed me. The key to my epiphany was that I discovered
something called The Theory of Constraints, that you heard about in my
last visit.”
Tom continued, “The Theory of Constraints explains that within
any company, including Simpson Water Heaters, there are key lever-
age points that truly control the rate of money generated by a company.
Simpson Water Heaters’ Next Meeting • 97
Sometimes these leverage points are physical bottlenecks, but many times

they are just policies that prevent companies from realizing their true
profit potential. In my analysis, the successful efforts all had one thing
in common, and that was the focal point of their improvement effort.
In this session, I'm going to demonstrate to you how to use the power of
the Theory of Constraints to truly jump-start your Lean and Six Sigma
improvement efforts. But better yet, I'm going to help you turn all of those
training $'s into immediate profits, and then illustrate how to sustain your
efforts over the long haul.”
“If Simpson Water Heaters is like many other companies, there always
seems to be a rush to run out and start improvement projects, without really
considering the bottom-line impact of the projects selected. Many compa-
nies even develop a performance metric that measures the number of on-
going projects, and then attempt to drive this metric higher and higher.
Instead of developing a strategically focused and manageable plan, many
companies try to, in effect, ‘solve world hunger!’ Many Lean initiatives
attempt to drive waste out of the entire value chain, while Six Sigma initia-
tives attempt to do the same thing with variation. There’s nothing wrong
with either of these strategies, but they must be focused on the right area
within your company to achieve their maximum benefits,” Tom explained.
Tom could see that he had a very captive audience, so he continued, “The
real problem with failed Lean and Six Sigma initiatives is really two-fold.
There are typically too many projects and most of the projects are focused
primarily on cost reduction. The true economic reality that supersedes
and overrides everything else, is that companies have always wanted the
most improvement for the least amount of investment. Attacking all pro-
cesses and problems simultaneously, as part of an enterprise-wide Lean-
Six Sigma initiative, quite simply overloads the organization and does not
deliver an acceptable ROI. In fact, according to some studies, the failure
rates of many Lean-Six Sigma initiatives are hovering around 50%. With
failure rates this high, is it any wonder why companies abandon their
improvement initiatives and simply back-slide to their old ways?”
“Earlier I said that focusing projects on cost reduction was one of
the primary reasons that many Lean-Six Sigma initiatives are failing.
Across-the-board cost-cutting initiatives are pretty much standard for
many businesses. My belief is that focusing solely on cost reduction is a
colossal mistake. So, if this misguided focus isn’t right, then what is the
right approach? What is it that companies should be doing to maximize
1. What to change?
2. What to change to?
3. How to cause the change to happen?
FIGURE 8.1
Three critical questions.
their profits? Based upon my experiences in a variety of organizations and

industries, the disappointing results coming from Lean and Six Sigma are
directly linked to failing to adequately answer three questions,” and he
inserted a new slide (Figure 8.1)
“Take a look at your own company. Are your improvement projects
focused on cost reduction? Do you have an army of Green Belts and Black
Belts? Do you have so many projects that they are actually bogging down
your company? Are your Six Sigma projects typically taking 2–4 months
to complete? Are they providing you with real bottom line impact or are
they simply a mirage? You will recall from my last visit I demonstrated
the basics of the Theory of Constraints using my simple piping diagram. I
then showed you a simple four-step process and you were able to correctly
identify the constraint within each example. And to reinforce to you that
saving money is not the same as making money, I presented Throughput
Accounting to you and showed you why it’s a superior way to make real
time financial decisions. You also learned that focusing on increasing
Throughput was critical to becoming more profitable,” Tom explained.
“So, the question then became, how do I know where to focus my
improvement efforts? Goldratt also developed his own version of a pro-
cess of on-going improvement and he gave us five simple steps to follow. I
explained that these five steps will form the framework for significant and
sustainable improvement for your company,” he explained as he loaded a
new slide on the screen (Figure 8.2).
Tom continued, “OK, so that’s your Process of On-Going Improvement
(POOGI) introduced by Goldratt back in the 1980s. Once again, think back
to my drawings of the piping system and 4-step process and try to imagine
your POOGI and how it might apply to your company. Are you following a
logical pathway for improvement or are you instinctively moving to the next
improvement project? This logical pathway is what I refer to as the Ultimate
Improvement Cycle (UIC) and today I’m going give you the details of how
this improvement methodology should be implemented in your company.”
1. Identify the system constraint.
2. Decide how to exploit the constraint.
3. Subordinate everything else to the above decision.
4. If necessary, elevate the constraint.
5. Return to Step 1, but don't let inertia become the constraint.
FIGURE 8.2
“As I just mentioned, there’s an improvement methodology that I refer

to as The Ultimate Improvement Cycle (UIC). One of the most important
points I just presented was the need to combine the two most popu-
lar improvement methodologies, Lean and Six Sigma, with the Theory
of Constraints. And while Lean and Six Sigma are an integral part of
this integrated method, both are missing a key ingredient, and that is
a focusing mechanism. Theory of Constraints clarifies where you must
focus your Lean and Six Sigma initiatives, in order to realize an accept-
able return-on-investment (ROI). Of course, that focal point is the sys-
tem constraint. The system constraint represents the leverage point for
your improvement efforts and delivers the Return on Investment needed
to justify your training investment,” Tom continued.
“During my last visit, I brought forward a different accounting method
referred to as Throughput Accounting (TA). I explained that Throughput
Accounting was never intended to replace traditional Cost Accounting
(CA) because companies are required by law to follow GAAP report-
ing rules and requirements. Remember I explained that Throughput
Accounting was developed to help make easier and more logical real-time
financial decisions,” Tom added. “I also explained that in order to judge
if an organization is moving toward its goal of making more money, I
explained that three basic questions need to be answered,” and he loaded
a new overhead (Figure 8.3).
1. How much money is generated by your company?
2. How much money is invested by your company?
3. How much money do you have to spend to operate your company?
FIGURE 8.3
Three basic questions.
“During my last visit, I explained that Traditional Cost Accounting is

not only difficult to understand, but it’s all about what you did last month
or last quarter. The key point brought forward in my previous visit, was
that Cost Accounting teaches you that the pathway to profitability is
through cost-cutting, that is saving money, and this belief is simply wrong.
The correct pathway to improving profitability is through making money
which is completely different than saving money. I explained that in order
to have real-time financial decisions, Theory of Constraints pursues prof-
itability by using three simple financial measurements,” he explained as he
posted a new overhead (Figure 8.4).
“I also explained that from these three basic financial measurements,
you are then able to calculate Net Profit (NP) and Return-On-Investment
(ROI) as follows,” and he loaded a new overhead on his screen (Figure 8.5).
“As explained previously, and without sounding too redundant, the
Theory of Constraint’s process of on-going improvement is a direct
result of always focusing your efforts toward achieving the system’s goal.
In order to achieve this focus, Goldratt and Cox developed a five-step
process toward that end,” Tom explained and loaded another overhead
(Figure 8.6).
“In the Lean Improvement Cycle, you are primarily interested in remov-
ing unnecessary waste from your process, in an effort to improve the flow
of products through your processes. You do this by using the following
five steps,” and he load a new overhead (Figure 8.7).
1. Throughput (T): The rate at which the system generates new money primarily through
sales of its products.
2. Inventory or Investment (I): The money the system invests in items it plans to sell.
3. Operating Expense (OE): The money spent on turning (I) into T.
FIGURE 8.4
Three simple financial measurements.
1. Net Profit = Throughput (T) – Operating Expense (OE) or NP = T – OE
2. Return-On-Investment = (Throughput – Operating Expense) ÷ Investment or (T – OE) / I
FIGURE 8.5
Calculations for NP and ROI.
1. Identify the system's constraint(s).
2. Decide how to exploit the system's constraint(s).
3. Subordinate everything else to the above decision.
4. Elevate the system's constraint(s).
5. If in the previous steps a constraint has been broken, return to Step 1, but do not
allow inertia to cause a system constraint.
FIGURE 8.6
Theory of Constraints’ Five Focusing Steps.
1. Define and identify what value is.
2. Identify the entire value stream.
3. Make value flow without interruptions.
4. Let customers pull value from the producer.
5. Relentlessly pursue perfection, making our processes less and less wasteful.
FIGURE 8.7
Lean’s five steps.
“A true lean implementation will definitely produce a better process, as

long as it is done correctly and if it is applied in the right location, but this
is sometimes a big if,” Tom added.
Tom continued, “In the Six Sigma Improvement Process, you are pri-
marily interested in identifying variation, then reducing it, and finally
controlling it. The steps for Six Sigma are as defined by the acronym
DMAIC as follows,” as he loaded another overhead (Figure 8.8).
Tom then suggested that they take a short break and that when they return,
he would demonstrate how to combine these three improvement strategies.
1. Define problems and requirements and set goals.
2. Measure the key steps and validate and refine the problems identified in Step 1.
3. Analyze the pertinent data to develop or validate our causal hypotheses.
4. Improve the process by testing solutions and removing root causes.
5. Control our processes by establishing standard measures.
FIGURE 8.8
Six Sigma’s five steps.
“Are there any questions or comments before we take a break?” Tom asked.
Matt raised his hand and said, “I don’t know about everyone else, but I don’t
think we need a break just yet?” he said in a question format. Tom then said,
“By a show of hands, how many of you want to delay your break?” Everyone
in the room wanted to delay the break, so Tom continued.
“So, by now you must be wondering why we are going to such great
lengths to explain these three, very separate and, to this point, mostly
stand-alone initiatives? What does the Theory of Constraints have to do
with either Lean or Six Sigma or vice versa? The answer to this question
is quite simply, everything!!! The key to successful Lean, Six Sigma and
Theory of Constraints implementations, in terms of maximizing through-
put and return on investment, is to ensure that your company’s efforts are
focused on the right area of your business, and the Theory of Constraints
provides this focus. The right area of focus is always the system constraint!
While Theory of Constraints provides the needed focus, Six Sigma and
Lean provide the tools needed to reduce waste and variation. In effect,
Lean, Six Sigma, and Theory of Constraints form what I call The Ultimate
Improvement Cycle!” Tom explained.
“It’s quite likely that there could be some disparaging and reproachful
comments from both the Lean and Six Sigma camps, and there will no
doubt be attempts to discredit this approach. Zealots of any kind seem
to always assume a defensive posture when their beliefs are being chal-
lenged. But the fact is, we’re not challenging the validity of Lean or Six
Sigma or the Theory of Constraints. We’re simply presenting a better
approach for all three initiatives. All three initiatives are vital pieces to the
improvement pie and this combination of the three is a better approach to
improvement than each being pursued in isolation as stand-alone initia-
tives,” Tom explained.
Tom continued, “So just what would happen if you were to combine the
best of all three of these improvement initiatives into a single improve-
ment process? Just what might this amalgamation look like? Logic would
say that you would have an improvement process that reduces waste
and variation, but primarily focusing in the operation that is constrain-
ing throughput. That is exactly what we have! The figure on the screen
(Figure 8.9) is a depiction of how to combine these three separate, but
absolutely dependent improvement methodologies.”
Tom then explained, “As I said earlier, this graphic is what I refer to
as the Ultimate Improvement Cycle (UIC) which combines the power of
Lean, Six Sigma, and Theory of Constraints improvement cycles to form
Identify
1a
Pursue Identify
Perfection 1b Value
4c Identify Value,
Implement Stream + Current
Identify, Measure,
Protective & Next Constraint
& Analyze NVA
Controls to Sustain + Performance
Waste in Current
the Gains Metrics
Constraint
1c
4b
Identify
If Necessary, Constraint Identify, Measure, &
Elevate the Analyze Variation &
Current Defects in Current
Constraint Constraint
4a
Integrated
2a
Plan for Current Theory of Constraints Develop Plan On Define
Control
Constraint
elevation, Define
If Necessary,
Elevate
Lean Exploit How to Exploit the Measure &
Constraint Current Analyze
Protective Controls, Constraint Six Sigma Constraint
Use of TA
(UIC) 2b
3c
Implement DBR + Execute Waste Reduction
Buffer Mgt + Theory Plan in Current Constraint &
Subordinate Eliminate Efficiency in Non-
of Constraints
Nonconstraints constraints
Distribution &
Replenishment 2c
3b
Execute Plan on How Execute Variation
Pull to to Subordinate Non- Reduction Plan in Make
Customer Constraints to the 3a Current Value Flow
Demand Current Constraint Constraint
Develop Plan on How
to Subordinate Non- Lean
Constraints to the
Current Constraint
Six Sigma
Improve
Theory of
Constraints
FIGURE 8.9
The UIC methodology.
a more powerful and profitable improvement strategy. This improvement

cycle weaves together the DNA of Lean and Six Sigma with the focusing
power of the Theory of Constraints to deliver a powerful and compelling
improvement methodology that will generate amazing results that your
company hasn’t seen before. All of the strategies, principles, tools, tech-
niques and methods contained within all three improvement initiatives,
are synergistically blended and then time-released to yield improvements
that far exceed those obtained from doing these three initiatives in isola-
tion from each other.”
“There are four distinct phases of the Ultimate Improvement Cycle
which are, analyze, stabilize, flow, and control. Each phase is critical to
the optimization of revenue and profits. Don’t jump from one to the
other, simply follow them in sequential order,” Tom said as he scanned
the audience for questions or comments, but again there weren’t any, so
he continued.
He explained, “The Ultimate Improvement Cycle accomplishes five pri-

mary objectives that serve as a spring-board to maximizing revenue and
profits. First, it guarantees that we are focusing on the correct area of the
process or system, the constraint operation, to maximize throughput and
minimize inventory and operating expense. Second, it provides a roadmap
for improvement to ensure a systematic, structured, and orderly approach
to assure the maximum utilization of resources to realize optimum rev-
enue and profits. Third, it integrates the best of Lean, Six Sigma and the
Theory of Constraints strategies, tools, techniques, and philosophies,
to maximize your organization’s full improvement potential. Fourth, it
assures that the necessary, up-front planning is completed in advance
of changes to the process or organization so as to avoid the ‘Fire, Ready,
Aim!’ mindset. And finally, it provides the synergy and involvement of the
total organization needed to maximize your return on investment.”
“So, let’s look at the actions we should take and what we’re trying to
accomplish with each one,” Tom explained as he loaded a new graphic
onto the screen (Figure 8.10).
“If Simpson Water Heaters is seriously committed to following the steps
of the Ultimate Improvement Cycle, in the sequence illustrated in the
figure I have on the screen, then I am convinced that you will see bottom
line improvements that far exceed what you’ve experienced using stand-
alone initiatives. Just like any new initiative, it requires the entire organi-
zation’s focus, discipline, determination, and a little bit of patience. This is
new territory for Simpson Water Heaters, so follow the path of least resis-
tance that I have provided for you…it truly does work!” Tom explained
and he then recommended another break.
When everyone returned from the break, Tom continued his discussion
on the Ultimate Improvement Cycle. “Referring to the overhead on the
screen, you may be wondering, ‘So just how do we accomplish each of the
steps in the Ultimate Improvement Cycle?’ We do so by using all of the
tools and actions that we would use if we were implementing Lean and
Six Sigma as stand-alone improvement initiatives, but this time we focus
most, if not all, of our efforts primarily on the constraint operation. The
figure on the screen lays out the tools and actions we will use and perform
at each step of the Ultimate Improvement Cycle and as you can see there
are no new or exotic tools that I am introducing. In creating the Ultimate
Improvement Cycle one of my objectives was to keep things simple, and I
Identify
1a
Pursue Identify
Perfection 4c 1b Value
VSM or Current State
Perform Process P, -Map, Performance
VSA to Determine
Audits, Policy Metrics, Inventory
Waste & Inventory
Analysis, Use TA Analysis, Theory of
Location, CRT to ID
& Control Charts Constraints TP
UDE’s
Tools, Gemba walk
4b 1c
Identify
Perform Capacity Capability Study,
Constraint
Analysis & Cost Benefit Control Charts,
Analysis C & E Diagram, Pareto
Analysis
4a
UIC 2a
Plan How to Elevate
Current Constraint
If Necessary, Improvement Develop Plan On Define
Elevate Exploit How to Exploit the Measure &
Control and Define
Constraint
Tools, Actions Constraint Current Analyze
Protective Controls
and Focus Constraint
3c 2b
Optimize Buffer Organize Current

Size + Limit Non- Constraint via 5S,
Subordinate Std Work, Visual
Constraint
Nonconstraints Aids
Production
3b 2c
Pull to DOE’s, Causal Make

Synchronize Flow Chains, Conflict Value Flow
Customer via DBR & Buffer
Demand 3a Diagrams, IO
Management Map
Synchronized flow Lean
through the current
constraint
Six Sigma
Improve
Theory of
Constraints
FIGURE 8.10
UIC improvement tools, actions, and focus.
think you’ll agree that the tools I’ve laid out to use are all of the basic and
time-tested tools that have been around for years.”
“For example, in Step 1a we will be creating a simple current state Value
Stream Map to analyze things like where the excess inventory is, what
the individual processing times are, cycle times and the overall lead time
within the process. We will use this tool to identify both the current and
next constraint. We will also be looking at the current process and infor-
mation flow and performance metrics to make certain that the metrics
stimulate the right behaviors and that they will in fact track the true
impact of our improvement efforts,” he explained.
He continued, “Likewise in Steps 1b and 1c we will be analyzing our
process by using simple tools like Pareto Charts, Run Charts, Spaghetti
Diagrams, Time and Motion Studies, Cause & Effect Diagrams, Causal
Chains, etc. Keep in mind that these are by no means the only tools you
can utilize, just some of the more common ones. In each phase of the
Ultimate Improvement Cycle I have recommended simple tools used to
perform the tasks at hand.”
“One last point I need to make. One of the primary reasons why compa-
nies have excess inventory on hand is to compensate for hidden problems,
a kind of safety net if you will. Some people believe that there should be a
radical inventory reduction to force the problems to the surface, but I ada-
mantly disagree. The reason I disagree with this strategy is because most
organizations aren’t prepared to tackle these problems that have been cov-
ered up for so long. As inventory is reduced these problems will surface
and if the organization isn’t prepared or capable of solving these problems,
then improvements will not happen, and chaos will reign. There are many
good books on problem-solving, so prepare yourselves now. Now let’s look
more closely at each step in the Ultimate Improvement Cycle,” Tom said.
Matt raised his hand and said, “In all my years of doing this, I have
never heard improvement efforts explained in so much detail and for sure,
I have never been given a roadmap with such detail. I am so very excited to
use this methodology and can’t wait to see the results we achieve.” Cynthia
Eberstein, the Quality Manager, then raised his hand and said, “Tom, I
too am excited about using this method, but I do have one question for
you.” “And your question is?” Tom asked. “What are the expected deliv-
erables we should be expected to deliver?” Cynthia asked. Without hesita-
tion, Tom responded and said, “It’s ironic that you would ask that question
Cynthia, because the next part of my presentation will be focused on the
expected deliverables from the Ultimate Improvement Cycle.”
“In this part of my session, I’m going to lay out each of the expected
deliverables when implementing the Ultimate Improvement Cycle.”
And with that, Tom flashed a new figure on the screen. “In this figure
(Figure 8.11) I have laid out the expected deliverables for each step of the
Ultimate Improvement Cycle that Cynthia just asked about. I’m sure you
will have questions as we progress around this figure, so speak up when
you do,” Tom encouraged everyone.
Tom began again, “As I said earlier, when I created this methodology, I
wanted to keep everything simple, so as you can see, the wording is very
descriptive, but very simple. In Step 1a, using things like Value Steam
Maps, or simple Process Maps, or even Gemba walks, you should come
away with a complete picture of the system you’re attempting to improve,
FIGURE 8.11
Expected deliverables from the UIC.
in terms of flow and predicted people behaviors. In addition, you need to

make sure that efficiency is now only truly measured and acted upon in
the step that is constraining system throughput. This, of course, assumes
that you have correctly identified the system constraint.”
Tom continued, “In Step 1b, you are attempting to gain knowledge of
both the location and type of waste within your system, plus the location
of inventory, plus any potential core problems that exist within the system
you’re attempting to improve. These problems could be a variety of differ-
ent types of problems, including things like high levels of work-in-process
inventory, high levels of waste, or even excessive amounts of equipment
downtime.”
Continuing Tom said, “In Step 1c, we are interested in understanding
both the location and type of variation we are experiencing, as well as any
recurring defects that exist within the system being improved. Here, you
will be running Process Capability studies, performing Pareto Analyses,
creating Cause and Effect Diagrams and maybe even creating Control
Charts. This is a very important step, simply because recurring defects that
result in either scrap or rework can seriously impede the flow of products
through your production system. We are concerned with defects ahead of
the constraint that might starve the constraints, but equally important are
defects that occur after the constraint as they leave the system constraint.
In both cases, these defects could significantly reduce the throughput of
the total system which could result in missed shipments and late deliveries
of products to the end customer,” Tom explained. “Are there any questions
on what you’ve heard so far?” Tom asked the group.
Greg Thompson, the Production Manager raised his hand and said,
“This make perfect sense to me, but if I remember what you said earlier, we
aren’t supposed to take action on things just yet. Is that correct?” he asked.
“Great question Greg,” Tom responded. “The answer is, yes and no,” Tom
said with a smile. “What we are attempting to do is only collect informa-
tion so that we can develop a coherent improvement plan. But having said
that, it would make no sense at all, if you found a problem that was fix-
able immediately, and then wait for a plan to be generated before taking
action,” Tom explained. “Does that make sense to you Greg?” Tom asked,
and Greg responded with his head bobbing up and down indicating that it
did. “Are there any other questions?” he asked that group, and when there
weren’t any, he continued his presentation on deliverables.
In Step 2a, we will use all of the information collected in Steps 1a, 1b,
and 1c to develop a coherent system action plan on how we intend to
improve the quality and capacity of the system being improved. In effect,
we will be using Goldratt’s second step, ‘exploiting’ the system constraint.
You should now know where the system constraint is located, the per-
formance metrics that are in place which stimulate the expected people
behaviors, the location of excessive waste and variation, and you should
no longer be measuring efficiencies in non-constraints. Let me say this
about measuring efficiencies. You may have a corporate edict to continue
measuring efficiencies in non-constraints, but the only efficiency result
that truly matters is the efficiency of system constraint. Here we are apply-
ing Goldratt’s third step, ‘subordination,’ Tom explained.
“My recommendation is that this plan should be developed as a team
and not just by a single person. The plan should clearly identify specific
actions to be taken,” he explained. Tom continued, “In Steps 2b and 2c

your deliverable should be a well-organized constraint with minimal
amounts of waste. You will be effectively executing both your waste and
variation reduction plan focused on the system constraint. In addition,
after implementing your improvement plan, you should only have com-
mon cause variation within the system being controlled using things like
Control Charts to maintain control,” Tom explained.
“Continuing on, Step 3a’s deliverable is a coherent, well documented
plan on synchronizing flow throughout and within your system. Here
your plan will be focused on how to subordinate non-constraints to the
current system constraint. When implemented, this plan will result in a
well-functioning process with synchronized flow, using both Drum Buffer
Rope coupled with Buffer Management, which is the hallmark of Step 3b.
In Step 3c, you will have also optimized your buffer size and will have lim-
ited your non-constraint production by never out-pacing the drum or sys-
tem constraint. I can’t emphasize enough how important this step is! Any
questions here?” he asked. Once again, Greg raised his hand and asked,
“What the hell is Drum Buffer Rope?” Tom replied and said, “Drum Buffer
Rope is Theory of Constraints’ version of a scheduling system, which I will
explain on my next visit.”
Matt Maloney raised his hand and asked, “How long should it have
taken to get this far along on the Ultimate Improvement Cycle?” “Being
a Plant Manager, a question related to time doesn’t surprise me at all,”
Tom thought to himself. “Matt, “he responded,” while there isn’t a specific
amount of time expected to complete these first three major steps, I would
tell you not to apply a time limit. Think about what you’re attempting to do
here. Obviously if your process is already functioning well, then you might
expect to complete this rotation fairly quickly. On the other hand, if your
current system is delivering poor results, which is the case here at Simpson
Water Heaters, then it will take much longer. The key point here is, don’t
rush through this process!” Tom explained.
After answering Matt’s question, Tom continued, “Having completed
the first three major steps of the Ultimate Improvement Cycle, you will
have significantly improved your production system. In fact, if you’ve
done your work correctly, you may have already ‘broken’ your current
constraint, but if you haven’t, then you must develop a plan on how to ‘ele-
vate’ the constraint. Remember back in Step 1a, I told you to identify both
the current and next constraint? I did this in anticipation that the current
constraint would eventually be broken and a new one would immediately

appear, so be ready to move to it,” Tom explained.
Tom continued, “In addition, we want to make sure that all of our
improvements will remain in effect, so I instruct you to define protective
controls to guarantee this state will continue. Having said this, your deliv-
erable in Step 3a is the development of a coherent sustainment plan which
will include protective control devices such as Control Charts. Wouldn’t
it be a shame that after all of your hard work to bring your process under
control that you might take actions that remove your control?”
“So, the deliverables for Steps 4a, 4b, and 4c would all be aimed at sus-
taining the gains you have already made. Your actions would include
things like performing routine process audits and maintaining Process
Control Charts. Another important deliverable in this step is at least a
basic understanding of Throughput Accounting by the shop floor employ-
ees, so that sound financial decisions can be made in real time. In addition,
it is very important that the operators running the machines understand
how Control Charts are maintained so that process control can be a way
of life on the shop floor,” Tom explained.
Tom began again, “This completes the first rotation of the Ultimate
Improvement Cycle, but we’re not finished yet. We must make sure that
everyone is prepared for the next constraint which will appear almost
immediately, when the current constraint is broken, and it will be. By
preparation, I mean that all of the sustainment tools we developed, as
we progressed around the Ultimate Improvement Cycle, must be main-
tained if our improvements are to be sustained. This completes my
presentation, so I want to open the floor for questions, comments and
concerns,” Tom stated.
Matt was the first one to comment, “I have been involved in manufac-
turing for most of my career and I’ve been to many training sessions on a
variety of subjects. Having said this, I have never been in a training ses-
sion that was as complete as this one. So, Tom I just want to say thank you
for what you presented today. As I look into the future, I see very positive
things happening at Simpson Water Heaters! I truly believe that our profit
margins will turn positive and that the Board of Directors will be very
happy with our new direction. Why do I say that? I say that because I know
that, if we follow the steps outlined in the Ultimate Improvement Cycle,
we will have record profit margins and a plethora of satisfied customers. I
see our on-time delivery becoming one of the best in the business!”
Greg was the next one to speak and said, “I too have a positive outlook
for the future of Simson Water Heaters! One of the keys to our success
will be how well we embrace the concepts of Throughput Accounting. By
using this method, I can see a vast improvement in our real time financial
decisions. I also believe our cash on hand will be significantly improved,
simply because we won’t be tying up our cash on excessive amounts of
inventory.”
Nancy Watson, the company’s Accounting Manager, then spoke up
and said, “I’m excited for a variety of reasons. First, I always worry about
having to lay people off, but with the Theory of Constraints in place, our
future growth will mean that we need all of our hourly workers to satisfy
our future demand. I can also see our equipment downtime improving
dramatically and our process flow improving intensely! I can honestly say
I have never been this excited about the future of Simpson Water Heaters!”
“Any other comments, questions or concerns?” Tom asked.
Cynthia Eberstein, Simpson’s Quality Manager, was the next to speak, “I
am so happy that our path to improvement took the route that it did. Think
about it, we first tried Six Sigma and learned valuable tools and techniques.
We then employed Lean Manufacturing and learned all about waste and
value. But as good as these two methods are, their full potential won’t
be realized until we combine them both with the Theory of Constraints!
Using the Ultimate Improvement Cycle is the key to improvement and
I’m excited to get all of the Green Belts and Black Belts leading the charge
to our future. I can absolutely say that Simpson Water Heaters will be the
leader in the water heater industry!”
Pete Hallwell from Maximo then commented and said, “I am excited
to return to Maximo with our new-found knowledge of this amazing
improvement initiative. I can see so many areas where this integrated
methodology will apply. Areas like treatment clinics, emergency depart-
ments, and the list goes on and on, so thank you so much for inviting us to
be a part of this experience.” When there were no more comments, Tom
addressed the group. “I appreciate all of your glowing comments about
what you heard today, but I want to tell you that there is much more to the
Theory of Constraints that you haven’t heard about yet.
On my next trip, I’ll teach you about the Theory of Constraints sched-
uling system, which I mentioned earlier, Drum Buffer Rope. I will also
explain the Theory of Constraint’s Parts Replenishment Solution. You will
hear all about how you will be able to reduce your part’s inventory by fifty
percent while at the same time, reducing your stock-outs to near zero! I
also want to teach you how to develop something called the Goal Tree,
which is a tool you can use to plan your future strategically, and I think
when you see it, you’ll fall in love with it. I think it’s time to call it a day, so
thank you again for taking the time to listen to what I had to say today.”
When everyone had departed the conference room, Matt and Tom
began another discussion about when Tom would be coming back. Matt
indicated he was excited to learn about Drum Buffer Rope, the Theory of
Constraint’s Parts Replenishment Solution, and The Goal Tree. And with
that, Tom left for the airport.
9
The Next Step at Maximo
Health Center Complex
It was Thursday morning and Tom was on his way to Maximo Health
Center Complex to present a couple of different subjects, namely the
Theory of Constraints Replenishment Solution and the Goal Tree. He
made a quick call to Pete, to let him know he would be there shortly. Upon
arrival there, he saw Pete standing outside waiting for him. Tom parked
his car and walked up the stairs where he met Pete. The two of them shook
hands and took the elevator to the seventh floor conference room. On the
way to the seventh floor, Pete said, “Tom, thank you so much for inviting
Jimmy Thompson, Susie Wong and me to attend your session in Detroit.
The three of us discussed it the next day and we can’t wait to get started
on our own implementation.” He then added, “Your presentation of how
to combine Lean, Six Sigma, and the Theory of Constraints made it sound
so simple to implement!” The attendees for his session today were already
seated, so Pete introduced Tom and he began.
Tom began, “Before I begin, what I’m about to present is based upon a
typical manufacturing company and not healthcare. But as I present this
information, I want you all to think about how it might apply to your own
hospitals and medical facilities. The fact of the matter is, it matters not
what type of company you are working in, because everything you will
hear today applies equally to medical or manufacturing companies or any
other type of company.” With that introduction, Tom began.
“Most, if not all, businesses are linked one way or another to some kind
of supply chain. They need parts or raw materials or medical supplies from
somebody else, in order to do what they do and pass it on to the next sys-
tem in line until it finally arrives at the end consumer. Depending on what
113
you make or what service you deliver, and how fast you make or deliver it,
the supply chain can be your best friend or worst enemy. If it works well,
it’s your best friend. If it doesn’t work well, it’s your worst enemy. And of
course, we all want it to be our best friend,” Tom explained.
Tom continued, “The fundamental problem with most supply-chain
systems is that they have remained stagnant in their thinking through
time, while business reality has flexed in a cycle of constant change, some-
times at an exponential rate. There are many new supply-chain software
applications, with each proposing that it will solve the problems associated
with the supply chain. These new software applications have come about
mostly because of advances in computer technology, but few have solved
the real issues of the supply chain. While it is true that these systems can
provide an enormous amount of information very fast, sometimes sys-
tem speed is less important than having access to the correct information.
What difference does it make how fast you get the information, if it’s the
wrong information?”
“The new business reality has caused a need for change in supply-chain
systems, but most systems simply have not changed. Businesses now are
required to build products or deliver services more cheaply, with higher
quality, and with faster delivery of products and services. These are the
new rules of competition,” Tom explained. He continued, “You either play
by the rules or you must get out of the way. The rules in business have
changed, and yet many businesses insist on doing business the same ‘old’
way. How come?” he asked rhetorically.
“Usually, the most common answer given is, ‘Because that’s the way
we’ve always done it,’ he explained, and he noticed everyone moving their
heads in agreement.” Tom continued, “The old system and the old rules
may have worked in the past, but times are changing. If your supply-chain
system has not changed to align with the new rules, then the gap between
supply-chain output and system needs will continue to grow. If the supply-
chain system is not changed to meet future needs, then there is very little
hope of getting different results, and such was the case at Tires for All,”
Tom explained.
Tom scanned the room to see if everyone was understanding what he
had explained so far and then continued. “Many supply-chain systems
were designed to solve a problem. And the problem they were trying to
solve was the needed availability of parts, raw materials, supplies, or inven-
tory. In other words, the right parts or materials or supplies, in the right
Next Step at Maximo Health Center Complex • 115
location, at the right time. These systems were designed to hold inventory
in check. That is to say, don’t buy too much, but also don’t allow stock-out
situations to occur. Then and now, managing the supply chain is a tough
job and there are many variables that can require constant attention. You
don’t want to run out of parts or materials, and yet, sometimes you still
run out of them. You don’t want excess inventory, and yet sometimes you
have too much inventory. This constant negative cycle of sometimes too
much and sometimes too little has continued through time. The supply
problems encountered years ago are still the problems being encountered
today,” Tom explained.
“For many companies the supply chain/inventory system of choice is
one referred to as the Minimum/Maximum (MIN/MAX) system. Parts or
inventory levels are evaluated based on need and usage, and some type of
maximum and minimum levels are established for each item. The tradi-
tional rules and measures for these systems are usually quite simple,” and
with that Tom loaded a new overhead on the screen (Figure 9.1).
“Is this what rules you’re using here at Maximo?” Tom asked. Pete
Hallwell, the CFO at Maximo Health Center Complex, responded, “Yes,
pretty much so.” Tom continued, “The foundational assumptions behind
these rules and measures are primarily based in Cost Accounting and
commonly referred to as cost-world thinking. In order to save money and
minimize your expenditures for supply parts or inventory or supplies, you
must reduce the amount of money you spend for these items. In order to
reduce the amount of money you spend on these items, you must never
buy more than the maximum amount. In addition, in order to reduce the
money spent on these items, you must not spend money until absolutely
necessary, which means you only order parts or supplies when they reach
or go below the minimum level,” Tom explained to a very captive audience.
Tom continued, “These assumptions seem valid, and if implemented cor-
rectly and monitored closely, they should deliver a supply system that con-
trols dollars and maintains inventory within the minimum and maximum
Rule 1: Determine the maximum and minimum levels for each item.
Rule 2: Don’t exceed the maximum level.
Rule 3: Don’t reorder until you reach or go below the minimum level.
FIGURE 9.1
The rules of the Min/Max system.
levels. However, most systems of this type, even in a perfect world, don’t
seem to generate the desired results that are required,” and again, Tom
could see most in attendance shaking their heads in agreement. “For some
reason, there always seem to be situations of excess inventory for some
items and of stock-out situations for others. There always seem to be con-
stant gyrations between too much inventory and too little inventory. The
whole operational concept behind the Minimum/Maximum systems was
supposed to prevent these kinds of occurrences from happening, and yet
they still do,” Tom explained.
“Perhaps the best way to make this point, is with a couple of examples,”
Tom said. “The first example deals with a company that measured and
rewarded their procurement staff based on the amount of money they
saved with parts purchases. For the procurement staff, their primary way
to accomplish this objective was to buy in bulk, and for the most part this
was usually quite easy to accomplish. Their suppliers preferred, and some-
times demanded, that their customers buy in bulk to receive the benefit
of ‘quantity discounts.’ The more you bought, the less it cost per unit. The
assumption being that the purchase price per part could be driven to the
lowest possible level by buying in large quantities, and the company would
save the maximum amount of money on their purchase. It seemed like
a great idea, and certainly a way to meet the objective of saving money.
Sometimes these supply items were procured in amounts well in excess of
the maximum, but the company got them at a great price!” Tom explained.
Tom continued, “The bottom line was that by using this cost-saving
strategy, the company had a warehouse full of low-cost inventory that had
used a large portion of their cash. The problem was, they didn’t have the
right mix of inventory to build even a single product. They had too many of
some items and not enough of others. The bigger problem was they ran out
of money to purchase any more parts, especially the parts and materials
they desperately needed!” Tom explained. “Do you suppose they wished
they had at least some of the money back so they could buy the right parts,
in the right quantity, at the right time, so they could produce products or
deliver their service?” Tom asked the group. Without exception, everyone
agreed with this question.
Tom continued, “The other cost saving example is one a friend of mine
was involved in that was with a company who was a contractor to the Federal
Government. In their contract with the Government, the Government
had offered a very lucrative clause to save money. This company was given
a budgeted amount to buy parts on a yearly basis, and based on this bud-
geted amount, the Government offered to split fifty-fifty any amount the
company could underrun their parts budget. The company took the total
budgeted dollars and divided it by twelve to establish the monthly parts
budget. They also held back a percentage of the budgeted amount each
month, so they could claim cost savings and split the difference. Any parts
purchase that would have exceeded the targeted monthly budget was post-
poned until the next month, even if it was urgently needed. The ability
of this company to make money slowed dramatically. They were literally
jumping over dollars to pick up pennies. There were many jobs waiting for
parts that couldn’t finish until they had the parts to finish, but they had to
wait, sometimes for several days or weeks, to get the parts, because of the
cost-saving mentality.”
Then, Tom said, “In both of these examples, it’s an issue of bad cost
metrics driving the bad behavior. In both of these cases, cost savings were
employed as the primary strategy. In the first example, the company ulti-
mately went bankrupt and went out of business. They couldn’t pay back
the loans on the money they had borrowed to buy all of the low-cost
parts because they couldn’t make enough finished products. In the sec-
ond example the company avoided bankruptcy because they provided a
needed service for the Government, so they were ultimately spared by see-
ing the error of their ways, and they decided to spend the budgeted dollars
to buy the needed parts.”
Pete spoke up and commented on what he heard so far, “This is all
so very interesting Tom!” Tom responded by saying, “I’m just getting
started.” Tom continued, “If the system as a whole isn’t producing the
desired results, then what segment of the system needs to be changed to
produce the desired results? Perhaps the minimum and maximum levels
are the wrong rules to engage, and saving money is the wrong financial
measure to consider. In order to solve today’s problems, we must think at
an order of magnitude higher than we were thinking when we developed
yesterday’s solutions. In other words, yesterday’s solutions are causing
most of today’s problems.”
“One of the most important aspects of any service, manufacturing, pro-
duction, or assembly operation system, is to have and maintain the ability
to supply raw materials or parts or supplies at a very predictable level. If
the parts availability goes to zero, then your production or service activi-
ties will stop. The continual availability of parts, monitored accurately,
implies a supply-chain system that contains all of the necessary and robust
features to support the customer demand requirements,” Tom explained.
“Does everyone understand this basic comment?” Tom asked the group,
and again, everyone in the audience shook their heads in agreement.
Once again, Tom continued, “The Minimum/Maximum supply-chain
system was developed years ago, and at the time it brought forward some
favorable improvements. Then and now, the functional theory behind the
supply-chain Minimum/Maximum concept is that, supplies and materi-
als should be distributed and stored at the lowest possible level of the user
chain. In essence, this is a push system, one that pushes parts through the
system to the lowest possible level. It seems to make some sense because
parts must be available at the lowest level in order to be used. In this type
of system, the parts are consumed until the minimum quantity is met or
exceeded, and then an order is placed for more parts. The parts order goes
up the chain from the point-of-use location back to some kind of central
supply center. Or the necessary orders are placed directly back to the ven-
dor, depending on the situation.”
Tom continued, “When the orders are received at the central supply cen-
ter, they are pushed back down the chain to the lowest point of use loca-
tions,” Tom explained and then flashed a figure (Figure 9.2) on the screen.
“This drawing defines a simplified version of this parts Flow activity.
This flow might not be applicable to all situations, but I believe it applies to
Maximo’s Hospitals. Some companies, and smaller businesses, will have
fewer steps, in that they order directly from a vendor and receive parts
back into their business without the need for large, more complex, distri-
bution systems. However, the thinking behind the Minimum/Maximum
system will still apply, even to those smaller businesses,” Tom explained.
“Larger companies, or those with numerous geographical locations, like
Maximo, will most likely have developed some type of a central supply
and/or distribution locations that feed the next level of the supply dis-
tribution system. Maybe a regional warehouse versus local distribution
points. The distribution points in turn feed the companies or business
segments that use the raw material and parts at the final point of use loca-
tion to build products or deliver their service. Some distribution systems
may even be more complex than what is displayed here. But even with
increased complexity, the results they are trying to achieve remain the
same, which is to get the parts to where they need to be when they need to
be there,” he explained.
FIGURE 9.2
Supply chain parts Flow activity.
“The model of a central supply system versus a decentralized system

has moved back and forth for many years. Some will say that the supply
system should be centralized at the user location to make supply activi-
ties easier and more responsive. Others argue that the supply chain activi-
ties should be decentralized to save money and reduce operating expense.
Even with these different and opposing views, it seems that the current
method is for the decentralized model of supply systems,” Tom explained.
Tom then suggested that they take a short break in order to digest what he
had explained so far.
After the break, Tom continued his detailed explanation. “For all of
its intent to save money and reduce operating expenses, this decentral-
ized system can and usually does cause enormous hardships on the very
systems it is designed to support. With all of the intended good this
type of system is supposed to provide, there are some top-level rules
that drive the system into chaos. Let’s look at some of these rules and
understand the negative aspects that derive from them,” as he flashed a
Table 9.1 on the screen.
TABLE 9.1
Top-Level Rules for Minimum/Maximum Supply System
1. The system reorder amount is the maximum amount no matter how many parts are
currently in the bin box.
2. Most supply systems only allow for one order at a time to be present
3. Orders for parts are triggered only after the minimum amount has been exceeded.
4. Total part inventory is held at the lowest possible level of the distribution chain—the
point-of-use (POU) location.
5. Parts are inventoried once or twice a month and orders placed, as required.
“This table provides a summary listing of the top-level rules for the
min/max supply system,” Tom explained. “Even though the Minimum/
Maximum system appears to control the supply needs and cover the inven-
tory demands, there are some significant negative effects caused by using
this system. First and foremost, there is the problem of being reactive to
an inventory or parts situation, rather than proactive. When minimum
stock levels are used as the trigger to reorder parts or supplies, some
supply-chain systems, as they are currently organized and used, will have
a difficult time keeping up with the demands being placed upon them.
And there is an increased probability that stock-outs will occur, possibly
for long periods of time,” Tom explained.
“Stock-outs occur most often when the lead time to replenish the part
exceeds the minimum stock available. In other words, availability of the
part between the minimum amount and zero is totally depleted before the
part can be replenished from the vendor,” Tom explained and flashed a
new figure on the screen. Tom then said, “This figure (Figure 9.3) displays
a graphical representation of this stock-out effect. The curved line shows
the item usage through time and the possibility of a stock-out situation,”
he explained.
Tom added, “Of course, when parts are reordered, they are ordered at a
level equal to the maximum amount, and the problem appears to quickly
correct itself. However, there can be a significantly large segment of time
between stock-out and correction, and if the part is urgently needed, the
parts non-availability can cause havoc in the assembly sequence.” “Does
everyone understand what this figure is actually saying?” Tom asked.
When everyone answered in the affirmative, Tom continued. “Some might
argue that the solution to the problem is to simply increase the minimum
amount to trigger a reorder sooner in the process and avoid the stock-out
situation. While it is possible this solution could provide some short-term
FIGURE 9.3
Graphical impact of the stock-out effect.
relief, in the long run it causes inventory levels to increase, which need-
lessly ties up cash and continues at this elevated level. It is also possible
that if you raise the minimum level, then the maximum level must be
raised also. Many companies use a ratio variable to calculate the spread
between minimum and maximum. If that’s the case, then total inventory
levels will go up, which again costs more money to maintain. This action
would be totally counter to the Cost Accounting rules.”
Once again Tom continued his presentation, “The Minimum/Maximum
supply chain system is based totally on being in a reactive mode. That
is you must wait for the part to reach its minimum stock level before a
reorder request is activated. In many companies, the most used parts are
managed using the Minimum/Maximum concepts and can frequently be
out of stock. All of these ‘rules’ of the Min/Max supply system create the
disadvantage of having maybe several thousand dollars, or hundreds of
thousands of dollars, tied up in inventory that may or may not get used
before it becomes obsolete, modified, or dated because of expiration.
If additional money is spent buying parts that might not be needed, at least
in the quantity defined by the maximum limit, then you have effectively
diverted money that could have been used to buy needed parts.”
Just to reinforce the point he just made, Tom said, “As an example
for purposes of discussion, suppose we pick a random part with a
Minimum/Maximum level already established, and we track this part for
a twenty-six-week period using the current system rules and follow the
flow and cyclical events that take place. What happens at the end of the
twenty-six weeks? For this example, we will assume that the maximum
level is ninety items; the minimum reorder point is twenty items; and the
lead time to replenish this part from the vendor averages four weeks. The
average is based on the fact that there are times when this part can be
delivered faster, say three weeks, and other times it is delivered slower, say
five weeks. Let’s also assume that usage of these parts varies by week, but
on average is equal to about ten items per week,” Tom explained.
Tom then flashed Table 9.2 on the screen and said, “This table shows the
reorder trigger happening when current inventory drops below the mini-
mum amount of twenty items. The first reorder would trigger between
weeks six and seven, and again between weeks seventeen and eighteen,
and again between weeks twenty-five and twenty-six.”
“During this twenty-six-week period there would be a total of about eight
weeks of stock-out time. Remember, there is an average of four weeks of
vendor lead time to replenish this part. This repeating cycle of maximum
inventory and stock-outs becomes the norm, and the scenario is repeated
time and time again.” Tom explained. Tom followed Table 9.3 with a new
figure (Figure 9.4) which uses the data from this table.
“As I said, in this figure (Figure 9.4) we have used the data from our table
to graphically display the results of the Minimum/Maximum system, and
it demonstrates the potential negative consequences that can occur when
using this system. If the vendor lead time is not considered as an impor-
tant reorder variable, then stock-outs will continue to occur. Stock-outs
can become a very predictable negative effect in this system,” he explained.
In addition, Tom added that the graph shows the negative consequences
of the supply system and demonstrates why supply-chain systems using
the Minimum/Maximum concepts will periodically create excessive
inventory and stock-out situations. The primary reason this happens is
because part lead times are not properly taken into account. “This is amaz-
ing material Tom!” Pete said.
TABLE 9.2
Simulated Data for Minimum/Maximum Supply System
Current Actual Items End of Week Items Added
Week Inventory Used Inventory (Replenish)
1 90 10 80
2 80 15 65
3 65 15 50
4 50 15 35
5 35 5 30
6 30 15 15
7 15 15 0
8 0 0 0
9 0 0 0
10 0 0 0 90
11 90 15 75
12 75 15 60
13 60 8 52
14 52 12 40
15 40 10 30
16 30 10 20
17 20 15 5
18 5 5 0
19 0 0 0
20 0 0 0
21 90 15 75 90
22 75 18 57
23 57 15 42
24 42 12 30
25 30 15 15
26 15 15 0
Tom continued, “In most cases, the most prominent measures for the
Minimum/Maximum systems are focused in cost world thinking, rather
than what the system needs. If the lead times from the vendors are not
considered, then there remains a high probability that stock-outs will con-
tinue. The stock-out situation exacerbates itself even further when at the
point-of-use a user has experienced a stock-out situation in the past. In that
situation the users will often try to protect themselves against stock-outs
by taking more than is needed.” “Do we need another break?” Tom asked.
Virtually everyone in the room indicated that they would rather continue.
TABLE 9.3
Theory of Constraints Distribution and Replenishment Model
Current Actual Items Weekend Items Added
Week Inventory Used Inventory (Replenish)
1 90 10 80
2 80 15 65
3 65 15 50
4 50 15 35 10
5 45 5 40 15
6 55 15 40 15
7 55 15 40 15
8 55 10 45 5
9 50 10 40 15
10 55 15 40 15
11 55 15 40 10
12 50 15 35 10
13 45 8 37 15
14 52 12 40 15
15 55 10 45 15
16 60 10 50 8
17 58 5 53 12
18 65 10 55 10
19 65 10 55 10
20 65 10 55 5
21 60 15 45 10
22 55 18 37 10
23 47 15 32 10
24 42 12 30 15
25 45 10 35 18
26 53 15 38 15
Tom continued, “It is also possible that some companies will preorder
inventory based on some type of forecast for the coming year, and this
strategy only exacerbates the problem even more. At best, it is extremely
difficult to forecast what a consumer may or may not buy. I’ve always
said that forecasts are always wrong and the further into the future you
make the forecast, the ‘wronger’ it will be. This problem is encountered at
the manufacturing level and the retail level. Manufacturers will produce
excess finished good inventory that must be stored at a great cost or sold
to retailers at a discounted price. Because of the flaws in their forecasting
methods, some stores are left with large amounts of inventory when new
FIGURE 9.4
Consequences of Min/Max supply system.
models or products are released. This becomes most visible when stores
offer ‘year-end clearance sales’ or ‘inventory liquidation’ events. They
guessed wrong with the forecast and have much more inventory than
they can sell. In many cases because stores couldn’t get enough of the hot-
selling product, they missed out on sales. Now they must sell any remain-
ing inventory, sometimes at bargain prices, to generate enough cash to go
buy more inventories for the coming year. This cycle of too much and too
little repeats itself year after year.” Tom then said, “So, what’s the answer
to this logistics dilemma?”
Tom began to answer his own question by saying, “One of the primary
operating functions of the supply-chain system is to build and hold inventory
at the lowest possible distribution level. This assumption is both correct and
incorrect. The correct inventory should be held at the point-of-use location,
but not based on minimum or maximum amounts. Instead, the necessary
inventory should be based on the vendor lead times to replenish and main-
tain sufficient inventory to buffer the variations that exist in lead time. The
Theory of Constraints Distribution and Replenishment Model is a robust
parts replenishment system that allows the user to be proactive in manag-
ing the supply-chain system. It’s also a system based on usage, either daily or
weekly, but not some minimum amount. Some parts/inventory will require
much more vigilance in day-to-day management.” And with this comment,
Tom flashed a new table on his screen and explained, “This table (Table 9.4)
defines the suggested criteria required to implement a Theory of Constraints
Distribution and Replenishment Model in a s upply-chain system.”
Tom continued, “The Theory of Constraints Distribution and
Replenishment Model argues that the majority of the inventory should be
held at a higher level in the distribution system and not at the lowest level.
It is still important to keep what is needed at the lowest levels, but don’t
try to hold the total inventory at that location.” Again, Tom checked for
understanding, and when he was comfortable that everyone was following
what he had just said, he continued.
“The Theory of Constraints model is based on the characteristics of a
‘V’ plant distribution model. The ‘V’ plant model assumes that distribu-
tion is fractal from a single location, which in this case is either a central
supply location or a supplier/vendor location (the base of the ‘V’) and dis-
tribution is made to different locations which are the arms of the ‘V.’ The
‘V’ plant concept is not unlike any supply-chain distribution methodol-
ogy. However, using a ‘V’ plant method has some negative consequences,
especially when working under the Minimum/Maximum rules that I pre-
sented earlier. If one is not careful to understand these consequences, the
system can suffer dramatically,” Tom explained. He continued, “One of
the major negative consequences of ‘V’ distribution is distributing items
too early and sending them down the wrong path to the wrong location. In
other words, inventory is released too early and possibly to the wrong des-
tination. This is especially likely to happen when the same type of inven-
tory or part is used in several locations.”
TABLE 9.4
Criteria for the Theory of Constraints Distribution and Replenishment Model
1. The system reorder amount needs to be based on daily or weekly usage and part lead
time to replenish.
2. The system needs to allow for multiple replenish orders, if required.
3. Orders are triggered based on buffer requirements, with possible daily actions, as
required.
4. All parts/inventory must be available when needed.
5. Parts inventory is held at a higher level, preferably at central supply locations or
comes directly from the supplier/vendor.
6. Part buffer determined by usage rate and replenish supplier/vendor lead time.
Baseline buffer should be equal to 1.5. If lead time is 1 week, buffer is set at
1.5 weeks. Adjust as required, based on historical data.
Tom then asked the group a question, “Has it ever happened that at one loca-
tion you have a stock-out situation, and one of the rapid response criteria for
finding the part is to check another hospital within Maximo’s complex?” Pete
answered his question by saying, “Yes, it happens often!” Tom responded, “If
this is the case, then parts/inventory distribution has taken place too early in
the system. Sometimes, it’s not that the system does not have the right parts/
inventory, but it’s just that they are in the wrong location. Distribution from
a higher level in the chain has been completed too quickly.”
Tom continued his presentation, “The Theory of Constraints
Distribution and Replenishment Model also argues that the use of
Minimum/Maximum amounts should be abolished. Instead the inven-
tory should be monitored based on daily or weekly usage, with replen-
ishment occurring, at a minimum weekly, and possibly daily for highly
used items. The end result of these actions will be sufficient inventory
in the right location at the right time, with zero or minimal stock-outs
to support the activities that take place within your hospitals. Instead
of using the minimum amount to trigger the reorder process, it should
be triggered by daily usage and vendor lead time to replenish,” and with
that, Tom flashed another table onto the screen.
Tom then said, “As an example, suppose we apply the Theory of
Constraints Distribution and Replenishment Model rules to exactly the
same criteria that we used for the Minimum/Maximum system we dis-
cussed earlier. We will use the same part simulation and the same period of
time, with the same usage numbers. The difference will be in this simula-
tion, we will change the rules to fit the Theory of Constraints Distribution
and Replenishment Model, based on usage amount and vendor lead time
rather than minimum and maximum amount.”
Tom explained, “This table (Table 9.3) represents the simulated data for a
random reorder scenario using the Theory of Constraints Distribution and
Replenishment Model. In this example we will assume that the maximum
level is ninety items, which is the starting point for the current inventory.
We will also assume that there is no minimum reorder point, but rather
reorder is based on usage and vendor lead time. We will also assume that
the lead time to replenish is still four weeks and that the average usage of
the part is about ten per week. Does everyone understand?” Tom asked, and
again, it appeared that everyone did, so Tom continued with his example.
Tom began again, “The data in this table also assumes that no parts
inventory is held at the next higher level and that the parts replenishment
has to come from the vendor and consumes the allotted vendor lead time.
However, if the parts/inventory were held at a higher level in the distribu-
tion chain, such as a central supply or a distribution point, and replen-
ishment happened daily and/or weekly, then the total inventory required
could go even lower than the data suggests. This could happen because
distribution is completed weekly, rather than waiting the full four weeks
for delivery. Is everyone still with me?” has asked and again, everyone was.
Tom continued, “The part usage rates are exactly the same as the pre-
vious run and the starting inventory is equal to ninety parts. This also
assumes we have a weekly parts/inventory replenish after the initial four
weeks of lead time has expired. In other words, every week we have deliv-
ered what was ordered four weeks ago. In the Theory of Constraints sce-
nario, the reorder point is at the end of each week based on usage. The
total number of parts used is the same number of parts that should be
reordered.” Tom then flashed a new image on the screen (Figure 9.5).
Tom continued, “The figure on the screen demonstrates the effects of
using the Theory of Constraints Distribution and Replenishment Model.
One of the most notable things you see in this graph is that total inventory
required through time has decreased from ninety items to approximately
forty-two items or roughly a forty-seven percent reduction. In essence,
the required inventory has been cut in half. The other notable feature is
that even though the inventory level has been cut in half, the number of
FIGURE 9.5
The overall effect of Theory of Constraints Replenishment method.
stock-out situations has been reduced to zero!” Tom said with vigor. The
group was somewhat flabbergasted in that by reducing the inventory by
half, there were no stock-outs!
Tom continued, “When the Theory of Constraints Distribution and
Replenishment Model is used to manage the supply chain, there is always
sufficient parts inventory to continue your work in your various hospi-
tals. The total inventory is also much more stable through time, without
the large gaps and gyrations from zero inventories available to maximum
inventory as noted on the Minimum/Maximum system.”
With a smile on his face, Tom then said, “Perhaps the best way to explain
the Theory of Constraints Distribution and Replenishment Model is with
an easy example. Consider a soda vending machine. When the supplier,
the soda vendor, opens the door on a vending machine, it is very easy to
calculate the distribution of products sold. The soda person knows imme-
diately which inventory has to be replaced and to what level to replace it.
The soda person is holding the inventory at the next highest level, which
in on the soda truck, so it’s easy to make the required distribution when
needed. He doesn’t leave four cases of soda when only twenty cans are
needed. If he were to do that, when he got to the next vending machine he
might have run out of the necessary soda because he made distribution
too early at the last stop.” Tom could see by the expressions on everyone’s
face that they immediately related to this simple example.
“After completing the required daily distribution to the vending
machines, the soda person returns to the warehouse or distribution point
to replenish the supply on the soda truck and get ready for the next day’s
distribution. When the warehouse makes distribution to the soda truck,
they move up one level in the chain and replenish from their supplier.
This type of system does require discipline to gain the most benefits, but
it assumes that regular and needed checks are taking place at the inven-
tory locations to determine the replenishment needs. If these points are
not checked on a regular basis, it is possible for the system to experience
stock-out situations.” Tom explained.
“So, let’s summarize our conclusions from what you’ve heard today,” Tom
said. He continued, “The distinct contrast in results between simulated
data runs using the Minimum/Maximum supply system and the Theory
of Constraints Distribution and Replenishment Model are undeniable. The
true benefits of a Theory of Constraints-based parts replenishment system
are many, but the most significant impact is realized in these two areas.
The first benefit is the reduction of total inventory required to manage and
maintain the total supply-chain system by nearly fifty percent. This inven-
tory reduction could lead to a significant dollar savings in total inventory
required, perhaps thousands of dollars. And think about what would hap-
pen to your profit levels,” Tom said.
“The second benefit is the elimination of stock-out situations. Without a
doubt, not having parts available is an expensive situation because it slows
throughput through the systems you have at each hospital. Treatment sites
sit idle, waiting for parts or medications to become available. Stock-out
situations increase frustration, not only in not being able to complete the
work, but also in the time spent waiting for parts to become available. So,
think about what might happen to your on-time delivery of services met-
ric,” Tom suggested.
Tom completed his presentation by stating, “Looking for parts or medi-
cations and experiencing shortages are a continuing problem in most
supply-chain systems. These problems are not caused by the hospital staff,
but by the negative effects of the supply-chain system and the way it is used.
If your current Min/Max supply system is maintained, then the results
from that system cannot be expected to change much, if at all. However, if
new levels of output are required from the system, now and in the future,
then new thinking must be applied to solve the parts and medication
supply-system issues. The concepts and methodologies of the Theory of
Constraints Distribution and Replenishment Model can positively impact
the ability to provide services on time and in the correct quantity.”
When Tom finished, he asked, “Are there any questions or comments?”
Pete was the first to raise his hand and said, “I followed most of what you
were explaining throughout most of your presentation, but I must say,
when you finished with the soda vending machine example, it all fell into
place.” Cynthia, then added, “I absolutely agree with Pete and going for-
ward, I think we can make major improvements to our profit margins and
on-time delivery of treatments!” Bruce Johnson, the Accounting Manager
then commented, “While I had never heard of the Theory of Constraints
before you arrived, in the future I will be finding and reading everything
I can. Do you have other elements of Theory of Constraints that you’ll be
teaching us?” Tom just smiled and said, “As they say, you ain’t seen nothin’
yet!” “In fact, I know we had planned to discuss something referred to as
the Goal Tree, but I’d like to schedule another session to speak about that.”
They scheduled the meeting for the next week and with that, the meeting
came to a close.
10
Drum Buffer Rope at Simpson
Water Heaters
The next week, Tom flew back to Detroit to meet with the leadership team
that Matt had assembled to hear Tom’s presentation on Drum Buffer Rope.
Tom drove his rental car to Simpson Water Heater’s facility and signed
in. Matt came to meet him and they both walked to the conference room.
When everyone was seated, Tom began, “Unlike the last presentation on
the Ultimate Improvement Cycle, I want to keep today’s discussion much
simpler. In a Theory of Constraints environment, production planning
and scheduling is done so with a tool known as the Drum-Buffer-Rope.
Drum Buffer Rope is designed to regulate the flow of work-in-process
through a production line based upon the pace of the slowest resource, the
constraint operation, also known as the capacity constrained resource.”
Tom continued, “In order to optimize the flow of product through your
factory, material is released according to the capacity of your capacity
constrained resource. The production rate of the capacity constrained
resource is equated to the rhythm of a drum. The rope is the communica-
tion mechanism that connects the constraint to the material release to
the first operation, in order to make certain that raw material is released
in time to guarantee that the constraint always has material to work on.
So, the first purpose of the rope is to assure that the constraint is never
starved for work and not inundated with excess work-in-process inven-
tory, sort of like you have here at Simpson Water Heaters,” Tom said in a
joking manner.
131
Tom then explained, “Because of the existence of statistical fluctua-

tions and disruptions in the upstream operations, a buffer is established
to protect the constraint from ever being starved. By the same token, the
rope assures that material is not introduced into the production process
faster than the constraint can consume it. So DBR has three purposes,
namely, first to protect the constraint from starvation; second, to ensure
that excess material is not released into the system; and third, to protect
the delivery due dates to the customer.” Tom then flashed a Power Point
slide on the screen (Figure 10.1).
Tom then flashed a drawing of this system on the screen (Figure 10.2)
and said, “Visually these three elements might look like this figure.
Here we see the three elements of the Drum-Buffer-Rope system and the
interconnectedness of each. The drum sets the pace of the production
line and its capacity is hopefully greater than the number of orders in
the system. In order to satisfy the shipping schedule, we must first fulfill
the constraint schedule. In order to meet the constraint schedule, we
1. A shipping schedule which is based upon the rate that the constraint can produce parts.
That is, use the throughput of the constraint for promised due dates.
2. A constraint schedule which is tied to the shipping schedule.
3. A material release schedule which is tied to the constraint schedule.
FIGURE 10.1
Three main elements of Drum Buffer Rope.
FIGURE 10.2
Visual display of a Drum Buffer Rope system.
Drum Buffer Rope at Simpson Water Heaters • 133
must satisfy the material release schedule. Failure to release materials

per the schedule will jeopardize the constraint schedule which will in
turn jeopardize our shipping schedule. Because of this linkage of sched-
ules, managing the buffers becomes critical!” Tom then asked the group
if they had any questions.
Greg Thompson, the Production Manager raised his hand and asked, “If
we implement Drum Buffer Rope, what happens to our current schedul-
ing system?” Tom responded, “That’s a great question Greg, and if you can
hold on for a bit, I will answer it.”
Tom continued, “In this visual representation of a Drum Buffer Rope
system, I have displayed three buffers, the raw material buffer, the con-
straint buffer and the shipping buffer. And if you have an assembly opera-
tion that feeds parts into your process, you can place a buffer there as well.
These buffers are comprised of two different dimensions which are both
space and time. Now what do I mean by that?” he asked the group. “Since
we don’t want to have excess inventory in our process, the buffers contain
some physical inventory and a liberal estimate of lead time from various
points within our total process.”
Tom continued, “In the case of the raw material buffer, we place an
amount of needed raw materials at the beginning of the process, as well
as a time buffer to prevent material shortages at the beginning of the pro-
cess. In the case of the constraint buffer, we place an amount of physical
inventory in front of the constraint and a time buffer based upon the lead
time from raw material release until the products arrive at the constraint
operation. Likewise, if you have an assembly operation, the buffer would
contain some amount of material and a time buffer based upon the lead
time from the constraint operation to the assembly operation. The ship-
ping buffer contains some amount of work-in-process inventory and a
time buffer based upon the lead time from either the constraint operation
(or assembly operation) to completion into finished product. So how much
is ‘some amount of material?’” Tom asked rhetorically.
Tom continued, “In order to size the buffer correctly, the arrival of parts to
the buffer must be monitored and compared to the scheduled arrival time.
By monitoring the buffer, we are essentially sending a signal to the plant as
to when we need to expedite parts. You’ll notice a section of the drawing
of our Drum Buffer Rope system labeled as ‘buffers.’ When parts do not
arrive into the buffer on schedule, it in essence creates what is referred to
as a ‘hole’ in the buffer. If we divide the buffer into three zones, we will be
able to successfully manage the buffer. So, what are these zones?” he asked.
Tom continued his explanation, “The first zone, which is the green zone
in our drawing, means that everything is going according to the scheduled
arrival date or time, so holes in the green zone are no cause for concern.
The second zone, the yellow zone in our drawing, tells us that the parts are
not arriving on schedule and that it is time to locate the missing parts and
create an expediting plan, in the event the parts need to be expedited. The
third zone, the red zone in our drawing, means that the parts will defi-
nitely not be arriving into the buffer on schedule and that the jobs need
to be expedited. Managing the constraint buffer focuses attention on late
arrivals to the constraint and tells us when we need to expedite and when
not to expedite. Any questions so far?” Tom asked and when there were
none, he continued.
“How much physical inventory we need is a function of how stable or
consistent our process is at producing product. That is, if we are never
creating holes in our green zone, then our buffer is probably too high. By
contrast, if we are constantly penetrating our red zone, then the buffer is
clearly too low. If we have over-sized our buffer, then we are needlessly
increasing operating expenses and cycle time, while at the same time
decreasing inventory turns and cash flow. If we have undersized our buf-
fer, then we run the risk of starving our constraint and losing valuable
throughput. My advice to you is to err on the side of conservatism, because
losing valuable throughput is much more damaging to your plant than
increasing operating expenses or reducing cash flow. Remember, accord-
ing to the Theory of Constraints, Throughput is revenue minus Operating
Expense, which is the key driver of your profitability,” Tom explained.
Tom continued, “You may be wondering just how much of the buffer
should be physical parts and how much should be time? Believe it or not,
it depends upon the variability of our process. If we have a highly variable
operation feeding the constraint, or one that has many disruptions, then
most of our buffer will be in the form of physical materials. If, on the other
hand, our feeder operation contains very little variability, then most of the
buffer will be in the form of time. As you improve your process by reduc-
ing waste and variation using Lean and Six Sigma, rendering it more con-
sistent and stable, then the ratio of physical inventory to time will change
accordingly. Remember the purpose of these buffers is to protect our con-
straint from starvation and our delivery of product to customers.”
Tom looked directly at Greg and said, “The Drum Buffer Rope system is a
finite scheduling method that attempts to balance and control the optimum
flow of materials through a plant in accordance with the demands of the
market, while minimizing lead time, inventory and operating expenses.”
Again, Tom looked at Greg and said, “Greg, I’ll get more into your question
about what happens to your current scheduling system shortly.”
Tom continued his Drum Buffer Rope explanation, “In addition to pro-
tecting the constraint from starvation and/or inundating the process with
excess inventory, buffer management accomplishes another critical aspect.
Buffer management provides you with a vehicle to systematically identify
and quantify potential improvement opportunities in key non-constraint
operations. By focusing improvements on the sources or causes of buffer
holes, it provides you with the opportunity to improve throughput and
reduce both cycle times and inventory. If you are continuously finding
holes in your red zone, then you know that there are problems in one or
more of the upstream processes. If you know this, then your improvement
actions need to be focused on the operation creating the holes. As you con-
tinue to improve your process, these holes in your buffer will eventually
disappear and provide you with the opportunity to safely reduce the size
of your buffers and consistently improve throughput, reduce cycle times
and reduce inventory.”
“As you analyze and prioritize the causes of the holes in your buffer, another
important nuance occurs. You will be able to form a picture of protective
capacity throughout your process. This is important for several very impor-
tant reasons,” and Tom posted another overhead on the screen (Figure 10.3).
1. The non-constraint that has the least protective capacity will have the highest probability
of becoming the next constraint when we break the current constraint.
2. It provides you with a way of estimating how much of the non-constraint capacity can be
sold in a targeted market of the non-constraint products, if they are in a form that can be
sold. However, you will only be able to exploit this market if it will not jeopardize the
constraint buffer and the constraint throughput.
3. You are able to focus in on and prioritize improvement efforts in the right non-
constraints.
FIGURE 10.3
The importance of protective capacity.
“Okay, so let’s now answer Greg’s question about how we use Drum
Buffer Rope with your current scheduling system,” Tom said. “The real
question is, can Enterprise Resource Planning or ERP and Theory of
Constraints exist together in the same manufacturing facility? The short
answer is a resounding yes! The Theory of Constraints is very often seen
as an alternative to ERP, but it doesn’t have to be. Scheduling in your ERP
system begins by identifying a due date for an order and then attempts
to start the order as late as possible, but still meet the date. Scheduling
through a plant uses production rates and time to schedule each resource,”
Tom explained.
“The Theory of Constraints uses a much simpler approach. It begins by
identifying the constraining operation and other resources are scheduled
around the constraint. Remember, the rate of production that can pass
through the constraint is the definitive rate that can pass through the
entire plant and as I explained, that rate is the drum-beat. So, with this in
mind, you use ERP to schedule production in your plant around the beat
of the drum. The next step is to set up buffers ahead of the constrained
resource to ensure that it is never starved due to any unforeseen irregu-
larity upstream. You then set up a buffer downstream of the constraint
so that a downstream problem can never interfere with the constraints
output.” “Are you with me so far Greg?” he asked, and Greg indicated that
he was.
Tom continued, “The buffer can be inventory or what ERP refers to as
a safety stock. It can also be spare resources or whatever works in a par-
ticular environment, to never allow the constraint to move away from its
drumbeat. Finally, a rope is tied to all the other resources so that they
never fall behind or get too far ahead of the constraint. While falling
slightly behind is not usually a problem, getting too far ahead is simply a
waste which should be avoided. Together using the drum, the buffer, and
the rope makes Theory of Constraints a very simple system to implement
and you use the ERP system to effectively manage the constraint. Simply
schedule your upstream resources to keep the buffer full, and schedule
downstream resources based on the output of the constraint. The bottom
line is that ERP works on rules and the Theory of Constraints can eas-
ily be combined with it to give you a superior scheduling system.” Tom
then turned to Greg and asked, “Did that answer your question?” Greg
responded and said, “I think so, but I may have questions for you in the
future.”
“Let me say a couple more things comparing Drum Buffer Rope and
ERP,” Tom said. “In their pure forms, ERP assumes infinite capacity and
works to schedule all steps in the process. Drum Buffer Rope, on the other
hand, assumes finite capacity and only schedules the constraint. Typically,
ERP prohibits late release of materials, while Drum Buffer Rope pro-
hibits early release, simply because early release only serves to drive up
work-in-process inventory. Also, ERP drives material requirements all the
way through the bill of materials, no matter how much stock is on hand,
while Drum Buffer Rope takes existing stock and buffers into consider-
ation. The bottom line is that ERP and Drum Buffer Rope are different
solutions to scheduling, but they can co-exist. Simply use ERP to manage
the constraint and schedule upstream resources to keep the buffer full and
schedule downstream resources always forward from the output of the
constraint. As I said earlier, ERP works on rules and those rules can be
taken from Theory of Constraints easily,” Tom explained.
“Are there any questions or comments?” Tom asked. Matt raised his
hand and said, “What you’ve given us today is a new way forward for us
and I’m very excited to get moving on everything. I mean I can see clearly
how our new replenishment solution and now, our new scheduling system
will move us into new levels of profitability. My question is more one on
technique.” “And what question are you referring to?” Tom asked. Matt
responded with another question, “How do we go about developing our
company-wide improvement effort?” Matt asked. “That’s a great question
Matt, so let’s schedule another meeting and I would be happy to present
the details of how we do that,” Tom said. “Who would you like to be invited
to this session Tom?” Matt asked. Tom replied, “Let’s have the same team
that’s here today,” Tom replied. And with that, the meeting ended.
11
Maximo’s Goal Tree
As in previous sessions, the same group filed into Maximo’s conference

room, and Tom welcomed everyone and began. “In today’s session, I
want to present a simple strategic tool that I have used in many compa-
nies to create improvement plans and that tool is something known as the
Goal Tree. In the spirit of learning a tool and making it your own, I have
changed the way the Goal Tree was originally presented, but I’ll get to that
change later. So, before we get into how to create a Goal Tree, let’s review
the basics of the Goal Tree,” Tom explained.
“The Goal Tree is a logic diagram that is actually simple to construct, and
one that I think you will feel confident using.” Tom then explained, “[1] Bill
Dettmer, who is generally credited as being the man who developed the
Goal Tree, tells us of his first exposure to the Goal Tree back in 1995. Bill
had attended a management skills workshop conducted by Oded Cohen
at the Goldratt Institute. Back then, the Goal Tree was referred to as an
Intermediate Objectives Map (IO Map), but in recent years, Dettmer has
recommended that the IO Map should now be referred to as a Goal Tree.
Bill now believes that it should be the first step in the Theory of Constraints
full Logical Thinking Process analysis. He believes this because it defines
the standard for goal attainment and its prerequisites, in a much more effi-
cient manner.” “Just so you know, Theory of Constraints’ Logical Thinking
Process represents a series of logic trees used to analyze an organization to
locate its weak points. We won’t be covering these logic trees today, but I
wanted to make you aware of their existence” Tom explained.
“It is my belief that the Goal Tree is a great focusing tool that will help
everyone understand why an organization is not meeting its goal. The
thing I like most about the Goal Tree is that it can be used as a stand-alone
tool, which results in a much faster analysis of the organization’s weak
139
points. In this session we will discuss the Goal Tree as a stand-alone tool,”
Tom explained.
“There are two distinctly different types of logic at play which are
sufficiency-type logic and necessity-type logic. Sufficiency-type logic is quite
simply a series of ‘if-then’ statements. If I have ‘this,’ then I have ‘that.’ On
the other hand, necessity-based logic trees use the syntax, In order to have
‘this’ I must have ‘that.’ The Goal Tree falls into the necessity-based category.
For example, in order to have a fire, I must have a fuel source, a spark, and
air. If the goal is to have a fire, it must have all three components. The fuel
source, spark, and air are referred to as Critical Success Factors (CSFs).”
“Take away even one of the CSFs and you won’t have a fire,” Tom explained.
Tom continued, “Our first deliverable today is that we must first define
our span of control and our sphere of influence. Our span of control
includes all of those things in our system over which we have unilat-
eral change authority. In other words, we can decide to change those
things on our own, because they are within our control and don’t require
approval from someone outside our system. On the other hand, our
sphere of influence are those things we may want to change, but we must
get approval to do so.” Pete then said, “I would think our span of con-
trol covers everything within our four walls, from the time we receive
materials, medicines or parts, until we deliver our services to our cus-
tomers.” He then added, “Our sphere of influence, simply put, would be
everything before receiving materials, medicines or parts, as well as the
delivery of our services to our customers. Do I have that right Tom?”
he asked, and Tom indicated that was right.
Tom continued, “The distinction between what our span of control and
sphere of influence is very important, simply because our sphere of influ-
ence is not a fixed entity. In your systems here at Maximo, you can influ-
ence way more than you can control and it’s probably much more than
you realize. Generally speaking, as Pete just said, many things within the
walls of your hospital facilities represent you span of control. But having
said that, not everything fits into this category. For example, things like
governmental regulations under which your hospitals are regulated, are
not considered within your span of control. You might be able to influence
them, but you certainly don’t have control over them. So, for now, let’s go
with your definitions Pete, but we must exercise caution.” With Maximo’s
span of control and sphere of influence defined in limited terms, the cre-
ation of their Goal Tree began.
Maximo’s Goal Tree • 141
Tom continued and inserted a new slide onto the screen, “This figure
(Figure 11.1) demonstrates the hierarchical structure of the Goal Tree. The
Goal Tree consists of a single Goal, several Critical Success Factors (CSFs),
which must be in place to achieve the goal, and a series of Necessary
Conditions (NCs) which must be in place to achieve each of the CSFs.
The Goal and CSFs are written as terminal outcomes, as though they are
already in place. The NC’s are, more or less, written as activities that must
be completed in order to achieve each of the CSFs. We’ll be completing
our own Goal Tree, but a completed Goal Tree’s basic structure looks like
this,” Tom explained.
Tom continued, “Suppose that your organization is profitable, but you
want to become a highly profitable one. You assemble the key members
of your staff to develop an effective plan to achieve this goal. In the Goal
Tree drawing on the screen (Figure 11.2), after much discussion, you agree
on your Goal as ‘Maximum Profitability,’ and place it inside the Goal box.
This goal statement, which is the desired end state, is written as a termi-
nal outcome as though it’s already been achieved.” You think to yourself,
“What must I have in place for our goal to be realized?” You think, “I
know that we must have Maximum Throughput of patients, Minimum
In order to have………..
Goal
I must have……….. Crical Success Crical Success Crical Success

Factor 1 Factor 2 Factor 3
I must have………..
Necessary Necessary Necessary Necessary

Condion 1A Condion 1B Condion 3A Condion 3B
Necessary Necessary
I must have……….. Condion 2A Condion 2B Necessary
Necessary Condion 3C
Condion 1C
Necessary Necessary
Condion 2C Condion 2D
FIGURE 11.1
Basic structure of a Goal Tree.
Goal Tree
GOAL Max
Profitability
In order to have...
Maximum Minimum Minimum
Cri cal Success Factors Opera ng
Throughput Inventory
In order to have... Expenses
Necessary Condi ons

In order to have...
Lower Level NC’s
FIGURE 11.2
The Goal Tree with goal and Critical Success Factors.
Operating Expenses and Minimum Inventory, so you place each of these

in separate CSF boxes. One-by-one you continue listing those things that
must be in place to achieve your goal and place them into separate CSF
boxes like the figure below (Figure 11.2). In a Goal Tree you should have
no more than 3 to 5 CSFs.”
Tom then explained, “Because the Goal Tree uses necessity-based logic, it
is read in the following way: In order to have Maximum Profitability, I must
have Maximum Throughput, Minimum Operating Expenses, and Minimum
Inventory. Directly beneath the CSFs are the Necessary Conditions (NC’s)
that must also be in place to achieve each of the CSFs.” So, continuing to read
downward, “In order to have Maximum Throughput, I must have two NC’s,
high on-time delivery rates and excellent quality. Remember, the CSFs are
written as terminal outcomes, as though they’re already in place.”
“You continue reading downward, in order to have, for example, based
upon Throughput Accounting, Maximum Throughput, I must have
maximum revenue and minimum totally variable costs. The Necessary
Conditions represent actions that must be completed to achieve each indi-
vidual CSF, so they form the basis for Maximo’s improvement plan. In like
manner, your team completes all of the NCs, until you are satisfied that
what you have in place on the Goal Tree will ultimately deliver the goal
of the organization. The completed Goal Tree might look something like
this figure (Figure 11.3),” and he flashed it on the screen. Tom pointed out
the existence and direction of the connecting arrows for each entity which
Max
Goal Tree Profitability
GOAL
In order to have...
Maximum Minimum
Minimum
I must have……….. Throughput Operang
Inventory
Crical Success Factors Expenses
In order to have...
Opmized
I must have……….. Manpower
Levels Minimum WIP
Maximum Minimum
& Finished
Revenue TVC
Necessary Condions Goods
In order to have...
I must have……….. Minimum
Minimum
Scrap &
Overme
Lower Level NC’s Rework
Synchronize
Market Demand Minimum Producon Constraint
Sasfied & Demand
Orders up Raw Mat’l
Customers
Costs
Compeve
Price Point
High Level of Effecve Sales &
Customer Markeng
Highest On-Time Service
Quality Delivery
FIGURE 11.3
Completed Goal Tree.
are used to tie each entity together. He also explained that this Goal Tree
was actually one for a manufacturing company and when Maximo creates
their own Goal Tree, the entities will probably be completely different.
Tom asked if there were any questions or comments so far and Pete said,
“I can see how this tool can be used by Maximo to create our improve-
ment plan. But my question is, how detailed should you make the wording
in each of the boxes?” “Good question Pete,” Tom replied. “Typically, the
wording is intended to be a sort of shorthand note so that your team can
look at it and know the details of what you are saying. If you look at the
wording in this figure, you’ll see that in each box they are, in effect, short
statements of your intended results and actions you plan to take to achieve
each one,” Tom explained and continued on with his presentation.
“So, let’s work on creating your Goal Tree,” Tom said. “The Goal that
we start with is the responsibility of the owner or owners, so since all of
the leaders in each of the hospitals within Maximo, it is your responsibil-
ity to state the Goal.” Tom explained. “My suggestion is that you discuss
the potential Goal as a group and when you all agree, we will continue
constructing your Goal Tree. One thing to keep in mind is that for each
hospital within Maximo, you will be creating your own Goal Tree. But for
Maximo’s Corporate Goal Tree
GOAL Max Profitability

Now & in the
In order to have... Future
I must have……….. Maximum Minimum

Crical Success Factors Throughput Minimum Operang Inventory of
of Paents Expenses Paents
In order to have...
Necessary Condions
In order to have...
Lower Level NC’s
FIGURE 11.4
Maximo’s Corporate Goal Tree.
now, you must consider what you want as a conglomerate of sorts, when
creating this Goal Tree,” Tom explained.
All six leaders of the hospital complex met to develop Maximo’s Goal
statement. After about an hour, the group of executives notified Tom
that they had agreement on what they now referred to as their Corporate
Goal. The group of executives agreed that Pete would be the one to present
their final Corporate Goal. Pete began his explanation, “Tom, after much
discussion, we have concluded that our Corporate Goal will be to have
maximum profitability across all six hospitals. We also discussed what
our Critical Success Factors should be, and we came up with the follow-
ing (Figure 11.4)” Pete explained. “As you can see, our Goal is to achieve
Maximum Profitability both Now, and in the Future,” Pete added. Tom
replied, “I like the way you added a reference to the future.”
“Okay, since you have the leaders of each hospital here today, I think you
should take a shot at completing your Corporate Goal Tree. Remember, for
each individual hospital within Maximo’s Complex, when you return to
your individual hospitals, you need to get a group together to create your
own, individual Goal Tree,” Tom explained. “But for now, I want everyone
to work on your Corporate Goal Tree,” Tom added. And with these basic
instructions, the corporate group began to work on their Goal Tree. “If
you have any questions, I’ll be right here to answer them,” Tom said. The
group formed to create the Corporate Goal Tree consisted of the following
leaders from each of the hospitals (Figure 11.5), along with Pete Hallwell.
Maximo Children's Hospital, specializing in children's ailments, Tom Jones.
Maximo Women's Hospital, specializing in pregnancies, Philip Zagst.
Maximo Veteran's Hospital, specializing in military veterans, Marie Thomas.
Maximo Oncology Hospital, specializing in cancer treatments, Terry Sample.
Maximo Surgical Hospital, specializing in surgical operations, Patricia Smith.
Maximo Emergency Hospital, specializing in emergency patients, Ted Simpson.
Corporate CFO Pete Hallwell.
FIGURE 11.5
Maximo’s corporate leaders.
Tom Jones was the first to speak and said, “It’s my suggestion that
Pete Hallwell lead us through the creation of our Corporate Goal Tree.”
Everyone in the room agreed with Tom and so the effort began. Pete
stepped to the front of the room and said, “I think one of the most impor-
tant things we must keep in mind as we’re creating our Goal Tree is to con-
sider all we have learned about Throughput Accounting.” Again, everyone
agreed with Pete. “We have already agreed with what we have for our Goal
and Critical Success Factors, so let’s start with our first Critical Success
Factor, Maximum Throughput of Patients,” Pete suggested and loaded the
partial Goal Tree on his computer screen (Figure 11.6).

Now & in the

In order to have...
Necessary Condions
In order to have...
Lower Level NC’s
FIGURE 11.6
Original partial Goal Tree.
Pete began again, “So what must we do to obtain Maximum Throughput

of Patients?” he asked. Terry Sample was the first to respond and said,
“Clearly, in all of our hospitals, in order to achieve Maximum Throughput,
we must first identify our system constraint, if we are to follow the guide-
lines of Throughput Accounting.”
Everyone agreed with Terry, except Patricia Smith. She recommended
that they also include Goldratt’s second step, meaning they should not only
identify the system constraint, but they should also exploit it. Everyone
agreed with Patricia, and they were about to insert this comment into the
partial Goal Tree, when Ted Simpson said, “Wait, why should we only
apply the first two steps in Goldratt’s 5 focusing steps?” “What do you
mean Ted?” Pete asked. “Shouldn’t we apply all five steps?” Ted replied.
Heads were bobbing up and down until Pete said, “Great point Ted,” and
he added it to their Goal Tree (Figure 11.7). “Ted, that was a great point to
bring to our attention,” Pete said.
“I was just thinking that if we want to get the full potential, then we have
to first identify the constraint, then exploit it, then subordinate everything
else to the system constraint,” Ted said. “And if the first three steps don’t
cut it, then we would need to elevate the constraint until it’s broken. And
when it is broken, we have to react to the new system constraint,” Ted
added. “That’s a great point Ted!” Pete exclaimed. “So, let’s see how that
reads,” Pete said. “In order to have Maximum Profitability Now and in the

Now & in the

In order to have...
Apply Goldra’s 5
Focusing Steps
Necessary Condions
In order to have...
Lower Level NC’s
FIGURE 11.7
Applying Goldratt’s Five Focusing Steps.

Now & in the

Critical Success Factors Throughput Minimum Operating Inventory of
of Patients Expenses Patients
In order to have...
Apply Goldratt’s 5
Focusing Steps
Necessary Conditions
In order to have...
Teach Theory of
Lower Level NC’s
Constraints to Everyone
FIGURE 11.8
Goal Tree with lower level NC.
Future, we must have Maximum Throughput of Patients. And in order

to have Maximum Throughput of Patients, we must Apply Goldratt’s
5 Focusing Steps,” Pete read.
Continuing on Pete said, “So, in order to Apply Goldratt’s 5 Focusing
Steps, what must we have?” he asked the group. Philip responded and said,
“I think we must educate our employees on the Theory of Constraints?”
“I like that Philip, how about everyone else?” Tom asked. Everyone in the
room agreed on that being the next Necessary Condition, so he added that
one to their Goal Tree (Figure 11.8).
The corporate group continued working on their Corporate Goal Tree
until they were satisfied with their end product and decided it was time to
review their finished tree with Tom (Figure 11.9). Tom was on the phone
in the hallway, so Pete went looking for him. Tom saw Pete and hung up
his phone. “What’s up Pete?” Tom asked. “We think we have a finished
product for you to review,” Pete replied. “Wow, that’s one of the fastest
Goal Tree exercises I’ve ever seen, so let’s go check out your finished prod-
uct,” Tom said, and they both walked into the conference room. Pete had
used Visio to construct their Corporate Goal Tree, so he loaded it onto his
screen for easy review.
Tom took several minutes to review what the corporate group had pre-
pared and began speaking. “I don’t think I have ever seen a simpler Goal
Tree than this one,” Tom said. “And because it’s a corporate level Goal

Now & in the

Critical Success Factors Throughput Minimum Operating Inventory of
of Patients Expenses Patients
In order to have...
Apply Goldratt’s 5 Schedule Patients

Reduce or Maintain on Availability of
Focusing Steps
Necessary Conditions Current Employee Level Resources
In order to have...
Implement Drum
Teach Throughput Buffer Rope for
Lower Level NC’s Accounting to Everyone Scheduling
Teach Theory of
FIGURE 11.9
Completed Corporate Goal Tree.
Tree, I believe that it will serve its purpose for the Maximo Complex,”
Tom explained. “I say this, because you will be preparing a much more
detailed one for each individual hospital,” he said. “If you look at this Goal
Tree, you have indicated that the key to maximizing profitability, lies at
the base of it where it says, ‘Teach Theory of Constraints to Everyone’ and
that says it all,” Tom explained. “So, my assignment to all of you is to get
a group together at each hospital and create a lower level Goal Tree,” he
stated. “But having said this, we are not finished yet,” Tom said. “In the
spirit of learning a new tool and making it your own, I want to show you
how I have changed the original usage of the Goal Tree,” Tom said. “But
for now, let’s take a short break,” Tom said.
When everyone had returned from their break, Tom continued and
inserted a new figure on the screen (Figure 11.10), “Earlier I said that I have
changed the way the Goal Tree was first introduced. This change has to do
with how the Goal and Critical Success Factors are worded (and some of the
NC’s). The Goal Tree you see on the screen is from a manufacturing com-
pany I consulted for and we will use it as an example.” Tom also said, “You’ll
also notice that each block has a locator number inserted. I did this so that
if there is a question, you can locate the specific CSF or NC much easier.”
Tires for All’s
Leadership
Team’s 100
Goal Tree OptimizedProfit
In order to have... Margins
GOAL
I must have...
Critical
Success 700
300 400 500
200 600 Reporting System
Factors Tools and Parts Optimize
Work Scheduled to Stable & Consistent Results on time
Equipment available Available Manpower
meet demand Process Variation
In order to have...
I must have...
210 310 330 410 510 611 511
Necessary 211 710
Enhanced Tools and Preventive Parts replenish Manpower Minimum Strong
Facilities meet Reporting
Condions scheduling equipment maint. Plan plan in place for peak loads Waste & Shift Tie-in
demand requirements
system available on Variation
identified
all equipment
230 521
220 520 612 512
Effective 100% Work
Automated Manpower Plan to Reduce Solid shift
priority 320 tasks
scheduling adjusted Waste & tie-in
system Tool & Equipment identified
information to compensate Variation process
sign-in/sign-out
process
240 250
Scheduling system Priority
requirements criteria
identified defined
FIGURE 11.10
Manufacturing Goal Tree example.

Tom continued, “One of the key learnings in the book, [1] The 4
Disciplines of Execution: Achieving Your Wildly Important Goals, was the
concept of Lead and Lag Measures. The lag measure has to do with Goal
achievement and should be written in such a way that there is a clear mea-
surement of Goal units with a well-defined target. So, for example, instead
of the Goal being written as ‘Optimized Profit Margins,’ let’s word it as
though it was a performance measure with a target,” Tom explained.
“Let’s say that your company’s current profit margins are around 19 per-
cent. What if we re-wrote the Goal as follows: Profit Margins Above 25%?
Written this way, we can measure it and it has a clear target, just like a fin-
ish line in a race. In this way everyone knows what the company wants to
achieve and how to measure success,” Tom explained. “Any questions so
far?” Tom asked, and when there weren’t any, he continued.
Tom began again, “Now let’s look at the Critical Success Factors (CSFs).
The first CSF in our Goal Tree is written as Work Scheduled to Meet
Demand. What if we added something like ‘Greater Than 20%’ to our
original CSF? Can you now see how vague this CSF was as it was originally
written? Written in this manner, it is neither measurable nor does it have
a target for the improvement team to shoot for. By including our target, it
becomes measurable and has a clear target or measure of success to attain.”
Tom continued his explanation, “I chose to do so because, when they are
measurable and have a target, as many of them do, it becomes much easier
for the improvement team to define activities that will move these Lead
Measures in a positive direction. And if these lower level Lead Measures
move in a positive direction, they will move the upper level Lead Measures
in like manner. For example, one of the lower level NC’s is stated as ‘410-
Parts replenishment plan in place > 99% on time %.’ If this is achieved,
then the assumption is that ‘400- Parts Available > 99%’ will also be met.
And if this CSF is met, then it should move the Goal closer to its hoped-
for level of 25%. As we know, each CSF contributes to achievement of the
Goal, but all of them must be achieved to meet the final Goal target.” Tom
added, “So, review this new version of the Goal Tree and let me know what
you think of it.” There were no objections, so they moved on.
Tom continued, “What I’m suggesting is that the CSFs should be written as
Lead Measures that tie directly to the Lag Measures. In other words, if we were
able to move the Lead Measures in a positive direction, then the Lag Measure
would eventually improve as well. Let’s look at the original Goal Tree with
the remaining CSFs that I have changed using these simple guidelines.” Tom
loaded a new slide onto the screen for everyone to see (Figure 11.11).
Tires for Alls Goal Tree With Lead/Lag Measures
Leadership Team Team
100
In order to have...
Profit Margins >25%
GOAL
I must have...
Critical
Success 700
300 400 500
Factors Tools and Equipment Parts Optimize
available >95% Available >99% Manpower
meet demand >20% Process Variation < 1% >99%
In order to have...
I must have...
210 310 330 410 510 611 511
Necessary 211 710
Enhanced Tools and Preventive Parts replenish 100% Manpower Minimum Waste Shift Tie-in
Condions scheduling equipment maint. Plan on plan in place for peak loads & Variation 100% on time
demand >99% requirements
system available >99% all >99% on time
identified
equipment
230 521
220 520 612 512
Effective 100% Work
Automated Manpower Plan to Reduce Solid shift tie-in
320 tasks
scheduling priority adjusted Waste & process
Tool & Equipment identified
information system to compensate Variation
sign-in/sign-out
process >99%
240
250
Scheduling system
100% Priority
requirements
criteria defined
identified
FIGURE 11.11
Goal Tree with new guidelines implemented.
Tom continued, “As you can see, many of the CSFs are now measurable
and display a clear success target. For example, CSF number 400 is now
written as ‘400 Parts Available > 99%.” Clearly, this CSF is measurable and
the target to reach has been set. Now let’s look at the Necessary Conditions
(NC’s).” “As written in the original Goal Tree, the NC’s are written with
the same clarity as the CSFs,” Tom stated.
“When time is a factor, which it is at your hospitals, my next step is to
develop a real-time status or current state of the Goal, CSFs and NCs. I use
a simple Green, Yellow, and Red coding system to describe how each of the
Goal Tree entities exists in our current reality. With this new approach,
the status of each entity becomes much easier. I might add that the coding
system I will now describe is a departure from the way I had been using
the Goal Tree in the past,” Tom explained.
Tom inserted a new slide of the new Goal Tree onto the screen
(Figure 11.12) and said, “Notice the key on the bottom right hand side of
the Goal Tree and you’ll see that a box shaded in green indicates that the
measure is at or above the target level. Green can also be used to describe
actions that we plan to take to drive the lead measures in a positive direc-
tion. In this case, the required action is in place and functioning, so no
changes need to be made,” Tom explained. Tom continued, “Likewise, a
yellow box indicates that a lead measure is greater than 5%, but less than
25% away from the defined target. Or if it’s a required action, then it means
that there is something in place, but that it needs improvement. And if it’s
red, that means that it’s greater than 25% away from our target or there’s
no action in place or the one in place is not working.”
Tom began, “So, just to review what we’re going to be doing, we will use the
instructions at the base of our Goal Tree to assess how we’re doing with our
Goal, Critical Success Factors and Necessary Conditions,” and with that he
posted the three instructions on the screen (Figure 11.13). “Basically, if what
we have in place is at or above our target, or the action is in place and function-
ing well, we color it green. If we are between 5% and 25% from our target or
we have an action in place, but it isn’t functioning well enough, then we color
it yellow. And finally, if our measure is greater than 25% away from our target
or we don’t have an action in place or what we have in place is not functioning,
then we color it red. Does everyone understand what we’re doing?” he asked.
“Everyone at this manufacturing company seemed to understand
the instructions that I had laid out, so they began color-coding each of
the entities in their Goal Tree,” Tom explained. “One-by-one the team
Tires for All's Goal Tree With Lead/Lag Measures
Leadership Team
100
In order to have...
Profit Margins >25%
GOAL
I must have...
Critical
Success 700
300 400 500
Factors 200 600 Reporting System
Tools and Equipment Parts Optimize
In order to have...
I must have...
210 310 330 410 510 611 511
Necessary 211 710
Condions Facilities meet Reporting
scheduling equipment maint. Plan on plan in place for peak loads & Variation 100% on time
system available >99% all equipment >99% on time identified
520 521 512

220 230 612
Manpower 100% Work Solid shift
Automated Effective 310 Plan to Reduce
adjusted tasks tie-in
scheduling priority Tools and Waste &
to compensate identified process
information system equipment Variation
Sign-out >99%
240 250
Scheduling system 100% Priority
requirements criteria defined
identified
Green Measure at or above target or Yellow Measure >5-25% from target or Red Measure >25% from target or
Action in place and functioning Action in place but not functioning well enough Action not in place or not functioning
FIGURE 11.12
Goal Tree with coding system for status.

FIGURE 11.13
Instructions for assessing Goal Tree entities.
iscussed each of the individual entities, and although they had disagree-
d
ments at times, they were able to work their way through them and come
up with a final product. When they were finished, they called me back
into the room and showed me their final results,” Tom explained, and he
loaded their completed Goal Tree assessment on the screen (Figure 11.14).
Maximo’s team looked at the final Goal Tree with each of the colors
highlighted. Pete was the first to comment on what Tom had just presented
and said, “Tom, I have a couple of comments for you about this assessment
method.” “Sure Pete, what are they?” Tom asked. “First, I want you to know
that I really like this assessment method using the Goal Tree. I’ve never seen
anything like this before and I can’t wait to get started on each of our hos-
pitals,” Pete said. “Having said this, I do have one question for you,” Pete
added. “What question is that Pete?” Tom asked. “The percentages away from
target for the yellow and red boxes, are they hard and fast rules?” Pete asked.
“Remember when I told you to learn a new tool and make it your own?” Tom
said. “Well, it applies to these percentages as well,” Tom added. “You guys can
decide on what the assessment rules are for your hospitals,” Tom said. “So, I’d
like you guys to spend some time assessing your own Corporate Goal Tree,”
Tom instructed. And with that, the corporate team began their assessment.
With the instructions complete, the Maximo corporate team began
working on their new version of their Corporate Goal Tree. Their first
action item was to make sure they had the appropriate lead and lag mea-
sures, and then where appropriate, they needed to add target values. Once
again, the corporate team elected to have Pete Hallwell lead their effort,
and with that, they began.
All members of the corporate team participated actively in the assessment
of the Corporate Goal Tree, and while there were numerous disagreements
during their assessment session, at the end of the day, they had completed
their Corporate Goal Tree. When they were finished, they called Tom
back into the conference room to get his opinion on their finished product
(Figure 11.15). Tom spent several minutes reviewing Maximo’s Corporate
Goal Tree, and when he was finished with his initial review, he moved to
the front of the room to make his initial comments to the corporate team.
Tires for All's Goal Tree With Lead/Lag MeasuresLeadership Team
100
In order to have...
Profit Margins >25%
GOAL
I must have...
Critical
Success 700
300 400 500
Factors Tools and Equipment Parts Optimize
In order to have...
I must have...
210 310 330 410 510 611 511
Necessary 211 710
Conditions scheduling equipment maint. Plan on plan in place for peak loads & Variation 100% on time
system available >99% all equipment >99% on time
identified
230 521
220 520 612 512
Effective 100% Work
Automated 310 Manpower adjusted Plan to Reduce Solid shift tie-in
priority tasks
scheduling Tools and to compensate Waste & process
system identified
information equipment Variation
Sign-out >99%
240 250
Scheduling system 100% Priority
requirements criteria defined
identified
FIGURE 11.14
Final assessed Goal Tree.

GOAL Max Profitability Now

& in the Future
In order to have... Net Profit 25 %
I must have……….. Minimum Inventory

Maximum Throughput of Minimum Operating
Critical Success Factors Patients Expenses of Patients
In order to have... Min 100 patients/Day OE <10% of Revenue I <10 Patients waiting
Apply Goldratt’s 5 Schedule Patients

Reduce or Maintain on Availability of
Focusing Steps
Necessary Conditions Current Employee Level Resources
In order to have...
Implement Drum
Teach Throughput Buffer Rope for
Lower Level NC’s Accounting to Everyone Scheduling
Teach Theory of
Green Yellow Red

Entity in place & functioning well Entity in place & but not functioning Entity either not in place or Greater
well (Greater than 10% from target) than 25% from target
FIGURE 11.15
Final assessed Goal Tree.
“I suspected at the Corporate level, you might have some problems com-
ing up with appropriate assessment percentages, and based upon what I see
here, this is the case,” Tom explained. “We thought the same thing Tom,”
Pete replied. Tom then added, “It’s my belief, that when you complete your
Goal Trees for each of the individual hospitals, this will be much easier for
you. The one entity that is probably correct, is what you have entered as a
target for your overall profitability.
“I think we all agree with your assessment of our Goal Tree,” Pete added. “I
say that because we need the specific numbers from each of the hospitals to
set our targets more realistically,” Pete explained. “I agree with you, Pete, and
having said this, I think our session is over today,” Tom said. “How about we
get together in a couple weeks to review each of the individual hospital Goal
Trees?” Tom asked. “Agreed,” Pete said and with that, the session was over.
REFERENCE
1. Jim Huling, Chris McChesney and Sean Covey, The 4 Disciplines of Execution:
Achieving Your Wildly Important Goals, 2012, New York: Free Press.
12
Developing an Improvement
Plan at Simpson
When Tom finished his last session at Simpson Water Heaters, he had
been asked by Matt Maloney how to create an improvement plan. Tom
explained that when he returned, he would teach Simpson Water Heaters
how to do just that. Tom and Matt had talked and set up a new session for
the next day in Detroit. Tom prepared his materials for this session and
flew into Detroit. Tom had rented a hotel room fairly close to Simpson
Water Heaters, so it would be a short drive there in the morning.
As usual, Tom woke up early, showered, got dressed, and ate breakfast.
When he returned to his hotel room, he called Matt to chat about today’s
session. Tom explained that he would be presenting a tool known as the
Goal Tree and Matt seemed very anxious to learn more about it. Tom
explained that he would first teach how to create a Goal Tree and then
use it to create an improvement plan for Simpson Water Heaters. Tom
was scheduled to begin in 45 minutes, so he got into his rental car and
drove to the site. Tom entered the manufacturing complex, parked, and
walked to the lobby. The security guard called Matt to let him know of
Tom’s arrival. Matt came to the lobby and the two of them walked to the
conference room.
Matt reintroduced Tom to the group and Tom began today’s session.
“Good morning everyone,” Tom began. “Today’s session is all about an
improvement tool known as the Goal Tree and I think at the end of today,
you will see how valuable this tool is and what it can do for you here at
Simpson Water Heaters,” Tom said. “There’s another side of the Theory
of Constraints that we haven’t talked about yet and that is something
referred to as the Logical Thinking Tools. These Logical Thinking Tools
157
are a series of Logic Diagrams that can be used to both assess your com-
pany and locate those things that stand in the way of improving your
overall company. The one problem that many people feel after they have
been through a training session on these tools is that they don’t have a
good idea of how to begin using them. We’re not going to discuss these
tools, but rather we will discuss another logical thinking tool known as
the Goal Tree,” Tom explained.
“The Goal Tree is a sort of ‘short cut’ to assessing your company’s weak
points and it’s much simpler to use than the Logical Thinking Tools,” Tom
explained. “The man generally credited with developing the Goal Tree is
Bill Dettmer, of whom I have the greatest respect. When he originally cre-
ated the Goal Tree, he referred to it as the Intermediate Objectives Map,
but he has since then changed the name to the Goal Tree,” Tom stated.
“I want to make one thing perfectly clear, before we begin,” Tom said.
“As I said, we won’t be discussing the Logical Thinking Tools, but I want
everyone to understand that I am a huge fan of these logic trees. In the
future, we might have a session on these tools, but for now, we will only be
discussing the Goal Tree,” Tom explained.
When everyone arrives, Tom began his explanation, “When using
any of Theory of Constraints’ Thinking Process tools, there are two dis-
tinctly different types of logic at play, sufficiency and necessity based logic.
Sufficiency-based logic tools use a series of if-then statements, that connect
cause and effect relationships between most of the system’s undesirable
effects. Necessity-based logic uses the syntax, in order to have x, I must
have y or multiple y’s. The Goal Tree falls into the category of necessity-
based logic and can be used to develop and lay out your company’s stra-
tegic and tactical actions that result in successful improvement efforts.”
“As mentioned earlier, the Goal Tree dates back to at least 1995 when it
was casually mentioned during a Management Skills Workshop conducted
by Oded Cohen at the A.Y. Goldratt Institute, but it was not part of that
workshop, nor did it ever find its way into common usage as part of the
Logical Thinking Process (LTP). It was described as a kind of Prerequisite
Tree without any obstacles.” Tom explained.
“Bill Dettmer,” he continued, “the originator of the Goal Tree, tells us
that one of the first things we need to do is, define the system boundaries
that we are trying to improve, as well as our span of control and sphere
of influence. Our span of control means that we have unilateral change
authority, while our sphere of influence means that at best, we can only
Developing an Improvement Plan at Simpson • 159
influence change decisions. Dettmer explains that if we don’t define our

boundaries of the system, we risk ‘wandering in the wilderness for forty
years.’” Tom continued.
Tom began again, “The hierarchical structure of the Goal Tree consists
of a single Goal and several entities referred to as Critical Success Factors
(CSFs). The CSFs must be in place and functioning if we are ever going
to achieve our stated goal. The final piece of the Goal Tree are entities
referred to as Necessary Conditions (NCs), which must be completed to
realize each of the CSFs. The Goal and CSFs are worded as terminal out-
comes, as though they were already in place, while the NC’s are stated
more as activities that must be completed.”
Tom loaded a Power Point slide into his computer (Figure 12.1) and
explained, “This is a graphic representation of the structure of the Goal
Tree, with each structural level identified accordingly. The Goal, which is
defined by the owners of the organization, sits at the top of the Goal Tree,
with three to five Critical Success Factors directly beneath it. The CSFs are
those critical entities that must be in place, if the Goal is to be achieved.
For example, if your Goal was to create a fire, then the three CSFs which
must be in place are (1) a combustible fuel source, (2) a spark to ignite the
FIGURE 12.1
Basic structure of a Goal Tree.
combustible fuel source and (3) air with a sufficient level of oxygen. If you
were to remove any of these CSFs, there simply would not be a fire. So, let’s
look at each of these components in a bit more detail.”
Tom continued, “Steven Covey suggests that to identify our goal
we should, ‘Begin with the end in mind,’ or where we want to be when
we’ve completed our improvement efforts, which is the ultimate purpose
of the Goal. A Goal is an end to which a system’s collective efforts are
directed. It’s actually a sort of destination, which implies a journey from
where we are, to where we want to be. Bill Dettmer also makes it very
clear that the system’s owner or owners determine what the goal of the
system should be. If your company is privately owned, maybe the owner
is a single individual. If there’s a board of directors, they have a chairman
of the board who is ultimately responsible for establishing the goal, based
on input from the other board members. Regardless of whether the owner
is a single person or a collective group, the system’s owner(s) ultimately
establishes the goal of the system.”
“In the Goal Tree, there are certain high-level requirements which
must be solidly in place, and if these requirements aren’t achieved, then
we simply will never realize our goal. These requirements are referred
to as Critical Success Factors (CSFs) and Necessary Conditions (NCs).
Each of the CSFs have some number of NCs that are considered prereq-
uisites to each of the CSFs being achieved. Bill Dettmer recommends
no more than two to three levels of NC’s, but in my experience, I have
seen as many as five levels working very well. While the Goal and the
CSFs are written primarily as terminal outcomes, that are already in
place, the NC’s are worded more as detailed actions that must be com-
pleted in order to accomplish each of the CSFs and upper-level NCs,”
Tom explained.
Tom continued, “The relationship among the Goal, CSFs and the sup-
porting NC’s, in this cascading structure of requirements, represents what
must be happening if we are to reach our ultimate destination. For ease of
understanding, when I am in the process of constructing my Goal Trees,
the connecting arrows are facing downward to demonstrate the natural
flow of ideas. But when our structure is completed, I reverse the direction
of the arrows to reveal the flow of results. In keeping with the thought of
learning a tool and making it your own, I have found this works well for
training purposes even though this is the complete opposite of Dettmer’s
recommendations for construction of a Goal Tree.”
“As we proceed, it’s important to understand that the real value of a

Goal Tree is its capability to keep the analysis focused on what’s really
important to the success of the system. Dettmer tells us that a ‘Goal Tree
will be unique to that system and the environment in which it operates.’
This is an extremely important concept because ‘one size does not fit all.’
Dettmer explains that even two manufacturing companies, producing the
same kind of part, will probably have very dissimilar Goal Trees,” Tom
explained.
“A Goal Tree could very quickly and easily be constructed by a single
person, but if the system it represents is larger than the span of control
of the individual person, then using a group setting is always better. So,
with this in mind, the first step in constructing a Goal Tree is to clearly
define the system in which it operates and its associated boundaries. The
second consideration is whether or not it falls within your span of control
or your sphere-of-influence. Defining your span of control and sphere of
influence, lets you know the level of assistance you might need from oth-
ers, if you are to successfully change and improve your current reality,”
Tom continued.
“Once you have defined the boundaries of the system, your span of con-
trol, and sphere of influence you are attempting to improve, your next step
is to define the ultimate goal of the system. Remember, we said that the
true owner(s) of the system is/are responsible for defining the goal. If the
true owner or owners aren’t available, it is possible to articulate it by way
of a ‘straw man,’ but even then, you need to get concurrence on the goal
from the owner(s) before beginning to construct your Goal Tree. Don’t
lose sight of the fact that the purpose of the Goal Tree is to identify the
ultimate destination you are trying to reach,” Tom stated.
He continued, “Dettmer tells us that the Goal Tree’s most important
function, from a problem-solving perspective, is that it constitutes a stan-
dard of system performance that allows problem-solvers to decide how far
off-course their system truly is. With this in mind, your goal statement
must reflect the final outcome and not the activities to get you there. In
other words, the Goal is specified as an outcome of activities and not the
activity itself.”
“Once the Goal has been defined and fully agreed upon, your next order
of business is to develop three to five Critical Success Factors (CSFs) that
must be firmly in place before your Goal can be achieved. As we explained
earlier, the CSFs are high-level milestones that result from specific,
detailed actions. The important point to remember is that if you don’t

achieve every one of the CSFs, you simply will not achieve your goal,” Tom
explained.
Tom continued, “Finally, once your CSFs have been clearly defined,
your next step is to develop your Necessary Conditions (NCs), which are
the simple building blocks for your Goal Tree. The NC’s are specific to
the CSF they support, but because they are hierarchical in nature, there
are typically multiple layers of them below each of the CSFs. As already
stated, Dettmer recommends no more than three layers for the NC’s, but
on numerous occasions I have observed as many as five layers working
quite well. With the three components in view, you are now ready to con-
struct your Goal Tree. Let’s demonstrate this through a case study where
a company constructed their own Goal Tree.”
Tom then said, “The company in question here, is one that manufac-
tures a variety of different products for diverse industry segments. Some
orders are build-to-order, while others would be considered orders for
mass production parts. This company had plenty of orders to fill, but
unfortunately, they were having trouble not only filling them, but filling
them on time. As a result, this company’s profitability was fluctuating
between making money one month, to losing money the next month, sort
of like you here at Simpson Water Heaters. Because of this, the board of
directors decided to make a leadership change and hired a new CEO to
effectively ‘right the ship.’”
Tom continued laying out this case study, “The new CEO had a diverse
manufacturing background, meaning that in his career he had split his time
between job shop environments and high-volume manufacturing compa-
nies. When the new CEO arrived, he called a meeting of his direct reports
to not only meet them, but to assess their proficiencies and capabilities. He
soon realized that most of the existing management team had been work-
ing for this company for many years, and that their skills appeared to be
somewhat limited. Before arriving, the new CEO had concluded that the
best approach to turning this company’s profitability around and stabiliz-
ing it, would be to use the Theory of Constraints Thinking Processes. But
after meeting his new team, and evaluating their capabilities, and since
time was of the essence, he decided instead to use the Goal Tree to assess
his new company and lay out an improvement strategy.”
He continued, “The CEO’s first order of business was to provide a brief
training session on how to construct a Goal Tree for his new staff. The first
step was to define the boundaries of their system, which included receipt
of raw materials from suppliers to shipping of their products to their cus-
tomers. Within these boundaries, the team concluded that they clearly
had defined their span of control, because they had unilateral change
authority. They also decided that they could influence their suppliers, and
somewhat the same with their customers, so their sphere of influence was
also defined.”
“In advance of this first meeting with his staff, the CEO had met with
the board of directors, to determine what the goal of this company actu-
ally was. After all, he concluded, it’s the owner or owner’s responsibility
to define the goal of the system which was ‘Maximum Profitability.’ After
discussing his meeting with the board of directors to his team, and the
goal they had decided upon, the CEO posted the goal on the top of a flip
chart as seen in this figure (Figure 12.2).” Tom explained.
Tom continued, “The CEO knew that the board of directors wanted
maximum profitability both now, and in the future, so he added the future
reference to the Goal box. But before moving on to the Critical Success
Factors (CSFs), the CEO decided that it would be helpful if he explained
the basic principles of both the concept of the system constraint, and how
to use Throughput Accounting (TA). His staff needed to understand why
focusing on the constraint, would result in Maximum Throughput, but
equally important, his staff needed to understand how the three com-
ponents of profitability, Throughput (T), Operating Expense (OE), and
Investment/Inventory (I) worked together to maximize profitability. With
this in mind, the CEO explained Throughput Accounting to his new team,
along with the basics of the Theory of Constraints.”
Tom continued with his case study, “The CEO first explained the basics
of the Theory of Constraints and then explained that Throughput (T) was
equal to Revenue (R) minus Totally Variable Costs (TVC) and that Net
Profit was equal to Throughput minus Operating Expense (OE), or T – OE.
Finally, he explained that Return on Investment (ROI) was equal to NP/I,
where I is the Inventory value. With this brief training behind them, he then
FIGURE 12.2
Goal statement.
challenged his staff to tell him what they needed to have in place to satisfy
this profitability goal, both today and tomorrow. That is, what must be in
place to maximize Net Profit now and in the future?” After these explana-
tions were completed, the CEO returned to their Goal Tree creation.
After much discussion, his staff offered three Critical Success Factors
which the CEO inserted beneath the Goal in the Goal Tree (Figure 12.3).
After learning the basics of Theory of Constraints’ concept of the con-
straint, and basic Throughput Accounting (TA), his staff knew that
because they needed to increase Net Profit (T − OE), then maximiz-
ing Throughput had to be one of the CSFs. They also concluded that, in
order to maximize Net Profit, minimizing OE had to be another CSF.
And finally, because return on investment (ROI) was equal to Net Profit
divided by their investment (i.e. NP = (T ÷ I), they needed to include mini-
mum investment (i.e. inventory) as one of the CSFs.
The CEO felt very good about the progress they had made with their first
Goal Tree, but it was time for lunch, so they decided to break and come
back later to complete the Goal Tree. When his staff returned from lunch,
they reviewed what the CEO had presented on TA, just so it was fresh in
FIGURE 12.3
Goal Tree with goal and three CSFs.
their minds, as they began again to review and construct the rest of their
Goal Tree. The CEO started, “In order to maximize profitability now and
in the future, we must have Maximum Throughput, minimum Operating
Expense and minimum Investment, which is mostly inventory. Are there
any others?” he asked. His staff looked at each other and agreed that these
are the three main CSFs.
Knowing that what was needed next were the corresponding Necessary
Conditions (NCs), the CEO started with Maximum Throughput. “In order
to have Maximum Throughput, what do we need?” he queried. His CFO
put his hand up and said, “We need to maximize our revenue stream.”
Everyone agreed, but the Junior Accountant immediately raised her hand
and said, “That’s only half of it!” The CEO and CFO looked at her and
said, “Tell us more.” She explained, “Well you explained that Throughput
was revenue minus Totally Variable Costs, so minimal Totally Variable
Costs has to be a Necessary Condition too.” The CEO smiled and said, “So,
let me recap that what we have so far is that ‘In order to have Maximum
Throughput, we must have maximum Revenue and minimal TVC’s.’”
“And everyone agreed,” Tom reported.
Tom continued explaining his case study, “The CEO continued, ‘In
order to maximize Revenue, what must we do?’ The Operation’s Manager
said, ‘We must have satisfied customers,’ and before he could say another
word, the Marketing Director added, ‘We must also have sufficient market
demand.’ The CEO smiled, scanned the room for acceptance again, and
added these two NC’s to the Goal Tree (Figure 12.4). The CEO thought to
himself, I am so happy that I chose to use the Goal Tree rather than the
full Thinking Process analysis.”
Continuing on Tom said, “The CEO then said, ‘Let’s stay with the satis-
fied customer’s NC. In order to have satisfied customers, we must have
what?’ The Quality Director raised his hand and said, ‘We must have the
highest quality product.’ The Logistics Manager added, ‘We must also
have high, on-time delivery rates.’ And before the CEO could add them to
the tree, the Customer Service Manager added, ‘We must also have a high
level of customer service.’ The CEO smiled again and said, ‘Slow down, so
I don’t miss any of these everyone.’ Everyone laughed. The CEO looked at
the lower level NC’s for satisfied customers and asked if they needed any-
thing else. Everyone agreed that if they had the highest quality product,
with high on-time delivery rates and a high level of customer service, then
the customers should be highly satisfied.”
FIGURE 12.4
Partial Goal Tree.
Continuing Tom said, “The CEO continued on beneath the CSF for
Maximum Throughput and asked, ‘So, what do we need to supplement or
support sufficient market demand?’ The CFO said, ‘We need a competi-
tive price point and by the way, I think that would also help satisfy our
customers.’ The CEO added both NC’s and connected both of them to the
upper level NC of sufficient market demand. The CEO stepped back and
admired the work they had done so far, but before he could say anything,
the Sales Manager said, ‘If we’re going to have sufficient market demand,
don’t you think we also need effective sales and marketing?’ Again, every-
one nodded their heads in agreement, so the CEO added that NC as well.”
“Before the CEO could say anything more, the Junior Accountant raised
her hand and added, ‘I was thinking that three of the ways we could have
effective sales and marketing would be related to the three lower level NC’s
assigned to satisfied customers. I mean, can we do that in a Goal Tree?’
The CFO was the first person to speak and he added, ‘I think that’s a fan-
tastic idea!’ The CEO thanked her and added the connecting arrows,” Tom
explained.
Tom continued, “The CEO then said, ‘Great job so far, but what’s a good
way for us to minimize TVC?’ Without hesitation, the Quality Manager
said, ‘That’s easy, we need to minimize our scrap and rework.’ The Quality
Manager then said, ‘I think that would also be an NC for one of our other
CSFs, minimum operating expense.’ Everyone agreed, so the CEO added
both the NC and the second connecting arrow. Once again, the Junior
Accountant raised her hand and added, ‘I think that we should add another
NC to the CSF, minimum operating expense, and that we should say some-
thing like optimum manpower levels and maybe also minimized overtime.’
The CEO smiled and added both of the NC’s to the tree.”
“So, what about our CSF, Minimum Investment?” asked the CEO. The
Plant Manager raised his hand and said, “How about minimized WIP and
Finished Goods inventory?” The CEO looked for objections, but when
nobody objected, he added it to the tree. He then asked, “What about an
NC underneath that one?” The Plant Manager looked at him and said, “We
need to synchronize our production around the constraint and demand.”
“What do you mean?” asked the CEO. “I mean,” the plant manager replied,
“we need to stop producing parts on speculation and start building based
on actual orders. I’ve been reading about Theory of Constraints’ version of
scheduling referred to as Drum Buffer Rope and I think we need to move in
that direction,” he added. “And with that, the CEO added his comments to
the Goal Tree,” Tom stated.
Tom continued, “When he was finished adding the new items to the
Goal Tree (Figure 12.5), he turned to the group and began clapping his
hands in appreciation for their effort.” He explained, “I’ve been doing this
for quite some time now, but I have never seen a group come together
more than you have today.” He added, “I was a bit apprehensive when we
began today, that maybe some of you would push back and not contribute,
but I was totally wrong.”
Tom, nearing completion of the first part of his case study, then said, “The
CFO raised his hand and said, ‘For me, I have never seen this tool before,
but going forward, I will be using it a lot. In fact, I was thinking that this
tool can be used to develop individual department improvement plans.’ ‘Tell
us more,’ said the CEO. ‘Well,” the CFO replied, “if an NC, for example,
applies mostly to a specific group like Production or Sales & Marketing,
then that could be seen as the Goal for that group. I’m very happy to have
been here today to complete this exercise.’ Everyone else agreed with him.
The CEO then said, ‘Ladies and gentlemen, this exercise is not over yet.’
FIGURE 12.5
‘What else is there to do?’ came a question from the CFO. ‘We’ll get back
together tomorrow morning and I’ll explain the next steps,’ he explained.
Tom continued with his case study, “Bright and early the next morn-
ing, the executive team began filing into their conference room, full of
anticipation on just what they would do with their completed Goal Tree.
The CEO hadn’t given them any instructions on how to prepare for today’s
work, so they were all eager to have the events of the day unfold. When
everyone was seated, the CEO welcomed them and offered his congratula-
tions again on the great job they had done the day before.” “Good morning
everyone,” he said as everyone responded with a “good morning” back
to him. As he scanned the room, he noticed that there was one person
missing, the Junior Accountant. When he asked the CFO where she was,
he explained that she was working on the monthly report and wouldn’t
be joining them today. The CEO looked the CFO square in his eyes and
told him that nothing was more important than what they were going to
do today. “Go get her!” he stated emphatically. The CFO left and returned
minutes later with the Junior Accountant, and the CEO welcomed her. He
then said, “We created this as a complete team and we’re going to finish it
as a complete team.”
“The CEO explained, ‘When the Goal Tree was originally created by Bill
Dettmer [1], it was to be used as a precursor to the creation of a Current
Reality Tree (CRT). That is, he used it as the first logic tree in Theory of
Constraints’ Thinking Processes to help create the CRT.’ He continued,

‘And although I fully support this approach, I have found a way to use
the Goal Tree to accelerate the development of an improvement plan.’
The CEO passed out copies of the completed Goal Tree and began.” Tom
explained and continued on.
“I want everyone to study our logic tree, focusing on the lower level NC’s
first,” he explained. “As we look at these NC’s, I want everyone to think
about how we are doing with each of these,” he continued. “By that I mean,
is what we said is needed to satisfy a CSF or upper level NC, in place and
functioning as it should be. We’re going to use a color-code scheme to
actually evaluate where we stand on each one,” he said. “If you believe that
what we have in place is good and that it doesn’t need to be improved, I
want you to color it green. Likewise, if we have something in place, but it
needs to be improved, color it yellow. And finally, if an NC is either not
in place or is not ‘working’ in its current configuration, color it red,” he
explained. “Does everyone understand?” he asked, and everyone nodded
in agreement. “It’s important that we do this honestly, so be truthful or
this exercise will all be for not.” Tom explained.
Continuing Tom said, “The CFO raised his hand and asked, ‘How will
we use our color-coded tree?’” “Good question,” said the CEO. “Once we
have reviewed our Goal, CSFs, and NCs, we will start with the red entities
first and develop plans to turn them into either yellows or greens. Likewise,
we’ll then look at the yellows and develop plans to turn them into green
ones,” he explained. As he was explaining his method, the CEO could see
heads nodding in the affirmative, meaning that everyone understood his
instructions. With that, the CEO passed out green, yellow, and red pencils.
“I want everyone to do this individually first and then we’ll discuss each
one openly, until we arrive at a consensus,” he explained. “While you’re
considering the state of each entity, I also want everyone to also think
about a way we can measure the status of many of these in the future,” he
said. “I’ll be back in a couple of hours, so please feel free to discuss your
color selections as a group,” he added. “With the instructions complete,
the team began reviewing their Goal Tree and applying the appropriate
colors to each entity.”
“Right on schedule, the CEO returned and asked how the session was
coming. The Plant Manager spoke first, ‘I was amazed at how much dis-
agreement we had initially, but after we discussed each item, we eventually
came to an agreement on how we believe we’re doing.’ The CFO jumped
into the conversation and added, ‘I was amazed at how we came together
as a team, just by creating our Goal Tree.’ ‘I have to admit that when you
told me to go get our Junior Accountant, I was a bit taken back. But at
the end of the day, she was a very important addition to this team,’ he
added. And with that, the Junior Accountant was somewhat embarrassed,
but thanked the CFO for recognizing her contribution to the effort,” Tom
explained.
“So, where is it?” asked the CEO. “Where is your finished product, your
Goal Tree?” The CFO went to the flip chart and there it was (Figure 12.6).
The CEO then asked, “Did you also discuss what kind of metrics we might
use to measure how we’re doing?” “Yes, we did,” said the CFO. “And?”
the CEO asked. “We need to do more work on that,” he answered. “So,
what’s next?” asked the CFO. “After studying the finished product,” Tom
reported, “the CEO thanked everyone for their effort and then said, ‘Let’s
take a break and come back later and I’ll explain how we can use this tree
to develop our final improvement plan.’”
Tom continued, “The team reassembled later that day to discuss their
next steps. Everyone seemed enthusiastic about what they would be doing
going forward. When everyone was seated, the CEO turned to the group
Goal Tree

Now & in the
Future
In order to have...
I must have……….. Minimum

Maximum Minimum
Crical Success Factors Operang
Throughput Inventory
In order to have... Expenses
Opmized
Manpower
Necessary Condions Maximum Minimum Levels Minimum WIP &
Revenue TVC Finished Goods
In order to have...
Lower Level NC’s Minimum Scrap Minimum

& Rework Overme
Synchronize Producon
Sasfied Sufficient Constraint & Demand
Minimum Raw
Market
Customers Mat’l Costs
Demand
Compeve Price
Point
Color Key
High Level of Effecve Sales & In place – Functioning well
Highest Highest On-Time Customer Service Markeng
Quality Delivery Rates In place, not Functioning well
Not In place or in place but
not Functioning
FIGURE 12.6
Color-coded Goal Tree.
and asked, ‘So, how does everyone feel about this process so far?’ The Plant
Manager was the first to respond, ‘I can’t speak for anyone else, but the
development of the Goal Tree was a real eye-opener for me. I never imag-
ined that we could have analyzed our organization so thoroughly in such
a short amount of time. I mean think about it, when you add up the total
amount of time we’ve spent so far, it’s not even been a full day’s work!’ As
he spoke, everyone was nodding their heads in agreement.”
“The CFO was next to speak and said, ‘I can absolutely see the benefit
from using this tool and one of the things that impressed me the most, is
that everyone contributed. But what really captivated me is, that for the
first time since I started working here, we actually are looking at the sys-
tem rather than isolated parts of it. One of the things that I will take away
from this is that the total sum of the localized improvements does not
necessarily result in an improvement to the system. The Goal Tree forces
us to look at and analyze all of the components of our organization as one
entity.’ Tom explained.
Tom continued with the case study, indicating this last part would
answer Matt’s original question of how to create an improvement plan,
‘OK, let’s get started,’ said the CEO. ‘Today we’re going to plan on how
turn our problem areas, those we defined in red, into hopefully strengths,’
he said. ‘Does anyone have any ideas on how we can turn our bottom three
reds into either yellows or greens?’ ‘In other words, what can we do that
might positively impact delivery rates, customer service and synchronize
production to the constraint and demand?’ he asked.”
“The Plant Manager was the first to speak and said, ‘If we can come
up with a way to schedule our production, based upon the needs of the
constraint, it seems to me that we could really have a positive result for
on-time delivery rates and at the same time it would reduce our WIP and
FG levels?’ he said more in the form of a question. The CFO then said,
‘Since you mentioned Drum Buffer Rope (DBR) yesterday, I’ve been read-
ing more about it and it seems that this scheduling method is supposed to
do exactly what you just described,’ he said directly to the Plant Manager.”
Continuing on Tom said, “The CEO responded by saying, ‘He’s right,
DBR limits the rate of new product starts, because nothing enters the
process until something exits the constraint.’ ‘So, let’s look at what hap-
pens to the reds and yellows, if we were to implement DBR,’ he added and
pointed at the Goal Tree up on the screen. ‘The way I see it is, if we imple-
ment DBR, we will minimize WIP. If we minimize WIP, we automatically
Goal Tree
Now & in the
Future
In order to have...
Maximum Minimum Minimum

I must have……….. Throughput Operang Inventory
Crical Success Factors Expenses
In order to have...
I must have……….. Opmized

Manpower
Maximum Minimum Levels Minimum WIP &
Revenue TVC Finished Goods
Necessary Condions
In order to have...
Minimum Scrap Minimum
Lower Level NC’s & Rework Overme
Synchronize Producon
Sasfied Sufficient Constraint & Demand
Minimum Raw
Market
Demand
Compeve Price
Point
High Level of Effecve Sales &

Highest Highest On-Time Customer Service Markeng
Quality Delivery Rates
Implement Drum
Buffer Rope

In place – Functioning well In place, not Functioning well
not Functioning
FIGURE 12.7
Goal Tree with Drum Buffer Rope inserted.
minimize FG’s, which minimizes our investment dollars, which positively

impacts our profitability,’ he explained enthusiastically. ‘We should also
see that on-time delivery rates jump up, which should result in much
higher levels of customer satisfaction,’ he added. ‘This should also allow
us to be more competitive in our pricing and stimulate more demand and
with our ability to increase throughput, we will positively impact profit-
ability,’ he explained. The Junior Accountant then said, ‘Last night I read
more about the Theory of Constraints and it seems to me that one thing
we could do is stop tracking efficiency in our non-constraints and if we do
that, we should also reduce our WIP.’”
“The Quality Director spoke up and said, ‘I’m thinking that if we effec-
tively slowdown in our non-constraints, we should see our scrap and
rework levels improve significantly, because our operators will have more
time to make their products. And I also believe that we should imple-
ment TLS.’ ‘What is TLS?’ asked the CFO. ‘It’s an improvement method
which combines the Theory of Constraints, Lean, and Six Sigma,’ the
Quality Director explained. ‘This improvement will reduce our scrap and
rework levels and in conjunction with DBR, will reduce both our operat-
ing expenses and TVC. The combination of these improvements will both
contribute to our profitability,’ he added,” Tom explained.
“‘One other thing is that we should see our overtime levels drop, which
will also improve profitability,’ said the CFO. ‘I am just amazed that by
making these three basic changes, we could see a dramatic financial
improvement,’ he added. The team continued working on their Goal Tree
until it was complete (Figure 12.7),” Tom added.
Tom then said, “The stage was set for major financial gains by first,
developing their cause and effect relationships, and by looking at their
organization as a system rather than making improvements to parts of it.
That’s a very important message for everyone to glean from all of this. Not
all improvement efforts will happen rapidly like it did in this case study,
but it is possible to make rapid and significant improvements to your orga-
nization by looking at it from a holistic point of view. The fact is, isolated
and localized improvements will not typically result in improvement to
the system. So, let’s take a break for now and when we get back, we’ll com-
plete our case study.”
13
The Expanded Case Study
at Simpson Water Heaters
When everyone was back from their break, Tom began again with his case
study. “The CEO began to explain, ‘Before we develop our performance
metrics, let’s first discuss the purposes of an organization’s performance
metrics. In general, we need some type of feedback mechanism that tells us
how we’re doing. A way to be able to know that the direction we’re travel-
ing is on course. That is, in the event that we need to make any midcourse
corrections. These performance metrics should be system related, in that
they tell us how the system is performing, rather than how individual
processes are working. Remember, our focus is on system performance,
and not individual performance. So, think about what our performance
metrics should be? But before we answer that question, let’s talk about
their purpose,’ he added and loaded a Power Point slide (Figure 13.1).” The
CEO continued, “Performance measures are intended to serve at least six
important functions or roles.”
Tom continued, “The CEO then explained, ‘So with these functions in
mind, let’s now look at how we can use our Goal Tree to create our series
of performance metrics. If we use the Goal Tree as our guide, we should
start with our goal, Maximize Profitability Now and In the Future, and
create our first tracking metric,’ he explained. ‘Earlier in our discussion,
I introduced you to Throughput Accounting which defined Net Profit
as Throughput minus Operating Expense or NP = T – OE. The metric of
choice for this Goal Tree then, should be NP which we insert into our
‘Goal box.’ In addition, I prefer to give most of the metrics a target to
shoot for. With this metric, I believe that our Net Profit should be greater
than twenty-five percent (NP > 25%),’ he stated. ‘We must then look at each
175
1. First, and foremost, the measures should stimulate the right behaviors.
2. The performance measures should reinforce and support the overall goals and objectives
of the company.
3. The measures should be able to assess, evaluate, and provide feedback as to the status of
the people, departments, products, and the total company.
4. The performance measure must be translatable to everyone within the organization. That
is, each operator, manager, engineer, etc., must understand how their actions impact the
metric. Performance metrics are intended to inform everyone, not just the managers!
5. The performance metrics chosen should also lend themselves to trend and statistical
analysis and, as such, they shouldn't be “yes or no” in terms of compliance.
6. The metric should also be challenging, but at the same time be attainable. There should
be a stretch involved. If it's too easy to reach the target, then you probably won't gain
nearly as much in the way of profitability. If it's too difficult, then people wil l be
frustrated and disenchanted.
FIGURE 13.1
Six purposes of performance metrics.
CSF and NC and select appropriate performance metrics and targets for as
many as might be appropriate. Keep in mind that not every box will have
a defined metric, but let’s get as many as we can.’ “The CEO,” Tom said,
“then told the executive team that he wanted them to work on the rest of
the metrics as a team and that he would return later.”
Tom explained, “Because the operational status of companies varies
from company to company, there is no standard set of metrics and targets
to recommend. But for the company in this case study, the team stayed
focused and was able to identify appropriate metrics and targets. They
started with the Goal, then worked through the CSFs, and then onto the
NCs. Let’s get back to the case study and see what they were able to do.”
The CFO was the first to speak and said, “It’s clear to me that having per-
formance metrics for the three CSFs is imperative, since they are the three
components of profitability.” Tom interjected, “The team decided to first,
determine which entities could actually have metrics tied to them. After
they had determined all of the metrics, they would then develop targets for
each specific performance metric. The figure on the screen (Figure 13.2)
Case Study at Simpson Water Heaters • 177
Goal Tree
NP > 25%
In order to have...

Minimum Operating
Critical Success Factors Throughput Expenses Inventory
In order to have... T >20% OE < 10% 1<1 Day
Optimized
Manpower
Minimum Minimum WIP
Necessary Conditions Max Revenue Levels
TVC & Finished
R >30%
In order to have... TVC <10% Goods
Minimum Minimum
Lower Level NC’s
Scrap <0.2% Overtime
Rework<1.0 % <4 %
Synchronize
Satisfied Production Constraint
Customers Market Demand Minimum Raw & Demand
CSI >99% Orders Up >15 % Mat’l Costs
Competitive Price
Point
High Level of Effective Sales &
On-Time Customer Service Marketing
Highest Quality
Delivery
RFT >99%
>99 %
Implement
Implement No Efficiency @ Drum Buffer Rope
TLS Non-Constraints
In place & Needs

functioning well Improvement
FIGURE 13.2
Color-coded Goal Tree with targets.
is the Goal Tree with appropriate metrics defined by this executive team,
along with their targets.” Tom explained.
Tom then explained, “All of the team members contributed to this
effort and were all amazed at the finished product they had developed. As
they were admiring their Goal Tree with the performance metrics they
intended to track, the CEO entered the room. He studied the completed
Goal Tree and then moved to the front of the room. He thanked everyone
for their effort and told them that they could return to their offices. The
CFO stood and said, ‘With all due respect sir, we haven’t finished yet.’”
Tom continued with the case study explanation, “The CFO stood, faced
the group and asked, ‘Where do you think we should start? I mean should
we start at the top with the Goal or should we start at the bottom and work
our way up?’ The Junior Accountant raised her hand and said, ‘I think we
should start at the lower levels and work our way to the top.’ ‘Why do you
feel that way?’ asked the CFO. ‘If we follow the direction of the arrows, and
then set, and reach our target, then the level directly above will be the net
result of our efforts,’ she replied. ‘Could you give us an example?’ asked the
CFO. ‘OK, for example, if we set our target for Highest Quality, Right the
First Time (RFT) at greater than 99% and we achieve it, plus, our on-time
delivery rate to 99% and we achieve that, then we have a great chance of
having our Customer Satisfaction Index (CSI) be greater than 99%. So, it’s
kind of like sufficiency type logic using if-then statements,’ she explained.”
The Quality Director then spoke up and said, “I can see your point, but
I can also make the argument based on necessity-based logic. By that I
mean, we could start with the Goal and give it a target of 25%. So, with
necessity-based logic, we could say that in order to have a profitability
of 25%, we must have a Throughput improvement of at least 20%, while
holding our operating expenses to less than 10% and holding our on-hand
inventory to less than one day.” The CFO re-entered the conversation and
said, “I see both points of view, but I must tell you I like following the
direction of the arrows on our Goal Tree. I say this because, when we
implement Drum Buffer Rope and the combined Theory of Constraints,
Lean, and Six Sigma methodology, we drive improvement upward and our
metrics respond to what we’re doing.” The Junior Accountant then said, “I
don’t think it matters which direction we go, because at the end of the day,
the metrics will tell us how we’re doing,” she said.
Tom continued, “A short while later the CEO returned to the conference
room to find the completed Goal Tree, with metrics and targets posted on
the screen at the front of the conference room (Figure 13.3). He studied
it, turned to the group and asked someone to explain it to him. The CFO
turned to the Junior Accountant and said, ‘I think since you contributed
most to our success, that you should be the one to do that.’ The Junior
Accountant just smiled and said she would be happy to, and did so with
confidence, agility and a seemingly true understanding of this new tool.
She finished her presentation by telling the executive team that this tool
will serve her well in her new position as CFO with her new company and
everyone gasped in disbelief.”
Tom concluded his meeting and said, “The Goal Tree is an amazingly
simple tool to not only learn, but in my experiences, it’s a tool that most
Case Study at Simpson Water Heaters • 179
Goal Tree
NP > 25%
In order to have...

Minimum Operating
In order to have... T >20% OE < 10% 1<1 Day
Optimized
Manpower
Minimum Minimum WIP
Necessary Conditions Max Revenue Levels
TVC & Finished
R >30%
In order to have... TVC <10% Goods
Minimum Minimum
Lower Level NC’s
Scrap <0.2% Overtime
Rework<1.0 % <4 %
Synchronize
Satisfied Production Constraint
Customers Market Demand Minimum Raw & Demand
CSI >99% Orders Up >15 % Mat’l Costs
Competitive Price
Point
High Level of Effective Sales &
On-Time Customer Service Marketing
Highest Quality
Delivery
RFT >99%
>99 %
Implement
Implement No Efficiency @ Drum Buffer Rope
TLS Non-Constraints
In place & Needs

functioning well Improvement
FIGURE 13.3
people feel comfortable using. As you learned, in a very short amount of

time, this team not only learned how to create their Goal Tree, they were
able to use it to develop their strategic and tactical improvement plan. I
am forever grateful to [1] Bill Dettmer for providing us with this amazing
tool and I encourage everyone to read Bill’s book, The Logical Thinking
Process – A Systems Approach to Complex Problem Solving.” “Now, what I
want you to do before I return the next time, is create your very own Goal
Tree.” And with that, Tom left to drive to the airport for his flight home.
REFERENCE
1. H. William Dettmer, The Logical Thinking Process – A Systems Approach to Complex
Problem Solving, 2007, American Society for Quality Control Press, Milwaukee, WI.
14
Maximo’s Improvement Plan
When Tom Mahanan left Maximo Health Center Complex the last time,
he had just completed a session on the construction of a Goal Tree. He had
also instructed the corporate members in attendance to return to their
respective hospitals and create a Goal Tree for each one. He had told them
he would be back in two weeks to review their completed Goal Trees. Tom
looked at his schedule and decided to contact Pete Hallwell to set a date for
his next trip. He dialed Pete’s number, and after several rings, the phone
was answered. “Hello, Pete Hallwell here,” the voice said on the other end.
“Hi Pete, it’s Tom Mahanan,” Tom said. “Oh, hi Tom, what’s up?” he asked.
“I want to schedule another visit to review your individual hospital Goal
Trees,” Tom said. “When would you like to come Tom?” Pete asked. “You
tell me Pete, what’s the best day and time?” Tom asked. Pete looked at his
schedule and said, “How about Tuesday at 8:00 am?” he asked. Tom looked
at his schedule and said, “That works for me Pete, I’ll see you then.”
Tuesday morning Tom drove to Maximo’s Corporate offices, signed in,
and the guard called Pete to let him know that Tom was in the lobby.
Shortly thereafter, Pete arrived in the lobby, and the two of them went
to the conference room. Pete reintroduced Tom to the group, which con-
sisted of the same members that were there during his training session on
the Goal Tree. And with that introduction, Tom began. “Good morning
everyone, happy to be back with everyone,” he said. “So, how did everyone
do with the individual Goal Trees?” he asked. Everyone seemed to indicate
that they had been able to create their Goal Trees without any problems.
Pete then said, “What we did is to hold a general training session for all of
the hospitals in our complex and that seemed to work very well. In fact,
we created a Goal Tree for our Oncology Hospital as part of our overall
training.” “I like that approach Pete, so can I see what you came up with?”
181
Maximo Oncology Hospital Goal Tree
Max Profitability Now &

in the Future
In order to have... NP > 20 %
I must have……….. Minimum Inventory of

Maximum Throughput Minimum Operang
Crical Success Factors Of Paents Expenses Paents
In order to have... T > 20% OE <10% No more than 5 paents
Opmized
Manpower Levels
Maximum Minimum Totally Maintain Current
Necessary Condions
Revenue Variable Costs Level
In order to have... Rev > 30% TVC < 10%
Synchronize Service
Minimum Constraint & Demand
Lower Level NC’s Minimum
Overme
Waste
OT <3 %
Sasfied Max Throughput High Market Demand Minimum Mat’l &

Customers at Constraint For Services Medicine Costs
Rang >99% <1% Downme Service up >20% = or < current cost
Compeve Price Point

High Level of for Services
On-Time
Highest Quality Customer Service Effecve
Delivery
RFT >99% < 1 hour wait me Markeng
>99 %
FIGURE 14.1
Maximo Oncology Hospital Goal Tree.
Tom asked. “Of course,” Pete responded and loaded a completed Goal
Tree on the screen (Figure 14.1).
What Tom saw on the screen was a well-designed Goal Tree that con-
tained target values for many of the Goal Tree entities. After reviewing
the Goal Tree, Tom said, “I am very impressed with what you have put
together on this Goal Tree.” He continued, “The flow of information looks
very good, but what impresses me the most is your use of ‘lead and lag
measure’ just like we discussed in our training. I also like how you have set
target values for each of your key entity statements. Now all that’s left to do,
is your assessment exercise.” And with that comment, Pete flashed another
overhead on the screen (Figure 14.2) and said, “You mean like this?”
Tom looked at their assessed Goal Tree and said, “Wow! You guys really
hit a home run! I have to be honest with everyone, I truly didn’t expect
such a completed Goal Tree to be ready for this visit! Congratulations
everyone for a job well done!” he exclaimed.
Maximo’s Improvement Plan • 183

in the Future

Maximum Throughput Minimum Operang
Crical Success Factors Of Paents Expenses Paents
In order to have... T > 20% OE <10% No more than 5 paents
Opmized
Manpower Levels
Necessary Condions
Synchronize Service
Overme
Waste
OT <3 %
Sasfied Max Throughput High Market Demand Minimum Mat’l &

Rang >99% <1% Downme Service up >20% = or < current cost
Compeve Price Point

On-Time
Highest Quality Customer Service Effecve
Delivery
RFT >99% < 1 hour wait me Markeng
>99 %

not Functioning
FIGURE 14.2
Assessed Maximo Oncology Hospital Goal Tree.
And with that, Pete spoke up and said, “What we decided is that this
Goal Tree can be used by all six of our hospitals!” “Yes, there will be slight
modifications for each hospital, but at the end of the day, this Goal Tree will
fit each of our hospitals.” “What a great idea Pete!” Tom exclaimed. “So,
what is your next exercise Pete?” Tom asked. Pete responded immediately
and said, “Tom, this is where we will need your help.” “In what way Pete?”
Tom asked. Pete responded and said, “For example, for the Necessary
Condition, Maximum Throughput at Constraint, what improvement
would you recommend that we implement to achieve our target of less
than 1% downtime?” “It depends upon what the cause or causes of your
downtime are Pete?” Tom replied. He added, “Do you have an analysis of
your downtime?”
Pete responded and said, “I think I can speak for Terry Sample, when I say
that one of the reasons we have downtime here is that we frequently run out
of meds for our treatments.” Terry nodded in agreement. Tom responded
and said, “The Theory of Constraints has the perfect solution, if this is truly
what’s causing your downtime.” Pete replied, “Tom, what’s the solution
you’re referring to?” “The Theory of Constraints Replenishment Solution
would be ideal and I can teach your teams how to set that up,” Tom replied.
Pete then asked, “What about the Necessary Condition, Synchronize
Service Constraint and Demand?” Tom responded and said, “The Theory
of Constraints offers a scheduling method referred to as Drum Buffer
Rope.” “What is that Tom?” Pete asked. “It’s a simple scheduling method
that focuses on the rate of the system constraint,” Tom replied. “I would
assume you have waiting rooms full of patients waiting to receive treat-
ments?” He added. “That’s exactly what we have at all of our hospitals!”
Pete exclaimed. He added, “Is that something simple for our employees to
learn?” “Yes, absolutely, Pete,” Tom replied.
Tom then said, “I will schedule all of the necessary training and I will
assist your hospitals with the implementation of your key strategies for
improvement.” Then Tom added, “One thing that I don’t see on your Goal
Tree is any reference to ‘Emergency Services?’ Pete?” Pete responded and
said, “We all discussed that, and those hospitals that have Emergency
Departments, have it in their Goal Trees.” “Okay, I just wanted to make
sure that was included,” Tom replied. “At some point I want to present a
case study on a hospital Emergency Department for STEMI type heart
attacks, but we’ll address this later on.” Tom said.
“So now, let’s look in more detail at your Goal Tree, so I can demonstrate
how you can add your improvement efforts to develop your final improvement
plan,” Tom said. “For example, we just discussed two improvement initia-
tives, namely Drum Buffer Rope and Theory of Constraints’ Replenishment
Solution,” He explained. Tom then updated their Goal Tree to reflect these
additions, plus a couple others and loaded it onto the screen (Figure 14.3).
“By adding these improvement tools to your Goal Tree, you will be able to
see how many of the Goal Tree entities will be impacted,” he explained. “Just
follow the hashed arrows and you’ll see what I mean,” he added.
“It’s important to remember that these connecting arrows can impact
multiple NC’s and CSFs,” Tom added. “Does this make sense to you?”
he asked. Pete responded and said, “It makes perfect sense!” “So, your
new assignment is to focus on each of the individual Goal Trees and

in the Future

Maximum Throughput Minimum Operating
Critical Success Factors Of Patients Expenses Patients
In order to have... T > 20% OE <10% No more than 5 patients
Optimized
Manpower Levels
Necessary Conditions
Synchronize Service
Overtime
Waste
OT <3 %
Satisfied Max Throughput High Market Demand Minimum Mat’l &

Rating >99% <1% Downtime Service up >20% = or < current cost
Competitive Price Point

On-Time
Highest Quality Customer Service Effective
Delivery
RFT >99% < 1 hour wait time Marketing
>99 %
Implement Drum
Buffer Rope
Scheduling
Implement Implement Theory
Throughput of Constraints
Accounting Replenishment Implement
Solution Ultimate Improvement
Cycle

not Functioning
FIGURE 14.3
Goal Tree with improvements added.
record what you believe will be the best improvement strategy for each
hospital,” Tom explained. “So, when can we hear about the Emergency
Department Case Study?” Pete asked. “Let me check my computer to
make sure I have it with me and if I do, would you like to hear it now?”
Tom asked. Pete scanned the conference room, and everyone indicated
that they’d like to hear about it now. “So, everyone, take a break and I’ll
get it loaded,” Tom said.
When everyone was back from break, Tom began, “This case study took
place at Saint Mary’s Hospital located in the Western Chicago. Pete, you’ll
remember that I mentioned this case study to you in one of our first meet-
ings.” Tom related to Pete. Tom then continued his explanation of this case
study. “I met with a staff member of this hospital to discuss their perfor-
mance metrics. The woman I met with showed me a list of key performance
metrics that Saint Mary’s tracked on a regular basis.” Tom explained and
loaded this list of performance metrics onto his screen (Table 14.1).
Tom explained, “While all of these performance metrics were impor-
tant, those metrics that interested me the most, were those associated with
time spent waiting. I believed that if the wait times could be reduced, then
more patients could be seen and treated which could add to the hospi-
tal’s bottom line. I was especially interested in the metric dealing with
the Emergency Department. I asked the woman I was meeting with, more
specific questions about this metric and one of the areas that interested me
the most was a sub-metric that involved patients in the process of having
something referred to as a Stemi-type heart attack, with the actual metric
being, Door to Balloon (D2B) time.”
Tom continued, “I didn’t have a clue as to what D2B time actually
was, so I asked the woman to explain it in more detail, but in simpler
TABLE 14.1
Key Performance Metrics
Metric Metric Description
Average Hospital Stay Appraise the amount of time your patients are staying in
your hospital after admission.
Treatment Costs Calculate what a patient costs your facility.
Hospital Readmission Rate Calculate how many patients are coming back after they
are discharged.
Patient Wait Time Calculate your patient satisfaction score by assessing
their average wait time.
Patient Satisfaction How patients felt while being taken care of in your
hospital?
Patient Safety Identify any incidents happening in your hospital and
reduce the patients’ exposure to further risk.
ER Wait Time to See a Doctor Evaluate the time patients spend from checking in to the
ER until they see a doctor.
Costs by Payer Evaluate which type of health insurance they have and
what it costs.
terms.” She responded and said, “Door to Balloon is a time measurement

in Emergency Room/Cardiac Care Unit, specifically in the treatment of
ST Segment Elevation Myocardial Infarction, or simply, a STEMI heart
attack.” I responded by saying, “What did you just say?” She chuckled and
said, “The time interval starts with the patient’s arrival in the Emergency
Department and ends when a catheter guide-wire crosses the culprit
lesion in the Cardiac Cath lab. In everyday language, this just means that
a balloon is inflated inside one of the heart’s primary blood vessels to allow
unimpeded blood flow through the heart.”
She continued her explanation, “The clock starts ticking either as a walk-
in to the Emergency Department, or in the field where a patient is being
attended to by medical personnel. This metric is enormously important
to patients simply because the longer this procedure is delayed, the more
damage occurs to the heart muscle due to a lack of oxygen to the heart
muscle. It’s damaged because the cause of this problem is typically due to
a blockage within the heart that prevents oxygen from being supplied to
the heart, and without proper amounts of oxygen, muscle damage results.
The inflated balloon ‘unclogs’ the blood vessel. Graphically, door to bal-
loon might look like this (Figure 14.4),” and he loaded a picture on his
laptop’s screen. “For those of you who have no experience with this, this is
a graphic summary of the D2B Time,” Tom added.
Tom explained, “Seeing this graphic image of what this procedure
involved, made it much easier for me to understand. My conclusion was
that this might be a good place to start the improvement effort within
FIGURE 14.4
D2B time graphic.
Saint Mary’s. I then asked this same woman if there was a specific metric
value or standard that Saint Mary’s had to achieve.” She replied and said,
“Yes, the current median standard for Door to Balloon (D2B) time is
90 minutes, and Saint Mary’s was actually doing quite well against this
standard.” She continued, “We have a median score of 66 minutes, but
we are anticipating that the standard would be changing to 60 minutes in
the future.” I then asked, “When you say median, do you actually mean
that it’s the average or mean time?” She responded and said, “No, for some
reason this standard is tracked based on the median.”
“We continued discussing this standard and finally decided that this
would be a good place to start the improvement effort at Saint Mary’s. On
further discussion with this woman, she explained that in addition to this
new time benefitting the patient by experiencing much less heart muscle
damage, there was also a financial incentive for the hospital. Apparently,
reimbursement rates for Medicare and Medicaid patients were tied to
completing the D2B time below the standard median time. We decided to
put together a team of hospital subject matter experts to study this metric
and look for ways to achieve this future target, before it was mandated to
do so,” Tom explained.
Tom continued, “The team was formed, and I conducted a training ses-
sion for the team members focusing on how to use my integrated Theory of
Constraints, Lean, and Six Sigma improvement methodology. I explained
to the team that the Theory of Constraints and its Five Focusing Steps
offers a much quicker solution to this type of project. When I described
Theory of Constraints’ Five Focusing Steps, I used the hospital’s jargon
such as the following figure (Figure 14.5) describes.”
Tom continued, “I also reviewed the basics of both Lean and Six sigma
and how to combine these three methodologies into a single methodology
which I have named the Ultimate Improvement Cycle. I explained to them
that the Theory of Constraints identifies the focal point for improvement,
while Lean works to reduce waste and Six Sigma reduces and controls the
variation within the process.” In addition, “I displayed the UIC’s tools and
actions needed to implement the UIC as well as the expected deliverables.
With this training in place, the team began their improvement effort by
creating a simple Process Map (Figure 14.6) of another, lower level metric
known as Door to Doctor process.”
“After completing the simple process map of Door to Doc time, I
instructed the team to ‘Walk the Gemba’ by going to both the Emergency
1. Identify the system constraint—In a physical process with numerous processing steps,
like D2B Time, the constraint is the step with the smallest amount of capacity. Or another
way of stating this is the step with the longest processing time.
2. Decide how to exploit the system constraint—Once the constraint has been identified,
this step instructs you to focus your efforts on it and use the improvement tools of Lean
and Six Sigma to reduce waste and variation but focus your efforts mostly on the
constraint. This does not mean that you can ignore non-constraints, but your primary
focus should be on the constraint.
3. Subordinate everything else to the constraint—In layman's terms, this simply means
don't over-produce on non-constraints, and never let the constraint be starved. In a
process like the Door to Balloon Time, it would make no sense to push patients into this
process, since they would be forced to wait excessively. But of course, the hospital
cannot predict when patients with heart attacks will show up needing medical attention.
But by constantly trying to reduce the constraint’s time, the wait time should be
continuously reduced.
4. If necessary, elevate the constraint—This simply means that if you have done everything
you can to increase the capacity of the constraint in Step 2, and it’s still not enough to
satisfy the demand placed on it, then you might have to spend money by hiring additional
people, purchasing additional equipment, etc. That is, anything that would reduce the
time in the constraint. With a standard as important as D2B Time, this step would not be
out of the question.
5. Return to Step 1, but don't let inertia create a new constraint—Once the constraint's
required capacity has been achieved, the system constraint could move to a new location
within the process. When this happens, it is necessary to move your improvement efforts
to the new constraint if further improvement is needed. What is thing about inertia? What
this means is to make sure things you have put in place to break the original constraint
(e.g. procedures, policies, etc.) are not limiting the throughput of the process. If
necessary, you may need to remove them.
FIGURE 14.5
Theory of Constraints’ Five Focusing Steps in medical terms.
Door to Doctor Estimated Average Tim:

88 Minutes
Quick ID Patient in Triage Waiting ER

Patient Register/Triage Waiting Room Room MD
Arrives Pt in Computer Room 10 23 48 Exam
2 Minutes 8 Minutes Minutes Minutes Minutes
System Constraint
Waiting for Doctor to

see Patient
FIGURE 14.6
Current State Door to Doctor Time.
Department and Cardiology Department to observe what happens during

this process and to have conversations with employees from both depart-
ments about problems they might have encountered. This was a fact-find-
ing mission aimed at understanding how patients are managed through
this treatment process. The team collected many observations during
this walk, most of which would be used to construct their Current State
Process Map, for D2B Time,” Tom explained.
Tom continued, “The team then developed the following problem state-
ment: Hospital’s current state cycle time is 66 minutes (median) for Door to
Balloon Time when patients arrive at the Emergency Department and are
classified as a STEMI candidate. The Hospital’s goal is less than 60 minutes
(median) 100% of the time. In addition, the team set two primary perfor-
mance goals as follow:
1. Hospital’s median Door to Balloon Time at 60 minutes or below.

2. Decreased Door to Balloon Time will improve patient outcomes as
measured by quality metrics. Additionally, these quality metrics
are tied to the hospital’s reimbursement based on the result of those
outcomes.”
“The team then developed a business case for their efforts: In addition
to the quality and reimbursement benefits, this project will help in the
marketing of the hospital’s Cardiology services. Improved performance
in quality metrics will lead to awards and preferred provider status.
Examples include: Chest Pain Accreditation, Top 100 Heart Hospital, Blue
Cross Distinction for Cardiac Care.” Tom explained.
“As a final step before their improvement work began, the team devel-
oped their performance metrics to be used to judge the final impact of
TABLE 14.2
Performance Metrics for D2B Time
Metric/Unit: Complete Baseline: Goal: Future estimated
cycle time in Median Median = Future median = median =
Minutes 66 minutes <60 minutes 53 minutes
their improvement efforts on D2B Time which are include in the following
table (Table 14.2),” Tom explained.
Tom continued, “The team had access to D2B time data that had been
collected on previous patients passing through this process. The team then
analyzed the data to better understand what was happening on previous
D2B events, and to determine the location of the constraint within this
process. The team met with me and showed me what they had discovered
(Figure 14.7) as a summary of this analysis before any improvements were
initiated. They broke their analysis into three separate phases which were,
Door to EKG, EKG to Table, and Table to Balloon.”
“I reviewed what they had done and then told the team that ‘I really
liked the analysis they put together and how they had identified the system
constraint in this system. Based upon their analysis, the first stage, Door
to EKG, only took an average of 4.75 minutes, while the second stage, EKG
to Table, took, on average, 36.7 minutes, while the third stage, Table to
Balloon, took 21.2 minutes. This clearly demonstrates where they had to
focus their improvement efforts and that is EKG to Table.’” Tom contin-
ued. “I explained that I realize that you’re measured on the median time to
Door to Balloon Time After Improvements

Standard Threshold 90 minutes
Mean 52 minutes
Median 53 minutes
Constraint
Door to EKG EKG to Table Table to Balloon
Std Threshold = 10 minutes Std Threshold = 50 minutes Std Threshold = 30 minutes

Mean = 4.1 minutes Mean = 31.1 minutes Mean = 18.8 minutes
Median = 4 minutes Median = 30.5 minutes Median = 18.5 minutes
FIGURE 14.7
Door to Balloon Time process.
complete the full Door to Balloon Time, but my belief is that you should
measure your progress using mean values, rather than median times. The
reason I said this is because as you work to reduce variation in this system,
the values for mean and median will come closer together and statistical
tools and tests are all based on mean values. At any rate, this was a great
first step,” I concluded.
Tom continued, “One of the tools I taught the team was an Interference
Diagram, which I presented to everyone on a previous visit here.” I sug-
gested that this would be a good tool for this team to use to dissect the
process to develop improvement opportunities. I also explained, that the
purpose of the Interference Diagram, or ID for short, was to identify any
barriers or obstacles or interferences that stand in the way of achiev-
ing a goal or objective. I then explained that the Interference Diagram
can then be used to develop an improvement plan on how to reduce the
EKG to Table phase time. In the case for Phase 2, EKG to Table, the goal
developed by the team was identified simply as “EKG to ED Exam Room
Table Faster.”
Continuing on, “The team then reassembled and developed a list of
‘interferences’ that stood in the way of achieving the goal they had set of
reducing the EKG to ED exam room table time. One-by-one, the team
recorded the interferences or obstacles that stand in the way of reaching
their goal and created a slide to show me (Figure 14.8). They then called
me and asked me to come to their meeting room so that they could have
me see their completed Interference Diagram.”
“I reviewed the work they had done, looked at the group and simply
said, ‘Awesome work everyone!’ The team leader walked me through the
entire diagram, and I was very impressed to say the least. I had many ques-
tions about the writings within each box of the Interference Diagram, and
without exception every question was answered to my satisfaction,” Tom
explained.
“I then told the team that I will be leaving Saint Mary’s shortly, but the
next thing I would recommend that you create is a SIPOC Diagram. I
explained that in any process improvement activity, a SIPOC is a tool that
summarizes the inputs and outputs of one or more processes in a table
format. For anyone who has never seen this diagram, the acronym SIPOC
stands for Suppliers, Inputs, Process, Outputs, and Customers which form
the columns of the table. Over the next week, the team worked hard to
create the SIPOC Diagram (Figure 14.9), Tom explained. The team then
Distribute patients
evenly Too many high Distribute patients evenly
activity patients Need an IT solution
Computer is too slow
Develop written & log-in is extended
guidelines Too many patients at Non-Emergency
one time Consultants
Not enough
doctors in ED notified from
Work method inpatient floor
variation
Dr’s stopping Develop written
work early guidelines
Pull from other
EKG to ED
Not enough human units when busy
Exam Room Registration Develop written
resources (nurses, etc.) Table Faster process delay guidelines
No shift overlap with

Drs (Hand-off)
Admitted Patient Empower staff to
Not using ATU Delay inform attending Dr.
appropriateky
Review ATU
authorization Seeing non- Need a
emergency screening
Delay due to CT patients in ED process
transport to & from
Add
Scribes
Call-ins only Talk to Mid-

talking to doctors levels
Charting & Too many Too many interruptions during
entering orders procedures the day (e.g. phone calls)
Hospitalists
to notify
consultants
FIGURE 14.8
Completed Interference Diagram.
FIGURE 14.9
Completed SIPOC diagram.
created a series of process maps and did an excellent job of analyzing this
important process and they were able to remove much of the waste con-
tained within it. But the real improvement came in the overall potential
time to complete this procedure, which had a significantly positive impact
on damage to patient’s heart muscles when they implemented their solu-
tions,” Tom explained.
Tom continued, “When all of their actions were completed, the results
they achieved impressed everyone at the hospital. The team decided to
send an email to me which included the results they had achieved and then
scheduled a conference call with me. I received the email and immediately
contacted the team at Saint Mary’s to discuss their results (Table 14.3).”
“I was the first to speak and I told them that I was amazed at how much
progress their team had made on this very important metric, D2B Time!
They were able to reduce the number of steps required from 69 down to
an amazing 42! That’s a 27-step reduction, but another really important
improvement is what has happened to the percentage of value-added steps
which increased from 38% to 69%! But the most important improvement
of all is the D2B cycle time which dropped from 66 minutes to 53 minutes!
And after learning about how important this time is to a patient’s heart
muscle, this 13-minute reduction is a fantastic accomplishment!” Tom
explained.
“In conclusion, I knew that my Board of Directors would be interested
in getting an update on Saint Mary’s Hospital, so I scheduled a trip to
Chicago for the next day. When I arrived, I drove my rental car to the hotel
and decided to put together a brief presentation that I would deliver to The
TABLE 14.3
D2B Metrics Review
Metric Before After Improvement
Total # of Steps 69 42 −27
% of Value-Added Steps 38% 60% 31%
# of Swim Lanes 16 15 −1
Total Cycle Time 66 minutes 53 minutes 13 minutes
# of Decisions 13 6 −7
# of Green Steps 26 29 3
# of Yellow Steps 16 10 −6
# of Red Steps 27 3 −24
TABLE 14.4
Metrics Review
Metric Metric Description Before After
Average Hospital Stay Time patients spend in hospital 4 days 2 days
Patient Wait Time Average wait time for services 2 hours 1 hour
Patient Satisfaction How patients feel about services 77% 95%
ER Wait Time Time patients wait to see doctor 1.5 hours 45 minutes
Readmission Rates Patient return after discharge 22% 8%
Board. In addition to the amazing work the team had done on D2B Time,
there had also been other teams working on improving the other metrics,
so I included some of them in my presentation to the Board. I put together
a before and after review of some of the more important metrics that were
part of the D2B improvement effort (Table 14.3),” Tom explained.
Tom completed his explanation by explaining that he had also put
together a before and after review of some of the more important metrics
that the hospital tracks (Table 14.4).
The Maximo Group reviewed these metrics and were amazed at the
improvement results that Saint Mary’s had achieved. Pete then asked,
“Tom, can we expect to see the same level of improvement that Saint
Mary’s achieved?” Tom replied, “Yes, and one metric not listed in this
table was Profit Margins, which sky-rocketed just like these metrics did!”
“I know I can speak for everyone here when I say, I am excited to get going
on our improvement effort!” Pete added. And with that comment, the ses-
sion ended.
“Tom, I have a question for you,” Pete said. “When will you be able to
come back and train our employees on Drum Buffer Rope?” he asked. “If
you can, we can arrange that training for later this week. Look at your
schedule and let me know,” Tom replied. “Will do Tom,” Pete replied and
with that Tom left.
15
More Training at Maximo
The next day, Tom received a voice mail from Pete Hallwell indicating
that his team would be available for training on Drum Buffer Rope on
Thursday morning. Tom called Pete back and confirmed that he was avail-
able for this training session on Thursday, so they set it up to begin at
8:00 Thursday morning. Tom spent the rest of the day putting together the
training materials for this session. On Thursday morning Tom arrived at
Maximo Health Center Complex was met by Pete Hallwell and the two
of them took the elevator to the seventh floor. As the two of them entered
the conference room, Tom could see the same familiar faces that had been
involved in most of his presentations in the past. Pete reintroduced Tom
and he began.
“Good morning everyone,” Tom said and everyone in unison said good
morning back to him. “As all of you know, I am here today to discuss the
Theory of Constraints scheduling system known as Drum Buffer Rope, or
DBR for short,” Tom explained. Tom continued, “In their book, The Goal,
Goldratt and Cox effectively use a story written in a novel format to walk
the reader through the steps necessary to move a manufacturing organi-
zation from the traditional manufacturing concepts to a facility managed
using the concepts of Drum-Buffer-Rope (DBR). And while Maximo is
not a manufacturing complex, the same principles and actions apply to
service industries, just like Maximo,” Tom explained.
“The thinking behind Drum Buffer Rope is really quite simple, but
mostly just logical. Thinking logically is nothing new, but it is not the
way most people think. The fundamental view of Drum Buffer Rope is
to focus on the system as a whole rather than only a single segment of the
system, at least until you have clearly identified the constraint. This idea
of looking at the global system is a major shift in the way systems have
197
previously been viewed and managed. Prior to global, systems thinking,

the pervasive point of view was, and still is in many companies, that any
systems improvement, at any location, would improve the overall system.
The idea being that the sum total of several isolated improvements would
somehow equal an improvement to the overall system. But such is not the
case. The effects of employing the ‘shotgun’ approach to systems manage-
ment can cause a series of devastating systemic effects,” Tom explained.
“Just to review, a system can be defined as a sequence of steps or pro-
cesses that are linked together to produce something as an end result.
With that definition in mind, it’s easy to understand how virtually every-
thing can be linked to some kind of a system,” Tom explained. Tom con-
tinued, “Engineering organizations have systems, banks have systems and
hospitals have systems. Almost anything you can think of is the product of
a system. By design, a system can be as small and unique as two processes
linked together, where the output of one process becomes the input for the
next process. On the other hand, systems can be very complex, with many
processes linked together, maybe even hundreds or more. Just because a
system is complex does not mean it can’t be improved, it just means it’s
complex, and that’s okay. Even in a system as simple as two linked pro-
cesses, one of those two processes could very well constrain the other one.
It’s just the nature of how things work,” Tom explained.
“If a systems constraint did not exist, then the system should, at least
theoretically, be able to produce at infinite capacity. But infinite capac-
ity is not a level that is ever achieved from any system, simply because
all systems are restricted, at some point in time, by some type of output
limitation. This limitation is usually determined by the presence of some
kind of system, capacity limit. No matter how good the system is, there
is still only so much it can do. Sooner or later whatever kind of system is
being analyzed, it will reach its maximum system capacity and be unable
to deliver more. If higher system outputs are required beyond the cur-
rent capacity, then it should be clear that the system must be changed,”
Tom explained.
“For years, organizations have dedicated considerable time and effort
to remove variation from their systems. The overall goal is to remove as
much variation as possible from the system. But, no matter how much
effort is extended, variation will still exist! If you were asked; how long
it takes you to get to work every day, your response might be something
like, ‘about thirty minutes.’ The instant you answer with the word ‘about,’
More Training at Maximo • 199
you have introduced variation into the system. You know that historically
speaking, some days you get to work in twenty-five minutes and yet other
days it can take thirty-five or forty minutes. In your ‘get to work’ system,
things can happen that will either speed up the process or slow it down,”
Tom continued.
“Variation exists in everything, but especially within any system. You
understand that some processes will produce at a faster or slower rate than
others, and this is the premise behind variation. Because of variation, the
output from a system will not always be predictable, but rather it will oper-
ate within a range that constantly changes. This variable range is known as
statistical fluctuation, and it exists in every system. It’s important to under-
stand that you cannot make variation go away. The theory and practice of
Six Sigma has pioneered the race to variation reduction,” Tom stated.
Tom continued, “But even with the most valiant efforts of time and
money, not all variation can be removed. You can reduce the amount
and the severity of variation, but it will still exist in some form. Once you
understand that variation is a constant variable in any system, it’s easier to
understand that at some point, you will reach the minimum variation that
is controllable in the system, and any efforts to reduce variation beyond
that point are generally fruitless. Perhaps, instead of spending so much
time and effort on techniques to remove variation, the focus should really
be on techniques to manage variation.”
“When viewing a system through the eyes of Drum Buffer Rope, it
becomes quickly apparent that improving every step in the process is
not what is required, nor will the sum total of all of those discrete system
improvements equal an improved overall system. When conducting a full
systems analysis, with the intent of implementing Drum Buffer Rope, an
important consideration to know and understand is the location of the
system constraint, or the slowest operation,” Tom explained. “In Goldratt’s
Five Focusing Steps, this is Step 1, identify the system constraint. Once
you know where the slowest operation resides, you now have the informa-
tion necessary to know where to focus your attention within the system.
Why is it important to understand where the slowest operation is? Because
this is the location that controls and determines the output for your entire
system. In essence, the entire system will produce no faster than the slow-
est operation can produce,” Tom continued.
“With the constraining operation identified, you have collectively quar-
antined the drumbeat for your entire system. Knowing the drumbeat is of
strategic importance to implement and gain any system improvements.

The drum provides you with the necessary information of knowing where
to focus your improvement efforts. Historically, many organizations con-
duct many improvement projects, because there is a belief that every orga-
nization and every process should strive for improvement. However, the
sum of many efforts does not always equal what is good for the system as
a whole,” Tom explained.
He continued, “The problem with this type of thinking is it is a totally
unfocused shotgun approach to solving the problem. In effect, it presents
an improvement policy that states: if I select a wide enough range, then I
should hit the target, or at least come close to the target. When you take
the shotgun approach you might hit everything a little bit, but miss the full
impact required to make real change and improvements. If your shotgun
approach includes trying to improve non-constraints, as most do, then the
system as a whole gains nothing!”
“The improvement of non-constraints in isolation of the entire system,
without a comprehensive analysis, is just a way of treating the symptoms
and not the real issue, which is the system constraint. Without the ability
and the accurate information necessary to focus on the real issues, the
disease goes merrily on. Improvement of non-constraints is a noble ges-
ture, but one that yields little, if any, real improvements. Every process
within a system does not need to be improved at the same time, because
some system processes are more important than others. Without knowing
where your constraint resides, your efforts to improve will be unfocused
and consequently worthless, serving only to consume large amounts of
money, resources, and time,” Tom explained.
“Once you have identified the systems constraint, it must be subjected to
the red-carpet treatment. Nothing in your system is more important than
the constraint! Once you have this information, you must decide how to
best manage the constraint. If the output from your entire system depends
solely on the output of the constraint, then wouldn’t you think it merits spe-
cial attention? One of those considerations is to exploit the constraint, which
is Step 2 of the Five Focusing Steps. Exploitation simply means that you
evaluate the process to get the most out the constraint activity,” Tom stated.
He continued his explanation,
“Rarely is a constraint being utilized at, or near, the maximum that it
can do. The exploitation effort simply means looking for things that the
constraints can stop doing. This could be an excellent opportunity to
employ the Interference Diagram (ID) to define the interferences that stop
you from getting more from your constraint. You may want to implement
Lean concepts to reduce waste or Six Sigma to better control variation
and quality. It might also mean taking actions as simple as keeping your
process busy during breaks and lunch time, or perhaps implementing a
second shift or a third shift, or even off-loading work to non-constrained
processes or resources.”
“Exploitation does not mean buying a new machine or adding more
resources, at least not yet. It simply means that you need to find ways to get
more out of the current process than you are currently getting. There is a
very high probability that during the exploitation exercise, the constraint
capacity could be improved above and beyond the capacity of the next con-
straint in the system. If such is the case, then you simply go back to Step 1
and redefine the constraint. In a normal improvement effort, this repeating
cycle between Steps 1 and 2 might be completed several times before the
system has stabilized. When the system becomes stable, then go to Step 3
of the Five Focusing Steps and implement the subordination rule to syn-
chronize your patient flow. The end result is to stabilize and synchronize
the system, and then focus on the constraint. Let the non-constraints work
as required to serve sufficient quantities of patients to keep the constraint
busy,” Tom explained. He then added, “I know I’m giving a very detailed
explanation, but it’s important for you to have a complete explanation, if
you are to successfully implement Drum Buffer Rope.”
And with that comment, Tom continued, “The second consideration is
to make sure the constraints are busy all the time. In other words, never
let your constraint run out of work to do. If the constraint stops or slows
down, then the entire system will stop or slow down. The best way to
accomplish this objective is to make sure there are always patients in the
queue in front of your system constraint. In other words, create a buffer
of patients in front of the constraint. The entire system output has total
dependency on the constraint output, and constraint output is directly
proportional to system output. Think in terms of the right amount of
work, in the right location and at the right time.”
“The system constraint not only determines the number of patients you
can treat, but it also determines the correct amount of patient inventory
that should be maintained in the system. The correct inventory level of
patients will be reached almost by default when system subordination is
actively pursued and implemented,” Tom explained.
“The rope is actually a mechanism that controls two different functions.

First, it is the mechanism that determines how much and when to release
new patients into your system. The most common practice is to tie an arti-
ficial ‘rope’ from the constraint operation back to the front of the line.
When the constraint produces and completes one patient treatment, and
passes it to the next operation, then the rope is pulled to signal the front
end of the line to release one more patient into the system. The rope sig-
nal is equal to the output of the constraint operation, no more and no
less. This release mechanism, tied to the drumbeat of the constraint, will
allow for a synchronized patient flow and a smooth transition of patients
through the system,” Tom explained.
Tom continued, “The second function of the rope is to initiate and main-
tain subordination for all other processes in the line. By default, following
the cadence of the rope release signal causes subordination to the remain-
ing non-constraint process steps to be executed. The non-constraint pro-
cess steps can only work on what has been released to work on. By releasing
work only to the drumbeat of the constraint, all other operations will be
held in check to the rule of subordination. Even if the non-constraints can
do more work, they are restricted by subordination and only allowed to
work on patient work required by the constraint.”
“The systems inventory not only includes the patients located at the buf-
fer, but also the cumulative total of patients at other process locations as
well. Bad things can and do happen after processing patients at the con-
straint. There is also a buffer referred to as a shipping buffer, which in
a hospital environment would be completing treatment and release of
patients. The constraint buffer provides the necessary protection in front
of the constraint, and the shipping buffer provides protection after the
constraint. The shipping buffer is just a mechanism to absorb and manage
the inevitable variation that will occur. Buffer sizing at these two locations
is a variable, but you do need to start with something. Consider, as a start-
ing point for the buffer at the drum (the constraint) location to be about
one and a half patients or whatever units of time you are measuring,” Tom
explained.
“For example, if your constraints can treat ten patients in one day, then
the buffer should be set at fifteen units (or 10 × 1.5 = 15). You may decide
in time that the buffer is too large or too small, so you can adjust it either
up or down depending on the need. The shipping buffer could be three
or four hours or less depending on the speed of patients through your
system. It doesn’t need to be necessarily large in quantity or long in time. It

just needs to be sufficient to protect against variation after the constraint.
It’s also important to consider your shipping buffer time in your schedul-
ing calculation, in order to determine the correct release time into the sys-
tem for on-time completion of patient treatment. If you watch your buffer
locations carefully, you can make good decisions to increase or decrease
them based on some supportive historical data. If your buffer is constantly
on the high end, then reduce it. If it is constantly on the low end, then
increase it. Apply the rule of common sense to determine the correct buf-
fer,” Tom stated.
Tom continued, “When you know and understand the constraint loca-
tion, and you buffer the work activity, and you send the correct release
signal to the front of the line to release more patients, then you have in
essence implemented a system of synchronized flow,” Tom said and loaded
the following figures (Figure 15.1) onto the screen, which defines the DBR
steps and integration.
“But wait!” Tom exclaimed. “With a synchronized flow, and actively
implementing system subordination, there is a very high probabil-
ity that the performance metric of efficiency will deteriorate quickly, at
DBR = Synchronized Patient Flow
Identify the systems

constraint(s)
and maximize
throughput by defining the
“Drum” schedule.
Drum
Determine the
appropriate “Buffer” in
front of the constraint
operations.
Buffer
Finally, “Rope” back to the
front of the line to synchronize
patientreleaseto non-
constrained resources to the
‘drum beat’ of the constraint.
Rope
FIGURE 15.1
DBR’s steps and flow.
least for some period of time. It will manifest an unacceptable efficiency

performance metric that is considered undesirable by many companies.
The new mantra will be to ‘stop the synchronization nonsense and improve
the efficiency.’ Be careful what you consider to be nonsense. In this case,
the real nonsense is the efficiency metric. When the synchronized flow
is implemented, then excess capacity at non-constraints will be quickly
exposed, at least for some period of time. Based on the efficiency metrics
it will appear that everything is falling apart, and you are headed in the
wrong direction. But through time, the new system reality and thinking
will expose new evidence about what is actually happening in the system.
The new reality is this,” Tom explained and loaded a new overhead on the
screen (Figure 15.2).
Tom then said, “It’s important to remember that constraints can exist
in one of two types. The first type is the internal constraint, which simply
means that the market demand for your services is higher than the capac-
ity of your system to deliver it. Future patients want much more of what
you offer then what you can deliver. It’s a good situation for your hospitals
to be in, but only up to a certain point. If you can’t figure out a way to meet
patient demand, then your competitors will usually figure out a way to do
it for you. This situation is ideal for implementing traditional Drum Buffer
Rope to meet the demand and capture more patients.”
He continued, “The second type of constraint is an external constraint.
In this case the demand for your services is less than your ability to deliver
it. The market is buying less of your services, in some case much less than
you can deliver. This is a less desirable situation, but one that nonetheless
can exist. This situation usually means that there is not an internal con-
straint to contend with. If this is the case, then it is somewhat improbable
that traditional DBR will provide an acceptable answer. Instead, in this
situation, a modified or simplified form of DBR might be more practical.
This form is referred to as Simplified DBR, or S-DBR.”
Throughput rates will increase.
Lead times through the system will be reduced.
Work-in-process inventory will go down.
On-time delivery will improve.
FIGURE 15.2
The new reality from DBR.
“The concept of S-DBR was developed by Bill Dettmer and Eli

Schragenheim, and is defined in their book [1] Manufacturing at Warp
Speed. The S-DBR concept assumes that the constraint is external to your
system and resides in the market segment. Customers aren’t buying as
much of your service that you can deliver, or there is significant varia-
tion in market demand, which can cause the constraint to float back and
forth between internal to external locations. In this situation, the con-
straint becomes interactive by moving between the market constraint
(external) and the production constraint (internal). This oscillating cycle
between internal and external constraints can cause its own brand of
chaos in deciding which market segments should be pursued and which
ones might be better left alone. Either way it is a decision that must be dealt
with,” Tom explained.
“In the scenario of an external constraint, the drum is determined and
activated only when the system has firm service requests in place. The
rope is now determined by the service requests that actually exist, which
are released based on service due dates. If the service requests exceed the
capacity of the system, then the constraint has become internal and differ-
ent actions must be taken. This also assumes that the internal constraint
will exist only for short periods of time and can be overcome by actions
like implementing additional shifts or short-term overtime. Dettmer and
Schragenheim have argued, quite successfully, that the market is the true
constraint of any system,” Tom explained.
“There is another unique situation that can require the implementation
of a third type of DBR, known as Multiple-Drum-Buffer-Rope (M-DBR).
The situation for M-DBR is created when a single buffer location is required
to supply services to more than one treatment center, and each treatment
center has its own drum that is keeping pace at a different rhythm,” Tom
explained as he loaded a new overhead onto his screen (Figure 15.3) which
demonstrates an example of an M-DBR configuration.
Tom then said, “Even with all the respectable improvements that can
be achieved with a synchronized flow using traditional DBR, S-DBR or
even M-DBR, there can also be some problems associated with achieve-
ment, especially with traditional DBR. It’s not a bad problem, just one
you need to be aware of. When you follow Goldratt’s Five Focusing Steps,
it is possible during Step 2 (the exploitation step) that a constraint can
be improved to the point that it is no longer the constraint, and at times
this can happen very quickly. When it does happen, you have effectively
5
5
5
DRUM
4
4
4
3
3
3
Rope
Rope
2
2
Rope
Rope
1
1
1
Rope
BUFFER Location for all 5 lines
Single Distribution point
FIGURE 15.3
M-DBR model.
‘rolled’ the constraint to a new location, which means you only finished
Step 2 before it is now time to go back to Step 1 again. The original system
process that was considered to be the constraint today is no longer the
constraint tomorrow. These types of rapid system improvements can obvi-
ously cause some problems.”
“When a new constraint is identified in the system, then the system
effectively has a new drumbeat. When that happens, you also have to move
the buffer location to reside in front of the new constraint, and you have
to move the rope signal from this new location back to the release point
of patients at the front of the line. In some systems it might be possible to
roll the constraint several times to several different locations before an
acceptable level of system stability is achieved. This fast action of fixing
and rolling the constraint can and will cause a certain amount of chaos in
a system. Hospital employees will quickly become confused about ‘Where
is the constraint today?’ Improvements can happen so fast that the nega-
tive effects of change will outweigh the positive effects of improvement,”
Tom explained.
Traditional Drum Buffer Rope
Patient
Patient Step 1 Step 2 Step 3 Step 4
Treatment
Entry 10 Minutes 15 Minutes 30 Minutes 15 Minutes
Complete
Drum
Rope
Green Green Green
Yellow Yellow Yellow

Rope
Rope Red Red Red
Raw Mat’l Constraint Shipping

Buffer Buffer Buffer
FIGURE 15.4
Traditional Drum Buffer Rope.
“So, in conclusion, I want to show you a simple graphic of traditional

Drum Buffer Rope,” he said as he loaded a new Power Point slide on his
screen (Figure 15.4). “As we progress through our improvement efforts at
Maximo Health Center Complex, the use of DBR will have many appli-
cations,” Tom explained. “I hope today’s session has provided you with
numerous ideas for the application of DBR,” Tom explained and then
asked if there were any questions of comments.
Pete Hallwell was the first to respond and said, “Tom, for me I can see
numerous potential applications for Drum Buffer Rope within our com-
plex of hospitals. For example, at Maximo Oncology Hospital, where we
specialize in cancer treatments, I can see DBR as a way to treat patients
at a much faster rate, thus allowing us to serve the public much better.
Patricia Smith, from Maximo Surgical Hospital, specializing in surgical
operations, was next to speak and said, “I agree with Pete, and I can see
us increasing the number of surgical operations, which will have a pro-
nounced impact on revenue and profitability.” Tom Jones, from Maximo
Children’s Hospital, specializing in children’s ailments, then said, “At our
hospital, using Drum Buffer Rope, I can see us treating many more chil-
dren using the same resources!” When nobody else had comments, Tom
declared this session to be over.
Pete stayed in the conference room, and when everyone had departed,
he said to Tom, “Tom, that was an excellent session and I can’t wait to get
started with our improvement efforts. I realize we have already begun with
the development of our Goal Tree, but I’m talking about the actual imple-
mentation of the tools and methods you’ve given us. So, how soon can you
come back and get us started?” “I think we should be able to begin serious
improvement efforts next week, say Tuesday, if that works for you Pete?”
Tom asked. “Sounds great to me Tom, see you then!” Pete exclaimed. “Oh,
and one other thing Pete, when we implement Drum Buffer Rope, we’ll do
it in conjunction with Theory of Constraints’ Replenishment Solution to
maximize your results,” Tom said. “Can’t wait,” Pete replied.
REFERENCE
1. Bill Dettmer and Eli Schragenheim. 2001. Manufactruing at Warp Speed. Boca
Raton, FL: St. Lucie Press.
16
Simpson Water Heaters’ Goal Tree
Before leaving from Simpson Water Heaters the last time, Tom had
instructed Matt to lead an effort for Simpson to create their own Goal
Tree. Simpson’s team had done that very thing, so Matt decided to call
Tom and schedule his next visit. He called Tom, and they set up a meeting
for the day after tomorrow.
Tom arrived at Simpson Water Heaters, met Matt in the lobby, and the
two of them walked to the conference room. The conference room was
full, and Tom could tell by the look on people’s faces that they were anx-
ious to begin this session. Tom looked at the projection on the screen, and
he could see a completed Goal Tree. Tom noticed that it was very similar
to the one he had presented to them when he taught them how to create a
Goal Tree, but he decided not to say anything. Matt reintroduced Tom to
the group and began explaining the Goal Tree to Tom. “What you see on
the screen is our final Goal Tree,” Matt said. “The first thing we did was to
review our performance metrics,” he explained as he loaded an overhead
onto the screen (Table 16.1) with Simpson’s metrics highlighted.
“As you know Tom, our results have been pathetic and we have been
given an ultimatum to ‘fix’ them rapidly,” Matt said. If you look at each
metric individually, they are clearly the worst in the entire portfolio of
companies. Our % On-Time Delivery is only 68.1%, while our % Scrap and
Rework are 8.8% and 15.6%, respectively. Our Stock-Out % is a miserable
19.1%, and our Efficiency % is at 94.7%, which we all know now that this
is not a good place to be. And finally, our % Profit Margins are horrific at
negative 1.2%. With all of these metrics in mind, we created the Goal Tree
that was on the screen when you walked in (Figure 16.1).
“As you can see with most of entities in our Goal Tree, we have addressed
our performance metrics in some way. For example, we have set our
209
TABLE 16.1
Metrics Review
%
Company On-Time % % Stock-Out Efficiency % Profit
Name Delivery Scrap Rework % % Margins
Tamsen Auto 68.9 4.8 10.1 11.2 95.4 5.7
Parts
Simpson Water 68.1 8.8 15.6 19.1 94.7 −1.2
Heaters
Watson Rubber 70.9 6.8 8.8 9.9 88.7 7.8
Articles
Jackson 75.4 4.9 14.2 13.4 89.9 9.1
Electronics

NP = >25%
In order to have...
I must have……….. Maximum Minimum Operang Minimum

Crical Success Factors Throughput Expenses Inventory
In order to have... T > 20% OE < 10% I < 1 Day
Opmized
Manpower
Minimum WIP
Maximum Minimum Levels
Necessary Condions & Finished
Revenue TVC Goods
In order to have... R > 30% TVC < 10%
Minimum Minimum Synchronize

Lower Level NC’s Scrap < 0.2% Overme Producon Constraint
Rework < 1.0% <4% & Demand
Sasfied Minimum Raw
Market Demand
Orders up > 15%
CSI > 99%
Compeve Price
On-Time Point
Highest Quality High Level of Effecve Sales &
Delivery
RFT > 99% Customer Service Markeng
> 99 %
FIGURE 16.1
Simpson Water Heaters, Goal Tree.
targets for scrap at less than 0.2% and our rework at less than 1.0%. We
also address our on-time delivery by setting our target at greater than 99%.
Our critical success factors are all tied to what we learned about Throughput
Accounting, with some of the necessary conditions tied to what you taught
us about Theory of Constraints replenishment method and Drum Buffer
Rope,” Matt explained.
Simpson Water Heaters’ Goal Tree • 211
“From my perspective, it looks like you did a very good job, but my con-
cern is that you might have to reduce some of your targets, simply because
some of them may be very difficult to achieve,” Tom said. “It is our belief
that, if we are going to improve our performance metric values, then we
had to set targets that were way off from where they are now,” Matt replied.
“Okay, so your next activity would be to assess how you stand with each
of your entities,” Tom said. “We have already done that Tom,” and Matt
loaded another overhead on the screen (Figure 16.2).
“At the base of the Goal Tree, you will see three different shades with
each one having a different meaning, in that they are either in place and
functioning well, in place, but not functioning well, or either they are not
in place or they are but they’re not functioning,” Matt explained. Tom
replied, “Very well done everyone, but if I’m seeing correctly, you only
have one that is in place and functioning well?” “Yes, that is correct,”
Matt replied. “And to make matters worse, we only have three entities
that are in place, but not functioning well. The bulk of our entities are
Simpson’s Goal Tree

NP = >25%
In order to have...
I must have……….. Maximum Minimum Operang Minimum

Crical Success Factors Throughput Expenses Inventory
Opmized
Manpower Minimum WIP
Maximum Minimum & Finished
Necessary Condions Levels
Revenue TVC Goods

Lower Level NC’s Scrap < 0.2% Overme Producon Constraint
Sasfied Minimum Raw
Market Demand
Orders up > 15%
CSI > 99%
Compeve Price
On-Time Point
Highest Quality High Level of Effecve Sales &
Delivery
RFT > 99% Customer Service Markeng
> 99 %

not Functioning
FIGURE 16.2
Assessed Goal Tree.
mostly either not in place or are in place, but are not functioning,” Matt
added. “It’s very clear to me that if your assessment is correct, Simpson
has an unbelievable amount of work ahead,” Tom replied. “We agree, and
here’s what we think we need to do,” Matt said as he loaded another over-
head (Figure 16.3) onto the screen.
Matt began again, “As you can see on this version of our Goal Tree, we
have added four different initiatives. One of the first things we intend to
do is to use Throughput Accounting to make all of our real time financial
decisions, which included eliminating the metric efficiency in our non-
constraint process steps.” “That’s a good move Matt,” Tom said. “We’ve
also decided, based upon your training, that we should implement both
Drum Buffer Rope and Theory of Constraints’ Replenishment Solution
in order to synchronize our production constraint with the customer
demand for our products,” Matt explained. “That’s another really good
idea Matt,” Tom responded.

NP = >25%
In order to have...
I must have……….. Maximum Minimum Operating Minimum

Optimized
Necessary Conditions Levels
Revenue TVC Goods
Minimum Minimum
Lower Level NC’s Scrap < 0.2% Overtime Synchronize Production
Rework < 1.0% <4% Constraint & Demand
Satisfied Minimum Raw

Market Demand
Customers Mat’l Costs Implement Implement Theory
Orders up > 15%
CSI > 99% DBR of Constraints
Scheduling Replenishment
Solution
Competitive Price
On-Time Point
Highest Quality High Level of Effective Sales &
Delivery
RFT > 99% Customer Service Marketing
> 99 %
Implement Implement
Throughput Integrated
Accounting UIC
FIGURE 16.3
Goal Tree with improvement initiatives.
“And finally, which I believe is the key to our success is that we intend
to implement your Ultimate Improvement Cycle, and it will be one of the
first initiatives that we will undertake,” Matt added. “Another very good
effort Matt,” Tom responded. “Have you given any thought to what these
initiatives will do to change the status of your Goal Tree?” Tom asked.
Matt responded and loaded another figure onto his screen (Figure 16.4).
Matt continued, “We firmly believe that with these four improvement
initiatives implemented correctly, we will have an amazing impact on
all of our Goat Tree entities. In fact, we believe with just these four
improvement initiatives, all of our Goal Tree entities will have the
results that you see here on the screen. I know what you’re probably
thinking, maybe something like, these guys are crazy, but in our hearts,
based upon how you explained all of these improvement ideas, we will
drive our performance metrics to a level that we had never dreamed
were possible.” Tom looked in disbelief and simply said, “I do hope you
are right, but I must admit, I have never seen improvement predictions
that have ever come close to yours!”

NP = >25%
In order to have...
Critical Success Factors Maximum Minimum Operating Minimum
Throughput Expenses Inventory
In order to have...
T > 20% OE < 10% I < 1 Day
Optimized
Necessary Conditions Maximum Minimum
Levels & Finished
In order to have... Revenue TVC Goods
R > 30% TVC < 10%
Lower Level NC’s Minimum Minimum

Scrap < 0.2% Overtime Synchronize Production
Satisfied Market Demand Minimum Raw

Customers Orders up > 15% Mat’l Costs Implement Implement Theory
Solution
Competitive Price
On-Time Point
Delivery
> 99 %
In place – Functioning well
Implement Implement In place, not Functioning well

Throughput Integrated Not In place or in place but
Accounting UIC not Functioning
FIGURE 16.4
Future Goal Tree assessment.
TABLE 16.2
Future Performance Metric Predictions
%
Tamsen Auto 68.9 4.8 10.1 11.2 95.4 5.7
Parts
Simpson Water 98.5 0.5 1.4 0.5 63,7 20.7
Heaters
Watson Rubber 70.9 6.8 8.8 9.9 88.7 7.8
Articles
Jackson 75.4 4.9 14.2 13.4 89.9 9.1
Electronics
“One other thing I want to show you Tom, is our predictions on what
we believe will happen to the levels of our performance metrics,” Matt
added and loaded a new table on his screen (Table 16.2) with the new met-
rics highlighted. “As you can see Tom, we believe that our performance
metrics will reach new and acceptable levels of performance which should
make our Board of Directors very happy,” Matt explained.
“So, my question for you Tom, is how soon can we get started on these
implementations?” Matt asked. Tom responded and said, “I’d like to get
started as soon as possible, so you let me know when you’re ready.” “I can
assure you that we are ready just as soon as you have the time to begin our
journey,” Matt replied. “Okay, let’s start today!” Tom exclaimed. “Today?”
Matt said somewhat in disbelief. “Yes, let’s go and discuss your first ini-
tiative which you said was to implement Throughput Accounting,” Tom
replied. And with that, this session ended.
Tom and Matt walked to the office of the Nancy Watson, the Accounting
Manager, knocked on her door and entered. “Nancy, we’re here to begin
our company transformation,” Matt said. “Why are you starting here
Tom, why with me?” Nancy asked. Matt responded and said, “The reason
is actually a very simple one Nancy. Many of our improvement decisions
will be financial in nature and since you are our Accounting Manager, I
decided to start with you.” Nancy surprised Matt and Tom, and said, “I
haven’t said anything to you Tom, but I’ve been working on our account-
ing system and have already begun making the necessary changes to
it.” “What kind of changes have you made Nancy?” Tom asked. “I got to
thinking about our current accounting system and decided that what we
needed was an effective way to judge the potential impact of our opera-
tional decisions on profitability. I decided that would include thing like
decisions about p urchasing, inventory, pricing, staffing, production meth-
ods, and a host of other things. I also decided that we also needed a way
to monitor the actual daily effect of those decisions using available opera-
tions data,” Nancy explained.
She continued, “I went to the library to find information about Through
put Accounting and discovered that Throughput Accounting will help
leaders evaluate the impact of operational decisions on profitability before
they are made. I also discovered that Throughput Accounting will help
managers monitor the actual impact of each decision on profitability, so
adjustments can be made. The bottom line is that it is simply a way to help
managers make the best daily operational decisions in order to achieve
improved business performance.”
“After our training session, I sat down at my computer and created a
simple Throughput Accounting file in Excel in order to analyze the effect
of possible decisions on Throughput, ROI and Net Profit, using our exist-
ing data. I identified and evaluated several possible operational decisions
for return to our positive profitability which included several different
ideas. A couple of my ideas were to raise our prices selectively on some
items with low Throughput values and also to aggressively resolve delin-
quent accounts, to quickly generate Throughput,” Nancy explained.
Nancy then said, “Perhaps the greatest change was a shift in thinking that
affected virtually every aspect of our business. In essence, I shifted away
from my normal focus on revenue and cost-cutting and began focusing on
the Throughput ‘margin’ contributed by revenue generation. Needless to
say, I am excited about shifting away from Cost Accounting and instead,
gaining more insight into all that Throughput Accounting has to offer.”
The three of them met for several hours discussing what needed to
happen to convert their real-time decision-making to a Throughput
Accounting methodology. When they were finished, Tom spoke up and
said, “I want to thank you Nancy for the effort you have put forth so far by
embracing the concepts of Throughput Accounting. All three of us under-
stand that we must generate reports based on the requirements of GAAP,
but for real time decision making, Throughput Accounting is the method
of choice.” Tom then said, “Nancy, I’d like you to put together a perfor-
mance metric report, based upon what Simpson has done so far.” “I’ll get
to work on that right away Tom,” she replied.
Tom and Matt left Nancy’s office and decided to go to the break room
to have a cup of coffee and chat about the next steps at Simpson Water
Heaters. Tom then asked Matt an important question, “Matt, have you
done any training yet on the Theory of Constraints and the Ultimate
Improvement Cycle?” Matt replied, “Actually I have held training sessions
for my production managers and supervisors on both.” “And how was it
received Matt?” Tom asked. “Based upon the reaction I received at the end
of the training session, I would say it was very well received,” Matt replied.
“And have you implemented anything yet?” Tom asked. “One of the first
things we did was to stop measuring efficiencies in our non-constraints
and focused on increasing the efficiency of our constraint operation,” Matt
replied. “Let me rephrase that Tom. We are still measuring efficiencies in
our non-constraints, but the only one we react to is the efficiency of our
constraint,” Matt added. “What else Matt?” Tom asked.
“I think I told you that prior to me coming to Simpson Water Heaters, the
company had tried both Lean and Six Sigma,” Matt explained. “Yes, you did
tell me that,” Tom replied. “Well, we moved our efforts from non-constraints
to primarily our constraint operation,” Matt explained. “Have you seen any
results yet Matt?” Tom asked. “One of the biggest changes we’ve seen is the
drastic reduction in work-in-process inventory along with a major improve-
ment in flow,” Matt replied. “We’ve been doing this for a couple of weeks,
and at the end of each week, the flow has improved,” he added.
Tom and Matt continued talking and several hours later, Nancy came to
Matt’s office and said she had the preliminary performance metrics report
ready. “Great Nancy! Let’s have a look at it,” Matt said. Nancy opened her
laptop and loaded her Performance Metrics table on her screen (Table 16.3).
Nancy began explaining her new table and said, “As you can see, we’ve had
TABLE 16.3
Simpson’s Performance Metrics
%
Simpson Water 68.1 8.8 15.6 19.1 94.7 −1.2
Heaters Before
Simpson Water 75.2 4.8 10.4 13.7 76.3 +4.1
Heaters After
improvements on every metric.” The one metric that stood out for Tom
was the drop in Efficiency % as it dropped from 94.7% down to 76.3%! For
Matt, the most important metric was the change in profit margins which
had increased from a negative 1.2% to a positive 4.1%.
Tom then said, “This is a very good start for Simpson Water Heaters,
and you’ve only just begun your improvement effort!” Matt then said,
“What I’d like to do next is to implement the Theory of Constraints
Replenishment Solution and Drum Buffer Rope. I think that by combin-
ing these two together, we’ll see a jump in our % On-Time Delivery, a
dramatic reduction in our Stock-Out %, and a considerable jump in our %
Profit Margins. How soon can we begin these two initiatives Tom?”
Tom responded to Matt’s question and said, “Let’s try to begin these
two initiatives the day after tomorrow?” “Why not tomorrow Tom?” Matt
asked. “I have to travel to Chicago to meet with your Board of Directors
and give them an update tomorrow,” Tom replied. “What do you sug-
gest that I do until then Tom?” Matt asked. “What I would do is assem-
ble your key managers, like Greg Thompson, your Production Manager,
Ted Russell, your Purchasing Manager, Cynthia Eberstein, your Quality
Manager, plus your production supervisors, and have a review session
on the Replenishment Solution,” Tom replied. “This will be a big change,
especially for Ted, simply because you will no longer be buying parts and
materials in bulk anymore,” Tom added. “Okay, I’ll set that up and I’ll see
you in a couple of days,” Matt replied.
Tom then departed Simpson Water Heaters and drove home. Tom knew
he had to put together a summary of the key performance metrics for the
Board of Directors to review, so once he arrived home, he began mak-
ing phone calls to each of the other three portfolio companies. He first
called Tamsen Auto Parts and spoke with Bill Johnson, the plant manager.
He explained that he needed Bill to put together an update to the six key
performance metrics and send it to him. He also called Watson’s Rubber
Articles and Jackson Electronics, and gave them the same requirement.
All three of the plant managers agreed to have the results back to him by
the end of the day.
Around 9:00 pm, Tom had received input from all three of the port-
folio companies, so Tom decided to create a simple table demonstrating
the before and after results for each of the six key performance metrics
(Table 16.4).
TABLE 16.4
Before and After Performance Metrics
%
Tamsen Auto 68.9 4.8 10.1 11.2 95.4 +5.7
Parts Before
Tamsen Auto 73.1 3.9 8.8 9.0 81.2 + 9.2
Parts After
Simpson Water 68.1 8.8 15.6 19.1 94.7 -1.2
Heaters
Before
Simpson Water 75.2 4.8 10.4 13.7 76.3 +4.1
Heaters After
Watson Rubber 70.9 6.8 8.8 9.9 88.7 +7.8
Articles
Before
Watson Rubber 82.2 4.1 6.3 5.2 71.1 +10.1
Articles After
Jackson 75.4 4.9 14.2 13.4 89.9 9.1
Electronics
Before
Jackson 79.9 3.5 9.1 8.2 70.3 +11.6
Electronics
After
Tom was happy with the results that he saw with each of the four dif-
ferent companies. Tom was especially happy with the results he saw for
Tamsen Auto Parts, Watson Rubber Articles, and Jackson Electronics,
simply because most of his efforts with these three companies was via
phone and the internet. With the results in place, Tom went to bed.
17
The Board Meeting
Bright and early the next morning, Tom showered, ate breakfast, and drove
to the Pittsburgh Airport for his trip to Chicago and his meeting with
the Board of Directors. After an uneventful flight to Chicago, Tom picked
up his rental car and drove to the Board’s headquarters. He checked in
with security, and the guard called Jonathan Briggs, the Board Chairman.
Jonathan arrived shortly thereafter, and the two of them took the elevator
to the conference room. Jonathan introduced Tom to the rest of the Board
members, and Jonathan began.
“I want to first thank everyone for inviting me to come to Chicago to
give you an update on the four portfolio companies,” Tom said. “While
I haven’t been working with these four companies very long, I think the
results you will see shortly are demonstrating improvements to the six
key performance metrics we agreed we would track. Much of my time has
been spent at Simpson Water Heaters, simply because of their negative
profit margins. For the other three companies, most of my efforts have
been through telephone calls and internet briefings. As you will see, we
have actually seen improvements begins already, even after such a short
amount of time,” Tom explained, and with that, he loaded his metrics
table onto the screen (Table 17.1).
Tom began again, “As I said, much of my time has been spent with
Simpson Water Heaters and as you can see, their percent profits have
improved from a negative 1.2% to a positive 4.1%. I might add that on my
next update, I fully expect that their results will have improved signifi-
cantly. I say this because the man you hired to run this company, Matt
Maloney, was a great hire. He has truly grasped the improvement effort
at Simpson Water Heaters, and I am very confident that he will take this
company to levels of profitability not seen before.”
219
TABLE 17.1
Before and After Performance Metrics
%
Tamsen Auto 68.9 4.8 10.1 11.2 95.4 +5.7
Parts Before
Tamsen Auto 73.1 3.9 8.8 9.0 81.2 + 9.2
Parts After
Simpson Water 68.1 8.8 15.6 19.1 94.7 −1.2
Heaters
Before
Simpson Water 75.2 4.8 10.4 13.7 76.3 +4.1
Heaters After
Watson Rubber 70.9 6.8 8.8 9.9 88.7 +7.8
Articles
Before
Watson Rubber 82.2 4.1 6.3 5.2 71.1 +10.1
Articles After
Jackson 75.4 4.9 14.2 13.4 89.9 9.1
Electronics
Before
Jackson 79.9 3.5 9.1 8.2 70.3 +11.6
Electronics
After
Jonathan and the other members of the Board of Directors reviewed the
results displayed in Tom’s table, and Jonathan was the first to comment.
“First of all, I am very happy to see that Simpson Water Heaters is no lon-
ger losing money,” he said. “But I’m equally happy to see that both Watson
Rubber Articles and Jackson Electronics are both demonstrating double
digit profit margins,” he explained. “While I fully expected to see this level
of results, I just did not expect to see them so quickly!” He exclaimed.
“Well done so far Tom!” He added.
Jonathan then asked Tom what he had already helped these portfolio
companies do and Tom responded. “One of the first things I did was to
hold a general training session on how to prepare a Goal Tree and then use
it to create their own improvement plans,” he explained. “As you know,
I’m a huge fan of the Goal Tree Tom, so I think that was the right thing
to start with,” Jonathan said. “Do you happen to have Simpson Water
Heater’s Goal Tree with you Tom?” Jonathan asked. “I do, would you like
The Board Meeting • 221
to see it?” Tom asked. “Yes, I absolutely would Tom,” Jonathan responded.

Tom looked through the files on his computer, located the Goal Tree in
question, and loaded it (Figure 17.1).
Jonathan and the other Board Members reviewed it, and then, Tom said,
“As you can see, they started with the Goal of Maximum Profitability and
set their target at greater than twenty-five percent.” Jonathan then said,
“I see that for their Critical Success Factors they used the three main
components of Throughput Accounting, namely, Throughput, Operating
Expense, and Inventory.” “Yes, they did, and they set their targets for those
three at Throughput greater than twenty percent, Operating Expense
at less than ten percent, and Inventory at less than a single day,” Tom
explained. Jonathan then said, “I really like the approach they used and
with the lower level Necessary Conditions, it appears as though they have
all of the necessary components to achieve their Goal.” “Based upon what
you know Tom, can you give us an estimate of when you think they will
finish implementing whatever it is they’re going to implement?” Jonathan
asked. Tom responded and said, “Let me show you the next phase of their
Goal Tree where they assessed how they were currently doing.” And he
loaded the assessed Goal Tree (Figure 17.2).
NP = >25%
In order to have...
I must have……….. Maximum Minimum Opera ng Minimum

Cri cal Success Factors Throughput Expenses Inventory
Op mized
Manpower
Minimum WIP
Maximum Minimum Levels
Necessary Condi ons & Finished
Revenue TVC Goods

Lower Level NC’s Scrap < 0.2% Over me Produc on Constraint
Sa sfied Minimum Raw
Market Demand
Orders up > 15%
CSI > 99%
Compe ve Price
On-Time Point
Highest Quality High Level of Effec ve Sales &
Delivery
RFT > 99% Customer Service Marke ng
> 99 %
FIGURE 17.1
Simpson Water Heaters’ Goal Tree.

NP = >25%
In order to have...
I must have……….. Maximum Minimum Opera ng Minimum

Cri cal Success Factors Throughput Expenses Inventory
Op mized
Necessary Condi ons Levels
Revenue TVC Goods

Lower Level NC’s Scrap < 0.2% Over me Produc on Constraint
Sa sfied Minimum Raw
Market Demand
Orders up > 15%
CSI > 99%
Compe ve Price
On-Time Point
Highest Quality High Level of Effec ve Sales &
Delivery
RFT > 99% Customer Service Marke ng
> 99 %

not Functioning
FIGURE 17.2
Simpson Water Heaters’ assessed Goal Tree.
Tom began again, “As you can see, only a single Goal Tree entity is meet-
ing their expectations with that being Minimum Raw Material Costs.”
“Wow, only a single entity in the entire Goal Tree?” Jonathan asked. “Yes,
and then if you look closely, you’ll see that only three of the entities are
actually in place, but unfortunately, none of them are functioning well
enough. These three are, Optimized Manpower Levels, Competitive Price
Point, and Highest Quality, Right the First Time. The remainder of the
Goal Tree entities are either not in place, or are in place but are not func-
tioning,” Tom explained. “So, based upon their current state, the question
I asked regarding timing, it will probably take quite a while to see the
targeted results, right?” Jonathan asked. Without hesitation Tom replied
and said, “It will definitely take a while, but as I said, Matt Maloney is very
much into the improvement effort, so it won’t take that long.”
Jonathan then asked another question and said, “So based upon their
current state, what are the initiatives that they plan on executing to sort of
‘right the ship’ as they say?” Tom then loaded another figure (Figure 17.3)
on his screen and said, “Here is what they plan on doing going forward.
The Board Meeting • 223

NP = >25%
In order to have...
Critical Success Factors Maximum Minimum Operating Minimum
Throughput Expenses Inventory
In order to have...
T > 20% OE < 10% I < 1 Day
Optimized
Necessary Conditions Maximum Minimum
Levels & Finished
In order to have... Revenue TVC Goods
R > 30% TVC < 10%
Lower Level NC’s Minimum Minimum

Scrap < 0.2% Overtime Synchronize Production
Satisfied Market Demand Minimum Raw

Customers Orders up > 15% Mat’l Costs Implement Implement Theory
Solution
Competitive Price
On-Time Point
Delivery
> 99 %
In place – Functioning well
Implement Implement In place, not Functioning well

Throughput Integrated Not In place or in place but
Accounting UIC not Functioning
FIGURE 17.3
Simpson’s Goal Tree with improvements.
You’ll also notice that they have also included an assessment of their future
state after implementing their improvement initiatives,” Tom added.
Tom began again, “As you can see, there are four major initiatives
they want to initiate, which are the implementation of Throughput
Accounting, the implementation of my integrated Ultimate Improvement
Cycle, and the joint implementation of Drum Buffer Rope and the Theory
of Constraints Replenishment Solution. And the amazing part of their
assessment is that they firmly believe that after they have implemented
these four initiatives, they will meet each and every target value they have
set.” “Do you believe that’s possible Tom?” Jonathan asked. “Normally, I
would not, but after having worked with Matt and his team, I do believe
that they will,” Tom replied. “So again, I ask, how long do you think this
effort will take?” Jonathan asked. “With all of the enthusiasm I have seen
at Simpson Water Heaters, I believe they will be completed in about three
months,” Tom explained.
“What about the other three portfolio companies?” Jonathan asked. “I
have conducted some training for them, but I wanted to start with Simpson
Water Heaters because of their negative profit margins,” Tom replied. “As I
said, I have communicated with the other companies, but I’ve only visited
each of their facilities once, but have kept in touch via telephone and inter-
net,” Tom added. “We plan on visiting each location again in the near
future, after we get Simpson Water Heaters moving along,” Tom said. “I’ll
tell you what Tom, why don’t we plan on having regular internet updates
as you progress with these other companies?” Jonathan asked. “Sounds
good to me Jonathan,” Tom replied.
Jonathan then addressed Tom and the rest of the Board of Directors
and said, “I know I can speak for everyone here when I say that one of
the best moves we’ve ever made was offering you, Tom, a consulting posi-
tion with our Board. What you have done for our portfolio of compa-
nies is simply amazing and we look forward, to many more years working
together. Because of the improved profitability of all of our companies, we
the Board, plan to purchase other companies and then hire you to go in an
improve them.” “So, thank you Tom for the excellent work you have done
for us,” he added. “I do have one question for you before we end our session
today. Would you be interested in helping us select the companies that we
plan on purchasing?” Jonathan asked. Tom immediately responded and
said, “I absolutely would be honored to help with your selection process.”
“The way I’m seeing this consulting offer is that we would have you
go into the company first and assess it for possibilities for improvement,
and then report back to us with your recommendation on whether or not
to purchase it,” Jonathan explained. “That’s a very interesting scenario
Jonathan, but I’d like some time to ponder your offer,” Tom replied. “In
terms of how you would be paid, we’ll leave that up to you,” Jonathan
added. “Are there any restrictions on how I would be paid Jonathan?” Tom
asked. “Well, it must be a reasonable method for payment is all I can say.
So, think about it and let me know what you decide,” Jonathan replied.
“Okay Jonathan, I’ll get back to you later on this week,” Tom responded.
Tom packed up his computer and headed for the airport for his return
flight home to Pittsburgh. As he was driving to the airport, he kept think-
ing about the offer Jonathan had made to him. He thought to himself,
“Should I just bill by the hour or should I consider a completely new way of
billing for my work?” He then asked himself, “How would Kevin O’Leary
from Shark Tank, go about billing them? I don’t think this would fit into
a royalty scenario.” he said to himself. He arrived at the airport, checked
in, and boarded the airplane. He sat in first class again and closed his eyes,
still thinking about the best way to bill the Board for this kind of work.
18
Maximo’s Improvement Effort
On schedule, Tom arrived at Maximo’s Corporate Office where he was

scheduled to deliver his sessions on Drum Buffer Rope and the Theory
of Constraints Replenishment Solution. He checked in through security,
and the guard contacted Pete Hallwell to let him know that Tom was in
the lobby. Shortly thereafter Pete arrived and the two of them took the
elevator to the seventh-floor conference room. Since Tom had arrived a bit
early, nobody was in the conference room yet. Pete then asked Tom, “So
Tom, how do you plan on delivering your material today?” Tom responded
and said, “My first order of business will be to reacquaint everyone with
the concept of a system constraint, then Goldratt’s Five Focusing Steps,
and then we will discuss Drum Buffer Rope as it applies to a hospital set-
ting. I know we presented DBR before, but I want to key-in on the variety
known as Multiple Drum Buffer Rope or M-DBR.”
Tom continued, “One thing I want to discuss, somewhat in depth, is
the problem of hospital wait times. Every time either myself or someone
in my family has been a patient in a hospital, the wait times have been
excessive.” “That’s a fair statement Tom, wait times for most hospitals are
clearly excessive,” Pete replied. “This is especially a problem in hospital
Emergency Departments, so I’d like to begin there, if that’s ok with you
Pete?” Tom asked. “That’s fine with me Tom,” Pete replied.
Once everyone was seated, Tom began the session with his water piping
diagram so that the team would again see the relevance of why it was so
important to identify the constraint and determine the flow of patients.
He then walked them through his simple four-step process and presented
Goldratt’s Five Focusing Steps. He did this just to reacquaint everyone
with what they had heard in past sessions. Tom also presented the concept
of policy constraints and their potentially devastating effects. When he
225
felt sure that the team understood why it was so important to find both
the physical constraint and potential policy constraints, he suggested that
they go on their 2-hour Gemba walk at Maximo Emergency Hospital,
which specialized in emergency patients. Before they left, Tom instructed
them to not get too far into the weeds with their analysis, but rather to
identify the most notable steps in the process.
Tom also defined the starting point to be either patient arrival by ambu-
lance or the patient walks in by themselves and the end point to be one of
three choices.
• The patient is treated and discharged to go home.

• The patient is admitted to the hospital.
• The patient is transferred to another hospital.
The team left with a new level of enthusiasm and ready to go. They stayed
in the Emergency Department (ED) for the entire 2 hours, and when they
returned, they had actually created a simple process flow map of what
they had observed. One of the team members downloaded the image onto
Tom’s laptop for viewing on the screen by everyone. The team seemed to be
very proud of what they had accomplished. Tom addressed the team and
asked, “So, have you identified the system constraint within this process?”
One of the team members said, “We haven’t timed every step yet, but
we think we all know where the constraint is. We’re pretty sure it’s the
emergency room physicians since we only have three of them,” she added.
“So, you’re telling me that if you can reduce the time waiting for an ED
Physician, then you will reduce the wait times?” Tom asked pointing to the
slide on the screen (Figure 18.1).
The group indicated that they were sure of it, but Tom kept pushing the
subject. “I can tell you this, when my wife and I visited the ED not so long
ago, I saw many patients waiting on gurneys and all of the ED patient
rooms were full. In fact, we actually were able to see a physician relatively
quickly. So, if that’s true, then why do you think the constraint is the ED
physicians?” Tom asked the group. One of the audience members raised
their hand in the back of the room and Tom acknowledged “Mr. Mahanan,
the reason so many people in the ED are on gurneys is because sometimes
they’re waiting for a room to be ready in the hospital,” he explained. “We
also have to wait for test results so that we can get the right diagnosis for
treatment,” he added.
Maximo’s Improvement Effort • 227
Patient Flow Through the

Emergency Department
Diagnostic testing like blood work, CT

scan, X-ray, or other diagnostic service
Patient is
Patient arrives
Discharged
at ED in
Ambulance
Triage and Assessment Assessment Treatment Disposition Patient admitted

Registration by Nurse by Dr. of Patient Decision to hospital
Patient walks
into Energency
Dept Patient
transferred to
Consultation services like Urology, other hospital
Cardiology, or other diagnostic or
treatment service
FIGURE 18.1
Patient flow through the ED.
“So, is it possible that the primary reason, or the constraint for the ED,
actually lies outside of the ED completely?” Tom asked. “In the ED, you
just see the effect, but the cause is someplace else? Can anyone tell me why
the patients have to wait so long for a room?” asked Tom. “One reason is
that the hospital has a policy that all discharges must be completed before
noon or the patient stays until the following day,” Pete said. “So, what I’m
hearing you say is that we might be up against a policy constraint?” Tom
asked. “What would happen to bed availability if this policy didn’t exist?”
Tom asked.
Tim Bodley, an ED nurse, responded immediately and said, “Holy
smokes … the number of patients waiting for a room would decrease con-
siderably! Are you really saying that it’s possible that our ED wait times
could be controlled by our hospital’s discharge policy?” he asked. Tom
responded and said, “I don’t want to jump to any conclusions just yet, but
yes, it might be entirely possible. I think this team needs to go check out
the hospital’s discharge process and see what you can find,” he said, and
the team left the room to find an answer to Tom’s point.
The team decided to divide into teams so they could review multiple
nursing units and then went to each unit to determine both the steps
required to discharge a patient and to determine if there were any pol-
icies in place that would have a negative impact on the time it took to
discharge patients. The team returned shortly thereafter anxious to talk

about what they had found. Tom explained that they needed to invite the
supervisory team to the conference room to speak about their findings.
The supervisors were invited for a review of their findings and were all
in place shortly, thereafter, anxious to hear what the team had found. Tom
asked for someone from the team to speak about what they had learned
during their ED inspection. Tim Bodley volunteered and began, “The
most important thing I learned today was that if you want to speed up a
process, you must first find the constraint, but the constraint is not always
something physical. We also learned that the other important thing is that
the constraint might not always be in the immediate process you’re trying
to improve.” Tim then reviewed the information the team had discovered
during this session with Tom.
The remaining team members each had something to say about what
they had learned during their session and told the supervisors that they
were sure they will be able to improve the flow through the ED going for-
ward. Tom thanked them for all of their hard work and told them to be
back in the morning at 7:00. Everyone packed up their materials and left
for the day.
When everyone else was gone, Pete approached Tom and said, “Tom
that was the single best session I have ever been associated with in my
life!” “I’ve never seen a team so engaged,” he added. “The questions you
asked were right on the money and they stimulated thought for the entire
team,” said Pete. “What I really like is that you don’t provide answers to
questions … you let the team come up with their own answers. And if the
answer isn’t quite right, you have a way of asking another question until
they do get it right,” he said.
“Thanks Pete, but improvement is all about using basic common sense,
logic, and discovery. It was clear to me that the wait time problems were
not all associated with what’s going on in the ED,” said Tom. “I think what
we’ll hear tomorrow will be very enlightening to say the least,” he added.
“I need to leave now because I’ve got a conference call with two of my col-
leagues, so I’ll see you in the morning Pete around 7:00,” Tom said. “OK
Tom, I’ll see you in the morning and thanks for a very enjoyable day. I
learned so much today about how to effectively lead a team,” said Pete.
On the way home, Tom thought about what had happened with this
team and what he thought they might present to him in the morning.
He thought, “If I can just get them to think holistically, from a system’s
perspective, they can solve their patient wait times in the ED.” When he
arrived home, he was met with a kiss from his wife Beverly, eager to hear
what he had found at the hospital. Tom explained all that had taken place
that day and then they sat down and ate dinner.
“So, how did it go today honey?” asked Tom’s wife. “It went very well,
once we were able to get the right team in place,” said Tom. “It never ceases
to amaze me how the leadership of most organizations fails to recognize
who the true subject matter experts really are,” he continued. “If leader-
ship would only realize that the frontline employees, who live and breathe
every day in the system, are the people who know best how to solve the
problems, it would be so much easier. If they would only seek input, and
truly listen to what they have to say, and then turn them loose to solve
the problems, things would be so much better and easier. And Beverly, it
doesn’t matter what industry it is or how intelligent leadership is, they all
miss this important point,” Tom said.
The next morning, Tom arrived at Maximo Emergency Hospital around
6:30 and headed to the conference room to prepare for the day. To his
surprise, several members of the team were already seated and seemed to
be anxious to start the day’s activities. By 6:45 am, all of the team mem-
bers were seated. Tom began the day’s session by asking for volunteers to
review their findings from yesterday. “So, who wants to tell me what they
found yesterday?” asked Tom. Five team members raised their hands, but
Tom decided to pick a team member who had been virtually silent the day
before. “Why don’t we start with you,” said Tom pointing to one of the five
who had raised their hands.
“Good morning Tom, my name is Jeff Thompson and I’m an ED techni-
cian. I want to first say that I don’t normally say much when I’m on a team,
but today will be different. What I learned yesterday forced me to think
differently, and for the first time ever, I am convinced that we can solve
the problem of extended wait times in the ED. We all went to the various
nursing units around the hospital and we even created a basic process map
of the discharge process, which I might add, is full of waste. But the most
significant thing we found was the hospital’s policy of only completing
discharges before noon,” he explained.
“And why do you think that is so significant Jeff?” asked Tom. “Because
for the afternoon and early evening, no beds can be freed up for new
patients!” he said emotionally. “A typical day in our hospital, in terms of
when patients actually need an inpatient bed, starts to occur in the early
afternoon simply because the morning’s surgical cases are finishing up.
Plus, the ED is starting to heat up and our various clinics are feeding us
patients that might need to be admitted. In all of these cases, everybody
needs a bed in an in-house unit,” he explained. “So, Jeff, what are you
recommending in order to fix this problem?” Tom asked even though he
already knew the answer.
Jeff replied, “We need to radically change our discharge policy and then
work to remove the waste that exists within it.” “So, if you were to imple-
ment something, what might this new policy look like?” asked Tom. “To
begin with, I would eliminate using a set block of hours that the units have
to complete their discharges,” he said. “I asked everyone on the various
nursing units why they are limited to discharging patients by noon and
everyone told me the same thing, ‘it’s hospital policy,’” he added. “So, Jeff,
why do you think the hospital has this policy?” Tom asked. “Because we’re
stupid!” came a voice from the back of the room and everyone laughed.
With a smile on his face, Tom said, “I don’t think it’s stupidity. I think
it’s more the lack of systems thinking. By that I mean, if whoever came
up with this policy had been using systems thinking, then they would
have realized that it was not a patient-centered policy,” he added. “OK,
let’s assume for a minute that this discharge time policy did not exist,
where would the constraint be then?” asked Tom and again several
hands went up. “Yes?” said Tom, pointing to one of the women sitting at
the end of the table.
“My name is Sally Jones and I’m a nurse in the Emergency Department.
I think we don’t have enough information to say for sure where the con-
straint would be,” she said. “I think we would need to do extended time
studies to determine how long each step in the process takes,” she added.
“Sally, doing time studies will take a considerable amount of time, so can
you think of a different way we might be able to find the constraint?” Tom
asked. Sally replied immediately and said, “I’m thinking we could become
a patient ourselves and actually walk through the process. I don’t mean we
would actually be a patient, but we could each attach ourselves to a patient
and see where they get hung up,” she added.
“Sally, I think that is a great idea,” said Tom as everyone else nodded
their heads in agreement. “So, why doesn’t everyone follow Sally’s direc-
tion, pick an ED patient, and glue yourself to them,” said Tom. “I don’t
mean that you should be intrusive, just follow their progress,” Tom
explained. “But before we do that, what did anyone else find yesterday?”
Tom asked. “I too found that the hospital’s policy of limiting the time for
discharge has a negative effect on bed availability, but I think we have to
be careful not to discharge some patients, especially elderly ones, too late
in the day,” said Jeff. “I say this because some patients might have other
problems, such as their nighttime vision being impaired or maybe, if it
was in the middle of the night, there may not be buses running and cabs
are expensive,” he added.
Tom was very impressed with the level of sensitivity that Jeff had
expressed, related to patients, and he liked that. Jeff was truly embrac-
ing the philosophy of patient-centered care and that was a good thing in
Tom’s mind. The remaining members of the team presented their findings,
and then, Tom dismissed them to go become “a patient” as Sally had sug-
gested. The team left the room and headed for the ED to learn firsthand
why the patient wait times were so long. Tom thought more about Sally’s
recommendation and smiled. “She’s a very logical person and seems to
have the patient’s well-being at the forefront,” he thought. The team was
gone for approximately 2 hours, and a few members started trickling back
into the conference room. When they were all seated, Tom asked them
what they had uncovered.
As Tom expected, Sally was the first to respond. “Mr. Mahanan, I fol-
lowed two patients and both of them were supposed to be admitted to the
hospital, but because there were no rooms available, they had to wait on
gurneys in the ED,” she explained. “I left both of my patients and went to
the unit they were expected to be admitted to, to see if I could find the rea-
son there were no beds available,” she continued. “In one case, the admit-
tance order had been written, but they were waiting for housekeeping to
clean the room before the patient could be officially admitted,” she added.
“How long had this patient been waiting and why was it taking so long
to get the room cleaned?” asked Tom. “This particular patient was an
older woman and she had been waiting for over 3 hours. I was told that
the hospital needed to cut costs, so they had recently laid off some of the
housekeeping staff. It seems that the remaining housekeeping staff is now
supposed to focus on cleaning the surgical areas and the ED first and then
patient rooms,” she added. “And when housekeeping does come to clean
the room, it’s only one person doing it. It seems to me that if they had two
people doing the cleaning, they could cut the time in half, maybe more.
As far as the other patient goes, he was an elderly man who had been
waiting for 2 hours,” Sally explained. “The other reason the unit gave me
was that the discharge paperwork for several patients didn’t arrive until
after the noon deadline, so the patients had to stay one additional day,”
she explained.
As Sally explained what she had found, some of the others were nod-
ding their heads in agreement indicating that they had found similar
things. Tom was not surprised at what they had found and thought it
might be a good time to introduce the team to a different type of con-
straint. “What Sally found, regarding the layoff of the housekeeping staff,
is a classic example of something I refer to as a ‘dummy constraint,’” Tom
explained. “Think about just how much one of the housekeepers would
cost the hospital and compare that to the financial impact of the lost reve-
nue,” he explained. “What you’re witnessing is the negative impact of Cost
Accounting, whereby the key to profitability is thought to be achieved
through cost cutting,” he continued.
Sally raised her hand and said, “Mr. Mahanan, I think I understand
what you are saying. If we hadn’t cut the housekeeping staff like we did,
and if we didn’t have the current discharge policy, then we could process,
discharge, and admit more patients at a faster rate. And if we could pro-
cess more patients, then we could have more cash entering the hospital,”
she continued. “So, I think that what you’re saying is that the cost savings
of these so-called dummy constraints pale in comparison to the potential
gain in new revenue. Is that right Mr. Mahanan?” she asked. “And, the
discharge policy change shouldn’t cost anything,” she added.
“Yes, Sally, that is exactly what I am saying. In fact, by adding back some
of the laid-off housekeeping staff, then setting up the team approach to
cleaning the rooms, which you described, and by changing the discharge
policy, where do you think the constraint would be located?” asked Tom.
At the far end of the conference room table, Jeff raised his hand and said,
“I’m pretty certain that, if we were to remove the current constraint, then
the next constraint would be the physicians in the ED.”
Pete interrupted and said, “I get now why in your training you recom-
mend identifying the current and next constraint … it makes perfect
sense!” Sally said, “So how do we go about addressing these two prob-
lems so that we can make more beds available?” “Great question Sally,”
said Tom. “My suggestion is simple. What if we were able to collect some
data on how many patients were affected by the extended wait times
as a result of the housekeeping and discharge policy? We could then
compare the number and frequency of available beds and the financial
impact this might have. We can present the analysis at our afternoon
report-out?” said Tom.
Jeff was the first to speak and said, “I’m not sure we can do all of that by
our afternoon report-out. What if we just presented the concept to them?
After all, you did present Throughput Accounting to them and from what
I saw, it was received very well,” he added. “Maybe Terry’s right, let’s go
collect the data and hold the calculations until tomorrow,” Tom replied.
“Go see what kind of data are available and be back here by 3:30 so we
can put together some talking points,” he added. The team split up, with
part of them going to the ED to record patient wait times and the other
half going to the nursing units to see how many patient discharges were
delayed because of the discharge policy.
At 3:30 pm, the entire team returned, and they were obviously anxious
to report their findings. Once again, Tom asked who wanted to give their
report, and once again, Sally was the first to speak. “My team visited all
of the hospital nursing units and found that 15 patients couldn’t be dis-
charged because of the discharge policy,” said Sally. “In addition, there
were 5 patients that were discharged in violation of the policy,” she added.
“Thank you Sally. How about the team that went to the ED, what did your
team find out?” Tom asked.
Jeff spoke up and explained, “We found four patients that had been
in the ED for more than 4 hours, three patients that had been there for
between 3 and 4 hours, and two patients that had been there between 2
and 3 hours. And, I might add, this was not a super busy day in the ED,” he
added. Tom listened intently to what the teams had to say and then asked,
“But how many people in the ED experienced delayed admittance because
they were waiting for a bed?” Jeff replied, “On the basis of the information
we gathered, we found that three of the 4-hour patients and two of the
3-hour patients were told by the ED nurses that they would be admitted
when an in-house bed became available.” Just as they finished their team
reports, members of the supervisory team began entering the conference
room for the afternoon team report-out.
When they were all seated, Tom asked for a volunteer to summarize
what they had learned today. Jeff jumped up and began relating the team’s
experience saying, “Today was such an eye-opener for us as a team. We
collected some very interesting and important data relating to patient
wait times and discovered that one of the biggest causes of extended wait
times in the ED was actually our discharge policy. It seems as though the
policy states that all discharges in the nursing units must be completed
before noon, each day. If it’s not done by then, the patient must remain
for another day and occupy the bed. Not meeting this time requirement is
causing extended wait times for ED patients,” he added.
One of the ED doctors, Dr. Samuels, was very interested in this com-
ment and wanted to hear more about the data they had collected. The team
presented the minimal data they had collected earlier, and after much dis-
cussion, Dr. Samuels said, “So, what you are telling us is that, if we change
our discharge policy, then our ED patient wait times should decrease?”
“That’s exactly what we’re telling you Dr. Samuels,” Jeff replied. “We only
have one day’s worth of data, but we’re confident that by extending, or
removing, the discharge time to later in the afternoon, we should be able
to reduce the wait time,” he added. “I’ve been thinking about this and I
think it will also positively affect our metric, Patient Left without Being
Seen,” he said.
Sally stood up and said, “There’s something else we discovered yester-
day and today and that is, on many occasions, one of the reasons why
patient rooms are delayed from being ready is that housekeeping takes
too long cleaning the rooms. Because of the recent layoffs, there simply
are not enough housekeeping employees to clean the necessary rooms,
quickly,” she added. “Are you suggesting that we rehire these employ-
ees?” asked Dr. Samuels. “Remember, Sally, these people cost us money.
By being able to decrease the Operating Expense, we hoped to improve
our profitability,” he added.
“Yes, we know why you took this cost-cutting action, but if you consider
the impact on the system, in terms of having rooms available to admit
patients, and reduce ED wait times, we think it’s a decision that should
be reconsidered,” said Sally. “As we’ve learned, there is a better way to
improve profitability and that is to increase the amount of new revenue
entering the system,” she added. “Does anyone else have something they’d
like to add?” asked Tom. When nobody else raised their hands, Tom said,
“How about the executives … any comments?” he asked.
Dr. Samuels stood up and said, “I think we have a lot of new things to
consider and we did promise to consider all recommendations as long as
they didn’t violate our policies or safety. I do think that at our next execu-
tive staff meeting, this Thursday, we need to discuss both of these recom-
mendations and the potential positive impact they could have on revenue.
I feel confident that both of them can be implemented,” he added, which

brought a smile to the team members’ faces.
“Dr. Samuels, did you say you would consider all recommendations
from this team?” asked Tom with a piercing look on his face. “My apolo-
gies, we’ll do more than just consider them; we’ll implement them if they
don’t violate safety or any other healthcare regulations,” said Dr. Samuels.
Tom just smiled and thanked everyone for their efforts. He then told
the team to be back at 7:00 in the morning to begin looking at the new
constraint in the ED. He excused everyone for the day, and everyone
except Pete left.
“Tom, I truly do think that the executive team will implement what this
ED team has recommended. My question for you is, what do you see us
doing in the ED to improve the flow of patients?” he asked. “Tomorrow, as
we had originally planned to do, we’re going to talk about a new ED sched-
uling system, Drum Buffer Rope and based upon what we heard today,
I have a new idea about how we might go about rolling out,” said Tom.
“What’s your new idea?” Pete asked. “You’ll hear all about it tomorrow, so
be here bright and early tomorrow morning,” said Tom. “Tomorrow could
be a very interesting day,” he added.
19
Drum Buffer Rope at Maximo
As usual, Tom arrived at the hospital early to begin preparing for the
improvement team’s new focus: wait times. As he was waiting for the team,
he heard the conference room door open as several members of the team
had arrived early. Tom walked over, shook everyone’s hand, and welcomed
them. By 7:00, the team was assembled and ready to begin. Just before
Tom was ready to begin, there was a knock on the door and Dr. Samuels
walked in. From the back of the room, “Tom, do you mind if I say a few
words before you begin?” Dr. Samuels asked.
“No, by all means, take as much time as you need,” Tom replied. “Good
morning everyone. I wanted to let you know that yesterday the execu-
tive team had a meeting to discuss your proposed recommendations. I’m
pleased to inform you that the executive team has decided to implement
both of your recommendations. They have decided to rework and update
the discharge policy and will contact the previous housekeeping employ-
ees to see if they are interested in returning. If they aren’t available, or they
decline, HR will post the jobs and find new candidates,” Dr. Samuels said.
There were some claps and cheers in the room.
Dr. Samuels continued, “When the executive team met, we talked about
why the current discharge policy was written the way it was, and no one
could make a strong case for keeping it the way it is. We also considered
what Sally had recommended about doubling up on cleaning rooms and
it made good sense. I just want to say thank you, to all of you, for all your
hard work and the executive team is looking forward to hearing, and
reviewing, any new recommendations you might come up with.” Everyone
was smiling and patting each other on the back. “One other thing, since
these were this team’s ideas, we would like you to review what we think we
need to do before we actually implement any new policies or procedures,”
237
said Dr. Samuels. “Are there any questions?” Dr. Samuels asked. No hands
went up, so he thanked Tom for the time and left the room.
Sally was the first to comment and said, “I don’t know about anyone else,
but for me, having the executive team not only accept our recommenda-
tions, but also asking us to bless what they put together means that they
are listening and accepting what we have to say as important. The fact that
they even considered our ideas is a marked change from the past,” Sally
added. The other team members were nodding their heads in agreement.
No one else spoke, so Tom began.
“Today, I want to introduce you to a scheduling concept known as
Drum Buffer Rope, or DBR for short,” Tom said. “Although DBR was first
introduced for application in manufacturing plants, in recent years, other
industries have begun incorporating it as well. The basic premise behind
DBR is really quite simple, but mostly just logical. And although thinking
logically is nothing new, it is simply not the way most people think. The
fundamental concept of DBR is to focus on the system as a whole, rather
than only a single segment of the system, at least until you have clearly
identified the constraint,” Tom explained. “And, from what you believe so
far, you think the new constraint is the ED physicians?” he stated, scan-
ning the team for concurrence.
Tom continued, “When viewing a system through the eyes of DBR, it
becomes quickly apparent that improving every process in the system
is not required, nor will the sum total of all of those discrete process
improvements equal an improved overall system. When conducting a sys-
tems analysis, with the intent of implementing DBR, an important consid-
eration is to know and understand the location of the system constraint,
or the slowest operation. In Goldratt’s Five Focusing Steps, this is Step 1—
Find the constraint! Once you know where the constraint resides, you now
have the information necessary to know where to focus your improvement
attention,” he explained. “In essence, when you look at a system, the entire
system can only produce at a rate that is equal to, or less than, the output
of the constraint,” he added. “What if we’re not right about the physicians
being the constraint?” asked Jeff.
“I promise you Jeff, if you haven’t identified the correct constraint, it
will rear its ugly head and let you know where it really is,” Tom explained.
“So, with the constraint process properly identified, you have effectively
isolated the ‘drumbeat’ of the system and knowing the location of that
drumbeat is the first step for implementing DBR. Knowing this location
Drum Buffer Rope at Maximo • 239
is mandatory!” Tom added, emphasizing this point. “The second consid-

eration is that you must make sure the constraint is busy all the time, not
just part of the time,” Tom explained. “Why is it so important to have the
constraint busy all of the time?” asked Sally.
“Sally, why don’t you try to answer that question before I give you my
answer,” Tom said. Sally thought for a moment and then said, “On the
basis of what you’ve taught us about Theory of Constraints, I would say
that any time lost at the constraint is time lost forever; you can’t make
up that time. If the constraint stops or slows down, then the entire sys-
tem will stop or slow down,” Sally answered. “That is exactly right Sally!”
said Tom emphatically. “It’s the single point in the system where efficiency
really matters.” Sally raised her hand again. “So, I guess that the best way
to accomplish this is to make sure work is always waiting in front of the
constraint?” Sally asked. “Yes!” Tom answered. “In other words, we should
create something like a buffer of patients in front of our constraint?” she
said in a question-like response.
Tom smiled and said, “Sally, you are correct about the buffer of patients
in front of the constraint, but only if you have the right constraint.” He
loaded a new slide on his screen (Figure 19.1) to be used for his talking
points. “I say this because the total system output is not the sum output
from each process, but rather only the output from the constraint. In fact,
the system constraint not only determines the amount of throughput you
can achieve, but it also determines the correct number of patients that can
be in the system at any single point in time. The correct number of patients
will be reached when patient output is equal to patient input and system
subordination is actively pursued and implemented,” Tom explained.
Step 1 Step 2 Step 3 Step 4

Paent Paent is
Paent Paent Paent Paent
Checks In Discharged
Analyzed Diagnosis Treatment Rechecked
10 Minutes 10 Minutes
Green Green
Yellow Yellow
Rope Red Rope Red
Buffer
Buffer
FIGURE 19.1
Traditional Drum Buffer Rope.
“Tom, you have explained the drum and the buffer, but what the heck
is this rope that you mentioned earlier?” asked Jeff. “The rope is actu-
ally a communication mechanism that controls two different functions,”
Tom replied. “Can anyone tell me what those two functions might be?” he
asked. Jeff raised his hand and said, “First, I would think one of the func-
tions is that the rope determines how many and when to release patients
into the system?” Jeff responded in the form of a question.
Tom explained. “In the ED, the most common practice is to tie an arti-
ficial ‘rope’ from the ED physician back to the entry point for patients.
When the constraint completes treatment of a patient, the patient is
passed on to the next operation, which is either the patient is released to
go home, or the patient is admitted to the hospital, or perhaps admitted
to another hospital. When one of those three things happens, the signal
from the rope is to release another patient into the constraint buffer,” Tom
explained. “What we’re trying to achieve is synchronized patient flow
and a smooth transition of patients through the system,” Tom explained.
“What’s the second function of the rope?” asked Jeff.
“The second function of the rope is to make sure that subordination hap-
pens at all of the other steps in the process,” said Tom. “With active sub-
ordination, the non-constraints can only work on what has been released
into the system,” Tom added. “So, even though the non-constraints can
do more work, they are restricted from doing more by the act of subor-
dination and only allowed to work on the patients required to keep the
constraint busy?” Jeff asked. “Yes, no more and no less,” said Tom. “Tom,
I have a question,” Sally said. “How do we know how large the patient buf-
fers should be?”
“Great question, Sally. In the case of the hospital, it depends. It depends
on how many patients are waiting. The loads on the systems are never
quite the same from day to day. Some days there will be a lot of people
and other days not so many. On the slow days, a buffer won’t make any
difference. On the busy days, a buffer with synchronization, will make
all the difference in the world. If the loads are constant and heavy, then
as a general rule, the buffers should equal about one and a half times the
number of patients. It will also depend on how many physicians are avail-
able in the ED. For example, if an ED doctor can treat one patient every 15
minutes, then the buffer should be approximately 45 minutes, or roughly
three patients. You may decide in time, that the buffer is too large or too
small, so you can adjust it either up or down depending on what you’ve

learned from the system and your need,” Tom explained.
“Tom, I have another question about our situation here in the ED,” said
Sally. “Since we have more than one doctor in the ER, does that mean
we have more than one constraint?” she asked. “I mean if the ED physi-
cians are the next constraint, does that mean we will have more than one
drum?” Sally added as a question.
“Yes, you do Sally and another great observation! You have a situation
of multiple drums!” Tom exclaimed. “What Sally has just described is
something that I have been thinking about for quite a while. This con-
cept is relatively new, and I refer to it as Multiple Drum–Buffer–Rope, or
M-DBR,” he explained. “This is a point of separation between traditional
DBR and M-DBR. Traditional DBR is based on the fact that the output
from a constraint is very predictable. As an example, in a typical manu-
facturing environment, the constraint usually has a cadence or rhythm
that is very predictable and steady, for instance, a constraint machine that
is able to produce a part every 7 minutes, or whatever the time may be.
Knowing the constraint time allows you to be relatively accurate in estab-
lishing a buffer. In other words, there is a constant, but predictable nor-
mal variation at the constraint. However, in your situation at the hospital,
the constraint time can vary significantly. Each time a patient enters your
constraint, there can be a lot of uncertainty for when the patient will fin-
ish, depending on what needs to be done. You don’t know what patient
is coming in with what problem and the ED physician’s time can vary
greatly form one patient to the next,” Tom explained. “Under those kinds
of circumstances, it’s very difficult, if not impossible, to establish any kind
of an accurate buffer.”
“Back to Sally’s question about having more than one drum,” Tom con-
tinued. “If the ED physicians are truly the constraint, then how do we
manage to keep them fully occupied to reduce wait times?” Tom asked
rhetorically.
“It seems to me that we would need to know the real-time status of each
constraint,” Sally responded. “What I mean by that is, if we knew how
much longer each physician believed they had with their current patient,
then we could check and see which patient is next and get them ready.”
“That’s a good possible answer,” Tom said. “And, if we already have a buf-
fer in place, then we should know which patient is next. But let’s go back
and think for a moment about how you establish the buffer,” Tom said as
he loaded a new overhead on his screen (Figure 19.2). Remember, M-DBR
will be different from traditional DBR, mostly because of the uncertainty
involved,” Tom explained. “Typically, when a patient comes into the ED,
you perform a triage to determine severity, or urgency of the situation, is
that correct?” Tom asked. “As best we can, that is what we do,” Sally said.
“What happens during the triage activity?” Tom asked.
“Well, we evaluate the patient and determine a level of urgency.
Something like a broken leg would take precedence over a stomach-ache,”
Sally said. “And that by itself can cause some problems for people already
in the waiting room. For example, a less severe patient, who has already
been through triage, might end up waiting even longer if two or three
more patients show up with a higher priority. For those people, the wait
time can be very frustrating! Some people don’t seem to mind if it hap-
pens once, but when it gets up to two or three times, it starts to wear on
their nerves a bit,” Sally explained. “It can happen that a patient, who has
FIGURE 19.2
Graphic of M-DBR.
already been waiting for a long time, might keep getting pushed back
because a more urgent case comes in,” she explained.
Tom thought for a moment and asked Sally and the team, “What if we
had a system that would allow the lower-priority patients to get through
faster?” “I’m not sure how you might do that because everyone is waiting
to see a doctor and they have to wait their turn,” Sally said. “Remember,”
Tom said addressing the group, “if you reduce wait time, you can also
increase the hospital revenue.” Sally looked confused and said, “Honestly,
I could care less about hospital revenue. I care much more about good
patient care.” “I couldn’t agree more,” Tom said. “But what if there was a
way to do both?” he asked. “I still can’t see how you’re going to do that,”
Sally said. “Everyone still has to see a doctor,” she added. “Exactly, and
everyone will see a doctor,” Tom said with a smile looking directly at Sally.
“Well, I guess you’re right; everyone will see a doctor if they wait long
enough,” Sally said. “But, waiting a long time to see the doctor is the oppo-
site effect that we want,” said Sally. “How do you plan on making it faster?”
she asked. “Again, you are correct, at least if you keep doing the same
things you are doing now,” Tom said. “What do you mean?” Sally asked.
“Right now, you have everyone on the same priority list, based on a tri-
age ranking, and essentially everyone is in the same buffer location, the
waiting room,” Tom said. “Yes, that’s how we do it, but I still don’t under-
stand,” Sally said.
“Let me narrate a story to you,” Tom said. “Suppose you are in a super-
market and you go in for only a few items. Let’s say five different items.
You find your five items and move to the front of the store for checkout.
You notice there are only four lines open and each line has three or four
people already in it. You scan the lines and determine that each person has
a fairly full shopping cart with many more items than you have. Through a
random selection process, you pick a line and get in it. Now you are forced
to wait for those in front of you to finish, and they could take a long time.
They do have a sizeable number of items in their cart. Here’s what hap-
pens; the effects of the system’s codependency, has now been passed on
to you! What do you do?” Tom asked. Sally put her head in her hands to
cover her face. There was a huge smile on her face with an almost audible
laugh. She answered, “I’d go get in the express line!”
Tom smiled and said, “I would too! And, any others who were in the
other checkout lines, and met the criteria for the express line, could also
move that direction. It’s possible they could be finished and gone before
it would even have been their turn in the other line,” Tom added. Jeff was
the first to break the silence that followed and said, “But we don’t have an
express line in the ER!” Tom spun around and faces Jeff and said, “Why
not?” “Well, I’m not sure, but it sounds like maybe we should,” Jeff said.
“Now, it makes sense to me what you said earlier about everyone sees a
doctor, wait times can be reduced, and the hospital can bring in more
revenue,” Jeff added.
“It makes perfect sense to me,” said Sally. “We could change how we
use our ED capacity to meet the needs of the patient loads. Sometimes,
there can be a huge variation between those who can get in and out fast
and those who might need a longer time with the doctor. We could decide
how many express lines to have, depending on the patient loads and triage
classifications,” Sally added.
“You know,” said Jeff, “I can now see how we might have been unknow-
ingly punishing some of our patients by forcing them to use the system we
have in place. In a lot of ways, the system worked for us, but it didn’t work
for them, at least not to a high level of satisfaction. We made our patients
victims of a poorly organized process and system,” Jeff said with a much
lower voice, almost as if he was talking to himself and he didn’t want any-
one else to hear.
Tom spoke up. “Remember, this is only one possible idea for the front
end of the process. We still need to consider the back end of this process
for getting new patients admitted, other patients discharged, and rooms
cleaned and ready to a usable condition. Why don’t we take a break,” Tom
said looking at his watch. “Be back in 10 minutes,” he added. Most of the
team didn’t leave the room, but rather assembled into smaller groups with
lots of discussion going on.
When everyone sat down again, Tom spoke. “If we change the current
system, there are some things that will happen,” Tom started. “Basically,
we will shift the system from an ‘I’ configuration to a ‘V’ configuration.”
“Change it from what to a what?” Sally asked. “It’s not something we have
talked about before, at least with this group,” Tom said. “But it will be
important to understand. With an ‘I’ configuration, you basically start
with one product, or service, and end with the same product or service,”
he explained. “That’s kind of what we do now isn’t it?” Sally asked.
“Yes, it is,” Tom said. “All of your patients are in the same ‘I’ line, but
if we added an express line, then it will shift to a mini ‘V’ line. What I
mean is, after the triage is complete, a decision will be made if the patient
continues in the system down the express side, or do they continue down
the regular side. I use the term regular side because I don’t currently
have a more precise term,” he added. Everyone nodded. “Even with the
patients who continue down the regular side, there is another decision
gate when you decide if they are admitted or released. If you turn the ‘V’
on its side and consider the bottom to be the start point for the flow of
patients through the ‘V,’ you can now visualize three different paths and
each will have its own drumbeat, if you will. Each path will, in essence,
move forward based on a different drum or cadence,” Tom added. “When
you consider a ‘V,’ there are characteristics and consequences to be aware
of. If not managed correctly, this type of improvement can cause a multi-
tude of additional issues.”
“The characteristics of a ‘V’ are,” Tom walked to the whiteboard to
write, “Number one, the number of end items can be many. In your case,
the end items are three. Number two, all items are produced or treated
essentially the same way. In your case it’s the flow through the ED system.
And, number three, equipment to produce the end items or treat patients
can be capital intensive. In your case, the X-ray machine, magnetic reso-
nance imaging (MRI) machines, laboratory work and personnel to do the
testing, and so on,” Tom said.
“It’s also important to understand the consequences of the ‘V’ configu-
ration. They are as follows,” he continued to write on the board, “Number
one, misallocation of materials or medications. In other words, you com-
mit material or medications too soon. Number two, poor customer ser-
vice. In other words, it can be easy to get ‘stuck’ in a ‘V’ configuration.
Number three, priorities seem to change constantly. In other words, you
and your system get hung up in the cyclical nature of multitasking. You
start jumping from one patient to another trying to get something done.
It’s not the situation you want to be in,” Tom added. “And, number four
is the constant complaint that you are being unresponsive to the patient’s
needs. In the current situation, the patient is continually asking them-
selves, ‘What about me?’” Tom explained.
“If we take a moment and look at the system now, you can see the real
goal is not necessarily to create or maintain an appropriate buffer, but
rather to have the buffer, or triage priority list, be as close to zero as pos-
sible. Does that make sense to you?” Tom asked. He scanned the group
and heads were slowly starting to nod in agreement. “This is how an
M-DBR system would work. There are different paths, and each path has a
different drum. The beat of the drum determines how fast the next patient
can be moved forward. If the system loads are present, in your case people
waiting in the waiting room, then they need to be assigned a path to get
to the finish line,” Tom stressed, looking for understanding on the faces
of the group. So far, he thought he was seeing it. “So overall, the goal in
M-DBR is not to create, or maintain a buffer, but rather to assign the buffer
down the different paths and reduce it as quickly as you can. In this case,
a zero buffer is the best,” he explained and loaded a graphic of M-DBR
(Figure 19.3) onto the screen.
“Now, let’s work our way down the regular path to the next decision
gate. At some point in the system, it will be decided if the patient can
be released, or in fact, needs to be admitted, or transferred. This deci-
sion is very likely supported by various test results and information gath-
ered from x-ray, or MRI, or whatever. If it is determined that the patient
can be released, then they proceed to the finish line and exit the system.
However, if it is decided that the patient should be admitted, then a new
FIGURE 19.3
M-DBR.
set of problems arise, specifically bed availability. You need somewhere to

put the patient, in order to admit the patient,” Tom explained.
“When my wife Beverly and I came to the ED, getting in and seeing
the doctor was not the real problem. We did have some wait time that
seemed extreme to me, but I also understand now that I was in a panic
mode. I wanted answers!” he said, with a semi-smile. “When we arrived at
the ED, it was early afternoon, and according to your then current policy,
no more patients were being discharged. What we were waiting for was a
room to be cleaned and finished, so my wife could be admitted and put
in the room,” Tom said. “The entire time we waited for the hospital room,
Beverly was in an ED exam room, which meant that because we couldn’t
move forward, the next patient behind us couldn’t move forward either.
The system flow had stopped because Beverly had nowhere to go,” Tom
explained. “We ended up having to wait until 6:00 pm before we finally
got her into a room. Once she was in her room, she was considered to
be admitted. Before the room becoming available, we were just Work-in-
Process inventory that was polluting the ED system. We couldn’t get out
and no one else could get in. In fact, I can remember seeing some gur-
neys with patients on them, just sitting in the hallway waiting to be moved
somewhere,” Tom reminisced.
“So, in order to complete the flow through the system, it is imperative
that we spend some time looking at the discharge policy and housekeep-
ing staffing,” Tom said. “According to Dr. Samuels, the executive team
already approved those recommendations,” said Jeff. “They did approve
the recommendations, and the recommendations were to change the dis-
charge policy and approval to rehire, or hire, more housekeeping staff,”
Tom said. “And they did say they want you to look at the new discharge
policy before they implement it. My question for this team is, what are you
going to change the policy to, and how much more housekeeping staff will
be needed?” Tom asked.
“I see your point Tom,” Sally said. “We have permission to change it,
but we don’t know for sure what we should change it to!” Tom smiled.
“So, we need to discuss what a good policy looks like, and how better to
improve housekeeping,” Sally said. “That sounds like an excellent place to
start. Does anyone have a comment for that?” Tom asked. “I do,” Jeff said.
“I’m not a medical professional, but I think it should be based on when the
patient is ready, and not what time of day it is,” he added.
“I agree,” said Sally. “Part of the housekeeping problem right now is

many patients are released between 11:30 am and noon. That keeps the
release within the policy, but it also creates a situation where many rooms
become available for cleaning all at once before a new patient can be
admitted. Housekeeping goes from waiting for rooms to clean, to having
too many rooms to clean all within the span of approximately 30 minutes.
Sometimes, housekeeping can just get overwhelmed,” said Sally.
“It’s probably true that more rooms would become available in the morn-
ing hours, but if you miss the noon deadline, because of some unforeseen
issue, then you have to wait until the next day. So, we have a room being
occupied by someone who might not have to be there, and there is some-
one else waiting for a room they can’t get into yet. It’s just crazy when
you stop and think about it,” Sally said. “So, what I’m hearing is, remove
the deadline and release patients based on good medical protocol, and the
patient’s comfort and needs, no matter what time it is. Is that correct?”
asked Tom. “I think that pretty much sums it up,” Sally said. “There will
be some details to work out, but overall I think it’s a good approach,” she
added. “So, if we remove the deadline from the policy, does that mean that
patient releases will be more evenly distributed?” Jeff asked.
“It’s possible,” said Sally. “But I still think the morning will be the
favored time for release, and that means that a lot of rooms will need to
be cleaned at the same time,” she added. “What stops them from cleaning
the rooms faster right now?” Tom asked. “Honestly, I think they do try
and clean the rooms as fast as they can right now,” Sally said. “There are
several things that must be taken care of before a room is ready for a new
patient and it does take some time to do that. And, we did have the layoff.
I don’t know for sure how many that might have been, but it did have an
impact,” Sally added. “How long do you think it takes to clean a room
right now?” Tom asked.
“I guess that depends, but to do a really good job might take 45 minutes
to 1 hour,” Sally said. “There is a lot to do. New sheets, new towels, clean-
ing the bathroom including toilet and shower, or tub, and wiping every-
thing down and sanitizing the room, including the floors,” she explained.
“Let me relate a story to you,” Tom said. “Suppose it’s Saturday morning
and you want to have four new tires put on your car. You also want to fill
the car with gas, and you might even want a Slurpee. How long does it
take to get all of that done?” Tom asked the group. Everyone was contem-
plating the question and formulating an answer. Finally, Sally raised her
hand and said, “I’d guess approximately 2 or 3 hours.” “Anyone else have
a guess?” Tom asked.
“Well, I know a guy at the tire shop, so I think I could get it done in less
than 2 hours,” said Sally. “Hey, it pays to know people in the right places,”
she added. Everyone laughed. “I think 2 hours might be about right and
I don’t even know anyone at the tire shop,” Jeff said. “I agree with Sally,
I’m thinking more like 3 hours,” said Bill Thomas, who had been quiet for
most of the discussion. “So, the best time so far is 2 hours,” said Tom scan-
ning the group. “Any other guesses?” No one said anything. “What if I told
you I know where you can get all of them done in 16 seconds,” Tom said.
“No way,” someone said.
“Yes way,” Tom replied. “Think about a pit crew at a race-track. They
can change all four tires, fill the tank with gas, and give the driver a
drink, all within 16 seconds,” Tom said. The faces around the room
showed a look of surprise and many broke out with a smile. “He’s right!”
someone in the room said. “The previous best guess had been 2 hours,
but now you know a better way. So, in terms of housekeeping, and the
assumption that it takes a long time, ask yourself, ‘How can we con-
vert housekeeping into a well-organized pit crew? What is the pit crew
doing that housekeeping isn’t?’” Tom asked. He could see, if not hear, the
wheels turning, and he just smiled.
“I think having more housekeeping people will help a lot,” said Sally.
“How many more do you need?” Tom asked. “I don’t know for sure, but
if we want to do it that fast, then we might need three times as many
people,” Sally said. “Wow!” Tom said. “I don’t think the executive team
will go for that amount of an increase.” “Why not, they promised to fol-
low our recommendations,” Sally said. “Yes, they did, but within reason,”
Tom pointed out. “Let’s step back and look at the problem again,” he said.
“Sometimes, organizations think that the only way they can do more work
is hire more people. In some situations, that might be true, but most of the
time, it’s not. The real trick is to understand how to better use what you
have, and not necessarily piling more people into an already bad system,”
Tom explained.
“Yes, but a pit crew has a lot more people than we do,” Sally said. “We
only send one housekeeper to do a room, not six or seven.” Tom just
smiled and asked, “What would happen to the effectiveness of the pit crew
if it was only one person doing all of those tasks?” “Well, it would take a
lot longer and you would probably lose the race,” Sally said. “No doubt,”
Tom said. “What if you considered that when a room was ready for clean-
ing it was equal to a car being in the pit?” Tom asked.
“We’d still need more people. The current housekeeping staff is scattered
all over the hospital on different floors. They assign housekeeping based
on areas. Each housekeeper gets assigned so many rooms and hallways
and public bathrooms and common areas that they need to maintain,”
Sally explained. “When we had the layoff, the work increased even more.
So, when a room needs cleaning, and it’s in your area, you are the one
that does it,” she added. “Does that mean that at any point in time, some
housekeepers could be very busy and some not so much?” Tom asked.
“Wait a minute,” Jeff said, “I think I see where you are going with this.
If I understand correctly, we probably have the right amount of staff; we
just have them in the wrong locations! That could be especially true in the
mornings when there could be a surge of rooms that need cleaning,” Jeff
said. “When we first made our recommendation to increase the house-
keeping staff, and we talked about having two people on a cleaning team,
I was actually seeing the need to double the staff,” Jeff said with a certain
amount of doubt in his voice. “I think you might need more housekeeping,
but certainly not three times more,” Tom said.
Sally looked at Jeff and said, “If a room that needs cleaning is like a race
car in the pit, then that makes sense. We can’t use the room in its current
condition, and somebody might be waiting for it. The sooner it’s cleaned,
the sooner we can get somebody admitted, which is just like getting the
car back in the race!” Sally exclaimed. Then Sally said, “What we need are
room pit crews, but maybe just during peak loads, like in the morning.
We could pull other staff from other locations until the rooms are cleaned
and ready. Then, the other staff could go back to their assigned locations!”
Sally explained. “That makes a lot of sense to me,” Jeff said. “Housekeeping
can still have assigned locations, but if the need is there, we can then move
housekeeping where they are most needed. I like it!” Jeff said. “How many
people should be on a room pit crew?” Sally asked as a question to the
team. “As many as we need,” said Jeff. “I agree,” said Sally. “But how many
is that?” she asked.
“Again, think about the pit crew,” Tom said. “Each person on the crew is
assigned a specific part of the race car. There is someone on the left front
tire, on the left rear tire, and the same for the right side. There is also some-
one putting gas in, and someone assigned to jack the car up and down.
Now, think about the housekeeping crew. What are the critical areas that
need someone assigned?” Tom asked. “Maybe we should talk with the
housekeeping supervisor and get the information we need,” Jeff said. “I
agree,” said Sally looking at Jeff. “Let’s you and I go do that right now.”
Both Sally and Jeff left the room. Tom instructed everyone else to go on a
break until they got back.
They both returned approximately 15 minutes later and sat in their
chairs. “Well, I think we’ve got what we need,” Sally said. “We talked with
Nancy, the housekeeping supervisor, and told her what we were thinking
about. She seemed a bit surprised that anyone would take any interest in
housekeeping. We told her how important this was, and that we needed
the information,” Sally said. “When she talked about the critical areas,
she mentioned all of the linens, including bed sheet and towels, cleaning
the bathroom including sinks, toilets, and shower stalls, and making sure
the garbage cans are emptied and cleaned with new plastic liners inserted.
Also, a top priority is making sure everything is wiped down on all of
the flat surfaces. The last critical step is cleaning the floor as you leave the
room,” Sally said.
“From what I’m hearing, I think we might need three people on a team.
We want them to be able to do their work without constantly running into
each other,” Jeff said. “I think we need to get with Nancy and describe in
more detail what we’re thinking about. We need to put a practice team
together and watch them go through the steps. We can apply Lean and Six
Sigma and better define how the process would work and the correct order
for doing the steps. We can document our findings and create a prelimi-
nary process and work from there,” Jeff added. “That’s a good idea,” Sally
said. “Tom, would you mind if we all went back to housekeeping to talk
with Nancy?” Sally asked.
“Not at all,” Tom said. “It’s the next step for what we need to do. Besides,
it’s almost lunchtime, so we’ll meet back here at 2:30 to review your find-
ings. Does that give you enough time?” Tom asked. “I think it might,”
Sally said. “Even if it’s not enough time, it will give us a good start,” she
added. The team gathered up their things and headed out of the room
toward housekeeping. Tom stayed in the room. That would give him time
to consider his next steps at Simpson Water Heaters.
Around 2:20, the team started to assemble back in the conference room.
There seemed to be a lot of chatter and excitement with the group. When
everyone was seated, Jeff was the first to speak. “We talked with Nancy.
She seemed okay with the idea, but the first thing she said was, ‘We’ll need
more people to do that.’ We explained to her about what we had talked

about earlier, that we might have enough people, we just had them in the
wrong location. Anyway, she started to warm up to our idea,” Jeff added.
“Because it was the noon hour, there were a lot of rooms to pick from.
We looked at her list of rooms and picked one on the second floor. Nancy
looked at the list as well and determined that the fourth floor had only one
room to clean. She called the housekeeping lead on four and asked her to
send two people to the second floor. According to the list, the second floor
had the most rooms to clean,” Sally said.
“When everyone was assembled, we explained to the housekeeping per-
sonnel what we wanted to do. We went over the list of critical tasks, and
they all agreed,” Jeff said. “We divided the tasks among the three, with
one person assigned to change the bed sheets and gather towels. We then
assigned the second person to the bathroom to clean everything, and the
third person was assigned to do the wipe down. The third person would
also do the floors when everything else was done, while the other two
moved on to the next room,” Jeff added.
“When they started, I had a stopwatch on my phone, so I timed them,” Jeff
said. “They completed the room in 13 minutes. That’s almost five rooms an
hour!” Jeff said. “We also had Nancy inspect the room when they were fin-
ished to see if we had forgotten anything,” Sally said. “Nancy said they did a
good job and the room was ready!” Sally added. “The other two had moved
to the next room and the third person was close behind them,” Jeff said.
“I went with the first two and started the stopwatch again when they
started,” Jeff said. “When they finished the second room it took only 12
minutes,” Jeff said. “At that rate, it is five rooms per hour! That’s a big
improvement over one room every 45 minutes to 1 hour when just one
person was assigned,” Jeff added. “Nancy inspected the second room and
said it was also ready,” Sally said. “She was totally amazed at how fast they
could do it, and how well it was done,” she added. “We did a third room
and it was also approximately 12 minutes,” Jeff said. “I think if we look at
this process a bit closer and apply some Lean and Six Sigma, we can reduce
the time even more,” Jeff said. “Honestly, I was so amazed to see how fast
it could be done,” Jeff added.
“I think we might be on to something here,” Sally said. “I think we
need to fine-tune the process for figuring out which rooms need cleaning,
where to assemble the room pit crew staff from, and then notify Admitting
which rooms are ready to go,” she added. “Excellent!” Tom said, as he
walked toward the whiteboard. “Now we have our three injections to help
reduce the wait time.” He wrote the following on the board:
1. Express lane
2. Update and change the discharge policy
3. Implement room pit crews.
“Now, as a team, you just need to fine-tune these ideas and get ready to
make them happen,” Tom said. “Unless you have more comments or
questions, I think you should get back to working these new ideas,” Tom
added. No one raised their hand. As they started to exit the room, most
seemed excited to get back to what they were doing. Pete stayed behind to
talk with Tom for a few minutes. Pete had elected to stay all day and watch
Tom do his thing.
“Thank you, Tom, this has been an exceptional day, at least for me. I’ve
come to realize over the past couple of weeks the importance of doing a
good system’s analysis and applying good systems thinking. I would never
have considered any of the things we found without the systems thinking
to understand how it was all linked together. I understand much more
clearly now how important it is to focus on the real problem and not get
caught up in trying to fix everything. There is a lot of leverage in making
the system better,” Pete said. “Thanks Pete, but let me add that everyone
in your group have been exceptional students!” Tom said. “I think you are
well on your way to making Maximo Emergency Hospital a world class
hospital,” Tom added with a smile.
The team returned from their floor exercise and sat down. Tom then
addressed the group, “When we started this session today, I explained
that I wanted to talk about Drum Buffer Rope. We got side-tracked and,
although what we accomplished was fantastic. Drum Buffer Rope is a
very important element for your hospital scheduling,” Tom explained.
And with that brief statement, Tom inserted the same slide he had posted
before onto the screen (Figure 19.4).
“As we were discussing earlier, we discussed a new format for Drum
Buffer Rope in your Emergency Department which I referred to as Multiple
Drum Buffer Rope.” “Let’s walk through how M-DBR might work in your
Emergency Department,” Tom said.
“Emergency Department patients enter the ED triage area, are diag-
nosed and, if appropriate, they are treated and released. If they can’t be
FIGURE 19.4
Multiple Drum Buffer Rope.
treated and released, they are moved to a patient queue area for future
testing. When hospital beds become available, they are then transferred to
the appropriate section of the hospital for future treatment. The hospital
beds, in this case, are considered the drum. The buffer is based upon the
estimated time to complete the treatment of the current patient. Because
there are multiple drums (hospital beds), any drum can pull from any
buffer slot,” Tom explained. “The rope is simply the notification that a bed
is available for the queue of patients waiting for treatment,” Tom added.
“Eventually the patients will then be released,” Tom said.
Tom continued, “As I explained earlier, the point of separation between
traditional Drum Buffer Rope and Multiple Drum Buffer Rope is that
traditional DBR is based on the fact that the output from a constraint is
very predictable. You’ll remember I explained that as an example, in a
typical manufacturing environment, the constraint usually has a cadence
or rhythm that is very predictable and steady, for instance, a constraint
machine that is able to produce a part every 7 minutes, or whatever the
time may be. Knowing the constraint time allows you to be relatively
accurate in establishing a buffer. In other words, there is a constant, but

predictable normal variation at the constraint.”
“However, in your situation at the hospital, the constraint time can vary
significantly. Each time a patient enters your constraint, there can be a lot
of uncertainty for when the patient will finish, depending on what needs
to be done. You don’t know what patient is coming in with what prob-
lem and the ED physician’s time can vary greatly depending on the cir-
cumstances. It’s very difficult, if not impossible, to establish any kind of
an accurate buffer, from one patient to the next,” Tom explained. Tom
repeated what he said to emphasize the point, “Under those kinds of cir-
cumstances, it’s very difficult, if not impossible, to establish any kind of an
accurate buffer.”
He continued by asking the same question he had asked earlier in the
session, “If the ED physicians are truly the constraint, then how do we
manage to keep them fully occupied to reduce wait times?” Tom asked
rhetorically. “As I said earlier, it would seem to me that we would need to
know the real-time status of each constraint,” said Sally. “What I meant
by that was, if we knew how much longer each physician believed they had
with their current patient, then we could check and see which patient is
next and get them ready,” she added.
“That’s a good possible answer,” Tom said. “And, if we already have a buf-
fer in place, then we should know which patient is next. But let’s go back
and think for a moment about how you establish the buffer. Remember,
M-DBR will be different from traditional DBR, mostly because of the
uncertainty involved,” Tom explained. “As explained earlier, typically,
when a patient comes into the ED, you perform a triage to determine
severity, or urgency of the situation,” Tom said.
“Okay, we are finished for today. What I would like you to do as a team
is to assemble the appropriate group of ED doctors, nurses, and other
ED personnel and first, explain the M-DBR concept and then work to
implement it in your hospital Emergency Department,” Tom said. “I will
be available by phone for any question that you may have as you’re imple-
menting it,” Tom added. “In my next session here at Maximo Emergency
Hospital, I will present the Theory of Constraints Replenishment
Solution,” Tom explained. “Do you sometimes run out of supplies and
medications here?” he asked. The group, in unison, said, “Yes, that is defi-
nitely a problem here.” “Then what I will present next time is a way to
virtually eliminate stock-outs while at the same time, reduce your inven-
tory by about fifty percent.” Tom explained. He thanked the group for all
they had accomplished and dismissed them.
When everyone had left, Pete approached Tom and said, “Tom, this may
have been the best team session I have ever been involved with and I thank
you for everything.” “You’re very welcome Pete, but I promise you, after
the next session you will thank me even more,” Tom replied with a smile.
“I’ll call you later this week so we can schedule my next visit,” he added.
As Tom drove home, he had two things on his mind. One thing was
that he had to prepare for and schedule his next trip to Simpson Water
Heaters. The other thing on his mind was the offer Jonathan Briggs had
made to him, whereby he would help the Board decide which new com-
panies they should add to their portfolio. He thought long and hard about
the Board’s offer on his way home, but he still hadn’t decided if he wanted
to take this offer. When he arrived home, he decided to put together his
presentation on the implementation of Theory of Constraints’ Drum
Buffer Rope and Replenishment Solution that he would be presenting the
next day at Simpson Water Heaters.
20
Simpson Water Heaters’ New Initiative
When Tom left Simpson Water Heaters the last time, he explained that when
he returned, he would discuss another improvement initiative, the Theory
of Constraints Replenishment Solution. Tom arrived at Simpson Water
Heaters and walked to the conference room which was already filled with
participants. Matt Maloney, the Plant Manager, met him at the door and
reintroduced him to his audience. And with that introduction, Tom began
today’s session. “Good morning everyone,” he said. “Today you are going to
hear about a parts replenishment initiative that will significantly change the
way you order needed materials, supplies, and parts,” he explained.
He began, “Most businesses are linked one way or another to some kind
of supply chain. They purchase parts, supplies, or raw materials from other
companies so they can produce their products, and then pass it on to the
next system in line until it finally arrives at the end customer. It clearly
depends on what you make and how fast you make it, but keep in mind,
the supply chain can be your best, friend or it can be your worst enemy. If
it works well, it’s clearly your best friend, but if it doesn’t work well, then
believe me, it can be your worst enemy,” Tom explained.
“The problem with most supply-chain systems is that they haven’t
changed their thinking through time, even though the business reality
has changed. There are many new supply-chain software applications, like
MRP and ERP, with each one proposing that it will solve the problems
associated with the supply chain system. The problem is that while these
new software applications have come about mostly because of advances
in computer technology, but few have really solved the issues related to
the supply chain. It’s true that these systems can provide an enormous
amount of information very fast, but most times system speed is much less
important than having access to the right information. What difference
257
does it make how fast you get the information if it’s simply the wrong
information?” he asked.
He continued, “The new business reality has created a need for dramatic
changes in supply-chain systems, but unfortunately, most systems have
not pursued the needed change. In today’s worls, businesses are required
to build products cheaper, with higher quality, with high on-time delivery
rates. These are the new rules of competition, so you either play by the new
rules or get out of the way. While the rules in business have changed, many
businesses keep on doing business the same ‘old’ way. If a business owner
were to be asked why they haven’t changed, the most common answer you
would get would be ‘Because that’s the way we’ve always done it.’ If the
supply chain system has not changed to align with the new rules, then the
gap between supply-chain output and system needs will grow even larger
with very little hope of getting different results.”
“Many supply-chain systems were designed to solve a couple of key
problems, which were how to avoid stock-outs and how to significantly
reduce the size of their inventory of parts or materials. These systems were
designed to hold inventory in check, which means don’t buy too much,
while at the same time avoiding the stock-out situations that always seem
to occur. You don’t want to run out of parts, and yet, sometimes, you still
run out of parts. You don’t want excess inventory, and yet sometimes,
you have too much inventory. This constant negative gyration between
sometimes too much and sometimes too little has persisted through time.
Believe it or not, the supply problems encountered many years ago are still
the problems being encountered today,” Tom explained.
Tom continued, “Many company’s system of choice is one referred to
as the Minimum/Maximum (MIN/MAX) system. Parts, or inventory, or
supplies, are evaluated based on need and usage, and some type of maxi-
mum and minimum levels are established for each item. The traditional
rules and measures for the Min/Max system are usually quite simple,” He
said and loaded a Power Point slide onto the screen (Figure 20.1).
Rule 1: Determine the maximum and minimum levels for each item.
Rule 2: Don't ever exceed the maximum level.
Rule 3: Don't reorder until you go below the minimum level.
FIGURE 20.1
Rules for Min/Max system.
Simpson Water Heaters’ New Initiative • 259
“The basic assumptions behind these rules and measures are, as you
might have guessed, primarily based in Cost Accounting (CA) and com-
monly referred to as cost-world thinking. In order to save money and min-
imize your expenditures for supply parts/inventory, you must reduce, or
at least hold in check, the amount of money you spend for these items. In
order to reduce the amount of money you spend on these items, you must
never buy more than the maximum amount. Also, in order to reduce the
money spent on these items, you must not spend money until absolutely
necessary, and order parts only when they have reached the minimum
level,” Tom explained.
“These assumptions might seem valid, and if implemented correctly
and monitored, should provide a supply system that both controls dol-
lars spent and maintains inventory within the minimum and maximum
levels. However, even in the perfect world, most systems of this type don’t
seem to generate the desired results that are required. For some reason,
there always seems to be situations of excess inventory for some items and
of stock-out situations for others. The whole operational concept behind
the Minimum/Maximum systems was supposed to prevent these kinds of
occurrences from happening, and yet they still do. Let’s look at why this
happens,” Tom said.
“Maybe the best way to make this point is with a couple of examples.
The first example deals with a company that measured and rewarded their
procurement staff based on the amount of money they saved with pro-
curement purchases. For the procurement staff their primary method to
accomplish this objective was to buy everything in bulk. In fact, their sup-
pliers preferred that their customers buy in bulk in order to receive the
benefit of ‘quantity discounts.’ Back then, the more you bought, the less it
cost per unit. It seemed like a great idea and certainly a way to meet the
objective of saving money. Sometimes, these supply items were procured
in amounts well in excess of the maximum, but the company got them at
a great price!” Tom explained. “Is that what happens here?” Tom asked.
Matt replied, “Yes, pretty much.”
Continuing Tom said, “By employing this cost-saving strategy, this
company had a warehouse full of low-cost inventory that had used a large
portion of their available dollars. The problem was, they didn’t have the
right mix of inventory to build even a single unit of product. They had
too many of some items, even though they were all purchased at the low-
est price, and not enough of other items. The bigger problem was they
ran out of money to purchase any more parts, especially the parts they
desperately needed!”
“The other example is related to a company who was a contractor to
the government. Their primary mission was to perform maintenance on
helicopters. In their contract with the Government, the Government had
offered a very lucrative clause to save money. This company was given a
budgeted amount to buy needed parts on a yearly basis. Based on this
budgeted amount, the Government offered to split fifty-fifty any amount
the company could underrun their parts budget. The company took the
total budgeted dollars and divided it by twelve to establish the monthly
parts budget. They also held back a percentage of the budgeted amount
each month so they could claim cost savings and split the difference. Any
parts purchase that would have exceeded the targeted monthly budget was
postponed until the next month, even if it was urgently needed. The ability
of this company to make money slowed dramatically. They were literally
jumping over dollars to pick up pennies. There were many jobs waiting for
parts that couldn’t be finished until they had the parts to finish, but they
had to wait, sometimes for several days or weeks, to get the parts, because
of the cost-saving mentality,” Tom explained.
Again, Tom continued, “In both of these examples it was an issue of bad
cost metrics driving the bad behavior. In both of these cases, cost savings
were employed as the primary strategy. In the first example, the company
ultimately went bankrupt and went out of business. They couldn’t pay
back the loans on the money they had borrowed to buy all of the low-cost
parts because they couldn’t make any products. In the second example
the company avoided bankruptcy because they provided a needed ser-
vice for the Government; they were ultimately spared by seeing the error
of their ways, and they decided to spend the budgeted dollars to buy the
needed parts.”
“Then and now, the functional theory behind the supply-chain Min/
Max concept is that supplies, parts, and materials should be distributed
and stored at the lowest level of the user supply chain. In effect this is a
push system, or one that pushes parts through the system to the lowest
possible level. Parts must be available at the lowest level in order to be
used. In this type of system, the parts are consumed until the minimum
quantity is reached or exceeded, and then an order is placed for more
parts. The parts order then goes up the chain from the point-of-use (POU)
location back to some kind of central supply center, or orders are placed
directly back to the vendor, depending on the situation. When the orders
are received at the central supply center, they are pushed back down the
chain to the lowest POU locations,” he explained as he loaded a new slide
(Figure 20.2) which defines a simplified version of this parts Flow activity.
“This flow might not be applicable to all situations, but to most it will
make sense. Some companies and smaller businesses will have fewer steps,
in that they order directly from a vendor and receive parts back into their
business without the need for large, more complex, distribution systems.
However, the thinking behind the Min/Max system will still apply, even to
those smaller businesses. Larger companies, or those with numerous geo-
graphical locations, will most likely have developed some type of a central
supply and/or distribution locations that feed the next level of the supply
distribution system. The distribution points in turn feed the companies
or business segments that use the raw material and parts at the final POU
to build products. Some distribution systems may even be more complex
than what I have displayed here. But even with increased complexity, the
results they are trying to achieve remain the same which is to get the parts
to where they are needed and when they need to be there,” Tom explained.
Central
Supply
Center
Distribution Distribution Distribution

“A” “B” “C”
W/S W/S W/S

“1” “2” “3”
Hold maximum inventory

at the lowest point of use
Point of Use Point of Use Point of Use

(POU) (POU) (POU)
FIGURE 20.2
Simplified parts flow activity.
TABLE 20.1
Top-Level Rules for Minimum/Maximum Supply System
1. The system reorder amount is the maximum amount no matter how many parts are
currently in the bin box.
2. Most supply systems only allow for one order at a time to be present
3. Orders for parts are triggered only after the minimum amount has been exceeded.
4. Total part inventory is held at the lowest possible level of the distribution chain—
the point-of-use (POU) location.
5. Parts are inventoried once or twice a month and orders placed, as required.
“Let’s look at some of the Min/Max rules and understand the negative
aspects that result from them. Table 20.1 provides a summary of the top-
level rules for the Min/Max supply system,” he explained.
Tom continued his explanation, “Even though the Min/Max system
appears to control your supply needs, and cover the inventory demands,
there are some significant negatives effects caused by using this system.
First, there is the problem of being reactive to an inventory or parts situ-
ation, rather than being proactive. When minimum stock levels are used
as the trigger to reorder parts, some supply-chain systems will have a dif-
ficult time keeping up with the demands being placed upon them. And
there is an increased likelihood that stock-outs will occur and may be for
extended periods of time.”
“Stock-outs occur when the lead time to replenish the part will exceed
the minimum stock available. In other words, the availability of the part
between the minimum amount and zero is totally depleted before the
part can be replenished from the vendor,” Tom explained as he loaded a
new slide onto the screen (Figure 20.3). “The figure on the screen is what
typically materializes when using the Min/Max replenishment system.
The bottom line is that you will wait to reorder parts until you reach, of
go below the minimum level. Unfortunately, many times the replenish-
ment time exceeds the replenishment time and stock-outs occur,” Tom
explained.
He then loaded another slide onto the screen (Figure 20.4) and said, “The
figure on the screen is a visual flow of what I just described and as you can
see, the distribution of parts is from the top down and the reorder is from
the bottom up. The parts come into the central warehouse from the sup-
pliers, and from there, they are distributed to your facility’s stock room.
FIGURE 20.3
Stock-out condition with Min/Max system.
FIGURE 20.4
Parts and inventory flow.
The parts are distributed to the appropriate line stock bins until they are
needed in your operations. Typically, once a week the bins are checked to
determine the inventory level in each of the bin boxes. If the bins are at
or below the minimum defined level, then an order is placed for that part
number. Even though this type of system ‘appears’ to control the supply
needs of your plant, in reality there are negative effects that we see and feel
with the Min/Max system.”
“This problem of stock-outs seems to occur over and over again, yet
companies continue to use the Min/Max system for their replenishment
of needed production materials. I ask you, why in the world would you
continue using a system that continually doesn’t work the way you wanted
it to?” Tom asked rhetorically as he loaded yet another slide (Figure 20.5).
“So, what’s the solution to this stock-out dilemma?” he asked.
“As I explained earlier, even though the Min/Max type of system
‘appears’ to control the supply needs of your plant, in reality there are
some very negative effects that you see and feel with it. And I’m sure, you
here at Simpson Water Heaters have experienced them. The first problem
we experience with this Min/Max System is that you are continuously in
a reactive and knee-jerk state, rather than a proactive and practical mode.
This is simply because the Min/Max System is almost always assured to
FIGURE 20.5
Repeating periods of stock-outs.
have ‘stock-out’ conditions regularly and repeatedly. So, the questions

we must answer is why do these stock-outs occur and what can we do to
prevent them?” Tom asked.
“Very simply put, stock-outs occur principally because it’s not unusual
for the lead time to replenish the minimum amount of parts left in the bin,
quite regularly exceeds the time remaining to build products with what’s
left in the parts bin. And because of the inherent variation in demand,
stock-outs can occur in both shorter or longer times than the Min/Max
model might suggest. The problem with this is that when you do have a
stock-out, your production stops until new parts arrive, and it usually
happens often,” he explained.
Tom continued, “As mentioned earlier, the flow in the Min/Max Parts
Supply System, where the parts are distributed to the lowest level of the
distribution (i.e. to parts bins) and are also reordered from this same low
point in the system. So, what must be done differently to avoid these stock-
out periods? Wouldn’t it be great if we had a system that would operate
with much less on-hand inventory without stock-outs?”
“There is such a system, and it comes to us from the Theory of
Constraints. The Theory of Constraints Distribution and Replenishment
Model states that, unlike the Min/Max system, most of the inventory
should be held at the highest level in the distribution chain and not at
the lowest level (i.e. the bins). Of course, you must hold some inventory
at the point of use (POU) for your assembly work, but this model tells us
that the majority of it should be held at the warehouse, from where it’s
ordered and received from the supplier. The bottom line is this, instead of
using some minimum quantity to trigger the reorder of parts, the reorder
process should be triggered by daily usage and the time required for the
vendor to replenish the parts. That is, it tells us to simply replace what
we’ve used on a very frequent basis, rather than waiting for some mini-
mum quantity to be reached. When this system is used, there will always
be enough parts on hand to produce your products and no stock-outs will
occur!” Tom explained as he loaded a graphic image (Figure 20.6) of what
the Theory of Constraints Replenishment System might look like.
Tom then explained, “Buffers are placed at better leverage points in
the supply chain (i.e. Most inventory is held in the factory warehouse).
Likewise, each regional warehouse and retail locations have buffers for
FIGURE 20.6
Theory of Constraints Replenishment System.
each product. These buffers (physical products) are divided into green, yel-
low and red zones and are located at strategic locations to avoid stock-outs.
This replenishment system relies on aggregation to smooth demand and
demand at regional warehouses is smoother than demand at retail loca-
tions, simply because higher-than-normal demand at some retail locations
is offset by lower demand than at other ones. Demand at the factory ware-
house is even smoother than demand at the regional warehouses. Goods
produced by the factory, are stored in a nearby warehouse until they are
needed to replenish goods consumed by sales.”
“Because sales occur daily, shipments occur daily, and the quanti-
ties shipped are just sufficient to replace goods sold. This might seem to
increase shipping costs over what could be achieved by shipping large
batches less frequently, but the truth is, the net effect on total shipping
costs is that they actually decrease. Stopping the shipment of obsolete
goods and reshipment of misallocated goods, more than compensates
for increased costs created by smaller shipments of saleable goods,” Tom

explained.
Tom then said, “The ability to capture sales that would otherwise be lost
due to insufficient inventory, makes the Theory of Constraints solution a
better alternative. In this system, replenishment is driven by actual con-
sumption and not a sales forecast. As sales are made, the buffer levels at
retail locations drop, eventually triggering replenishment from the factory
warehouse, which triggers a manufacturing order to resupply the appro-
priate buffer before it runs out.” He continued, “Buffer sizing is based on
both variability and the time it takes to resupply the needed parts or mate-
rials. So, the more variable the consumption is, the larger the buffer must
be to cover this variability. In addition, the longer it takes to re-supply, the
bigger the buffer needs to be, so that it is able to cover the demand during
the re-supply waiting times,” he explained.
“The benefits of Theory of Constraints’ replenishment solution can be
very striking. For example, a traditional distributor that is 85% reliable,
can reasonably expect to increase its reliability to 99%, while reducing its
inventory by fifty percent or more. In addition, the average time to resup-
ply retail locations typically drops from weeks or months, to days. A cen-
tral benefit of Theory of Constraints’ Replenishment Solution is to change
the distribution from push to pull. That is, nothing gets distributed, unless
there is a market for it. Market pull, the external constraint, then opti-
mizes distribution while minimizing inventory,” he explained.
Tom continued, “As an added bonus for using this system, the average
overall inventory will be significantly lower. This happens because when
an order is placed under the Min/Max system, the system automati-
cally reorders, but does so to the maximum quantity. Since the Theory
of Constraints Replenishment System simply reorders what’s been used,
the amount of inventory required to be on hand drops significantly. In
fact, you’ll see a drop-in inventory levels in the neighborhood of 40–60%
while stock-outs drop to nearly zero! Imagine what that means to your
cash flow. The figure I just posted (Figure 20.7) is a graphical summary
of what you can expect.”
FIGURE 20.7
The benefits of Theory of Constraints’ Replenishment System.
Tom then explained, “A simple way to present Theory of Constraints’

Replenishment System is by considering a soda vending machine. When
the supplier (the soda vendor) opens the door on a vending machine, it
is very easy to see what products have been sold. The soda person knows
immediately which inventory has to be replaced and to what level to
replace it. The soda person is holding the inventory at the next highest
level, which is on the soda truck, so it’s easy to make the required distribu-
tion when needed. The soda person doesn’t leave six cases of soda when
only twenty cans are needed. If he were to do that, when he got to the next
vending machine, he might have run out of the necessary soda, because he
made distribution too early at the last stop.”
“After completing the daily refill of the vending machines, the soda person
then returns to the warehouse or distribution point, to replenish the supply
on the soda truck and get ready for the next day’s distribution. When the
warehouse makes distribution to the soda truck, they move up one level in
the chain and replenish what’s been used from their supplier. Replenishing
in this way, significantly reduces the on-hand inventory, while significantly
reducing stock-outs. If a type of soda always runs out, then more should be
added to the vending machine (i.e. another row of soda),” Tom explained as
he posted another new slide onto the screen (Figure 20.8).
• The Theory of Constraints Replenishment Model holds a small amount of inventory
at the Point of Use (POU), while holding the majority of the inventory at the highest
level of the organization, typically in a central warehouse. The Min/Max System
holds all of the inventory at the POU.
• The Theory of Constraints Replenishment Model re-orders parts based upon real
usage on a frequent basis (i.e. typically weekly), and orders parts from the central
warehouse. The Min/Max System re-orders to the maximum level, when the
number of parts remaining in the parts bin, meets or goes below the calculated
minimum quantity, and then orders directly from the POU. Many times, the time
required to replenish the part, exceeds what’s left in the parts bin and a stock-out
occurs.
• Because the Theory of Constraints Replenishment Model re-orders what’s been
used on a frequent basis, no stock-outs occur and typically the level of inventory
is reduced by approximately 50%.
FIGURE 20.8
Summary of differences.
So, to summarize the differences:

“In closing, here is a summary of the benefits from using Theory of
Constraints’ Replenishment System, rather than the traditional Min/
Max System,” Tom said as he posted another new slide onto the screen
(Figure 20.9).
1. The reduction of total inventory required to manage and maintain the total supply-
chain system is typically on the order of 40-60%, while experiencing the virtual
elimination of SKU stock-out situations.
2. Distribution of SKU is made at the right time, to the right location.
3. The frustration caused by stock-out situations virtually disappears. Not only in being
able to complete the work, but also the elimination in the time spent looking for and
waiting for SKUs to become available.
FIGURE 20.9
Benefits from Theory of Constraints’ Replenishment System.
Tom then finished by saying, “Because waiting due to stock-outs

virtually disappears, parts flow and synchronization improves dramati-
cally, which improves the throughput of parts through the entire supply
chain. And because throughput improves, profitability increases pro-
portionally to the level of sales. Are there any questions about Theory of
Constraints’ Replenishment System?” Tom asked, and when there weren’t
any, he continued.
“You will recall during my last visit here to Simpson Water Heaters,
we discussed a different scheduling system known as Drum Buffer Rope.
We discussed the details of Drum Buffer Rope and the basics of imple-
menting it here at Simpson Water Heaters. One of the most important
points you need to understand is that there is an important relationship
between Drum Buffer Rope and the Theory of Constraints Replenishment
Solution. While Drum Buffer Rope takes care of your scheduling needs,
the Replenishment Solution makes certain you won’t run out of parts or
raw materials,” Tom explained.
“I want you to implement both of these improvement initiatives right
away here at Simpson Water Heaters and when you do, you will see many
benefits happen almost immediately!” Tom exclaimed. “Think, for a min-
ute, what benefits you will see from these two initiatives,” he said. “From
Drum Buffer Rope, you will see a dramatic reduction in on-time deliveries
and a significant reduction in work-in-process inventory. You will also see
a significant shift upward in new revenue entering your system, which will
translate into a corresponding increase in you company’s profit levels,”
Tom explained.
He continued, “To summarize, the apparent benefits from implement-
ing the Theory of Constraints Replenishment Solution will be about a fifty
percent reduction of parts and materials inventory, while at the same time
completely eliminating stock-outs. These two benefits will also increase
your on-time delivery of orders as well as a significant reduction in the
amount of money spent on parts and material’s purchases, which also
positively impact profitability!” The bottom line is that by implementing
both of these methods, your bottom line will improve well beyond what
you dreamed was possible.
“As I said, I want you to immediately implement both of these tech-
niques and I will be available for any implementation questions you might
have,” Tom said. “You’ve already seen significant improvements in your
profits by implementing my Ultimate Improvement Cycle methodology,
but when you tie these initiatives together, your company will become one
of the best in the portfolio of companies,” Tom emphasized. “That is all I
have to say today, so go forth and do your thing!” he said.
When everyone was gone, Matt approached Tom and said, “Tom, what
you have provided for my team is something that will help us get to the
proverbial promised land, and all I can say is thank you!”
“Matt, you have a great team in place, and I am convinced that you guys
here at Simpson Water Heaters will become one of the best, if not the best
in the Board’s entire portfolio!” Tom emphasized. “Think about that Matt,
going from ‘last place’ to ‘first place’ would be an amazing turn-around!”
he exclaimed. “Gotta go now, Matt, but remember, if you need any help,
I’ll be available by phone or the Internet,” he said as he left.
21
The End of the New Beginning
As Tom was driving home from Simpson Water Heaters, a thought entered
his mind regarding the offer the Board of Directors had made to him regard-
ing helping the Board select new companies to purchase. He thought to
himself, “I’d really like to help them make their purchase decisions, but how
should I get paid?” And then he thought back to his favorite TV show, Shark
Tank. He imagined sitting next to Kevin O’Leary listening to Kevin’s royalty
offers and that wasn’t what he wanted to do this time. “If not a royalty, what
if I told the Board that I would take the job, if they would give him an equity
percentage instead of a royalty?” he thought. The more he thought about
getting paid this way, the more he liked the thought of this approach. He
decided to call Jonathan Briggs and discuss this approach with him.
He dialed the number for Jonathan’s cell phone and Jonathan answered,
“Hello, this is Jonathan Briggs.” “Hi Jonathan, this is Tom and I have an
answer to your question about helping the Board select future companies to
purchase,” he explained. “Great Tom, what did you decide?” Jonathan asked.
“I decided that I’d like to take you up on your offer,” Tom responded. “And
how would you like to be paid Tom?” Jonathan asked. “I’d like to get an equity
percentage for each company that you end up buying,” Tom said. There was
dead silence on the other end until Jonathan finally said, “An equity percent-
age?” “Yes, and I’m thinking something like three percent for each one based
upon the new profit levels after one year of turning each one around,” Tom
explained. “And after the first payout, my equity would drop to one percent
and would last forever,” he said. Jonathan then said, “I’ll have to discuss this
proposal with the other Board members.” And with that, they both hung up.
Tom had been working for months on the four portfolio companies that
the Board of Directors had assigned to him for his improvement efforts.
Tom sat down at his desk and pulled up the table of performance metrics
273
TABLE 21.1
Portfolio Performance Metrics Before and After
%
On-Time % % Stock-Out Efficiency % Profit
Company Name Delivery Scrap Rework % % Margins
Tamsen Auto 68.9 4.8 10.1 11.2 95.4 +5.7
Parts Before
Tamsen Auto 73.1 3.9 8.8 9.0 81.2 + 9.2
Parts After
Simpson Water 68.1 8.8 15.6 19.1 94.7 −1.2
Heaters
Before
Simpson Water 75.2 4.8 10.4 13.7 76.3 +4.1
Heaters After
Watson Rubber 70.9 6.8 8.8 9.9 88.7 +7.8
Articles
Before
Watson Rubber 82.2 4.1 6.3 5.2 71.1 +10.1
Articles After
Jackson 75.4 4.9 14.2 13.4 89.9 9.1
Electronics
Before
Jackson 79.9 3.5 9.1 8.2 70.3 +11.6
Electronics
After
that he had started with and had made some improvements in his first few
months (Table 21.1). And although he had made some improvements, he
was anxious to see what the latest results looked like. He decided to send
out a general email to all four portfolio company leaders to get an update.
While he had spent the majority of his time at Simpson Water Heaters
and Maximo Health Center Complex, he had provided regular webinars
for the other portfolio companies as well as the other hospitals within the
Maximo Heath Center Complex.
Tom contacted each of the leaders and requested that they update their
performance metrics, so he could get a feel for how things were going at
each of the portfolio companies. Within twenty-four hours, Tom received
feedback from each of the portfolio companies and the results were stun-
ning! He put together an updated table of results (Table 21.2) and he was
delighted to see that Simpson Water Heaters, which had been in last place
for % Profit Margins at −1.2%, was now leading the group of companies
TABLE 21.2
Portfolio Performance Metrics Update
% On-Time % % Stock-Out Efficiency % Profit
Delivery Scrap Rework % % Margins
Company Name Bef Aft Bef Aft Bef Aft Bef Aft Bef Aft Bef Aft
Tamsen Auto Parts 68.9 94.8 4.8 1.4 10.1 5.1 11.2 1.8 95.4 68.1 +5.7 +29.8
Simpson Water Heaters 75.2 95.8 8.8 1.2 15.6 3.9 19.1 0.7 94.7 61.3 -1.2 +30.3
Watson Rubber Articles 70.9 89.2 6.8 2.1 8.8 4.2 9.9 2.2 88.7 67.1 +7.8 +28.1
Jackson Electronics 75.4 88.9 4.9 1.5 14.2 6.7 13.4 2.2 89.9 64.3 +9.1 +29.6
The End of the New Beginning • 275
with profit margins approaching 30% at +29.1%. The remaining three

companies in the portfolio now had double-digit % Profit Margins. Tom
knew the Board of Directors would be happy with these results, especially
because of the short amount of time that had passed since Tom started
this assignment.
Tom knew that in three weeks, he had a meeting schedule with the Board
of Directors to review the status of the latest performance metrics, so he
decided to have a conference call with all four of the portfolio companies.
He wanted this call to see what short-term activities each of the portfolio
companies had planned, going forward. He arranged the conference call
for the day after tomorrow.
Today was the day he had scheduled a conference call with the four port-
folio companies, so he logged in to his computer and waited for everyone
to join him for their on-line meeting. Matt Maloney from Simpson Water
Heaters was the first to log on for the conference call. “Good morning
Tom,” he said. “Good morning Matt, how are you today?” Tom asked. “I’m
actually very good this morning,” Matt responded. One-by-one each of the
portfolio leaders joined the conference call and the on-line meeting began.
“Good morning everyone,” Tom said and everyone in unison replied
with a good morning. “In three weeks, I have a meeting with the Board of
Directors, so today I want to get an idea of your immediate future plans
for improvement. How many of you have fully implemented my Ultimate
Improvement Cycle methodology,” he asked. Bill Dawson, from Tamsen
Auto Parts, was the first to reply and said that his company had fully
implemented it and that their scrap and rework levels had improved dra-
matically, along with their rework levels. “How about everyone else? Have
you all seen similar results?” Tom asked. Everyone in the group replied
and said they had seen similar results.
Tom then asked, “What about the Theory of Constraints Replenishment
Solution?” Tim Selsa, from Jackson Electronics responded and said, “We
saw an unbelievable reduction in stock-outs as we reduced it from 13.4%
down to 2.2%!” Matt Maloney then said, “You think that was good, ours
dropped from 19.1% down to 0.7%!” “Wow!” everyone exclaimed. Then,
Tom asked, “How about everyone’s Efficiency %?” There was a general
laugh that followed with that question as everyone’s efficiency had fallen
dramatically. Once again Matt Maloney responded and said, “That was
the most surprising change for me. I never dreamed that reducing our
overall efficiency metric would be a positive result of our improvement
efforts!” Everyone in the group had similar feelings on that metric. What
they were reporting was the actual average efficiency of their constraint
plus their non-constraints.
Tom began again, “I want everyone to know that your % Profit Margins
are simply amazing, but not surprising at all. I mean, look at where you are
now compared to where you were before you started your improvement
initiatives. All of your companies are now approaching a profit margin
of thirty percent!” Sarah Johnson from Watson Rubber Articles spoke up
and said, “I never imagined profit margins this high Tom and my com-
pany is just so thankful to you for teaching us the right way to run our
company!” Everyone in attendance agreed with Sarah.
Tom then responded to Sarah’s comments and said, “Yes, I did teach you
a new way to run your companies, but it was you that spearheaded your
improvement efforts and ultimate results. Does anyone have anything new
that you want to share with this group?” Tom asked. Matt Maloney then
said, “Yes, I have something to share.” “And what is that Matt?” Tom asked.
“Well, when you taught us about Drum Buffer Rope, I absolutely believed
that using traditional DBR was the right way to go and I still do. But after
thinking about it more, and relating our multiple production lines, I have a
new idea,” Matt said. “And what is your new idea Matt?” Tom asked.
“We have five production lines in our plant with each one making a
slightly different type of water heater. And in each line, the location of the
constraint is different,” Matt said as he loaded a figure describing what he
had just explained (Figure 21.1).
Matt continued, “In this configuration of multiple drums, there are also
multiple ropes, and each has different requirements. There are multiple sig-
nal points for the rope as seen in this figure. The signal of each rope would
be back to the buffer to release more work for that particular line. The sec-
ond rope goes back to the raw material release areas to support the needs of
the buffer, which in turn releases work at the front of the water heater line.”
“It’s my belief that the advantage of this concept is to reduce the ten-
dency for economic batch size quantity. Many companies believe when
they set up a machine to make parts, they should make as many parts as
they can, especially if the machine is expensive, or the setup times seem
especially long. The thought that this economic batch size quantity some-
how saves money is, at best, absurd, based upon what you taught is about
Throughput Accounting. The economic batch size only serves to slow
down throughput in the system,” Matt explained.
Multiple Drum Buffer Rope
5 5 5 5 5
Drum 4 4 4 Drum 4 4
Rope
3 3 Drum 3 3 Drum 3
2 Drum 2 2 Rope 2 Rope 2

Rope Rope
1 1 1 1 1
Buffer Location for all 5 Lines
Single Distribution Point
FIGURE 21.1
Multiple Drum Buffer Rope at Simpson Water Heaters.
He continued his explanation and said, “No money has been saved at
all! In fact, it will cost additional amounts of money because throughput
will have been damaged, revenue is lost, and the dollars will have been
spent to buy those raw materials and parts that aren’t needed yet. It’s my
belief instead, that you should manage the constraint, conduct the setups
in the sequence and frequency required from the drumbeat in the lines,
and solve the problem of shorter setup times as they occur using Single
Minute Exchange of Dies (SMED) techniques. The action of the machine
should be to support the buffer for the various ‘I’ line drums, not maintain
‘high efficiency’ at the expense of making money.”
Tom responded and said, “Matt, I believe what you have just presented
is a brilliant concept and one that should be shared with all of the Board’s
portfolio of companies!” There were numerous other positive comments
from the other plant leaders. Tim Selsa, from Jackson Electronics, was
especially complimentary and indicated that when he returned to his com-
pany, he would absolutely want to implement this new concept. He even
asked Matt if he would be willing to come to his manufacturing facility
and assist them with their implementation of M-DBR, and Matt indicated
that he would be happy to help. Tom had one more question for Matt,
“Matt, have you actually implemented this concept?” Matt replied, “Yes,
we implemented it four days ago and I can’t wait to see what happens to
our profit margins.” “I have a meeting with the Board in a couple of weeks,
so please update your performance metrics before I go,” Tom said. When
nobody else had any comments, Tom ended the session, and everyone left.
The next item on Tom’s agenda was to have a meeting with all of the hos-
pitals within the Maximo Health Center Complex. He wanted to see how
each of the hospitals was performing, so he decided he would contact each
hospital leader and schedule a joint meeting with all of the leaders of each
hospital. He then called Pete Hallwell, the CFO at Maximo Health Center
Complex, and his general contact during the improvement efforts. He looked
in his desk and found the hospital name and person in charge (Figure 21.2).
The meeting was scheduled for the next day, and he really looked forward
to hearing about each of the hospital’s improvement efforts. As he talked
to each of the hospital leaders, he requested their latest status on the set of
performance metrics (Table 21.3) that they had all agreed to keep records
of. The next morning Tom arrived around 7:30 am at the corporate office
of Maximo Health Center Complex where he was greeted by Pete Hallwell.
They took the elevator to the seventh-floor conference room and waited
for everyone to arrive. When everyone had arrived, Pete was the first one
to speak. “Good morning everyone, I hope you’re ready for today’s session
with Tom Mahanan today. I want each of you to present your results and be
ready to answer any questions Tom might have,” Pete explained. “Let’s start
with Tom Jones from Children’s Hospital,” Pete said.
Tom Jones walked to the front of the room and began, “First, let me say
thank you to Tom Mahanan for everything he has taught us over the past
Maximo Children's Hospital, specializing in children's ailments, Tom Jones
Maximo Women's Hospital, specializing in pregnancies, Philip Zagst
Maximo Veteran's Hospital, specializing in military veterans, Marie Thomas
Maximo Oncology Hospital, specializing in cancer treatments, Terry Sample
Maximo Surgical Hospital, specializing in surgical operations, Patricia Smith
Maximo Emergency Hospital, specializing in emergency patients, Ted Simpson
FIGURE 21.2
Maximo Hospitals and leaders.
TABLE 21.3
Maximo Health Center Complex Hospitals
Avg. ED Hrs of Patient

Wait Time for Satisfaction Med Stock-Out Bed Occupancy % Profit
Services Index % Rate (Days) Margins
Hospital Name Before After Before After Before After Before After Before After
Children’s Hospital 2.5 1.2 82.1 91.7 11.2 0.5 6.7 4.5 +4.2 +9.9
Women’s Hospital 2.9 1.5 83.3 90.1 10.8 0.7 5.9 3.4 +2.9 +10.6
Veteran’s Hospital 3.4 1.6 78.1 91.1 9.8 0.7 7.8 3.9 +1.8 +14.8
Oncology Hospital 2.8 1.4 82.2 90.8 8.1 0.5 8.2 4.3 +6.2 +17.1
Surgical Hospital 2.7 1.1 80.4 88.8 8.9 1.1 7.3 3.6 +7.4 15.8
Emergency Hospital 1.9 0.7 83.8 93.5 9.9 0.5 3.9 2.4 +3.9 +18.9
several months. As you can see on the screen our before and after results.
And while all of these metrics have improved, the one that stands out for me
is our Average Emergency Department Wait Time for Services as we have cut
this time in half!” “This metric, above all others fully describes our improve-
ment effort results. To think that we have cut the wait time in half means so
very much to the parents of the children needing our services. I think it’s
probably the main reason our Patient Satisfaction metric has improved so
much,” he explained. He then presented the rest of his metrics and sat down.
Philip Zagst, from Maximo Women’s Hospital, was the next to speak,
and like Tom Jones, he thanked Tom Mahanan for all of his help in trans-
forming his hospital. Just like Tom Jones, he was especially happy with
how much they had reduced their Average Emergency Department Wait
Time for Services. He explained that he was also very happy with their
new profit margins which were now approaching 11%. Ted Simpson, from
Maximo Emergency Hospital, took the floor.
Ted began, “I have been especially blessed to work directly with Tom
Mahanan. He has helped us change the course of history at our hospital
and I will be forever indebted to him. While all of our performance met-
rics improved substantially, the one that stands out the most is our new %
Profit Margin which is now approaching twenty percent! In all of my years
in the medical field, I never expected to see profit margins at a hospital rise
to this level,” he explained.
Marie Thomas from Maximo Veteran’s Hospital then said, “I too want
to thank Tom for everything he has taught us, but I’m especially thank-
ful for our new Patient Satisfaction Index which, before we started our
improvement journey was at 78.1% and now sits at over 91%. This is a very
important metric for us since we specialize in helping our military veter-
ans who don’t deserve to wait for our services.”
Terry Sample from Maximo Oncology Hospital was next to speak and
like the rest of the hospital leaders thanked Tom for his efforts. “Since
our objective is to treat various cancer patients, it’s extremely important
that we always have the necessary meds available when they are needed.
Because of Tom’s teachings, especially on the Theory of Constraints
Replenishment Solution, our stock-out percentage is among the best in
our complex of hospitals. Before we started, our Stock-Out % was around
eight percent, but now we’re down to less than one percent.”
And finally, Patricia Smith from Maximo Surgical Hospital stood up
and said, “Our Bed Occupancy Rate, before we started our improvement
efforts stood at 7.3%, but now, because of our Drum Buffer Rope imple-
mentation, it has dropped to 3.6%. This means that we can perform many
more surgeries which is reflected in our new % Profit Margin which is now
almost 16%!” “So, thank you Tom for everything you have taught us and
know that we will be forever grateful to you!” she added.
Pete Hallwell thanked everyone for their presentations and then said,
“I’m not sure if everyone knows this, but Tom Mahanan and I first met
at, of all places, a golf course. I was part of a foursome and was fortunate
enough to have shared a golf cart with Tom. I can’t remember exactly how
we got onto the subject of system’s improvement, but as we continued play-
ing the round of golf, Tom shared the basics of the Theory of Constraints
and all that it has to offer. Based upon what I heard that day, I invited Tom
to come meet with me and the rest, shall we say, is history. Oh, and by the
way, Tom and I won the skins game we played with the other golfers.”
Pete continued, “After our meeting the next day, I offered Tom a con-
sulting contract and I must say, I think that was the best decision I
have ever made!” “To think how far each of our hospitals in our com-
plex have come, is simply an amazing feat. So, Tom, when we originally
signed our consulting agreement, it was to last for a year. But I’d like
to extend our contract for at least another year. We would be honored
to have you continue to help us get better and better,” he said. Tom
responded immediately and said that he would be honored to continue
working with Maximo. “Great Tom, I have a contract ready for you to
sign right now,” he said as he reached into his brief case and pulled it
out. Without hesitation, Tom signed it and with that, the meeting was
adjourned.
As Tom was driving home, he thought about his meeting next week with
the Board of Directors and what he had to do to prepare. Upon arriving
home, he was met at the door by his wife and kids and received big hugs
from everyone. They sat down to dinner and to his surprise, his wife had
made his favorite meal, which was chicken divan! The family exchanged
pleasantries throughout dinner, and then, Tom let his wife know about the
extended consulting agreement with Maximo Health Center Complex.
She was very happy to hear about his new agreement, but then, she had a
surprise for Tom. “Honey, I have something to tell you,” she said. “What’s
that honey?” Tom asked. “I’m pregnant!” she exclaimed. Tom got the big-
gest smile on his face, stood up and went over, kissed her, and then said,
“I’m so happy to hear that sweetie!!”
Tom had requested updates from the four portfolio companies on their lat-
est performance metrics, and when he checked his emails, he found updates
from each of the companies. Tom worked the rest of the week on his presen-
tation to the Board of Directors which was scheduled for Monday morning.
He updated his metrics slide and then thought about how he would present
it. He also thought about the payment offer he had made to Jonathan Briggs
and wondered whether the Board would approve his offer. To think that he
could possibly be a part owner of future companies excited him. He worked
off and on throughout the weekend, and then, Sunday he flew to Chicago.
As usual, on Monday morning, there was a car ready for him that drove
him to his Board meeting. He signed in, and Jonathan met him in the
lobby. They exchanged greetings and took the elevator to the conference
room which was full of Board Members. Jonathan welcomed everyone and
then, once again, introduced Tom to the Board of Directors. Tom thanked
everyone for inviting him back to Chicago and began his presentation.
“First of all, when I accepted your offer to improve the results of the origi-
nal portfolio of companies, I never expected to realize the results that were
achieved. After all, my background prior to this had been almost exclusively
in the financial world. I learned so much working with the original portfolio
of companies which have carried over into the latest four companies,” he
explained as he posted a table of results onto the screen (Table 21.4). When
the results were seen by the Board members, there was a distinct hush that
came over the room. They were not surprised with the end results, but they
were amazed that the results came as quickly as they did!
When everyone had digested the new data, Jonathan spoke up and said,
“Tom, these results are totally amazing!” He continued, “While the actual
results aren’t surprising to me, the speed at which you have achieved them
certainly is!” “I am especially surprised with the results you were able to
achieve with Simpson Water Heaters. To think that when you started, they
were losing money and now they are the most profitable of all of our port-
folio companies is mind boggling!” he exclaimed. “Well, thank you for
your glowing remarks Jonathan, but the credit has to go to Matt Maloney,”
Tom replied. “He actually led his team, so to speak, to victory,” Tom added.
They continued discussing the various bits of data Tom had presented
until Jonathan spoke up and said, “So, Tom, the Board and I have been
discussing your latest consulting payment proposal over the past week.
What you requested was that you’d like to get an equity percentage for
each company that we end up buying,” Jonathan said. “You also suggested
TABLE 21.4
Portfolio Performance Metrics Update

% On-Time % % Stock-Out Efficiency % Profit
Delivery Scrap Rework % % Margins
Company Name Bef Aft Bef Aft Bef Aft Bef Aft Bef Aft Bef Aft
Tamsen Auto Parts 68.9 96.8 4.8 1.1 10.1 3.2 11.2 0.5 95.4 63.1 +5.7 +31.1
Simpson Water Heaters 75.2 98.8 8.8 0.5 15.6 2.2 19.1 0.3 94.7 60.1 −1.2 +34.3
Watson Rubber Articles 70.9 95.3 6.8 1.7 8.8 3.4 9.9 0.6 88.7 63.2 +7.8 +30.2
Jackson Electronics 75.4 94.1 4.9 1.1 14.2 3.5 13.4 0.7 89.9 60.2 +9.1 +30.2
something like three percent for each one based upon the new profit levels
after one year of turning each one around,” Jonathan continued. “And
finally, you suggested that after the first payout, your equity would drop to
one percent and would last forever,” he explained. Jonathan then said, “I
told you that I had to discuss this proposal with the other Board members.
Did I get your payment method correct Tom?” Jonathan asked.
Tom responded and said, “Yes Jonathan, you got it absolutely right.” “After
much discussion, the Board and I have decided to not accept your payment
recommendation,” he said. He then added, “Our counter offer goes like
this,” he said, “Your payment for each company we decide to purchase, will
be $200,000 with one caveat, and that is, the profits need to at least double
after one year. At the end of the year, assuming the profits have doubled,
you will receive the $200,000 plus 1% of the profits forever. And if we were
to sell the company, you would receive another payment of $200,000. We
think this offer is a fair offer, so what do you think?” he asked.
“I think the offer you have made is a very reasonable offer and I am
pleased to tell you that I accept it, but with one additional caveat. On sign-
ing this agreement, I want a signing bonus of $500,000 to be payable the
day I sign your offer?” he replied. Jonathan looked around the room and
saw most heads nodding in the affirmative, so he turned to Tom, and
extended his hand, and the two of them shook hands in agreement.
Jonathan offered to take Tom to dinner that night, and he accepted the
offer. They decided to meet at a restaurant close to Tom’s hotel at 7:00 pm.
As Tom walked in the door, he could see Jonathan already seated, along
with a couple of the Board Members. They all stood up and shook hands
with Jonathan, then ordered a bottle of champagne. When the drinks were
in place, Jonathan reached in his brief case and pulled out a piece of paper.
It was Tom’s new contract and a check for $500,000! Tom immediately
signed the contract, and they all ordered and ate their dinner.
As soon as Tom reached his hotel room, he called his wife and said, “Are
you sitting down honey?” She said, “Yes I am, what’s up?” Tom explained
the details of his new contract with her, and she replied, “That’s fantas-
tic honey!” Tom replied and said, “I’ve never been more surprised in my
entire life when Jonathan handed me a check for $500,000 tonight!”
“Wow Tom, but I have something to tell you honey that might surprise
you even more. I told you I was pregnant, but what I didn’t know was that
we are having triplets!” “Really? This is the greatest day of my life!” he
exclaimed.
22
The Virus
On Tom’s flight home, he kept thinking about his future family. “Triplets!
I never expected anything like this,” he thought. He continued thinking,
“Because of our new family size, we’ll probably have to buy a new house
with more bedrooms. I am so thankful that I received such a huge royalty
payment!” As he was sitting there thinking about his new family size, the
passenger beside him said, “So what do you think is going to happen as a
result of this new virus?” Tom hadn’t been watching the news and replied,
“What virus is that?” The passenger replied, “It’s called the Corona Virus
or Covid-19.” “Tell me more,” Tom said. “Well, apparently there is a virus
that supposedly originated somewhere in China and the news reports are
saying it’s very deadly,” said the passenger. “Do you have any idea what the
symptoms are for this virus?” Tom asked. The passenger replied, “I’m not
sure about all of the symptoms, but I did hear that two of the symptoms
are a dry cough and a fever.”
Tom decided to log onto his computer and read more about this new
virus. He found an article on it with the headline, “Deadly Corona Virus
Spreading Quickly Throughout China and is Spreading to Other Countries.”
Tom immediately thought about his family and how he wanted to get home.
He continued searching for more information until his plane finally landed
in Pittsburgh. He grabbed his bag and headed for the parking lot to find
his car. On his way home, he called his wife. “Hi honey, I’ll be so glad to
get home,” he said. She replied, “And we’ll be happy to get you home.” They
continued talking, and one thing Tom noticed that his wife kept coughing.
He then said, “Honey, are you feeling ok?” She responded and said, “I’ve had
this nagging cough for a couple of days and today I have a fever.” “Have you
called the doctor?” he asked. “Not yet, as I thought maybe my cough was an
allergy, but now that I have a fever, I’ll call him tomorrow,” she replied.
287
About an hour later, Tom arrived home and hugged his wife and kids.
They all sat down and ate dinner together, and then, Tom decided to turn
on the news to see if he could hear something about the Corona Virus.
What he heard pretty much shocked him as the newscaster focused on the
number of infections and the death rate, which were both very high. This
menace of a virus apparently hadn’t hit the United States yet, but this same
newscaster explained that it was just a matter of time before it did. Tom
decided to get on the Internet and find out more about this virus. As he
was reading, one thing he noticed was the length of time it took to actually
get the test results. What he read shocked him, in that after the test was
administered, the patient had to wait for two full weeks before finding out
if they were infected with the virus. Tom thought to himself, “Well that
surely is one of the constraints that must be addressed!”
Tom continued reading and discovered that there was also a shortage of
test kits available, and because of this, the medical profession was forced
to only test people who had exhibited symptoms of the virus. Tom then
thought, “I wonder who the manufacturer of these test kits is? I hope who-
ever it is, that they’ve been exposed to the Theory of Constraints so that the
throughput of kits can be accelerated.” But perhaps the most serious thing
Tom read was that there was no vaccination available to prevent this virus
from being transmitted and received. Needless to say, the more Tom read,
the more worried he became about his wife and her symptoms. “Could she
be infected with the Corona Virus?” he thought. He also thought, “If she
is infected, what about our two kids? What will be do with them to keep
them safe? And what about our unborn triplets?” he thought.
The next morning Tom had his wife call her doctor to make an appoint-
ment and scheduled it for later that day. Tom decided to work a bit on some
things related to his consulting work, but no matter how hard he tried,
he had difficulty concentrating on his work. He kept thinking about the
ramifications of his wife possibly being infected with the Corona Virus.
He thought to himself, “If she does have the virus, she could be gravely ill,
but regardless she will have to be self-quarantined for at least 2 weeks.” He
kept thinking about all of the problems he read about on the Internet and
how he honestly believed that, if given the chance, he might be able to help
the medical community speed-up the testing, as well as the company that
produces the test kits. He then thought to himself, “I wonder if Jonathan
might know anyone in the government that he could call to offer his ser-
vices for free.”
The Virus • 289
His wife’s appointment time arrived, and they traveled to the doctor’s
office. When they arrived and met with Dr. Thompson, they discovered
that her doctor did not have any test kits for this apparently new type
virus. Dr. Thompson made several phone calls until he was able to locate
a medical facility that did have the test kits available. They immediately
scheduled an appointment for Tom’s wife, Beverly, to come in for test-
ing. Beverly took the test and was instructed to “self-isolate” for 2 weeks,
meaning she should not leave her house and avoid contact with neighbors
and other family members. Beverly contacted her mother to let her know
her health status, and her mother immediately volunteered to come watch
her kids. Beverly instantly explained that in her mother’s age group (i.e.
over 60), the death rate from this virus is very high and that she needed to
stay home and away from her for at least 2 weeks. Her mother reluctantly
agreed to do so.
Tom set up the guest room for himself to sleep in, so that his wife could
feel more comfortable in their master bedroom during her self-isolation.
Because not much was yet known about the impact of this virus, Tom
decided to err on the side of safety. He knew that he would have to care for
his two children so as to avoid contact with their mother. His two children
were ages eight and ten, and although what he had read about the Corona
Virus, that they were less vulnerable, again he decided to err on the side
of safety. Tom had heard earlier that all schools in Western Pennsylvania
were canceled for at least 2 weeks, so he knew he had to stay home during
that period of time. Because of the school being canceled, Tom decided
to set up some form of home schooling, in the event that schools would
remain closed beyond the current 2-week period.
Tom also decided to research as much as he could about this virus so
that he would have a much better understanding of the potential impact
on hospitals and other medical facilities and the American citizens.
“After all,” he thought, “if these medical facilities were overwhelmed with
patients needing testing and treatment, they should have a clear under-
standing of how the Theory of Constraints could be used to positively
impact patient flow.” Tom thought about what constraints might exist and
the first one he considered was this 2-week period where the patients had
to wait for test results. In order to help shorten this wait time, he needed
to understand why the test results were taking so long. The constraint was
clearly the existing testing procedure, so someone needed to investigate
this and come up with a much faster test method. He then thought about
the treatment for this virus, which at this point was a sort of unknown
entity and it too should be considered a constraint.
What he read scared him very much, as at this point in time he read that
there was no cure for the Corona Virus (aka COVID-19), nor were there
any specific medicines to prevent or treat it at this point in time. Tom was
very worried about his wife Beverly and what her final outcome might be.
He decided to research how things looked in Pennsylvania and found that
the Pennsylvania Department of Health reported that there were 3,394
positive cases of the Corona Virus in the state and at least 38 people had
died from the virus. Tom and his family lived in Allegheny County, so
he looked up the infection rate and found that Allegheny County had
reported 265 cases with 2 deaths.
Tom continued thinking about what he might do if he was asked to help
solve this mystifying problem. He thought, “This is a very complicated
problem that has several constraining factors associated with it. The fact
that the test takes so long to get results is a serious issue facing human-
ity. We need to very quickly develop a different test that takes hours or
minutes to determine if a patient has the Corona Virus.” He then thought,
“But even if we do come up with a faster test, the most important things we
need to discover is first, how do we save the lives of those people already
infected? Saving lives must be our first priority! Almost as important is
coming up with a way on how to prevent this disease from attacking peo-
ple. Prevention truly is almost as important as saving the lives of those
already infected.”
Tom decided to call the Chairman of the Board, Jonathan Briggs.
Jonathan was the man Tom used to report to when he sat on the Board of
Directors of Jonathan’s portfolio of companies. Tom had worked for one of
those companies, Tires for All, and had led major improvements in profit-
ability. Because Tom wanted to help fight this deadly virus, he wanted to
see if Jonathan might know anyone who might be interested in using his
services for free. He dialed Jonathan’s number, and after three rings, he
answered his phone. “Hi Jonathan, it’s Tom Mahanan,” Tom said. “Well hi
Tom, it’s so good to hear from you. What’s up?” he asked.
“Jonathan, I’ve been reading quite a bit about the Corona Virus and
how complicated everything is. I’m very interested in helping solve this
complicated disease and I was wondering if you knew anyone at the fore-
front of this disease that I could call and offer my services for free,” Tom
explained. “That’s very kind of you Tom, so let me check into just who
The Virus • 291
I might know, and I’ll get back to you with the names of several people
that might be interested in your free services,” Jonathan replied. “Thanks
Jonathan and I assume you are feeling ok?” he asked. “Yes, no problems so
far,” he replied. And with that, the conversation ended.
Several hours later, Tom received a call back from Jonathan with the
names of two medical professionals that could possibly be interested in
working with Tom. One of the doctors, Dr. Samuel Johnson, was from
New York City, and the other doctor, Dr. Timothy Wasso, was from
Chicago. Both doctors were in hot bed areas where the virus was flour-
ishing. Jonathan had provided Tom with their phone numbers, so Tom
decided to call both of them, just to offer his services for free. During the
conversation, Tom let both doctors know that he probably couldn’t help
them in the medical field, but that he could help them receive medical
supplies at a faster rate. Dr. Johnson explained to Tom that he was in great
need of ventilators, while Dr. Wasso explained that facial masks were criti-
cally needed. Both doctors gave Tom the names and phone numbers of
their contacts at two of their suppliers.
Before Tom called these two contacts, he decided to do a little research
on respirators and facial masks, just so he could speak intelligently to both
of the contacts. Tom first researched ventilators and found that ventilators
are the machines that push and pull air through a tube connected to the
lungs, allowing people with limited pulmonary capacity to breathe better.
He also read that for people with severe infections from this Corona Virus,
which attacks respiratory cells, these machines can literally be the differ-
ence between life and death.
Tom then researched facial masks and discovered that the Surgeon
General’s official post stated that “They are NOT effective in preventing
general public from catching the Corona Virus, but if healthcare provid-
ers can't get them to care for sick patients, it puts them and our commu-
nities at risk!” Tom thought after reading this that, “Clearly we need to
protect our healthcare workers first, so our country, and the world, needs
to make sure that our healthcare workers aren’t in jeopardy.” So, with his
new information on these two products, Tom decided to call both contacts
to see if they were interested in his assistance.
He first contacted the ventilator company, Jefferson Ventilators. “Hello,
this is Steve Thomas.” Tom replied, “Hi Steve, my name is Tom Mahanan.
I am an independent consultant and I specialize in helping companies
improve the output of their products.” Steve immediately replied and said,
“Hi Tom, sorry but we can’t afford to hire a consultant at the moment.”
“Steve, I’m offering my services for free, if your company is interested,”
Tom said. “For free?” Steve said. “Yes, for free! I want to help with this
pandemic in any way I can and since I’m not a doctor, I see the only way
I can contribute is to help companies make major improvements in their
output rate, without spending major amounts of money,” Tom replied.
The two of them continued talking, and Steve thanked Tom for his
generous offer. “In all my years in manufacturing, I’ve never been given
an offer quite like the one you just made me. So, Tom, how would we
go about doing this?” Steve asked. Tom replied, “I’ve given this a lot of
thought and I think the best way to do this would be for me to have a
webinar with your company with your key manufacturing personnel in
attendance.” Steve then asked, “So, what would be included in your webi-
nar?” Tom responded, “Not sure how familiar you are with the Theory of
Constraints, but this will be the focus of the webinar. I’ll demonstrate how
you can combine the Theory of Constraints with Lean and Six Sigma that
will result in significant improvements to your product throughput.”
“Tom, it would be great if you could help us increase our output of ventila-
tors!” Steve said. Tom replied, “When would you like to have our webinar?”
“The sooner the better Tom!” Steve exclaimed. “Why don’t you talk to your
key people and get back to me as to when you’d like to have our webinar
Steve,” Tom said. “Who do you think should be in the audience for this
webinar Tom?” Steve asked. Tom replied, “You need to invite your produc-
tion managers, supervisors, your Industrial Engineers and anyone else that
you think might benefit from our webinar.” “Okay Tom, I’ll have a meeting
here and get back to you on when we could have your webinar,” Steve said.
Tom then contacted the company that manufactures facial masks, The
Mask Makers. “Hello, this is John Watson, how can I help you?” Once
again, Tom explained who he was and made the same offer to John, and as
with Jefferson Ventilators, The Mask Makers were very interested in Tom’s
offer for a free webinar on how to maximize their company’s output. “How
soon could you have this webinar Tom?” John asked. Tom then said, “As
we were talking, what if we could hold a joint webinar with your com-
pany and Jefferson Ventilators?” “I have no problem at all with that,” John
replied. “Once I hear back from Jefferson Ventilators on when they want
to have the webinar, I’ll call you back and see if the day and time works for
your company,” Tom explained. “Sounds good to me Tom and thank you
for your offer,” John said.
The Virus • 293
While Tom eagerly awaited his call back from Jefferson Ventilators, he
began planning his webinar. He thought to himself, “Now what should I
include in this webinar?” He assumed that both of these companies would
have experience with Lean and Six Sigma, so he needed to focus the webinar
on the Theory of Constraints. He could then explain just how to go about
combining the Theory of Constraints with Lean and/or Six Sigma. He knew
he wouldn’t have time to explain either Lean or Six Sigma, but he could lay
the foundation on how to use these three improvement methodologies in
combination. And with these thoughts in mind, he began preparing a series
of Power Point slides that he would deliver during his free webinar.
Just then, Tom’s cell phone rang, and he answered it, “Hello, this is Tom
Mahanan.” “Hi Tom, it’s Steve from Jefferson Ventilators. Would it be pos-
sible to have the webinar tomorrow at 3:00 pm?” Steve asked. “Yes, abso-
lutely. I hope it’s alright with you, but I’ve invited a company that produces
facial masks to join in my webinar?” Tom asked. “Yes, that’s actually a
great idea! Killing two birds with one stone is better,” Steve added. “I’ll
send you the login details later today Steve,” Tom said. Just as Tom hung
up, his phone rang again, and it was John from The Mask Makers. “Tom
Mahanan here,” Tom said as he answered his phone. “John from The Mask
Makers here,” said the voice on the other end. “Any idea on when you plan
on having your webinar?” John asked. “Yes, our plan is to have it tomor-
row at 3:00 pm,” Tom replied. “Sounds great for us Tom,” John replied.
“Great John, I’ll send you the login information a bit later today. Oh, and
it’s going to be a joint webinar with Jefferson Ventilators,” he added.
Tom called both John and Steve back just to get an idea of what improve-
ment methods both companies were using and discovered that Jefferson
Ventilators was deep into Lean Manufacturing while The Mask Makers
were using a combination of Lean and Six Sigma. He also asked each
of them how much time he should plan on for the upcoming webinar.
Both of them said that they thought an hour and a half would be the ideal
amount of time. Using this information, Tom completed the preparation
of his slide deck. Tom was very anxious to help both companies improve
their rate of finished product generation and hope that what he presented
would result in a meaningful new methodology for both companies. Tom
put together the login information and sent it on to John and Steve. He
also thought it would be a good idea to send a copy of his Power Point pre-
sentation to distribute to all of the webinar participants to make it easier
to follow and to use it to train others in both companies.
23
The Webinar
It was now time for Tom’s webinar to begin, so he logged in and waited
for both companies to also login. When both companies were on-line,
Tom welcomed everyone and began presenting his slide deck. “Today,
because of time limitations, what I will present will be a ‘fast’ version
of what normally takes several hours to present. What you see on the
screen (Figure 23.1) is a simple cross section of a piping system used to
FIGURE 23.1
Piping diagram.
295
deliver water. It is a gravity fed system with water entering Section A,

then flows into Section B, and continues downward until it collects in the
receptacle at the base of the system.”
Tom then asked the group, “If you wanted a higher rate of flow of water
through this piping system, what would you need to do?” One of the par-
ticipants from Jefferson Ventilators, Tony Jefferson, responded and said,
“Based upon what I see in this diagram, it looks like Section E is limiting
how much water can flow through this system. So, I would say that you
would have to increase the diameter of Section E?” he said in a question-
like manner. “Does everyone see what Tony has pointed out?” Tom asked.
When everyone in attendance seemed to agree with Tony, Tom asked a
different question. “Tony, since your last name is Jefferson, and you work
for Jefferson Ventilators, are you part of the Jefferson family?” Tom asked.
Tony replied and said, “The man who started this company was my grand-
father, so the answer is yes.” With that response, Tom loaded a new Power
Point slide onto his screen (Figure 23.2).
Tom continued, “Based upon Tony’s suggestion, here you see the same
piping system, with Section E’s diameter being enlarged. Section B is now
the limiting factor in this piping system. Section E, and now Section B, are
referred to as system constraints. The bottom line is that water can only
flow through this system at the rate dictated by the system constraint. So
why did I present this piping system? How could this piping system pos-
sibly relate to either of your manufacturing systems?” And with that com-
ment, Tom loaded a new slide onto his screen (Figure 23.3).
Tom continued his presentation, “Using the piping system as a reference,
raw material enters this process in Step 1 and is processed for two days.
The semi-finished product is then passed on to Step 2, which takes seven-
teen days to complete and then passes it on to Step 3 which takes five days
to process before passing it on to Step 4, which takes an additional three
days to complete. When it exits Step 4, it is considered a finished product
and is passed on to shipping. If this process was just being started, how
long would it take to complete the first finished product?” Tom asked. One
of the participants from The Mask Makers, Sylvia Tammers, answered
Tom’s question saying that it would be the sum total of each of the indi-
vidual steps for a total of 27 days.
Tom then asked, “Once the process has been up and running for some
time, what is the output rate of this process?” Again, Sylvia replied and
said, “My guess is that it would depend upon what you referred to as
The Webinar • 297
FIGURE 23.2
Piping system with a new constraint.
FIGURE 23.3
Simple 4-step process.
the system constraint?” “Which would be?” Tom asked. Sylvia replied,
“Clearly, Step 2 at seventeen days, is the system constraint. So, the output
rate would be one finished product every seventeen days.” “Absolutely cor-
rect Sylvia! And if you wanted to increase the output rate, what must you
do?” Tom asked. Once again Sylvia replied and said, “If you wanted to
increase the output rate, you would need to reduce the time it is taking at
Step 2, since it is the limiting factor in this process.” “Excellent Sylvia, does
everyone see what Sylvia has pointed out?” Tom asked and when everyone
did, Tom continued.
“Based upon the cycle times of each step in this process, what would hap-
pen if every step was forced to run at its maximum capacity?” Tom asked.
Sylvia again, answered Tom’s question by saying, “It would seem to me that
if every step in the process ran to its capacity, in parts of the process you
would have a ton of work-in-process inventory, but most of it would be in
front of our now defined system constraint.” “And why do you say that
Sylvia?” Tom asked. “Step 1 only takes two days to complete, while Step 2
takes seventeen days to complete. So, after one day, you would have almost
nine semi-finished parts waiting to be processed by Step 2. And if you con-
tinued running Step 1 at its maximum capacity, after two days, you would
have eighteen parts waiting to be processed by Step 2,” Sylvia replied. “So
based upon your observation, what needs to happen?” Tom asked.
Sylvia responded by saying, “It seems to me that you have two options.
The first option would be to increase Step 1’s processing time to match
that of the constraint. But that wouldn’t make much sense. The second
option, which is a much better option, would be to reduce Step 2’s process-
ing time to some lower level. And whatever that new level ends up being,
that should be the new processing time for Step 1.” “Excellent Sylvia!” Tom
exclaimed. “Does everyone see what Sylvia has so eloquently explained?”
When it appeared that everyone not only understood, but they also agreed,
Tom continued.
“Dr. Eliyahu Goldratt developed what he referred to as the Theory of
Constraints. Goldratt’s Theory of Constraints, as presented by Dr. Goldratt,
contains five steps as follows:
• Step 1: Identify the system constraint.

• Step 2: Decide how to exploit the system constraint.
• Step 3: Subordinate everything else to the system constraint.
• Step 4: If necessary, elevate the system constraint.
• Step 5: Return to Step 1 to identify the new system constraint.”
The Webinar • 299
“If you think about our four-step process, there is a huge gap between the
cycle time of Step 1 and Step 2. So, my next question for everyone is, how
could you reduce the cycle time of Step 2 to make it more in line with the
other steps in the process?” Tom asked.
Jeffrey Holstein, an employee at Jefferson Ventilators said, “It seems to
me that since there is such a huge difference in cycle times between Steps
1 and 2, that you might have to add another Step 2 to this process. What I
mean by that is, if you set up an identical Step 2 beside the current Step 2,
you would reduce the total cycle time by half, so instead of it taking sev-
enteen days to complete, Step 2 would now take just eight and a half days
to complete. And in so doing, you would have doubled the output of this
process?” Jeffrey said in the form of a question. Tom replied, “Jeffrey, that
is an excellent idea! Does everyone see what Jeffrey is saying?” Tom asked
and everyone did.
“This is Step 4 of Goldratt’s Five Focusing Steps, which says if neces-
sary, elevate the system constraint,” Tom explained. He continued, “And
if you added two additional Step 2’s, you would reduce the effective cycle
time to four and a quarter, days which would make the new constraint be
Step 3 at five days. This is the concept of elevating the system constraint,
to create a new system constraint. And to increase the throughput of this
process, you would then need to focus on the new constraint, which is
what Step 5 tells us to do.”
Tom’s time for the webinar was almost complete, so he decided to stop
and ask for comments and questions. Steve, from Jefferson Ventilators,
was the first to comment and said “In all my years in manufacturing, I had
never been introduced to the Theory of Constraints. But I must say going
forward, it will become an integral part of our improvement efforts. I per-
sonally want to thank you Tom for such an enlightening session today.”
Tom thanked him for his comment and let everyone know that as they
work to produce more ventilators and facial masks, if they have questions,
everyone must feel free to contact him.
John from The Mask Makers asked another question, “Tom, not sure
about Jefferson Ventilators, but at our company we have been using Lean
and Six Sigma to improve our process. Is there a way to combine our cur-
rent improvement efforts with the Theory of Constraints?” “Excellent
question John and the answer is a resounding yes!” Tom replied. “Could
we take a few more minutes to answer this important question?” Tom
asked. Both John and Steve said yes, so Tom continued and flashed a new
overhead onto the screen (Figure 23.4).
Identify
1a
Pursue Identify
Perfection 1b Value
4c Identify Value
Stream + Current &
Identify, Measure
Implement Next Constraint +
& Analyze NVA
Protective Controls Performance
Waste in Current
to Sustain the Gains Metrics
Constraint
4b 1c
Identify
Constraint Identify, Measure &
If Necessary,
Analyze Variation &
Elevate the Current
Defects in Current
Constraint
Constraint
4a
Integrated
2a
Plan for Current Theory of Constraints
Control
Constraint
Elevation, Define
If Necessary, Lean Exploit
Develop Plan On Define
Measure &
Elevate How to Exploit the
Protective Controls, Constraint Six Sigma Constraint
Current Constraint Analyze
Use of TA
3c 2b
Execute Waste
Implement Drum Reduction Plan in
Buffer Rope + Subordinate Current Constraint
Buffer Management Nonconstraints
2c
3b
Execute Plan on How Execute Variation

Pull to to Subordinate Non- Make
Customer Reduction Plan in
Constraints to the 3a Value Flow
Demand Current Constraint
Current Constraint
Develop Plan on How to
Subordinate Non- Lean
Constraints to the
Current Constraint
Six Sigma
Improve
Theory of
Constraints
FIGURE 23.4
How to integrate Theory of Constraints, Lean, and Six Sigma.
“What you see on the screen is what I refer to as the Ultimate Improve
ment Cycle or UIC. In it you will see the steps required to integrate all
three of these initiatives into a single improvement initiative.” Tom then
loaded two slides on the screen, which summarized the tools, actions, and
focus of combining these three initiatives (Figure 23.5) and the expected
deliverables.
“In this first slide I have outlined the basic ingredients of the UIC, or
those tools and actions needed to use the UIC,” Tom explained. Tom then
explained that the second slide (Figure 23.6) outlines the expected deliver-
ables from this combination of improvement initiatives. “So, if you were to
combine these three improvement initiatives, there are a host of expecta-
tions you should expect to see when you are successful in doing so,” Tom
explained. “I have tried to keep this simple for everyone to understand,
The Webinar • 301
Identify
1a
Pursue Identify
Perfection 4c 1b Value
VSM or Current State
Perform Process P-Map, Performance
Metrics, Inventory VSA to Determine
Audits, Policy
Analysis, Theory of Waste & Inventory
Analysis, Use TA
Constraints TP Location, CRT to ID
& Control Charts UDE’s
Tools, Gemba walk
4b 1c
Identify
Perform Capacity Capability Study,
Constraint
Analysis & Cost Benefit Control Charts,
Analysis C & E Diagram, Pareto
Analysis
4a
UIC 2a
Plan How to Elevate
Current Constraint
If Necessary, Improvement Develop Plan On Define
Elevate Exploit How to Exploit the Measure &
Control and Define
Constraint
Tools, Actions Constraint Current Analyze
Protective Controls
and Focus Constraint
3c 2b
Optimize Buffer Organize Current

Size + Limit Non- Constraint via 5S,
Subordinate Std Work, Visual
Constraint
Nonconstraints Aids
Production
3b 2c
Pull to DOE’s, Causal Make

Synchronize Flow Chains, Conflict
Customer Value Flow
via DBR & Buffer Diagrams, IO
Demand Management 3a
Map
Synchronized flow
Lean
through the current
constraint
Six Sigma
Improve
Theory of
Constraints
FIGURE 23.5
Tools, actions, and focus of the UIC.
and since we don’t have much time left in today’s session, I want every-
one to study these three slides and consider how your processes might use
them to improve the output of your processes and system,” Tom explained.
“I know you’ll have quite a few questions going forward and I want
everyone to know that I will be available to take phone calls or emails
any time you need answers. What I’ve explained to you today, is just part
of the Theory of Constraints, so I wish you much luck. We can overcome
this terrible virus, so take what I gave you today and apply it to your pro-
cesses,” Tom stated. And with that, the webinar ended. John and Steve
stayed on-line to have a few words with Tom.
Steve was the first to speak and said, “Tom, I personally want to thank
you for all of the valuable information you gave us today. And to think you
did this without any kind of charge is mind boggling!” John then added,
Identify
1a
Pursue 1b Identify
Perfection 4c Complete picture of
Value
system in terms of Knowledge of
Sustainment
flow, predicted people location/type of
actions in place &
behaviors, efficiency waste & inventory
functioning well,
only measured in plus potential core
with sound
constraint system problems
financial decisions
4b 1c
Complete Identify
Knowledge of location/
understanding of new Constraint
type of variation &
capacities & financial defects within the
gains using TA system
4a
2a
Coherent
sustainment plan &
If Necessary, UIC Coherent action Define
Elevate Exploit plan on how to Measure &
Control optimized process
Constraint
Deliverables Constraint improve the Analyze
capability & control system’s capacity
3c 2b
Optimized safety Well organized

buffers with WIP constraint with
Subordinate
minimized minimal waste
Nonconstraints
throughout system
2c
3b
Well controlled
Pull to Well functioning constraint with
Customer only common Make
process with
Demand 3a cause variation Value Flow
synchronized flow
present
Coherent/documented
Lean
plan on synchronized
flow within the system
Six Sigma
Improve
Theory of
Constraints
FIGURE 23.6
Expected deliverable from the UIC.
“I totally agree with Steve. In the future I can see our facial mask business
being able to supply many more masks to not only the medical commu-
nity, but to the citizens of America and the world in general.” He then
added, “I also appreciate you being available for assistance as we imple-
ment our new improvement methodology.” Steve then chimed in and said,
“Tom, would it be possible for us to have a weekly, on-line update?” “Yes,
absolutely Steve!” Tom replied. “Just let me know when you both would
like to schedule it and I will make myself available.” Tom added.
It has now been two weeks since Tom’s wife, Beverly, had been tested
for the Corona Virus and they were both eagerly awaiting the test results.
Later on, in the day, they received a call from her doctor’s office with the
news that Beverly did not have the virus, and needless to say both were
excited to hear this news. Finally, Beverly could get back to her normal life
The Webinar • 303
of caring for her children. Tom was thankful because he could get back to
focusing on virtually helping companies improve their profitability, espe-
cially Jefferson Ventilators and The Mask Makers. Tom hadn’t heard any-
thing back from either company on how their improvement efforts were
progressing, so he decided to contact both companies to get an update.
As he was sitting on his couch watching television, the broadcaster
provided the latest infection and death rates on the Corona Virus and
they were staggering. Apparently 200,000 Americans had been infected
with nearly 4,400 deaths being recorded. Worldwide, there are nearly
1,000,000 confirmed cases with nearly 46,000 deaths. The announcer also
talked about the apparent shortage of both ventilators and facial masks
which prompted Tom to make the call to Steve and John, so he called
Steve first. Steve answered the phone, and Tom said, “Hi Steve, it’s Tom
and I was wondering how you’re doing on implementing the Theory of
Constraints?” Steve replied, “Tom, I don’t know how we could have sup-
plied enough ventilators without incorporating the Theory of Constraints.
As a result of your webinar, we have actually tripled the rate of ventilator
production!” “That’s fantastic Steve!” Tom replied. “But Tom, we’re just
getting started. We think that at the end of the day our throughput rate
will have increased by a factor of five!” Steve added. “Let me know if you
need anything Steve,” Tom replied, and they both hung up.
Tom then called John from The Mask Makers. “Hello, John here,” John
said as he answered the phone. “Hi John, it’s Tom and I was just calling to see
how things are going since you learned about the Theory of Constraints?”
Tom asked. “Tom, all I can say is that they’re going fantastic!” John stated.
“Since leaving your webinar, we have been able to triple the rate on the
number of facial masks we can produce, and we truly believe that this rate
will increase substantially over the next month.” “You remember Sylvia
from the webinar?” John asked. “I sure do John,” Tom replied. “I was so
impressed with her answers to the questions you asked in the webinar that
I put her in charge of incorporating the Theory of Constraints and that
was a great move!” John explained. “After the webinar, on her own, she
went out and purchased a couple of books and then stayed up all night
reading them,” John added. “Which books did she buy?” Tom asked. “She
bought The Goal by Eli Goldratt and Jeff Cox and Epiphanized by Bruce
Nelson and Bob Sproull. I was so impressed with her work that I bought
all of my supervisors a copy of both books,” John explained. “Thanks for
the update John and if you need anything, call me,” Tom said.
After he hung up, Tom became curious about what a ventilator is and
why they are so important in some coronavirus cases? He logged on to the
internet to see what he could find. According to a man named David Hill,
a Pulmonologist who sits on the board of the American Lung Association,
“A ventilator is a fairly fancy piece of technological equipment which is
designed to breathe for somebody who is unable to breathe effectively
on their own.” Apparently, a ventilator essentially helps a patient’s lungs
accomplish this task. He continued reading and read that modern ventila-
tors consist of a pump machine and a tube that healthcare professionals
slide into a victim’s windpipe to control airflow. Tom also read that it’s
important to understand that ventilators do not cure the Corona Virus,
but they help support lung function while a patient’s body is fighting the
infection. “Wow, no wonder ventilator companies are trying to produce
more,” Tom thought.
The next day, as Tom was working on a new slide deck, his cell phone
rang. He answered it and said, “Hello, this is Tom Mahanan.” “Hi Tom, it’s
Steve. I have a question for you about the Theory of Constraints,” he said.
“Sure Steve, what’s up?” Tom asked. “I was wondering whether or not the
Theory of Constraints has anything that addresses parts shortages?” Steve
asked. “It most certainly does Steve, why did you ask that?” Tom asked.
“Well, with our new improvement methodology, we have been running
into problems with parts not being available for our ventilators. We could
actually be producing more, but we don’t have all of the parts we need,”
Steve explained. “Why don’t I set up another webinar to explain the Theory
of Constraints Replenishment Solution,” Tom responded. “Sounds great
Tom,” Steve said. “Why don’t I call John and see if he wants to be a part of
it?” Steve added. “That would be a good idea, so let me know what he says,”
Tom said. “I will Tom and thanks,” Steve replied.
Fifteen minutes later Tom received a call back from Steve who explained
that John was having the same problem with parts availability, so he
wanted to be a part of this webinar. They discussed when they should have
this webinar, and both agreed that tomorrow at 2:00 pm would work. Tom
told Steve that he would send him the login details for the webinar, and
as soon as they hung up, he began preparing a slide deck for tomorrow’s
webinar. Once again, Tom decided that he would not go into great detail,
but rather he would provide the basics of what needed to happen to imple-
ment this important effort.
The Webinar • 305
The next day, at 2:00 pm, Tom logged into the site and waited for both
companies to join him on-line. When everyone was on-line, Tom began.
“Most, if not all, businesses are linked one way or another to some kind of
supply chain system. Companies need parts or raw materials from some-
body else, in order to do what they do and pass it on to the next system in
line until it finally arrives at the end consumer. Depending on what you
make and how fast you make it, the supply chain can be your best friend
or worst enemy. If it works well, it’s your best friend. If it doesn’t work well,
it’s your worst enemy.”
Tom continued, “The fundamental problem with most supply-chain
systems is that they have remained stagnant in their thinking through
time, while business reality has flexed in a cycle of constant change, some-
times at an exponential rate. There are many new supply-chain software
applications, each proposing that it will solve the problems associated with
the supply chain. These new software applications have come about mostly
because of advances in computer technology, but few have solved the real
issues of the supply chain. While it is true that these systems can provide
an enormous amount of information in very fast fashion, sometimes sys-
tem speed is not as important as having access to the correct information.
What difference does it make how fast you get the information if it’s the
wrong information?”
Tom asked if everyone was understanding what he had explained so far
and when they indicated that they did, he continued. “Many supply-chain
systems were designed to solve a problem, and the problem they were try-
ing to solve was the needed availability of parts, raw materials, or inven-
tory. Companies need the right parts or material, in the right location, at
the right time. The bottom line is that you don’t want to run out of parts
or materials, and yet, many times you do. You don’t want excessive inven-
tory, and yet sometimes you have way too much inventory. This constant
negative cycle of sometimes too much or too little has continued through
time.”
“For many companies the supply chain/inventory system of choice is
one referred to as the minimum/maximum (MIN/MAX) system. Parts or
inventory levels are evaluated based on need and usage, and some type of
maximum and minimum levels are established for each item. The tradi-
tional rules and measures for these systems are usually quite simple,” and
with that Tom loaded a new overhead on the screen (Figure 23.7).
• Rule 1: Determine the maximum and minimum levels for each item.
• Rule 2: Don't exceed the maximum level.
• Rule 3: Don't reorder until you go below the minimum level.
FIGURE 23.7
The rules of the Min/Max system.
“Is this what rules you’re using at your companies?” Tom asked. Both
Steve and John responded and said, “Yes, pretty much so.” Tom contin-
ued, “The thinking behind these measures are primarily based in Cost
Accounting and commonly referred to as cost-world thinking. In order
to save money and minimize your costs, you must reduce the amount of
money you spend for these items. In other words, you must never buy
more than the maximum amount. In addition, you must not spend money
until absolutely necessary, which means you only order parts only when
they reach or go below the minimum level,” Tom explained to a very cap-
tive audience.
Tom continued, “These assumptions seem valid, and if implemented
correctly and monitored closely, they should deliver a supply system that
controls dollars and maintains inventory within the minimum and maxi-
mum levels. The problem is that most systems of this type, don’t seem to
generate the desired results that are required,” and again, Tom checked
to see if most in attendance agreed with his comment and they did. “For
some reason, there always seem to be situations of excess inventory for
some items and of stock-out situations for others. “Is that what your com-
panies are experiencing?” Tom asked. Steve and John replied that it was.
The whole operational concept behind the Minimum/Maximum systems
was supposed to prevent these kinds of occurrences from happening, and
yet they still do,” Tom explained.
Tom continued, “If the system, as a whole, isn’t producing the desired
results, then what segment of the system needs to be changed to produce
the desired results? Perhaps the minimum and maximum levels are the
wrong rules to engage, and saving money is the wrong financial measure
to consider. In order to solve today’s problems, we must think at an order
of magnitude higher than we were thinking when we developed yester-
day’s solutions. In other words, yesterday’s solutions are causing most of
today’s problems.”
The Webinar • 307
FIGURE 23.8
Min/Max system results.
“Stock-outs occur most often when the lead time to replenish the part
exceeds the minimum stock available. In other words, availability of the
part between the minimum amount and zero is totally depleted before
the part can be replenished from the vendor,” Tom explained and flashed
a new figure on the screen (Figure 23.8). “So, you end up with periods of
stock-outs that occur when you least need them. So, what’s the answer to
this dilemma?” he asked.
Tom continued, “One of the primary operating functions of the supply-
chain system is to build and hold inventory at the lowest possible distri-
bution level. This assumption is both correct and incorrect. The correct
inventory should be held at the point-of-use location, but not based on
minimum or maximum amounts. Instead, the necessary inventory should
be based on the vendor lead times to replenish and maintain sufficient
inventory to buffer the variations that exist in lead time. The Theory of
Constraints Distribution and Replenishment Model is a robust parts
replenishment system that allows the user to be proactive in managing
the supply-chain system. It’s also a system based on usage, either daily or
weekly, but not the minimum amount. Some parts/inventory will require
much more vigilance in day-to-day management.” Tom said and posted
the rules for Theory of Constraints’ Replenishment System on his screen.
1. The system reorder amount needs to be based on daily or weekly

usage and part lead time to replenish.
2. The system needs to allow for multiple replenish orders, if required.
3. Orders are triggered based on buffer requirements, with possible
daily actions, as required.
4. All parts/inventory must be available when needed.
5. Parts inventory is held at a higher level, preferably at central supply
locations, or comes directly from the supplier/vendor.
6. Part buffer determined by usage rate and replenish supplier/ven-
dor lead time. Baseline buffer should be equal to 1.5. If lead time
is 1 week, buffer is set at 1.5 weeks. Adjust as required, based on
historical data.
Tom continued, “The Theory of Constraints Distribution and Replenishment

Model argues that the majority of the inventory should be held at a higher
level in the distribution system and not at the lowest level. It is still
important to keep what is needed at the lowest levels, but don’t try to hold
the total inventory at that location.” Again, Tom checked for understand-
ing and when he was comfortable that everyone was following what he had
just said, he continued.
Tom continued his presentation, “The Theory of Constraints Distribution
and Replenishment Model also argues that the use of minimum and
maximum amounts should be abolished. Instead the inventory should
be monitored based on daily or weekly usage, with replenishment occur-
ring, at a minimum weekly, and possibly daily for highly used items. The
end result of these actions will be sufficient inventory in the right location
at the right time, with zero or minimal stock-outs to support the activi-
ties that take place within your hospitals. Instead of using the minimum
amount to trigger the reorder process, it should be triggered by daily usage
and vendor lead time to replenish,” Tom explained and posted a new slide
on his screen (Figure 23.9).
Tom continued, “The figure on the screen demonstrates the effects of
using the Theory of Constraints Distribution and Replenishment Model.
One of the most notable things you see in this graph is that total inventory
required through time has decreased from ninety items to approximately
forty-two items or roughly a forty-seven percent reduction. In essence,
the required inventory has been cut in half. The other notable feature is
that even though the inventory level has been cut in half, the number of
The Webinar • 309
FIGURE 23.9
Theory of Constraints Replenishment Results.
stock-out situations has been reduced to zero!” Tom said with vigor. The
group was somewhat flabbergasted in that by reducing the inventory by
half, there were no stock-outs!
Tom continued, “When the Theory of Constraints Distribution and
Replenishment Model is used to manage the supply chain, there is always
sufficient parts inventory to continue your work in your companies. The
total inventory is also much more stable through time, without the large
gaps and gyrations from zero inventories available to maximum inven-
tory as noted on the minimum/maximum system. So, there you have it. A
system that will typically reduce inventory by 50% while virtually elimi-
nating stock-outs.”
With a smile on his face, Tom remembered an analogy he had presented
to another company and said, “Perhaps the best way to explain the Theory
of Constraints Distribution and Replenishment Model is with a very sim-
ple and common example you’re all familiar with. Consider what happens
with a soda vending machine. When the soda vendor opens the door on a
vending machine, it is very easy to see what’s been sold since the soda ven-
dor last replenished the vending machine. The soda person knows imme-
diately which inventory has to be replaced and to what level to replace it.
The soda person is holding the inventory at the next highest level, which
is on his soda truck, so it’s easy to make the required distribution when
needed. He doesn’t leave four cases of soda when only twenty cans are
needed. If he were to do that, think about what would happen. When he

got to the next vending machine he might have run out of the necessary
soda because he made distribution too early at the last stop.” Tom noticed
that the faces in his audience were smiling, meaning that they immedi-
ately related to this simple example.
“After completing the required daily distribution to the vending machines,
the soda person returns to the warehouse or distribution point in order to
replenish the supply on the soda truck and get ready for the next day’s
distribution. When the warehouse makes distribution to the soda truck,
they move up one level in the chain and replenish what’s been used from
their supplier. This type of system does require discipline to gain the most
benefits, but it assumes that regular and needed checks are taking place
at the inventory locations to determine the replenishment needs. If these
points are not checked on a regular basis, it is possible for the system to
experience stock-out situations.” Tom explained.
“So, let’s summarize our conclusions from what you’ve heard today,”
Tom continued. “The distinct contrast in results between simulated data
runs using the Minimum/Maximum supply system and the Theory of
Constraints Distribution and Replenishment Model are undeniable.
The true benefits of a Theory of Constraints-based parts replenishment
system are many, but the most significant impact is realized in these
two areas. The first benefit is the reduction of total inventory required to
manage and maintain the total supply-chain system by nearly fifty per-
cent. This inventory reduction could lead to a significant dollar savings
in total inventory required, perhaps thousands of dollars. And think
about what would happen to your profit levels, but more importantly,
what would happen to your ability to supply more ventilators and facial
masks?” Tom said.
“The second benefit is the elimination of stock-out situations. Without a
doubt, not having parts available is an expensive situation because it slows
throughput through the systems you have at each company. Process steps
sit idle, waiting for parts to become available. Stock-out situations increase
frustration, not only in not being able to complete the work, but also in
the time spent waiting for parts to become available. So, think about what
might happen to your capacity and on-time delivery,” Tom suggested.
Tom completed his presentation by stating, “Looking for parts and
experiencing shortages are a continuing problem in most supply-chain
systems. These problems are not caused by the operators, but by the
The Webinar • 311
negative effects of the supply-chain system and the way it is used. If your
current Min/Max supply system is maintained, then the results from that
system cannot be expected to change. However, if new levels of output
are required from the system, which they clearly are, then new think-
ing must be applied to solve the parts supply-system issues. The con-
cepts and methodologies of the Theory of Constraints Distribution and
Replenishment Model can positively impact the ability to produce ven-
tilators and facial masks in larger quantities. Are there any questions or
comments?” Tom asked as he completed his presentation. It was clear that
everyone had understood the basics of Theory of Constraints Distribution
and Replenishment Solution as there were no questions and with that the
webinar ended.
As with his previous webinar, Steve and John stayed on-line to chat with
Tom about what he had presented. John was the first to speak and said,
“Tom, I have a general knowledge question for you.” “Sure John, go ahead
and ask away,” Tom replied. “Why is it that the Theory of Constraints is
not presented in colleges as part of a degree program?” John asked. “That’s
a very good question, John, and I wish I had a good answer for you. I will
tell you that there are quite a few graduate programs that offer it as part
of their curriculum,” Tom explained. “One other question for you,” John
said. “Are there other tools and methods that are part of the Theory of
Constraints body of knowledge?” he asked. “Yes, there are many other
facets within the Theory of Constraints body of knowledge,” Tom replied.
“For example, the Theory of Constraints has its own version of accounting
known as Throughput Accounting. While traditional Cost Accounting
focuses on saving money to enhance profitability, Throughput Accounting
focuses on how much money a company can make, and trust me, these
two approaches are entirely different,” he explained.
Steve then asked, “What other things does the Theory of Constraints
offer?” Tom replied, “If your company uses project management,
Theory of Constraints has its own version known as Critical Chain
Project Management or CCPM. There is also another side of Theory of
Constraints known as the Thinking Processes which are a series of logic
tools which can be used to analyze a business to identify areas in need
of improvement. I could go on and on, but my time is limited today. My
advice to you is to get a copy of the book Epiphanized and focus on the
appendix as it summarizes many of the tools and techniques associated
with the Theory of Constraints. Before we hang up, let me know if you
need any help implementing what I presented today.” And with that,
their conversation was over.
It had been two weeks since Tom’s webinar, and needless to say, Tom
was very curious about how things were going at Jefferson Ventilators and
The Mask Makers. Tom decided that instead of wondering how things
were going, he would call Steve and John to get an update. He called
Steve first and Steve answered the phone. “Hello, Steve here,” he said.
“Hi Steve, it’s Tom. I was wondering how things were going at your com-
pany?” he asked. “Things are progressing nicely, thanks to the Theory
of Constraints and you too Tom,” Steve said. “In what way Steve?” Tom
asked. “Well, we’re just starting to see the results from our new replen-
ishment system and based upon what we’ve seen so far, our number of
stock-outs are rapidly approaching zero. Plus, our inventory levels have
decreased by thirty percent so far. But the thing that is most important is
that our new capacity is six times what it was before we started this effort!
And that’s the key to success for us!” Steve exclaimed. “Thanks Steve, for
the update and if you need anything, just call me.” Tom replied. “Will do,
Tom, and thanks for everything,” Steve replied.
Tom next called John and asked him the same question. And like Steve’s
response, John indicated that their output of facial masks had accelerated
upward at a very fast pace. But then, John completely surprised Tom by
saying, “One thing else, Tom. You remember Sylvia, well she has taken
the Theory of Constraints to a new level. She has been working with our
accounting people and we now have implemented Throughput Accounting
to make our financial decisions. And she did this all by reading the book,
Epiphanized. She was able to glean enough from the book to be able to con-
vince our financial people that we needed to try it. We can already see an
improvement in our profitability.” “That’s amazing John!” Tom exclaimed.
“Let me know if you need anything from me John,” Tom added. “I will do
that Tom,” he replied and they hung up.
When his calls were complete, Tom turned on his television to get an
update on the Corona Virus. The pandemic was clearly out of control now
as 4,000,000 people were now infected worldwide, with nearly half of the
infected residing in the United States. The death rate was clearly out of
control with the number of reported deaths worldwide now over 700,000.
And nearly one third of the reported deaths were from the United States.
But even though these rates were shocking, there was some relatively good
news. According to the announcer, the pandemic had finally reached its
The Webinar • 313
apex, and the infection and death rates were on their way down. This was
very refreshing for Tom to hear.
Another bit of good news was that the number of ventilators was now
sufficient to treat the people that were severely infected with the Corona
Virus, as well as the facial masks being in sufficient volume to aid in the
prevention of this deadly disease. While this was all great news, there were
two other pieces of news that truly struck a positive cord with Tom. The
first bit of news was that doctors in the United States had developed a vac-
cine which could be easily administered to the general public that would
prevent this pandemic from returning in the future. But the best news of
all however was that his wife was now experiencing labor pains and that
he would soon be the father of three new children.
The End
Index
Note: Bold page numbers refer to tables and italic page numbers refer to figures.
average hospital stay metrics 47, 48 negative impact 232

rules 84, 88, 121
Black Belts 96, 98, 111 traditional 64
board meeting cost accounting product mix 67
assessed Goal Tree 221, 222 cost-cutting 61
critical success factors 221 cost reductions 24
Drum Buffer Rope, implementation cost-world thinking 306
of 223 Cox, Jeff 303
metrics table 219, 220 Critical Chain Project Management
negative profit margins 219 (CCPM) 311
TOC Replenishment Solution 223 critical success factors (CSFs) 140, 141,
Briggs, J.256, 273 150, 159, 160, 221
buffer management 109 Current Reality Tree (CRT) 168
business checking account 37 Customer Satisfaction Index (CSI) 178
case study, Simpson Water Heaters Dawson, B. 276

color-coded goal tree 177, 177 death grip 93
organization’s performance metrics Dettmer, Bill 139, 158, 160, 168, 179, 205
175, 176 discharge policy 233
Causal Chains 105, 106 Distribution and Replenishment Model,
Cause & Effect Diagrams 105 TOC 307–309, 309
CCPM see Critical Chain Project benefits of 310
Management (CCPM) concepts and methodologies of 311
color-coded goal tree 170, 170, 177, 177 Door to Balloon (D2B) time 47, 186
constraint, piping system 6–8, 7, 8, 17, emergency room/cardiac care unit 187
17–19, 19 hospital tracks 195, 195
Control Charts 109 improvement effort 194, 194, 195
Corona Virus (Covid-19)287–291, 302, performance metrics 190, 191
304, 312 process map 188, 190, 190, 191, 191
infection rate 290 time graphic 187, 187
self-isolation 289 Drum Buffer Rope (DBR) 33, 51, 171, 178,
shortage of test kits 288–289 184, 197, 201, 210, 235, 277
TOC usage 289–290 early release 137
ventilators and facial masks 291–293 elements of 132, 132
Corporate Goal Tree 144, 147, 148, 154 graphic of traditional 207, 207
Cost Accounting (CA) 13–14, 23–25, 259, green zone 134
306, 311 hospital scheduling 253
different layers 90, 91 hospital setting 225
elements of 61, 61 housekeeping problem 248
315
316 • Index
Drum Buffer Rope (DBR) (cont.) completed 167, 168

implementation of 223 critical success factors 164, 164
medical protocol 248 with Drum Buffer Rope 172, 173
new policies or procedures 237 hierarchical structure 159
new reality 204, 204 with improvements 184, 185
new scheduling system 137 Maximo’s Corporate 144, 144
protective capacity 135, 135 assessment 154, 155
race-track 249 coding system 152, 153
random selection process 243 completed 142, 143
replenishment solution 256 finished product 154, 156
scheduling method 135 goal and critical success factors
three injections 253 141, 142
total system output 239, 239 Goldratt’s five focusing steps
ultimate improvement cycle 131 146, 146
upstream operations 132 hierarchical structure 141, 141
visual display 132, 132 instructions for 154, 154
work-in-process inventory 247 logical thinking process
yellow zone 134 analysis 139
lower level NC 147, 147
Eberstein, C. 53, 106 manufacturing example 148, 149
efficiency % or utilization metrics 3, 30, necessity-type logic 140
31, 47, 48, 51, 52 new guidelines implementation
emergency department (ED) 150, 151
hospital’s discharge policy 227 original partial 145, 145
patient flow 226, 227 sufficiency-type logic 140
physicians in 232 partial 165, 166
subject matter experts 229 Simpson Water Heaters 209, 210
Epiphanized (Nelson and Sproull) 28, 303, before and after results 217, 218
311, 312 assess 211, 211
current accounting system 214
facial masks, Covid-19 291–293 Drum Buffer Rope 217
financial decision-making 23–24, 28, 29 future assessment 213, 213
financial measures reverse improvement initiatives 212, 212
management 70 performance metric 209, 210, 211,
financial metrics 46 214, 214, 216, 216
finished product inventory 63 TOC Replenishment Solution 217
“five focusing steps,” continuous ultimate improvement cycle 213
improvement 6 Goldratt, Eliyahu M. 6, 15, 27, 57, 79,
Focus and Leverage Consulting 11, 35 298, 303
4-step process 9, 9 five focusing steps 57, 57, 98, 99, 146,
146, 199, 205, 225, 238
The Goal (Goldratt and Cox) 6, 28, 303 The Goal 6, 28, 303
Goal Tree 112, 130, 178, 179 good business decision 88, 89
with appropriate metrics 177 gravity fed system 55
associated boundaries 161 Green Belts 96, 98, 111
basic structure 159, 159 green zone 134
Bill Dettmer 158 Gregory, B. 54
Index • 317
Hallwell, P. 74, 111, 115, 279 hospitals and their specialties 75

Hill, David 304 labor costing 84
min/max system 115, 115, 118
infection rate, Covid-19 290 consequences of 122, 125
integrated TOC, Lean, Six Sigma data for 122, 123
299–300, 300 rules of 115, 115
Interference Diagram (ID) 201 top-level rules 120, 120
Intermediate Objectives Map wrong financial measure 117
(IO Map) 139 performance metrics 46, 48, 73, 73
Inventory Dollar Days measures 65 piece-rate pay system 82
inventory system 305 piping system 76, 77–78, 78
investment/inventory (I) 25, 26, 29 raw materials expense 92
run at maximum capacity 80, 81
Jackson Electronics 42 supply-chain systems 114
Jefferson, Tony 296 fundamental problem 114
Jefferson Ventilators 291–292, 296, negative effects 130
299, 303 Throughput Accounting
Johnson, B. 217 vs. cost 89, 90
Jones, S. 230 definitions 87, 88
Jones, T. 54, 145 different layers 90, 91
investment/inventory 86, 87
labor costs 62–64, 66, 71, 82–86, 90, 91, 92 operating expense 86, 87
Lean 93, 172, 252 throughput 86, 87
Lean methodology 14, 292–293 TOC Distribution and Replenishment
logical thinking process (LTP) 158 Model 125–127, 126
logical thinking tools 157 criteria 124, 126
effect of 128, 128
magnetic resonance imaging (MRI) rules 127
machines 245, 246 TOC replenishment solution 113
Mahanan, Tom 295, 296, 298–313 training
Maloney, M. 53 constraining operation 199
Mask Makers 292–293, 296, 299, 303 DBR steps and integration 203, 203
Maximo Emergency Hospital 229, external constraint 204
253, 254 five focusing steps 201
Maximo Health Center Complex 13, 45 global system 197
cancer treatment 77–79, 78–79 improvement efforts 207, 208
Cost Accounting 84 initiate and maintain
different layers 90, 91 subordination 202
rules 84, 88 internal constraint 204
cost model cycle 92 M-DBR configuration 205
customer demand requirements 118 non-constraint process steps 202
day-to-day operation 82 original system process 206
flow activity 118, 119 red-carpet treatment 200
Goal Tree 113 S-DBR concept 205
Goldratt’s five focusing steps 79, 80 “shotgun” approach 198
good business decision 88, 89 Maximo Health Center Complex
graphical representation 120, 121 Hospitals 279, 279, 280
318 • Index
Maximo Oncology Hospital Goal Tree oncology hospital Goal Tree 182,
182, 182, 183 182, 183
Maximo’s Corporate Goal Tree 144, 144 performance metrics 186, 186
assessment 154, 155 SIPOC diagram 192, 193
coding system 152, 153 Six Sigma improvement
completed 142, 143 methodology 188
finished product 154, 156 medical protocol 248
goal and critical success factors minimum/maximum (MIN/MAX)
141, 142 system 115, 115, 118, 305,
Goldratt’s five focusing steps 146, 146 310–311
hierarchical structure 141, 141 consequences of 122, 125
instructions for 154, 154 data for 122, 123
logical thinking process analysis 139 results 307, 307
lower level NC 147, 147 rules for 258, 258, 262
manufacturing example 148, 149 rules of 115, 115, 305–306, 306
necessity-type logic 140 stock-out condition 262, 263
new guidelines implementation top-level rules 120, 120
150, 151 wrong financial measure 117
original partial 145, 145 Multiple-Drum-Buffer-Rope (M-DBR)
sufficiency-type logic 140 model 205, 206, 225, 241, 246,
Maximo’s corporate leaders 144, 145 246, 253, 254
Maximo’s improvement effort graphic of 242, 242
cost-cutting action 234 Simpson Water Heaters 277, 278
dummy constraints 232
emergency department Necessary Conditions (NCs) 142, 152,
hospital’s discharge policy 227 159, 160
patient flow 226, 227 Nelson, Bruce
physicians in 232 Epiphanized 303
subject matter experts 229 new initiative, Simpson Water Heaters
physical constraint 226 flow activity 261, 261
potential policy constraints 226 functional theory 260
Maximo’s improvement plan on-time delivery rates 258
cardiac cath lab 187 stock-out situations 258
completed interference diagram repeating periods 264, 264
192, 193 supply-chain systems 257, 258
D2B time 186
emergency room/cardiac care O’Leary, K. 273
unit 187 on-time delivery 1, 4, 30, 31, 51, 52, 71, 72
hospital tracks 195, 195 Operating Expense (OE) 25, 26, 27–29, 88
improvement effort 194, 194, 195
performance metrics 190, 191 Pareto Charts 105
process map 188, 190, 190, 191, 191 patient-centered care 231
time graphic 187, 187 patient satisfaction metrics 48
general training session 181 patient wait times metrics 48
Goal Tree, with improvements 184, 185 performance metrics 3–4, 4, 25, 30, 46,
hospital’s Cardiology services 190 51, 52
Lean improvement methodology 188 piece-rate pay system 82
Index • 319
piping system problem 6–8, 7, 8, 17, new scheduling system 137

17–19, 19 protective capacity 135, 135
point-of-use (POU) 260 scheduling method 135
portfolio performance metrics ultimate improvement cycle 131
before and after 274, 274 upstream operations 132
performance metrics 283 visual display 132, 132
short-term activities 276 yellow zone 134
update 274, 275, 284 financial statements preparation 62
Process of On-Going Improvement five focusing steps 57, 57–58
(POOGI) 98 four-step process 58, 59
production-based companies 66 GAAP requirements 63
profit margins metrics 1, 30, 30, 47, 48, Goal Tree 209, 210, 221, 221
51, 52 before and after results 217, 218
with appropriate metrics 177
quality metrics 46 assess 211, 211
QuickBooks 37 associated boundaries 161
basic structure 159, 159
red-carpet treatment 200 Bill Dettmer 158
Replenishment Solution 51 completed 167, 168
replenishment system, TOC 307, 308 critical success factors 164, 164
return-on-investment (ROI) 95, 96, 99, current accounting system 214
100, 163 with Drum Buffer Rope system 172,
revenue leakage metrics 46 173, 217
Ricketts, J. 61 future assessment 213, 213
Right the First Time (RFT) 178 hierarchical structure 159
Run Charts 105 improvement initiatives 212, 212
Russell, T. 54, 55 partial 165, 166
performance metric 209, 210, 211,
Saint Mary’s hospital 48 214, 214, 216, 216
self-isolation, Covid-19 289 TOC Replenishment Solution 217
selling, general and administrative ultimate improvement cycle 213
(SG&A) costs 63 new initiative
Selling Price (SP) 91, 92 flow activity 261, 261
Shark Tank (TV show) 1, 273 functional theory 260
Simpson’s Goal Tree, with improvements on-time delivery rates 258
222, 223 stock-out situations 258
Simpson Water Heaters 41, 42, 49–51 supply-chain systems 257, 258
case study next meeting
color-coded goal tree 177, 177 cost reduction 97
organization’s performance metrics critical questions 98, 98
175, 176 financial measurements 100, 100
cost-cutting 61 four-step process 98
decision-support measures 65 Lean’s five steps 100, 101
Drum Buffer Rope system Lean-Six Sigma initiatives 96–97
early release 137 net profit calculations 100, 100
elements of 132, 132 new overhead 99, 99
green zone 134 on-time delivery 110
320 • Index
Simpson Water Heaters (cont.) before vs. after, performance metrics

return-on-investment calculations 51–52
100, 100 constraints 16–17
TOC’s five focusing steps 100, 101 Distribution and Replenishment
piping system 54, 54 Model 307, 308, 309, 309–311
plan improvement five focusing steps 6, 20, 188, 189
color-code scheme 169 focusing process 15–16
goal statement 163, 163 logic-based method 33
intermediate objectives map 158 piping system with constraint 6–8, 7, 8,
security guard 157 17, 17–19, 19
success factors 164 process with work in process (WIP)
training session 162 9–10, 10, 20–21, 21
reduce labor costs 71 Replenishment Solution 113, 184,
SG&A costs 63 304, 311
simple manufacturing process 55, 56 scheduling system 33, 111
Throughput Accounting 61 simple 4-step process 9, 9, 19–20, 20
traditional cost accounting 61 Thinking Processes 311
work in process 59, 59 Thompson, G. 53, 55, 108, 133
Single Minute Exchange of Dies (SMED) Thompson, J. 95, 113, 229
techniques 278 Throughput (T) 25, 26, 28, 29
Six Sigma 14, 60, 74, 93, 172, 252, Throughput Accounting (TA) 23, 25, 39,
292–293 61, 63, 311, 312
Six Sigma Improvement Process, five steps alternative to Cost Accounting 28–29,
101, 101 32–33
Spaghetti Diagrams 105 calculating profit metrics 47
Sproull, Bob concept of 26
Epiphanized 303 vs. cost 89, 90
STEMI heart attack 187 definitions 27, 87, 88
treatment time 47–48 different layers 90, 91
stock-out percentage 1, 30, 32, 51, 52 effective decision-making 28
stock-out situations 120, 121 efficiency metrics 47
elimination of 130 investment/inventory 86, 87
subject matter experts 229 methodology 215
supply-chain distribution operating expense 86, 87
methodology 126 outcomes 70
supply-chain software 114 portfolios improvement results 2
supply-chain system 114, 305, 307, 310, 311 product mix 69
fundamental problem 114 Simpson Water Heaters 49–50
negative effects 130 throughput 86, 87
TVC 26–27, 29
Tammers, Sylvia 296 Throughput Dollar Days measures 65
Tamsen Auto Parts 42, 217 Time and Motion Studies 105
Theory of Constraints (TOC) 96, Tires for All 30, 32, 290
298–299, 303, 311, 312; see also efficiency % 4, 4
Throughput Accounting (TA) existing process 13–14
acceleration of medical test kits 288 improving profit % 15
Index • 321
on-time delivery % 5, 6 ventilator 304

performance metrics 1, 3 Covid-19291–293
profit % 5, 6 volume metrics 46
TOC see Theory of Constraints (TOC)
TOC Distribution and Replenishment Watson, N. 53, 214
Model 125–127, 126 Watson Rubber Articles 42, 217, 277
criteria 124, 126 webinar
effect of 128, 128 five focusing steps 298–299
rules 127 at Jefferson Ventilators 296, 299
TOC replenishment method 128, 210 minimum/maximum system 305,
TOC Replenishment System 265, 266, 267 310–311
benefits of 267, 268, 269 piping system 295, 295–297, 297
Total Variable Cost (TVC) 26–27, 29, 63, ToC 298–299, 303, 311
64, 86, 163 Distribution and Replenishment
Model 307, 308, 309, 309–311
Ultimate Improvement Cycle (UIC) 50, Replenishment Solution 304, 311
98, 99, 102, 104, 188, 300 Ultimate Improvement Cycle 300
actions 104, 105 deliverable from 300, 302
deliverable from 300, 302 tools, actions, and focus of 300,
expected deliverables 106, 107 300–301
focus 104, 105 work in process (WIP) 9–10, 10, 20–21,
improvement tools 104, 105 21, 59
methodology 102, 103 inventory, DBR 247
tools, actions, and focus of 300,
300–301 year-end clearance sales 125
ultimate improvement cycle methodology yellow zone 134
270, 276
utilization metrics 46 Zagst, P. 77
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The New Beginning

The New Beginning

Bob Sproull & Matt Hutcheson

© 2021 Bob Sproull & Matt Hutcheson

Library of Congress Cataloging-in-Publication Data

ISBN: 9780367688387 (hbk)

Typeset in Minion Pro

listening, loving, and being devoted to their wonderful spouses. I dedicate

without him nothing would be possible. To my loving wife Emily and

daughters Ally and Madison without whom I would not be a father

or husband. Thank you for always being supportive and encouraging

in anything I strive to achieve. Also, to my father-in-law and author

of many books (including this one). Thanks Bob for allowing me to

inspire me to be a better father, husband, and overall human being.

Chapter 1 Tom’s New Beginning ........................................................ 1

Chapter 16 Simpson Water Heaters’ Goal Tree ............................... 209

Index .................................................................................................... 315

Chapter 7, entitled “Maximo Health Center Complex’s New Beginning,”

In Chapter 14, entitled “Maximo’s Improvement Plan,” Tom sets up a

In Chapter 17, entitled “The Board Meeting,” Tom attends a meeting

being fifty plus percent reduction in inventory volume while stock-outs

Bob Sproull is an Independent Consultant and the co-owner of Focus

and memberships: Bachelor of Science Equivalent in Math and Physics,

Matt Hutcheson is a Senior Logistics Administrator in the manufactur-

sky-rocketing upward? What’s going on at Tires for All?” he asked. Tom

1. Identify the system constraint.

“The new constraint is Section B, so if we need more water, like Section

make all of my company’s financial decisions,” Tom explained. “In my last

Constraints, he used a chain analogy to explain this concept and explained

• Step 1: Identify the system constraint.

“These two approaches to making a profit are opposite in their thinking,

 Investment/Inventory is the money an organization invests in items that it intends to sell

time, be sold for cash.

within one of the first two Throughput Accounting categories.

Net Profit (NP) = Throughput (T) minus Operational Expense (OE). Or NP = T – OE

Return on Investment (ROI) = Net Profit (NP) divided by Inventory (I).

Productivity (P) = Throughput (T) divided by Operating Expense (OE).

Inventory Turns (IT) = Throughput (T) divided by Inventory Value (IV).

implement Throughput Accounting!” Pete replied. “It’s as though we have

our decision to eliminate driving efficiencies higher in non-constraints,

opportunity?” he asked. “Tom, is it something you want to do?” Bob asked.

to go to the Board Room to have this meeting. Surprisingly, when they

much more profitable companies. He thought to himself, “The good news

we will use is % Profit, but we’ll use Throughput Accounting’s calculation

“I am Bill Gregory and I am the Shipping Manager.” “I am Ted Russell

Raw Step 1 Step 2 Step 3 Step 4 Finished

 Step 1: Identify the system constraint.

 Step 2: Decide how to exploit the system constraint.

 Step 3: Subordinate everything else to the system constraint.

 Step 4: If necessary, elevate the system constraint.

money now and in the future. Within the confines of an improvement

labor costs dominated manufacturing and workers were paid by how

• Net Profit = Throughput – Operating Expense or NP = T – OE

“In all of my years in Finance, I have never even heard of Throughput

• Throughput per Constraint Unit: T/CU = (Revenue – Totally Variable

Tom then explained, “The way to maximize T is to maximize these

• Change in Net Profit: ΔNP = ΔT – ΔOE. In this case, the Δ symbol

Tom then explained, “Throughput Dollar Days measures something that

Tom responded and said, “Well, most of what I presented today is

Investment/Inventory is the money an organization invests in items that it intends to sell

Step 1: Identify the system constraint.

Step 2: Decide how to exploit the system constraint.

Step 3: Subordinate everything else to the system constraint.

Step 4: If necessary, elevate the system constraint.

Step 1: Identify the System Constraint.

Step 2: Decide how to exploit the System Constraint.

Step 3: Subordinate everything else to the System Constraint.

Step 4: If necessary, elevate the System Constraint.

Nett Profit (NP) = Throughput (T) minus Operational Expense (OE). Or NP = T – OE

Productivity (P) = Throughput (T) divided by Operating Expense (OE). Or P = T/OE