Profitability With No Boundaries Megasampler PDF

Profitability with
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Profitability with
No Boundaries
Optimizing TOC, Lean, Six Sigma Results
Focus
Reduce Waste
Contain Variability
Reza (Russ) M. Pirasteh

Robert E. Fox
ASQ Quality Press

Milwaukee, Wisconsin
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American Society for Quality, Quality Press, Milwaukee 53203
© 2011 American Society for Quality
All rights reserved. Published 2010
Printed in the United States of America
14 13 12 11 10 5 4 3 2 1
Library of Congress Cataloging-in-Publication Data
Pirasteh, Reza M., 1956–

Profitability with no boundaries : optimizing toc and lean-six sigma / Reza M. Pirasteh.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-87389-795-2 (alk. paper)
1. Theory of constraints (Management) 2. Six sigma (Quality control standard) 3. Industrial
productivity. I. Title.
HD69.T46.P57 2010
658.4⬘013—dc22
2010021466
ISBN-13: 978–0-87389-795-2
No part of this book may be reproduced in any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior written permission of the publisher.
Publisher: William A. Tony

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excellence worldwide through learning, quality improvement, and knowledge exchange.
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Contents
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv
Part I: Leadership Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Chapter 1: Productivity, Growth, and Prosperity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
HENRY FORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ALFRED SLOAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
TAIICHI OHNO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
TLS—A FOURTH WAVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Chapter 2: Productivity Improvement—A Checkered History . . . . . . . . . . . . . . . . . . . 25
Chapter 3: What Is an Improvement? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
HOW TO MEASURE AN IMPROVEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
WHY IMPROVEMENTS EFFORTS OFTEN FAIL . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Chapter 4: Current CPI Favorites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
THEORY OF CONSTRAINTS (TOC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
The Five Focusing Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Thinking Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Critical Chain Project Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
LEAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SIX SIGMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Six Sigma—A Metric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Six Sigma—A Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Step 1—Define. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Step 2—Measure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Step 3—Analyze . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Step 4—Improve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Step 5—Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Design For Six Sigma (DFSS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Six Sigma—A Management System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Summary/Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Chapter 5: The TLS Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
WHAT IS iTLS™®? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
How Does iTLS™® Work? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
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vi Profitability with No Boundaries
WHAT IS UNIQUE ABOUT ITLS™®? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

HOW SHOULD ITLS™® BE APPLIED? WHAT IS THE
SEQUENCE OF EVENTS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Chapter 6: Results: Has a More Global Focus Worked? . . . . . . . . . . . . . . . . . . . . . . . . . 61
INITIAL CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
WHICH METHODOLOGY WAS MOST EFFECTIVE?. . . . . . . . . . . . . . . . . . . . . 62
Chapter 7: Throughput Operating Strategies (TOS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
A NETWORKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
V NETWORKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
T NETWORKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
I NETWORKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Chapter 8: Management Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
FOCUSING IMPROVEMENT EFFORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
MOTIVATING THE DESIRED BEHAVIORS AND BUILDING TRUST. . . . . . . . . . 77
THE MISSING LINK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Chapter 9: Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Part II: Practitioner’s Guide. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Chapter 1: Productivity Growth and Prosperity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
FORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
SLOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Product Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Investment Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Make vs. Buy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
OHNO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
A FOURTH WAVE—iTLS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Chapter 2: The Productivity Improvement Dilemma . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
IMPROVEMENT CHALLENGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Chapter 3: CPI Favorites: TOC, Lean, Six Sigma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
THEORY OF CONSTRAINTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
LEAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Principle 1: Specify the Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Principle 2: Define the Value Stream . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Principle 3: Make Value Flow without Any Interruptions . . . . . . . . . . . . . . . . . . . . . 134
Principle 4: Make Customer Pull from Supplier . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Kanban . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Principle 5: Perfection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Principle 6: Agility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
SIX SIGMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Six Sigma—A Metric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Six Sigma—A Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Step 1—Define. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
Step 2—Measure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
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Contents vii
Step 3—Analyze . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Step 4—Improve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Step 5—Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
DESIGN FOR SIX SIGMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
Phase 1—Identify. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Phase 2—Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Phase 3—Optimize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Phase 4—Validate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
WHERE WE WENT WRONG. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Case I: Direct Labor Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Case II: Increase Throughput. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Case III: Labor and Throughput Improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Chapter 4: What Is an Improvement? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
HISTORY OF “IMPROVEMENTS” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
HOW TO MEASURE AN IMPROVEMENT? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
WHY DO IMPROVEMENT EFFORTS OFTEN FAIL?. . . . . . . . . . . . . . . . . . . . . . . . 191
Chapter 5: The iTLS Model and How It Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
WHAT IS THIS iTLS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Step 1—Mobilize and Focus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
Step 2—Decide How to Exploit the Constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
Step 3—Eliminate Sources of Waste . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Step 4—Control Process Variability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
Step 5—Control Supporting Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
Step 6—Remove the Constraint and Stabilize. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
Step 7—Reevaluate the System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
Chapter 6: iTLS Study and Results Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
HAS A MORE GLOBAL FOCUS WORKED? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Initial Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258
Which Method Is More Effective?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
Chapter 7: River System Optimization with TOS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
A NETWORKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268
V NETWORKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
T NETWORKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279
I NETWORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
BETTER UNDERSTAND YOUR PROCESSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284
Chapter 8: “MOST” TLS Project Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
LEADERSHIP RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
Mobilize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286
Organize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
Speed-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288
Tie Loose Ends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
Real-World Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
User Feedback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
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viii Profitability with No Boundaries
Chapter 9: Real-World Application of iTLS Approach . . . . . . . . . . . . . . . . . . . . . . . . . . 293

STUDY—INVENTORY MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
iTLS-O Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294
Examples of Real-Life Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296
CASE STUDY ELECTRONIC MANUFACTURING COMPANY . . . . . . . . . . . . . . . 296
Initial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296
iTLS in Action and Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297
Steps 2 and 3—Decide How to Exploit the Constraint and Eliminate Sources of Waste
in the Constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302
Step 4—Control Process Variability and Error in the Constraint . . . . . . . . . . . . . . . 303
Step 5—Control Supporting Activities to the Constraint. . . . . . . . . . . . . . . . . . . . . . 303
Step 6—Remove the Constraint and Stabilize. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
Step 7—Reevaluate System Performance and Go after the Next Constraint . . . . . . 305
Going Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306
CASE STUDY—VALVE ASSEMBLY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306
Initial Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306
Step 2—Decide How to Exploit the Constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
Step 5—Control Supporting Activities to the Constraint. . . . . . . . . . . . . . . . . . . . . . 313
Step 6—Remove the Constraint and Stabilize the Process . . . . . . . . . . . . . . . . . . . . 313
Step 7—Reevaluate the System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314
CASE STUDY—CELSO CALIA OF BRAZIL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314
Our Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315
The Votorantim Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318
Initial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318
Step by Step . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
Step 2—Identify and Exploit the Constraint (Drum). . . . . . . . . . . . . . . . . . . . . . . . . 320
Step 5—Control Supporting Activities to the Drum . . . . . . . . . . . . . . . . . . . . . . . . . 322
Step 6—Control Supporting Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322
Step 7—Reevaluate the System and Go After the Next Drum . . . . . . . . . . . . . . . . . 323
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324
Chapter 10: Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347
About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353
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Figures and Tables
PART 1
Figure 3.1 OE, I relationship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Figure 5.1 iTLS™® model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Figure 5.2 iTLS™® seven-step process.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Figure 5.3 iTLS™® seven-step flow, tools, and techniques. . . . . . . . . . . . . . . . . . . . . . 58
Figure 6.1 Lean and Six Sigma benefits/project.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Figure 6.2 Lean–Six Sigma and TLS benefits/project. . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Figure 6.3 Lean, Six Sigma, and iTLS™® financial return/project. . . . . . . . . . . . . . . . 64
Table 6.1 Lean, Six Sigma, and iTLS™® comparison . . . . . . . . . . . . . . . . . . . . . . . . . 65
Figure 6.4 Financial contribution by methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Figure 7.1 A–river flow operation network—laptop computer manufacturing. . . . . . . . 68
Figure 7.2 V–river flow operation network—a pick-pack-ship warehouse. . . . . . . . . . . 69
Figure 7.3 T–river flow operation network—automobile assembly.. . . . . . . . . . . . . . . . 71
Figure 7.4 I–network river—airline meal tray assembly operations. . . . . . . . . . . . . . . . 72
PART 2
Table 1.1 Product costs when most costs are variable . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Table 1.2 Product costs when most costs are not variable. . . . . . . . . . . . . . . . . . . . . . . 92
Table 1.3 Investment decisions when most costs are variable . . . . . . . . . . . . . . . . . . . . 93
Table 1.4 Investment decisions when most costs are not variable. . . . . . . . . . . . . . . . . 93
Table 1.5 Make vs. buy decisions when most costs are variable . . . . . . . . . . . . . . . . . . 94
Table 1.6 Make vs. buy decisions when most costs are not variable. . . . . . . . . . . . . . . 94
Table 1.7 Standard costs of clutches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Figure 1.1 Kanban system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
ix
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x Profitability with No Boundaries
Figure 1.2 Drum buffer rope system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

Table 2.1 Job losses—major metropolitan areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Table 2.2 Comparison of improvement programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Table 2.3 Distribution of time a company has been using Six Sigma. . . . . . . . . . . . . . 114
Table 2.4 Support of Six Sigma implementation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Figure 2.1 Four major waves—the evolution of continuous improvement. . . . . . . . . . . 120
Table 3.1 Types of constraints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Table 3.2 Constraint management steps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Table 3.3 Types of value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Figure 3.1 Hidden factory.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Figure 3.2 Value characterization decision flowchart.. . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Table 3.4 Seven sins of production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Figure 3.3 Order fulfillment value stream. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Figure 3.4 Takt time and balancing workload. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Figure 3.5 Takt time—unbalanced work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Figure 3.6 Process flow matrix.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
Figure 3.7 Workflow transportation logistics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Figure 3.8 Example of a traditional layout.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Figure 3.9 Example of a work cell layout. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Figure 3.10 5S CANDO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Table 3.5 Components of 5S.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Figure 3.11 Poka-yoke, error-proofing.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Figure 3.12 Kanban system mechanics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Figure 3.13 Inventory hides problems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
Figure 3.14 Six Sigma evolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Figure 3.15 Normal distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Figure 3.16 Process control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Figure 3.17 1.5 sigma shift assumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Figure 3.18 Area under normal curve assuming 1.5 sigma shift. . . . . . . . . . . . . . . . . . . . 154
Figure 3.19 Relationship of sigma levels and PPM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Figure 3.20 FPY in a two-step process.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
Table 3.6 Relationship between Cp, PPM, and sigma level. . . . . . . . . . . . . . . . . . . . . . 156
Table 3.7 Sigma capability and DPM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
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Figures and Tables xi
Table 3.8 DMAIC process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

Table 3.9 Process overall yield vs. Sigma.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Table 3.10 DMADV process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Table 3.11 Benefits of reducing direct labor costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Table 3.12 Benefits of increasing throughput. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Table 3.13 Benefits of increasing throughput and labor savings. . . . . . . . . . . . . . . . . . . 171
Table 3.14 GM story. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
Figure 3.21 Sustainable operational ecosystem. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
Figure 4.1 T, OE, I relationship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
Figure 5.1 iTLS model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
Figure 5.3 Integration of TOC, Lean, Six Sigma iTLS. . . . . . . . . . . . . . . . . . . . . . . . . . 199
Figure 5.5 iTLS seven-step process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
Figure 5.6 iTLS seven-step flow and tools. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Figure 5.7 Application of TOC tools. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
Figure 5.8 Problem statement development checklist. . . . . . . . . . . . . . . . . . . . . . . . . . . 207
Figure 5.9 Step 1, mobilize and focus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Figure 5.10 Exploit the constraint. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Figure 5.11 Application of Lean tools. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
Figure 5.12 Ishikawa cause and effect diagram. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
Table 5.1 CNX definition for factor screening. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
Figure 5.13 Five whys. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Table 5.2 FMEA objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Figure 5.14 PFMEA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
Table 5.3 SEV scoring guide. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
Table 5.4 OCC scoring guide. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
Table 5.5 DET scoring guide. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
Figure 5.15 Eliminate sources of waste. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
Figure 5.16 Application of Six Sigma tools. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
Figure 5.17 Comparisons of two processes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
Figure 5.18 Measurement errors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
Figure 5.19 Control process variability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
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xii Profitability with No Boundaries
Figure 5.20 iTLS rapid problem-solving worksheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228

Figure 5.21 Control supporting activities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
Figure 5.22 What and how for iTLS monitoring model.. . . . . . . . . . . . . . . . . . . . . . . . . . 231
Figure 5.23 Generic iTLS takt board layout.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
Figure 5.24 Generic iTLS performance tally sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
Figure 5.25 Remove the constraint and stabilize. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
Figure 5.26 Reevaluate the system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
Figure 5.27 Base-line assessment.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238
Figure 5.28 iTLS Implementation road map. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
Figure 5.29 High-level model for undesirable outcome of strategic planning.. . . . . . . . . 242
Figure 5.30 High-level generic model for collaborative strategic planning.. . . . . . . . . . . 243
Figure 5.31 Conversion of firm’s core values to balanced scorecard. . . . . . . . . . . . . . . . . 243
Figure 5.32 iTLS generic layout for balanced scorecard. . . . . . . . . . . . . . . . . . . . . . . . . . 247
Figure 5.33 Organization’s responsibilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Figure 5.34 Different operating strategies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252
Table 6.1 One-way ANOVA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260
Figure 6.1 Lean and Six Sigma benefits.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261
Figure 6.2 Lean, Six Sigma, and iTLS benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
Figure 6.3 Lean, Six Sigma, and iTLS financial returns. . . . . . . . . . . . . . . . . . . . . . . . . 263
Table 6.2 Lean, Six Sigma, and iTLS Comparison. . . . . . . . . . . . . . . . . . . . . . . . . . . . 264
Figure 6.4 Contribution percentage by method applied. . . . . . . . . . . . . . . . . . . . . . . . . . 265
Figure 7.1 A river flow operation network—laptop computer manufacturing.. . . . . . . . 269
Figure 7.2 V river flow operation network—a pick-pack-ship warehouse. . . . . . . . . . . 275
Figure 7.3 Relationship of increased uncertainty with the levels of two-headed forks. 276
Figure 7.4 T river flow operation network—automobile assembly. . . . . . . . . . . . . . . . . 279
Figure 7.5 I network—airline meal tray assembly operation.. . . . . . . . . . . . . . . . . . . . . 282
Figure 8.1 High-level process of developing a balanced scorecard. . . . . . . . . . . . . . . . . 286
Figure 8.2 Continuous improvement steering team configuration model. . . . . . . . . . . . 288
Figure 9.1 Inventory optimization model using TLS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 295
Figure 9.2 Inventory initial analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298
Figure 9.3 iTLS seven-step process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299
Figure 9.4 Inventory analysis discovering step function. . . . . . . . . . . . . . . . . . . . . . . . . 300
Figure 9.5 Using a cause and effect diagram to identify key factors. . . . . . . . . . . . . . . . 301
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Figures and Tables xiii
Figure 9.6 Box plot of inventory before and after iTLS implementation.. . . . . . . . . . . . 304
Table 9.1 ANOVA indicating reduction significance. . . . . . . . . . . . . . . . . . . . . . . . . . . 304
Figure 9.7 Inventory position after implementation of the iTLS. . . . . . . . . . . . . . . . . . . 305
Figure 9.8 Goals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
Figure 9.9 Spaghetti flow of the current layout. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
Figure 9.10 Cause-and-effect analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310
Figure 9.11 FMEA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311
Figure 9.12 New process flow after implementation of improvements. . . . . . . . . . . . . . . 312
Figure 9.13 Process time reduction monitoring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313
Figure 9.14 iTLS model applied.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315
Figure 9.15 The DBR model → D 5 drum, B 5 buffer, R 5 rope.. . . . . . . . . . . . . . . . . . . 317
Figure 9.16 Thinking tool applied for cause-and-effect determination. . . . . . . . . . . . . . . 320
Figure 9.17 Mobilize work teams.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321
Figure 9.18 Buffer management.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321
Figure 9.19 Application of SPC, Lean, and Six Sigma tools and techniques. . . . . . . . . . 322
Figure 9.20 Buffer performance and status dashboard in real time. . . . . . . . . . . . . . . . . . 323
Figure 9.21 Metallurgical plant expansion.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323
Figure 9.22a, b, c, d Examples of four plants’ performances applying iTLS. . . . . . . . . . 324
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00_FM_pg00i-xvi_Pirasteh_ASQ.indd xiv 8/31/10 4:00 PM
Preface
This book is a result of a serendipitous meeting in 2007. Despite different ca-

reer paths and experiences, we had each arrived at the conclusion that American
industry was encountering a continuing, but unnecessary, decline in competitive-
ness. Over several decades many efforts to improve productivity had come and
gone, both because they were ineffective and because in some cases they were
counterproductive. We also believed that the situation was worsening because
practitioners of the continuous productivity improvement (CPI) methodologies
of choice—Lean, Six Sigma, and the Theory of Constraints (TOC)—often oper-
ated in a divisive rather than collaborative fashion. Each group seemed convinced
that their methodology was the true religion. While they battled over who had
the best solution, the competitiveness of many American industries continued to
decline.
We believe we know the core problem that caused previous improvement ap-
proaches to fail and are concerned that this obstacle will impair current efforts.
We also know that when TOC, Lean, and Six Sigma (iTLS) are combined in a
unique fashion results improve dramatically. A scientifically conducted study in
the United States showed that iTLS projects produced more than four times the
benefits of either Lean or Six Sigma projects. Subsequent experiences in other
countries have produced even greater benefits. We have had an opportunity to
implement iTLS in 15 countries in a variety of operations, including discrete
and transactional environments, with phenomenal success. The resulting benefits
include significant improvements in quality, productivity, and profitability. We
also have developed an understanding of how these internal improvements can
be further leveraged to increase sales, market share, and profits.
The book is divided into two parts. The first is geared to senior decision mak-
ers—those who decide “if ” their company should adopt an iTLS approach. The
second deals with the details of “how” and is directed at those responsible for
implementing iTLS. Readers who would like more depth on any section of Part
I can go directly to the matching chapter in Part II. iTLS concepts and principals
are given relevant coverage in Part I and Part II with various depths. A small
xv
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xvi Profitability with No Boundaries
portion of the material in Part I has been repeated in Part II to provide continuity
in the flow of ideas.
Throughout the book we often use both “we” and “I” in describing our views
and experiences. “I” is used when describing an experience unique to one of us,
although we don’t normally distinguish which one. “We” is used when referring
to our collective beliefs.
If your intention is to learn how to systematically improve quality, process
reliability, and throughput while creating a waste-less enterprise, then you should
read on. This book is for you!
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Part I
Leadership Summary
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1
Productivity, Growth, and Prosperity
During the last century, three waves washed over the shores of developed and
developing countries, creating both wealth and freedom. These waves were break-
throughs in how companies managed their businesses, and all have deep roots in
the automobile industry. Despite beginning in a single industry, these management
systems eventually influenced many industries and countries. The first system was
initiated early in the last century by Henry Ford at Ford Motor Company, the second
was led by Alfred Sloan at General Motors, and the third resulted from the efforts
of Taichi Ohno at Toyota Motor Company. Although these breakthroughs resulted
in enormous increases in productivity, growth, and prosperity, they were not the
result of improvements in technology, at least not how technology is commonly
viewed. They were changes in how these three automobile companies managed
their businesses. Today we stand on the verge of a fourth system of management,
which promises similar benefits in productivity, growth, and prosperity.
HENRY FORD
So what did Henry Ford do that was so earthshaking? We often view him as
the inventor of the assembly line, a very efficient production process with negative
overtones of subjecting people to mind-numbing repetitive tasks. Although there
is truth in both viewpoints, they miss the magnitude of Ford’s accomplishment.
Ford’s goal was extraordinarily ambitious, to say the least. He wanted to pro-
duce a reliable, dependable automobile that the common man, including those
who produced it, could afford. In the early 1900s, only the wealthy could afford
an automobile. Such a purchase was far beyond the reach of the great majority,
causing most people to live their entire lives within a few miles of their birthplaces.
Ford’s management system changed all that. Between 1909 and 1927, he
produced and sold 17 million Model Ts while driving the price down from $970
to $290, and that was without taking into account inflation. Ford claimed that ev-
ery time he reduced the price of the Model T by $1, he created another 1000 buy-
ers. In addition to developing a more efficient method of producing automobiles,

4 Part I: Leadership Summary
Ford devised a way to greatly increase demand for his product. At one point, he
more than doubled the going wage of his workforce to $5 a day while reducing
the workday from nine to eight hours. This wage increase allowed his workers
to purchase the product they produced by simply saving this wage increase for
about a year. This action not only made his workers customers, but it also forced
many other companies to pay a competitive wage in order to retain their best
workers, again increasing the number of customers for Ford’s Model T.
The effect in the United States was profound and quickly spread to Europe.
Economic activity exploded, and the ensuing wealth was much more widely dis-
tributed. In rural areas, which comprised most of the United States, families were
no longer tethered to the plow and the beasts that pulled it, which sometimes
were the farmers themselves.
We know a great deal more about the results of Ford’s management system
than we do about the system itself. We are going to call it a “river system.” The
outputs of his system were Model Ts being purchased by customers, often as
they rolled off his assembly lines. The inputs were raw materials like iron ore
for metal parts, silicates for glass, and textiles for fabrics. The flow eventually
became so seamless from raw materials to finished product that it represented
a smooth, fast-flowing river system. The content or materials flowed smoothly,
steadily, and directly throughout the entire system, like small creeks feeding
larger streams and then a larger river—a river system in which there were no
meandering flows, dams, or rapids. Ford focused on expanding the breadth of his
river system, shortening the length of the various tributaries and making it flow
faster and more smoothly.
Ford poured the company’s earnings into expanding and improving his river
system. At the onset, he basically produced engines and assembled cars. Using
the profits generated, he began to produce more of the components needed in
his cars. He eventually integrated his supply lines to the point that instead of
purchasing and assembling components he was buying basic raw materials such
as iron ore, sand, and textiles and converting them into components. He was so
single-minded in the pursuit of reinvesting in his river system that other investors
sued him in order to force distribution of some of the profits.
The rate at which Ford produced cars was dictated by the number and speed
of his assembly lines; they controlled the flow rate, because for nearly 18 years
demand always exceeded supply. It made for a very efficient management sys-
tem. Everyone from Henry Ford on down knew exactly how many of each part
needed to be received, produced, and shipped each day. The financial system
was equally straightforward. Productivity was simple to measure—the number
of cars produced divided by the number of employees times $5 (the daily wage).
While expanding the breadth and increasing the flow rate of his river system, he
simultaneously reduced its length. In his River Rouge plant, it took only 28 hours
for iron ore to be converted into steel for engines, body panels, and other parts
and roll off the assembly line as a finished car.

Chapter 1: Productivity, Growth, and Prosperity 5
Ford’s system relied on relentless execution. Workers needed to produce a

required number of parts day in and day out. There was an intense focus on re-
ducing disruptions caused by defects, absenteeism, equipment breakdowns, and
the like. As these disruptions were reduced, his river system flowed faster and
more smoothly. When volumes grew, the pressure on the workforce increased.
Workers were prized for their ability to execute more and more of the assigned
tasks. This philosophy, despite the increased wages, eventually led to widespread
dissatisfaction in the workforce, unionization efforts, and bitter strikes.
Some have minimized Ford’s achievement by pointing out that, “You could get
a Model T in any color you wanted, as long as it was black.” The color actually was
midnight blue, but the point was valid. Ford built his river system to produce one
product in one color—no variations or options were available. Product improve-
ments were phased in so as not to disturb the flow. As his river system become
more and more efficient, he lowered the price, causing demand for this unchanging
product to grow. His river system was so powerful that demand for the Model Ts
exceeded supply for over 18 years, despite a huge expansion in output.
In essence, this was his management system—constantly expanding his river
system, increasing its speed, shortening its length, and smoothing the flow. In the
process, the expense needed to make a Model T continually declined, and his goal
of providing reliable, affordable transportation for the average man was achieved.
Despite the enormous success of Ford’s river system, it fell victim to the very
success it created. The economic benefits that it helped produce created a more
affluent society. Many people could now afford to purchase more expensive au-
tomobiles, ones that were more comfortable and distinctive. Competitors began
to produce “closed sedans,” which greatly increased comfort. They also added
improved features and increased the available styles—from roadsters to town
cars—to more closely match market needs and desire for status and performance.
The demand for a basic, reliable, and economical automobile began to de-
cline. As a result, the market shifted from Ford’s black Model T to the greater
variety and improved features of competitors’ automobiles. Ford’s river system
was so successful that it changed the world it was serving and in the process
caused its own demise. It was replaced by a new system more suited to managing
increasingly complex organizations producing a variety of products.
ALFRED SLOAN
General Motors’s strategy was totally different from Ford’s. It had 10 car
lines, while Ford had only two. Ford owned the low end of the market, the Model
T, and had a strong foothold in the high end with the Lincoln. GM’s 10 lines
covered all the market segments. Its strategy provided the greater variety of body
styles, features, and prices that the market was now demanding. However, man-
aging this diversity required a totally different management system.

A single-product river system like Ford’s could be effectively managed in a

centralized fashion. The General Motors assembled by William Durant operated
initially in a highly decentralized fashion. General Motors had purchased a num-
ber of other companies; some assembled cars and others produced components.
Most of these companies were managed by independent-minded founders, many
of whom continued to run their companies after acquisition by GM. The 10 car
lines often competed against one another in an uncoordinated, overlapping fashion.
The individual car companies purchased components from other GM divi-
sions, which, in turn, often served competitors of GM, like Chrysler and Nash.
GM’s various divisions, unlike Ford’s, were neither physically integrated nor co-
ordinated by a centralized management system run by a dominating personality.
Despite being in an excellent position to capitalize on the fact that the constraint
was shifting from production to the marketplace, the lack of an effective system
to manage this complexity nearly brought GM to its knees on two occasions.
The first occurred in 1920, when uncontrolled expenditures for expansion and
inventory created a cash crisis, resulting in Durant’s resignation and the eventual
elevation of Alfred Sloan as GM’s leader.
Sloan reined in many of the excesses of this extreme decentralization and
resolved the 1920 crisis by somewhat arbitrarily controlling how capital was al-
located. However, in 1924, following a boom year, optimism again prevailed in
all the operating divisions and they all ramped up production. At that time, GM
had little information on the level of retail sales or the amount of inventories in
the field—a problem that Ford evaded for nearly 18 years. The magnitude of the
problem was uncovered during a famous field trip that Alfred Sloan and Donald-
son Brown (GM’s treasurer) made in May 1924. They visited major car dealer-
ships and literally counted the cars on their lots. To their dismay, they discovered
huge numbers of unsold cars and realized that their factories were producing at a
rate far in excess of retail sales.
Sloan later recounted that these findings led him to issue one of his few direct
orders to the operating divisions. He ordered them, with a couple of exceptions,
to stop producing cars and buying materials. GM’s management system was out
of sync with the realities of the marketplace.
These two experiences greatly influenced Sloan’s thoughts on how to manage
a decentralized organization while maintaining corporate control of the entire en-
terprise. Sloan’s thinking had already progressed to the point that he understood
that enterprises should be largely judged based on the return on investment (ROI)
they generated.
However, in a loosely integrated organization like a 1924 General Motors,
how do you decide prices for materials transferred between divisions? A high
price would benefit the producing divisions and penalize the receiving ones,
and vise versa. Differences in prices impacted the ROIs of the various divisions
and determined which ones received capital for expansion and which didn’t. If

the divisions were truly independent entities, actual market prices would exist.
Unfortunately, because they were part of the same corporation, prices for the
internal transfer of products could be established only by management, not the
marketplace. An answer was needed that made sense to both the corporation and
its entities. It was a formidable challenge.
GM was fortunate to have gained the services of Donaldson Brown as a top
financial manager. DuPont had purchased a large portion of GM’s shares and had
dispatched Brown, a valued executive, to ensure a good return on its investment.
Brown was instrumental in developing decision-making tools that became the
heart of a new management system, one that enabled GM, and eventually other
companies, to effectively manage decentralized systems producing a variety of
products. It allowed GM to make good economic decisions in this new world of
organizational complexity and product diversity.
Brown devised a way to calculate the cost of each product, which became the
core of what we now call “cost accounting,” an approach that soon became the
basis for management decisions at General Motors and throughout much of
the industrial world. Today managers often act as if cost accounting were one of
the original Ten Commandments, because decisions based on its use are often
considered to be holy and beyond challenge.
The key to cost-accounting management was the assignment of the major
cost components—material, labor, and overhead—to individual products. Brown
believed that the “cost of a product” could be calculated by adding up these three
components. The costs of material and labor were easily attributed to products,
because at that time these costs varied directly with the volume of production.
When production increased, more material was purchased and more labor em-
ployed. Material and labor costs increased in direct proportion to the increased
production. When production volumes declined, the opposite happened. So de-
spite changes in volumes, the cost of the material and labor in a product changed
only in proportion to changes in material and labor costs.
Even in Sloan’s day overhead expenses did not directly vary with volume,
but because they represented a very small part of the overall cost of a product
they could safely be allocated to a product without introducing significant error.
During the early years of GM’s rise, material and labor accounted for 85–90% of
the cost of a product, whereas overhead expenses were only 10–15%.
Although it’s easy to see why material costs would vary directly with pro-
duction volumes, today it isn’t so obvious why labor expense should. One must
remember that in the early part of the last century most factory workers were paid
on piecework, not on the number of hours they worked. In addition, companies
could hire and fire workers at will, which they did, often on a daily basis, in order
to keep production volumes and labor costs tightly linked.
Knowing the cost of a product enabled companies to decentralize deci-
sion making and deal with an increasing variety of products when establishing

external selling prices and internal transfer prices. A division could establish
prices that yielded acceptable returns on the required investment. If sales fell far
short of expectations on this product, the return on investment would be much
less than expected. The division then needed to either reduce the costs of making
the product, find a way to increase sales, or discontinue the product. If not, ad-
ditional capital would be deployed to products and divisions that provided more
attractive returns. This approach worked for both automobiles and components
such as engines, transmissions, and the like.
Once the cost of a product was known, divisions could make a host of sound
management decisions without specific direction from the corporation. If they
could reduce the cost of making their products, profits and ROI would increase,
and more capital would be available to grow the business. Investing in more
efficient equipment had the potential of reducing both labor and material costs.
The existing material and labor costs for a particular operation or set of opera-
tions could be compared with the expected material and labor costs from using
a new piece of equipment. The resulting savings could be used to calculate a
return on the investment needed for the new equipment. If the return was above a
certain threshold the investment made sense; if not, then other alternatives should
be considered. As a result, investment decision making could be pushed lower
and lower in organizations. Corporate managers usually retained final signoff on
major investments, but their role shifted to checking the assumptions behind the
various requests and allocating capital to the most attractive opportunities.
A second avenue for increasing profits was to reduce material and labor
costs by “in-sourcing” production. A “make vs. buy” analysis could be done to
determine if costs would be reduced by producing items internally instead of
purchasing them. This analysis simply compared the vendor’s price to the cost of
internal production (material, labor, and overhead). If the savings were sufficient
to justify the required change, companies should make the item instead of buying
it. Many “make-buy” decisions could be made at a local level without corporate
authorization or awareness.
A third way to increase profits and ROI was to increase the efficiency of
the workforce so that more products could be produced by the same number of
people. Time study and industrial engineering techniques were widely employed
to determine the most efficient methods and time standards for each operation.
Workers were measured and held accountable for meeting these standards. More
efficient methods and tighter labor standards resulted in lower costs, an admi-
rable goal. Unfortunately, this process created divisiveness between management
and workers. Workers were naturally reluctant to find or divulge ways to improve
an activity, because the result would be tighter standards for measuring their
performance without any direct benefit to them.
In essence, the ability to calculate product cost gave rise to a series of proce-
dures for establishing transfer and market prices, evaluating investment oppor-
tunities, deciding whether to make or buy items, and driving down labor costs.

Cost-accounting thinking was essentially a way to decompose an organiza-

tion into smaller and smaller activities and then focus efforts on reducing the cost
of these activities. This approach was in marked contrast to Ford’s more holistic
way of improving his river system by surfacing and resolving obstacles to faster
and smoother flow.
Another impact of cost-accounting thinking that has had a lasting impact is
how managers tried to balance the cost of carrying inventory (producing in ad-
vance of need) and the costs of changing over equipment and assembly lines. The
basic mechanism for resolving this conflict was to calculate an economic order
quantity (EOQ). A formula was devised to allow users to do this calculation with
their own information. Unfortunately, this formula considered only local costs
and not the impact of the EOQ quantity on the entire system. It often resulted
in large-lot production for components, causing work to move through the sys-
tem like rabbits through a python. In the automotive industry, it encouraged the
building of assembly lines dedicated to producing only one model because it was
more efficient for the assembly line to run continuously than periodically change
it over to produce a second model.
General Motors, thanks largely to Brown, was the industry leader in develop-
ing and using these tools to manage in a world of increasing variety and decen-
tralization. With these tools, complex, integrated organizations could be dissected
and managed more effectively. This decision-making approach helped propel
GM into a position of world leadership in the automotive industry. It wasn’t
long before GM’s suppliers and many other American and European companies
adopted similar systems for managing their companies.
The rise of cost-accounting management systems fostered initial increases
in productivity, growth, and prosperity. They enabled companies to make sound
business decisions that both reduced the cost of their products and increased their
availability. We believe that cost accounting should be given a special place in a
hall of fame commemorating industrial growth and prosperity.
Over the ensuing years, a number of changes occurred that began to erode the
effectiveness of these local-cost-based approaches. Several factors caused labor
costs to become less and less variable with production volumes. Among these
were increases in unionization, changes in laws and regulations, and evolving
societal norms. Workers were increasingly paid based on the hours they worked,
not on the number of products they produced. Managements were less able to
hire and fire workers based on short-term production needs. As a result of los-
ing flexibility in such decisions, managements became increasingly focused on
achieving local efficiencies, which encouraged them to build inventories well in
advance of actual sales. As a result of increasing inventories, their river systems
lengthened and become more removed from actual customer demand.
In addition, increased mechanization and improved efficiencies significantly
reduced labor cost as a proportion of a product’s cost. This trend became so pro-
nounced that the U.S. automobile industry eventually signed a labor agreement

that essentially made labor a fixed rather than variable cost. Workers not needed
for the current level of production were allowed to be idle or participate in make-
work programs (like painting the fire hydrants in their community) rather than
being furloughed. During these times, they were paid approximately 90% of
wages they would have earned if they were producing products.
Success in using cost-accounting techniques also caused material and labor
costs to decline as a percentage of a product’s cost. Investment in more efficient
equipment and making, rather than buying, more products reduced the propor-
tion of material and labor in a product’s cost. At the same time, overhead became
an increasingly larger portion of the cost of a product.
The automobile industry had shifted from selling a Model T, whose design
barely changed for 18 years, to annual product redesigns. The engineering, fi-
nancial, and marketing staffs needed to develop, support, and sell this increased
variety of products grew at a much faster pace than material and labor costs.
Fixed costs, which were a mere 10–15% of General Motors’s product costs in the
late 1920s, skyrocketed to 50–60% near the end of the century.
At that point, instead of 85–90% of a product’s cost varying with volume,
it was only 30–40%. This shift greatly undermined the soundness of the tech-
niques used for pricing, investing, and deciding whether to purchase or make
components, yet these cost-accounting techniques continued to be widely used
and began to produce results that had negative, rather than positive, economic
consequences. For specific examples, see Chapter 1, Part II.
In addition, the use of EOQ thinking often resulted in large inventories that
needed to be scrapped or sold at reduced prices when overproduction and model
changes created obsolete parts and excess quantities of the prior years’ models.
The negative effects of dedicating assembly lines to single models highlighted
this problem. When actual demand exceeded the capacity of an assembly line,
there would be a shortage of cars consumers wanted to purchase, resulting in
lost sales. An even more common problem occurred when an assembly line
overproduced models that were not selling. Because labor efficiency was a very
important measure and workers could not be furloughed to save costs, plants
often produced cars well in advance of actual sales. Unfortunately, in order to
make room for the annual new model introduction, many of these cars needed
to be sold at a discount. Over time, consumers noticed this pattern, causing
many of them to defer purchasing a new car until dealers began offering year-
end discounts, further magnifying the problem.
The final and possibly most devastating impact of cost-accounting thinking
was how it valued inventories. It employed a value-added concept that assumed
that as raw materials are converted into finished products, the labor and overhead
associated with these activities should be added to the raw material cost to obtain
the cost of the product. These product costs were then used to value invento-
ries. When the level of finished goods increases, a portion of the increase occurs

because of the labor and overhead in the product cost. During that reporting
period, the labor and overhead costs that increase finished goods inventory are
excluded from the calculation of profits for that period.
A company’s profits can actually increase simply because the level of finished
goods increases. The opposite happens when the inventory is reduced. The labor
and overhead that had previously been capitalized are now counted as additional
expense, lowering the net profit for that period. When managers are rewarded
based on net profits, the temptation to inflate profits by increasing inventories
is often unavoidable. This distortion was not significant when directly variable
costs were a large portion of a product’s cost. However, when they became a
much smaller part, it created a serious problem.
The most devastating example I am aware of occurred as the result of a
highly successful experiment. This particular automobile company tested a dif-
ferent way of distributing cars to dealers. In one state, it shipped a portion of the
cars that dealers ordered to a central distribution point rather than directly to the
dealers. The distribution center had some capability to modify cars to fit the spe-
cific needs of the buyer, such as changing the seats, audio systems, and the like.
As a result, the dealers maintained smaller inventories on their lots, but with
enough variety that consumers could see and drive the various models. If the con-
sumer wanted to purchase a car with specific features not currently available on a
dealer’s lot, the dealer would check the central inventory to see whether the exact car
the customer wanted could be made available in a day or two. If so, a sale was made.
The experiment was a great success; inventories and shipping costs were
significantly reduced. Most important, sales rose because more consumers could
quickly get the exact car they wanted. Despite the success, however, the car com-
pany decided not to expand it to other models. So why didn’t the car company
make it standard practice for all models? The simple reason was that such a
system would significantly reduce the amount of cars in the field, which meant a
one-time drop in sales to dealers, even though sales to consumers would increase.
This inventory reduction would have caused a temporary, but significant, drop in
the company’s profits. Fearful of Wall Street’s reaction, management decided not
to implement the system company wide.
Unfortunately, the inertia of long accepted and once successful way of mak-
ing decisions tended to overwhelm “facts”—old habits die slowly. A marvelous
example of this inertia occurred in the English Navy when it dominated the seas.
Scurvy was a debilitating disease and a common problem among sailors, pi-
rates, and others who spent extended periods at sea. In 1536, a French explorer,
Jacques Cartier, learned from natives along the St. Lawrence River that he could
save the lives of men dying from scurvy by using a citrus tonic. In 1753, the
British Royal Navy finally approved a lime-based treatment, which incidentally
is why British sailors are still referred to as “Limeys.” The pain of this inertia to
change extended over 200 years and resulted in an enormous amount of misery.

The change in the elements that comprised a product’s cost eventually be-
came so widespread that they made the use of cost-accounting management not
only obsolete, but actually destructive. The good economic decisions that re-
sulted when most of a product’s cost varied with volume became bad economic
decisions when much less of the cost varied with volume. In addition, the focus
on optimizing local decisions resulted in negative effects on the total system.
Ford’s idea of a smooth, fast-flowing river system dissipated as supply chains
became more clogged with inventories and the results of local-cost thinking.
Inertia has blocked change to a decision-making system more suitable to the
current environment and has devastated many companies. It’s similar to the rise
and fall of Ford’s river system. The seeds of its downfall grew as a result of its
success, and they still infect decision making in many companies today.
TAIICHI OHNO
Sloan’s management system, like Ford’s, was developed in the U.S. auto-
motive industry and eventually spread to other industries and countries, greatly
benefiting those who adopted it. The next wave of improvement, however, origi-
nated in Japan’s automobile industry. Taiichi Ohno’s management system, often
referred to as the Toyota Production System (TPS), had a huge impact there and
reverberated throughout other countries. It’s acceptance in the United States and
Europe, however, has not been universally positive, both because of inertia and a
lack of understanding as to why the Toyota Production System was so effective.
This misunderstanding was in part due to Ohno’s successful efforts to mislead
and confuse non-Japanese companies.
After the Second World War, the bicycle was the standard mode of transpor-
tation in Japan and only the wealthy few could afford an automobile. Ohno’s
goal was not so different from Ford’s. He wanted to help Japan become a modern
industrial nation by producing an automobile that could be purchased even by the
workers who produced it.
Why was Ohno’s Toyota Production System a leap forward from Ford’s? Es-
sentially they were both highly efficient “river systems” with the same types of
inputs and outputs. However, Ohno built a river system that worked for multiple
products with uncertain demand. Unlike Ford, Toyota produced several models
in a variety of colors and with a number of options.
Creating an efficient river system for such an environment was much more
difficult. Ford had developed a highly integrated supply system with dedicated
manufacturing processes that produced the same quantity of each item day in and
day out. Volume increased only when new assembly lines were added or when
the productivity of the existing lines increased. The assembly lines and most

machines were dedicated to make the same item, and machine changeovers were
rare, which greatly simplified synchronizing the flow of materials.
Ohno had no such luxury. While the demand for the Model T exceeded Ford’s
capacity for 18 years, demand for the various Toyota models was uncertain and
subject to frequent change. Forecasting sales of the various Toyota models was
compounded by the annual introduction of new models by competitors. In addi-
tion, Ohno had to produce different models that were assembled from a variety
of parts. Since he couldn’t dedicate equipment, he had to frequently changeover
equipment in order to produce the needed parts.
Ohno faced another obstacle Ford did not have to deal with: the widespread
acceptance of cost accounting for managing complex production organizations.
Ohno told me that cost-accounting thinking was the biggest obstacle he had to
overcome in developing his system. When he eventually surmounted this ob-
stacle, he gained a competitive edge, because many of his competitors still have
not yet overcome this hurdle.
Ohno could have dealt with these obstacles in the same way as other car
companies—by producing large batches of the various parts and models to avoid
changeovers and obtain local production efficiencies. The result would have been
dams (piles of inventories), rapids (shortages that required expediting), and me-
andering flows in his river system. It also would have required maintaining a
large supply of cars in the showrooms to buffer the assembly lines from changing
consumer tastes.
It was clear from my discussions with Ohno and from his writings that he re-
jected these options. He spoke clearly and forcefully about developing a smooth-
flowing river system that closely linked actual sales to the assembly of cars,
production, and receipt of components. He believed it was the only way that
Toyota and Japan could compete with entrenched, well-financed competitors in
the United States and Europe. He knew that Japan initially had some advantage
due to low labor costs, but that this competitive edge would eventually disappear
as Japan became a modern industrial nation. He believed he had to devise a more
efficient management system than his competitors in order to reach his goal. He
spent over 40 years developing and refining such a system. The results of his ef-
forts speak for themselves.
In addition to the three-headed hurdle of uncertain demand, machine change-
overs, and cost-accounting thinking, Ohno had to rely on vendors for many com-
ponents. As a result, he had little direct control over a large part of his river
system. In order to have a fast, smooth-flowing river system like Ford’s, the as-
sembly of cars, production of components, and receipt of materials needed to be
tightly linked to actual sales. This required flexible rather than dedicated assem-
bly lines—lines that could produce several models. It also meant that the machine
shops, which produced the major components such as engines and transmissions,

had to be equally flexible, necessitating very quick changeovers. The production

of large batches of parts was totally incompatible with his river system, although
it was in line with cost-accounting thinking. Finally, he needed vendors who
were able to synchronize deliveries with Toyota’s needs.
Two factors greatly influenced Ohno’s efforts. A layoff of workers in June
1950, during a postwar period of great hardship, resulted in a bloody strike, caus-
ing Toyota management to vow to avoid such layoffs in the future. The second
was the sincere belief that workers were the “local experts” and should be treated
accordingly. The first influence convinced Ohno that Toyota couldn’t afford the
boom and bust cycles caused by building more cars than consumers were buy-
ing; this practice caused additional hiring and increased production followed by
severe cutbacks and layoffs or unacceptable financial losses. His system had to
be much more closely linked to actual sales in order to avoid these fluctuations.
Second, he wanted to develop a system that used not just the physical strength of
his workforce, but also its knowledge and skills.
Ohno pursued the development of his river system sequentially. He started
at the assembly line and figured our how to intersperse different models. By
producing a variety of models each day he was able to more closely synchronize
production with sales. This capability allowed him to greatly reduce Toyota’s
reliance on forecasts and avoid both shortages of cars that were selling and ex-
cess inventory of those that were not. This approach was met with considerable
resistance by the workforce because the workers believed it was more efficient
to assemble a large quantity of one model and then switch over and assemble a
large quantity of a different model. Ohno knew such an approach would make
assembly more efficient but the company less efficient.
Another example of his drive to link production closely with sales was the
development of models that could be either a left-hand or right-hand drive. These
cars were shipped to a distribution center in Europe where the drives were installed,
depending on actual sales in order to more closely link production and sales.
After a number of years of development, the mixed-model assembly process
was working well. Ohno then moved to the machine shop, where he met even
greater resistance. Workers were accustomed to producing parts in large lots in
order save the cost of extra setups. The equipment used to produce parts was
the same that was being used by Western companies and had been designed for
efficient large-batch production. He told me that this thinking was deeply imbed-
ded in the minds of his people. Workers believed it was inefficient to frequently
change over their machines. He stressed to them that what was important was the
efficiency of the company, not the efficiency of a particular operation. When I
asked how he persuaded them to do it his way, he smiled and said, “I tried logic
and persuasion, but neither worked, so I used a gun! I threatened that if they
didn’t do it my way I would literally shoot them. It took several years, but they
finally did it my way.”

He claimed that the resistance to small-batch production was strictly psycho-

logical. As an example, he talked about large stamping presses that previously
required more than eight hours of a skilled technician to do a changeover. By
closely analyzing these activities, he was able to change the press over in less
than five minutes using only semiskilled workers. He overcame order-quantity
thinking by pointing out that if the time for performing a setup were greatly
reduced then the formula would suggest a small rather than a large batch. Af-
ter several years of effort, the machine shop was able to produce parts in small
batches and synchronize its production with assembly line needs.
His next step was to align vendors with his internal river system. He began
by inviting all vendors to a meeting at Toyota to both explain and demonstrate
what Toyota had accomplished. He told them that Toyota would assist them in
changing their systems, but he did not insist that they do so. Again, over a period
of several years the vendors drew on Toyota’s experience and made the changes
necessary to synchronize their deliveries to Toyota’s schedules.
Ohno’s approach created the structure for a river system, but in order to make
it flow more quickly and smoothly he needed a way to systematically eliminate
the myriad factors that disrupt the flow of work. Once the major disruptors, like
long setup times, were eliminated, he developed a system to both control the flow
of work and to surface problems that disrupted flow. The system, called kanban,
allowed for inventories of predetermined size between operations or groups of
operations. These inventories were used to decide when an operation should pro-
duce and when it should stop producing. If the inventory immediately following
an operation was at its preset level, then the preceding operation should stop
producing. If the inventory was less than the preset level, then the preceding
operation should continue to produce. The purpose of the inventory was twofold.
First, it served as a buffer to protect the flow of work from all but the worst dis-
ruptions, such as defects, machine problems, and worker performance. Second,
it used disruptions as a reason to temporarily halt production and focus on fixing
the cause of the disruption. The workers’ knowledge of the process often played
an important role in resolving the cause of the disruption. While Ohno’s system,
like Ford’s, drove for relentless improvement, it relied on both the physical capa-
bilities and the knowledge of the workforce. Once the disruption was resolved,
production resumed.
When work was again flowing more smoothly. Ohno would further reduce
the amount of inventory in the system so that variations would again cause the
system to periodically stop. Each stoppage was used to identify the cause so that
improvement efforts could be initiated to remedy the problem. When enough
variations were eliminated so that smooth flow resumed, more inventory was
removed so that stoppages once again occurred. This trial-and-error process was
repeated over and over again to identify and eliminate the causes of disruptions
and enable Ohno’s system to flow more rapidly and more smoothly.

Ohno’s process of identifying problems came at a steep price. Whenever a line

was stopped it meant that throughput was lost, which negatively impacted profits
and ROI. Once his kanban system was in place, Toyota and its vendors continued
to refine the system by reducing the variability that caused such stoppages. They
systematically reduced the amount of inventory in the system so that smaller and
smaller disruptions affected the flow, which resulted in more efforts to reduce these
disruptions. After repeated efforts over many years, he finally had created a fast,
smooth-flowing system from his vendor base to the purchasers of Toyota’s auto-
mobiles. While it took nearly 40 years to convert his idea of a smooth, fast-flowing
river system into reality, in the end his efforts yielded great results.
In the early 1990s, Eli Goldratt and I met with Taiichi Ohno to better un-
derstand his approach. See Part II of this chapter for a detailed description of
this fascinating session. We learned two really important lessons. First, all of
Ohno’s efforts to improve his Toyota Production System were geared primarily
toward one objective—selling more cars. Improving quality did reduce the cost
of production and helped increase profits. However, Ohno stressed, the greatest
leverage from his quality efforts came from the increased sales that resulted from
the superior quality and reliability of their cars. Following this quality emphasis,
they focused on implementing a “just-in-time” philosophy to reduce inventories.
Ohno again stressed that the larger benefit came not because of the reduction in
investment but because lower inventories allowed them to become more closely
connected with consumer demand.
As Ohno’s river system became more and more effective, other Japanese
companies, including his competitors, came to learn the source of Toyota’s suc-
cess. He openly shared how his system worked and why it was so effective. A
number of companies adopted his approach, which contributed greatly to Japan’s
rise in the industrial world. He also described to us how he went to great lengths
to confuse Western visitors as to why his system worked so well for fear they
would copy it before Japan could fully compete with Western companies. At the
time of our meeting, he had become comfortable with the strength and capability
of Japanese industries and was now willing to share the source of their success.
Although it had taken Ohno nearly 40 years to develop and refine his sys-
tem, during our meeting we provided an insight that made him reevaluate how
he could have developed his river system much more quickly. This incident is
described in detail in Chapter 1, Part II. Essentially, it involved refocusing his
improvement efforts. In his drive to speed and smooth the flow of his river system
he would halt production for anything that disrupted flow, even though it resulted
in lost throughput.
Our simple example illustrated how Ohno could have developed his sys-
tem much more quickly by first placing most of his inventory in a buffer prior
to the operation that was most constricting flow (bottleneck) rather than scat-
tering inventory throughout the system. In this manner, very few disruptions
would ever starve the bottleneck, avoiding lost throughput. The disruptions

that most deeply or most frequently threatened depletion of the buffer could
be traced to their causes. The sources of these disruptions would be the prime
candidates for improvement. Essentially, the degree of buffer penetration
would provide a Pareto list of improvement opportunities. Using this ap-
proach, throughput is increased, less inventory is required, and the causes
of disruptions are prioritized. This laser-like approach enables a company to
much more rapidly develop a smooth, fast-flowing river system without the
loss of valuable throughput.
We knew that Ohno agreed when he exclaimed, “If I had thought about it that
way I could have developed my system in less than half the time.” He said that he
didn’t have a way to know which disruptions were most important, so he worked
on eliminating each disruption as it appeared.
The obvious question is whether there is a seed of destruction in Ohno’s sys-
tem that will cause its demise. We think the short answer is no. However, we do
believe that by building on the lessons of Ford, Sloan, and Ohno, a much superior
and more widely applicable management system can be constructed. The major
drawbacks to Ohno’s system are twofold. First, it takes a long time to embed it in
the DNA of a company and achieve a true competitive edge. Second, it has been
used primarily in higher volume, stable production environments. Unfortunately,
many companies do not have this ideal environment and certainly few can wait
many years to achieve similar benefits.
iTLS—A FOURTH WAVE

What is this new wave that might produce another tsunami of economic ben-
efits and growth? If Ford needed 5 years, Sloan 15, and Ohno nearly 40 years
to perfect their management systems, how long will it take for a fourth wave to
have a real impact?
We believe that, for the most part, the knowledge and techniques needed to
create a fourth wave already exist and have been tested and proven in a variety of
companies, industries, and countries. Much of the heavy lifting has already been
done. It is now a matter of assembling the pieces in a coherent fashion so that
they can be repetitively used.
As is evident from the title, iTLS integrates the Theory of Constraints (TOC),
Lean, and Six Sigma, in a unique and effective fashion. No one of these method-
ologies alone contains all the elements needed to create a fourth wave.
TOC’s strength lies in providing focus for improvement efforts. Its empha-
sis on generating more throughput by breaking constraints to increase volume
provides the needed direction for all improvement efforts. TOC, however, lacks
many of the analytical tools and techniques needed to expand constraint capacity,
eliminate disruptions in the flow of work, improve quality, and reduce variability.
TOC also does not take in account human resources values and significance.

Lean, in constrast, is replete with tools for reducing the seven wastes (muda)
but lacks a global focusing mechanism for prioritizing when and where to attack
these wastes. Effort to reduce some wastes can itself be a waste.
Six Sigma’s strength lies in its statistical tools for reducing variations in pro-
cesses. Like Lean, it is short on a focusing mechanism for prioritizing actions for
reducing these variations and removing the most important wastes.
Because of the similarities, overlaps, and shortcoming of these three meth-
odologies, it has not been a simple process to develop an iTLS system capable
of creating a fourth wave of prosperity, productivity, and growth. We believe
that the unique combination we have developed and tested has the potential to
be such a system. We call this unique combination iTLS™®. From this point
forward, we use the terms TLS and iTLS™® interchangeably.
So what is required to implement this new management system? It consists
of three major elements. The first is the development of an overall strategy to
manage our river systems. We refer to such a strategy as a Throughput Operating
Strategy (TOS), because the primary emphasis should be on continually growing
throughput (revenue) and profitability. Every organization produces and delivers
its products or services through a network of activities. When these networks are
mapped so that the flows of activities are displayed vertically, they take on one of
four shapes, or a combination of these four shapes. The fact there appears to be
only four shapes greatly simplifies the development of a Throughout Operating
Strategy. These four shapes roughly resemble either an A, V, I, or T.
In an A network, a variety of inputs, or materials, typically converge to form
a single or small number of end items. Organizations that fabricate and assemble
products are typically A structures. Ford, Sloan, and Ohno all dealt with A-shaped
river systems, although they varied greatly in complexity.
A V-shaped river system may initially look like an upside down A, but it has
entirely different characteristics. Instead of the flow of items converging to form a

small number of end items, they diverge to form a large, sometimes a very large,
number of end items. Examples of V structures include oil refineries, semiprocess
industries (e.g., steel, aluminum, paper), and operations that convert animals into
a wide variety of food products. Many distribution systems, reverse logistics, and
repair operations also take on the shape of a V.
An I structure is a river system with a singular flow, in which products neither

converge nor diverge. A singular input is processed through a number of opera-
tions and emerges as a single item. Wafer fabrication plants and assembly lines
are examples of I structures. In a wafer plant, a wafer of silicon may be processed
through more than 300 operations, yet it emerges as a single wafer, albeit with all
types of circuitry etched on it.

The T structure is probably the least common of the four river systems. It’s
essentially a network in which a number of items flow to an assembly point
where they can be combined in myriad ways to form a much larger number of
end items. An excellent example of T networks are automotive companies, where
a few thousand parts can be combined to produce millions of unique automo-
biles, especially when color, fabric, audio systems, and so forth are considered.
These four networks, or combinations of them, represent the river systems

by which almost all products and services are produced and distributed. Once
the shape of a network is known, the next step is to select a control point to
synchronize production and sales and to control when materials are released into
the system. In most organizations, work is released much earlier than necessary,
which inevitably creates confusion about production priorities. This confusion is
magnified by local measurements, which often cause people to work on what is
easy, or beneficial to do, rather than what is necessary to do. These murky and
changing priorities both slow and disrupt flow.
The control points provide the linkage between the procurement, production,
distribution, and consumption of a company’s products. It is important to distin-
guish between the sale of a company’s products and their consumption. Sloan
and Donaldson discovered to their dismay that just because dealers were buying
cars, it didn’t mean that they were being sold to consumers.
The second element in our iTLS system is a robust methodology to continu-
ally speed and smooth the flow of the river system—a superior kanban system. It
begins with a process for both exposing the root causes of the disruptions most
impacting throughput and then providing tools for eliminating the sources of
these disruptions. Finally, it contains a process for prioritizing disruptions so that
our improvement efforts are focused on the areas that will have the most positive
impact on the total system. Without such a process, we are doomed to using
Ohno’s trial-and-error method. Among the most important of these disruptions

are perceived bottlenecks to the flow. Even worse are bottlenecks that seem to
float or shift within the river system. Our experience is that very few, if any, orga-
nizations have real production bottlenecks that cannot quickly be broken with the
right focus and effort. We have found that a minimum of 25% more can be pro-
duced in every organization by applying proven tools to perceived bottlenecks.
Archimedes, a famous Greek philosopher, supposedly claimed that “If I had a
long enough lever I could move the whole world.” Expanding the capacity of our
organizations by breaking bottlenecks usually means that the organization can
produce additional products at essentially the cost of the purchased materials—a
very, very long lever.
It is estimated that these three methodologies (TOC, Lean, and Six Sigma)
comprise more than 90% of current improvement efforts. Unfortunately, the
practitioners of these methodologies often spend considerable time touting their
methodologies and defending their approaches rather than trying to determine if
and how they could be combined into a much superior system. The good news is
that the environment is beginning to change.
My research and practice concluded that a successful TLS methodology
should use TOC to determine where to focus improvement efforts—to set the
priorities. Based on these priorities, Lean, with its array of tools for reducing
waste, is best used to identify and eliminate the causes of these wastes. Then, to
stabilize the processes and achieve the desired statistical control for sustainabil-
ity, we employ Six Sigma tools. The combination of Lean and Six Sigma focused
by TOC, which I call iTLS, provides a proven methodology for smoothing and
speeding the flow of work in our river systems.
At the first Continuous Productivity Improvement (CPI) Conference in 2006,
sponsored by Weber University, I presented the results of an extensive and rigor-
ously conducted 2.5-year test of a unique comparison of the iTLS, Lean, and Six
Sigma methodologies. The results of this experiment demonstrated that iTLS
yielded four times more benefits than projects using either Lean or Six Sigma.
Even more telling was the fact that iTLS projects were responsible for 80% of
the financial benefits even though they were used in less than 30% of the plants.
More than 211 practitioners in 21 plants conducted 105 projects, which demon-
strates the validity of the results.
I made a similar presentation to the American Production Inventory Control
Society (APICS) during the same year and in articles in APICS’s magazine de-
scribing the enormous effect on profitability, agility, and quality. Frankly, I was
overwhelmed by the interest and excitement created among the CPI practitioners.
In 2007, I was a keynote speaker at Goldratt’s TOC-ICO conference in Ne-
vada to introduce iTLS™® to TOC practitioners and report on the increased
benefits that result from the interaction effects when TOC, Lean, and Six Sigma
are combined in a logical sequence. iTLS™® was warmly embraced by the TOC
practitioners, including Eli Goldratt, its developer.

Since 2003, iTLS™® has been used by more than 4000 practitioners in more
than 70 plants in the United States, Canada, United Kingdom, Germany, France,
Finland, Israel, Mexico, Brazil, Ireland, Spain, Hungary, China, India, South Ko-
rea, and Singapore. As our iTLS process has become refined and better under-
stood, the results have improved by more than 50% over the initial test.
One day in the fall of 2009, I received a call from two Brazilian consultants,
Celso Calia and Fabiano Almeida, partners with Goldratt Associados, de Brasil,
who specialize in implementing continuous improvement processes in Brazil’s
heavy industries. Historically, they had focused on using TOC. Celso had read
my articles and other materials published by APICS and wanted to arrange a
meeting. I agreed and at a meeting in Dallas, Texas, he gave a PowerPoint pre-
sentation that showed how they had successfully implemented iTLS™® and
achieved very significant results. He explained that using TOC had allowed them
to make significant positive changes, but variability in the processes was killing
them, and they could not understand why. They seemed to be constantly chas-
ing ghosts and floating bottlenecks. With considerable reservations they decided,
at least temporarily, to shed their current paradigm and apply what they had
learned from my articles and presentations. They were pleasantly surprised that
they were able to not only achieve significant process improvements, but were
also able to systematically control process variability from the onset. Now they
wanted more . . . they wanted to learn more about the nuts and bolts of the iTLS
process and its details, and asked if I could help them. They were very proud of
their accomplishments and so was I . . . like a proud grandparent!
Having agreement on a 40,000-foot view of how these three methodologies
should be combined is a major step forward. However, given the scope of the
various tools and techniques and the fact that in some cases they overlap, de-
veloping a ground-level working process was not a simple task. It was similar
to trying to combine the best racing engine, the best transmission, and the best
suspension system in order to produce a superior race car.
In summary, creating a smooth, fast-flowing river system requires three ele-
ments. First, we need to understand the shape of the network(s) by which we
deliver our products or services and develop an appropriate TOS for manag-
ing the flows. Ideally, the TOS will encompass procurement, production, and
distribution so that we can more closely connect all these activities with the
marketplace.
Second, we need a robust process for prioritizing and removing the disrup-
tions that impede rapid and smooth flow so that the time needed to turn materials
into purchased products shrinks.
Third, we need a combination of courage and consensus to make the transi-
tion from managing with a local focus to a more global one. The broader and
deeper the management consensus, the less courage is needed and vice versa.
Today, we oscillate between local and global actions. Almost everyone who
has worked in an organization that produces and delivers products and services

has experienced the hockey-stick impact of the end of the month (sometimes
it’s the end of the quarter); during the first portion of the period we focus on lo-
cal performance measures (efficiencies, limiting overtime, long production runs,
etc.). As we near the end of the period, the emphasis turns sharply to the global
focus of meeting shipping goals. We then take the opposite actions in order to get
as much produced and shipped as possible. Once the new period starts, we im-
mediately revert to the old ways of operating. This oscillation of effort continues
month in and month out, considerably disrupting the flow of our river systems.
The Fourth Wave Management System, iTLS, provides a consistent method
for running organizations. Educating employees in the new TOS helps refine
it and engenders both understanding and acceptance, providing a solid consen-
sus for change. When measurements are closely aligned with a more global ap-
proach, they reinforce the desired behaviors.
The timetable for adoption of a Fourth Wave Management System depends
almost solely on overcoming inertia, because the changes needed are mostly
in policies and mind-sets, not physical changes. Hopefully, companies will
move much more quickly than the British did in using citrus drinks to eliminate
scurvy.
Great organizations with excellent performances still need to constantly stay
on top of Voice Of the Customer (VOC) and the Voice Of the Processes (VOP),
particularly when it comes to favoring costs savings ahead of safety and quality.
The slightest slip in those dimensions can cause catastrophes that damage the
organization’s reputation, good will, and market health. The organization’s past
performance cannot necessarily guarantee present and future health without a
commitment to constant improvements that strengthen the basic fundamentals
that were causes of successes for the organization.
Let’s take a moment and reflect on a devastating situation in 2010 with the
Japanese automobile industry, causing Toyota to recall millions of its vehicles
due to manufacturing defects. Toyota recalled over 8,000,000 of its vehicles. The
recall included many models, such as the legendary Prius hybrid automobile.
Aside from losing nearly one billion dollars a month in cost of production shut-
downs, on top of the mammoth costs for the recall for the millions of vehicles,
Toyota’s pristine consumer confidence was severely bruised. Its stocks devalu-
ated by double digits in matter of only a few weeks as the automaker’s defects
became public knowledge. Toyota, the icon of auto-making quality and technol-
ogy, became the subject for the stand-up comedians! Toyota’s leading market
position in the auto industry came under question and began sliding backwards.
This became an opportunity for the other automakers to penetrate into Toyota’s
market share, which previously was a protected fortress.
What do you think happened to Toyota? Why didn’t the famed Toyota Pro-
duction System (TPS) protect this once-fine organization? Did it not seem as
though Toyota lost focus on what was important, allowing reliability variability
to sneak into its multinational operations? The TPS has been the cornerstone of

its impressive quality and reliability record. But as discussed earlier, the Lean
system has its limitations.
Auto industry failures were not limited to Toyota. The National Highway
Traffic Safety Administration reported 492 recalls for the same year, 2010, in-
volving more than 16.4 million vehicles. Among them were: GM with 1,300,000
vehicles, Nissan with 539,864 cars, Honda with 410,000 Odyssey minivans, and
Ford with 18,000 Fusion and Mercury hybrids.
We believe that our proposed application, iTLS™®, provides the needed
long-term protection for organizations’ profitability, reliability, and agility.
Frequently, well-performing organizations assume that the challenges for
achieving excellence have been met. These organizations often don’t invest in
the additional resources needed to sustain their competitive edge. That is why
many companies have up-and-down performances. When performance is poor,
they spend energy and resources to improve things, then, as the metrics indi-
cate necessary improvements have been achieved, the organization relaxes and
risks relinquishing their sustainability efforts. Over time, performance plummets
again, and this vicious cycle repeats.
We believe that by properly implementing iTLS, significant bottom-line ben-
efits will appear within a couple of months and that within one to two years many
companies will have more than doubled their profits. We know that making such
claims is extremely dangerous, not because they are not possible, but because of
the reaction of you, the reader. You may be inclined to immediately put down this
book and dismiss us. It’s a totally natural reaction, because these claims are so far
beyond most people’s personal experience and intuition that they assume there
is no chance of their being valid. Smart, dedicated people in many companies
have worked very hard and for a long time in order to squeeze out much smaller
gains. If our claims are true, it suggests that we have been either really stupid
or that some magic bullet has been invented. Of course, neither of these is true.
We simply ask you to read on to understand what’s involved in this Fourth Wave
Management System. If it makes sense to you, try it. If it works, extend it and
share it with others to help prevent future economic and industrial disasters like
the one we currently experiencing.

4
Current CPI Favorites
Improvement techniques have come and gone. Today’s favorites are Lean,
Six Sigma, and TOC. They all have reported notable successes, but, like earlier
techniques, some of these improvements have not reached the bottom line. In
addition, they are all facing some eroding support. The question often posed is
“Which one is the best method?” We believe that this is the wrong question and
that a better one is, “How can we best combine the strengths of these techniques?”
In order to answer this question, we need to better understand the strengths and
weaknesses of each methodology and how they can contribute to a smooth, fast-
flowing river system that produces tangible bottom-line improvements.
THEORY OF CONSTRAINTS (TOC)

The Theory of Constraints methodology was pioneered by Dr. Eli Goldratt
and broadly consists of three elements:
1. The five focusing steps
2. Thinking processes
3. Critical chain project management
The Five Focusing Steps

These steps were first popularized in Goldratt’s novel, The Goal. They are
based on the idea of viewing a company as a network composed of a chain or a
series of interconnected chains. The basic concept is that organizations convert
inputs (purchased materials) into outputs (products or services) by processing
them through a series of steps or activities.
This process can be depicted as a network of activities. As in a chain, there
can only be one weakest link in each independent network. It is this weakest link
that determines how much the network can produce. So if we want to improve
the system we should start by finding this weakest link and then exploiting it, or
39

squeezing more out of it. Typically there are only three physical constraints—
lack of capacity, sales, or materials, with the latter being the rarest. In reality,
very few companies have real physical constraints. The policies and practices
that determine the behaviors of the organization often manifest themselves as
physical constraints. As a result, most companies first focus on the most obvious
constraint, capacity. Hence, the first two steps are:
1. Identify the constraint.
2. Exploit the constraint.
The third step is to align activities at the other resources so they are consistent
with how the constraint is functioning. If the constraint is producing at a certain
level, it doesn’t make sense for preceding or following operations to produce at
higher or lower levels. The need to synchronize other activities is the third step:
3. Subordinate everything else to the above decisions.
In order to continue to generate more throughput, a company will eventually
need more of the constraint. If the constraint is internal, the company might need
to add another shift or purchase additional constraint capacity. If the constraint is
external, the company needs to increase demand for its products. TOC refers to
this need in the fourth step:
4. Elevate the constraint.
If more and more capacity is added at the constraint or if sales increase, the con-
straint of the system may shift. Therefore, we have the fifth step:
5. Go back to step 1.
This step is accompanied with the warning “Do not let inertia become the con-
straint of the system.” Be aware; things change, and when they do the constraint
may move, requiring different actions.
These five steps were developed in the early 1980s and have been widely em-
ployed with considerable success. We believe that three issues have limited even
more widespread use and additional benefits. First, while TOC clearly points to
where to focus, it is very short on providing tools for fixing the identified prob-
lems. As an example, TOC may highlight that a considerable amount of a con-
straint capacity is wasted in setups or that the constraint is causing considerable
scrap and rework. Unfortunately, TOC doesn’t provide tools on how to reduce
setup times (Lean does), nor does it provide tools for reducing the variations in
the output of the constraint (Six Sigma does).
A second obstacle is the suggested continual iteration of identifying the con-
straint, breaking it, resynchronizing all the other activities, and then repeating the
process. Companies have found that this degree is destabilizing and often stop

Chapter 4: Current CPI Favorites 41
after the third step. Incidentally, the later development of a TOS and the estab-
lishment of a single control point for each of the four network shapes resolve this
problem (see Chapter 7).
The third and largest obstacle to the wider use of TOC is the conflict it exposes
with prevailing cost-accounting measurement systems. These systems reward
fewer setups rather than the more needed for faster, smoother flow. Another com-
mon conflict is local efficiency measurements. Cost-accounting measurements
reward high local efficiencies even when the products produced cannot be pro-
cessed by the constraint or are not needed by the market. The conflicts with cost
accounting are not limited to how internal operations are measured. TOC’s view of
a product’s “octane,” and therefore its desirability, is diametrically opposed to cost
accounting’s concept of product cost and product margin. Failure to resolve these
conflicts with local measurements limits the degree to which TOC can be used to
develop a fast-flowing river system geared to generating more throughput.
Thinking Processes
The five-step focusing process is very effective in dealing with physical con-
straints. When the real constraint is a policy or practice, it may not be obvious. In
these instances, TOC’s thinking processes can be very helpful:
• What to change—what core problem bedevils the organization?
• What to change to—what actions will provide a breakthrough solution
that both eliminates the core problem and results in other benefits?
• How to create the change—what actions are needed to create the
desired environment, and how can they best be executed?
The first two aspects of the TOC thinking processes are similar to Lean’s kaizen
approach, except that are generally applied to more global issues. These thinking
processes are essentially logic trees and are best used by people who have intu-
ition about the subject matter being analyzed. TOC provides six logic processes
to help answer these three questions.
• A current reality tree (CRT) is used to identify a core problem.
It begins by listing several undesirable effects (UDEs) about the
current situation and first looks for the cause(s) of each UDE. These
causes are then viewed as effects, and the users work to determine
the cause of these effects. The process is continued until a single
cause or core problem is defined that is ultimately responsible for
all the UDEs.
• A conflict diagram is often used to find a breakthrough solution to a
core problem, although in many cases a solution may be obvious. The

conflict diagram simply poses the conflict between two requirements

for reaching a common goal. When the hidden assumptions inherent
in the conflict diagram are exposed, a breakthrough solution rather
than a compromise emerges.
• A future reality tree (FRT) starts with actions that may resolve the
core problem and produce desirable, rather than undesirable, effects.
These actions or injections when inserted into the current reality tree
project the logical effects of these changes. If all the UDEs do not
disappear, then additional injections are inserted until all the UDEs are
replaced by desired benefits.
• A prerequisite tree (PRT) defines the obstacles needed to implement
the injections that will replace UDE’s with desired benefits.
• A transition tree (TT) logically lays out the steps to overcome the
obstacles uncovered in the PRT. It provides a chronological list of
action items that essentially produced the desire future reality tree
state.
Critical Chain Project Management

TOC flow principles have been adapted to managing flow in project ori-
ented environments with great success. These environments are almost always
A-shaped networks. There have been some on efforts combining TOC, Lean,
and Six Sigma into a more effective system; however, such a discussion is both
premature and maybe the subject for another book.
LEAN
Lean was developed by a group of Massachusetts Institute of Technology
professors to provide a process for implementing Ohno’s Toyota Production
System. It has been well publicized and used by a wide range of companies.
Lean as generally practiced today differs somewhat from our understanding of
Ohno’s original intent, which was to improve internal activities so that Toyota
could sell more. This focus on directly connecting internal improvements to
more sales is sometimes lost in Lean implementations. Essentially, Lean is an all-
encompassing process that requires involvement of all functions of a company.
This highly disciplined approach takes considerable time, effort, and persistence
to implement—remember Ohno’s 40-year effort and use of a gun. It has proven
to be most successful in high-volume discrete manufacturing environments.
Lean focuses on improving processes and consists of discipline, daily practice,

and tools. It strongly emphasizes developing and growing a culture through re-
petitive practice.
Lean efforts are heavily focused on reducing the following seven wastes
(muda):
1. Transport
2. Waiting
3. Overproduction
4. Defects
5. Inventory
6. Motion
7. Extra processing
The process of implementing Lean involves the following six steps:
1. Specify the value—Lean attempts to create a waste-less environment
by first categorizing each activity as either:
• Value added (retain)
• Business value added (may be eliminated later)
• Non-value added (eliminate now)
2. Identify the value stream—Map the flows needed to design, order,
and make each product beginning and ending with the customer.
3. Make the value stream flow without interruptions—Herein lies the
heart of Ohno’s river system, the rapid, smooth-flowing of production
to the customer. In order to achieve such a system, it is essential
that variations be greatly reduced and where possible eliminated.
Lean focuses on continually exposing, highlighting, and eliminating
such disruptions. Lean suggests balancing takt times (the time to
perform an operation) so that there is no interruption in the flow of
work. It recognizes reality and establishes takt times slightly below
the capacity of each operation so that there is a capability to catch
up when small disruptions occur. This extra or protective capacity is
analogous to TOC’s use of time buffers to protect constraints from
disruptions. Lean spreads this protective capacity evenly throughout
the system, while TOC focuses it at key operations.
4. Let the customer pull value from the producer—Again, Ohno’s
concept of producing to actual customer sales is evident. The

ultimate concept is to respond to the needs of the consumer of

a product, which requires a close connection between when the
product is produced and when it is consumed. I encountered an
excellent example of the difference between sales and consumption
several years ago. I had just given a presentation on managing
production during an economic cycle. The gist of my talk was that
small changes in GDP typically are magnified, both positively and
negatively, the further a company is from the actual consumption of
its products. I pointed out that companies producing and using basic
raw materials such as steel and aluminum experienced much larger
swings during an economic cycle than retailers. One of the attendees
recounted an excellent example of this phenomenon. He worked for
a company that made diesel engines for over-the-road trucks and
similar applications. His company had historically experienced huge
swings in demand for its products. During the good times, the order
book skyrocketed, the company added production shifts, and the
workers had lots of overtime. In an economic downturn, the opposite
happened. Swings of increases and cuts in production of more than
40% were typical. Such oscillations were so difficult to manage
that the company looked for a different indicator of demand for its
product. They discovered that diesel fuel sales were an excellent
indicator of how quickly its products were being consumed and that
5% swings in diesel sales were causing 40% swings in customer
orders. Once the managers recognized this connection between
production and consumption, they were able to manage their
business in a much more stable and profitable fashion.
Ohno largely overcame this problem because Toyota controlled
distribution from its plants to dealers and tracked the actual sales to
customers. As a result, he was able to create a system where the next
operation in the production-distribution chain could be treated as
the customer. His kanban system was the mechanism for connecting
consumption/customer demand with production and procurement.
He used this system to identify and remove the sources of disruptions
in flow. The question that users must face is “Who is the customer?”
Is it the ultimate consumer of the product, or just the next link in the
chain? Ideally it is the ultimate consumer, but if the system does not
allow us to directly connect to this, then the next link in the supply
chain may be an acceptable substitute.
5. Pursue perfection—This aspect of Lean emphasizes both the need

for an incessant drive for continual incremental improvements and
the need for occasional radical changes.

6. Implement with agility—This step emphasizes the need for an

incessant drive for continual incremental improvements—do more of
what you have been doing so that the inherent variations in the flow
of work become less and less, resulting in a smoother, faster-flowing
river system. Practice, repetitiveness, and persistence are emphasized
in order to develop a perfect river system. Lean also recognizes that
periodically there is a need for radical changes and provides a tool
(kaikakku) for more quantum improvements.
Lean provides an impressive array of tools for eliminating waste and creating a
fast-flowing river system and stresses that they be used repetitively, persistently,
and in a disciplined manner throughout every aspect of the business.
SIX SIGMA
Six Sigma is a rigorous and disciplined methodology that uses data and sta-
tistical analysis to measure and improve a company’s operational performance.
It focuses on identifying and eliminating “defects” in production and service-
related processes. On a statistical basis, 3.4 defects per million opportunities are
considered Six Sigma, a performance bar that is significantly above what many
industries have achieved.
In the early 1980s with Chairman Bob Galvin at the helm, Motorola decided
that the traditional quality levels (measuring defects in thousands of opportu-
nities) didn’t provide sufficient granularity. Motorola’s engineers decided to
measure defects per million opportunities. Bill Smith, one of the engineers, is
credited with coining the term Six Sigma.
Motorola developed this new standard and created a methodology to cause
the needed cultural change. Over time, Six Sigma has evolved from a metric to a
methodology to a management system.
Six Sigma—A Metric

The roots of Six Sigma can be traced back to Carl Fredrick Gauss (1777–
1855), who introduced the concept of the normal, or bell-shaped, curve to explain
normal or expected variation. In the 1920s, Walter Shewart, a compatriot of Dr.
Deming, suggested that a deviation of more than three sigma (standard statistical
deviations) from the mean indicated that a correction in the process was needed.
The use of the bell curve was widely used to explain “normal” variations from
some average or mean, such as the heights or weights of a population. Many of
us recall our college professors grading a test on the “curve.” Instead of using a
strict numeric measurement of test scores (which may resulted in a failing grade

for many of us), teachers assumed that there would be a normal variation in test
scores and graded accordingly. The result of “curving” test scores was:
A—A few very bright students
A—A small number who scored well
B—The majority
C—A small number who performed poorly
F—A few who failed
The assumption was that the normal curve explained the inherent variation in
every process or population. Anything that varied beyond three standard statisti-
cal deviations was an anomaly or outlier, indicating a totally unexpected event.
When applied to manufacturing, the existence of such outliers meant that the
process had gotten out of control and needed to be adjusted.
The idea that processes should be kept within six rather than three standard
deviations dramatically raised the bar of when a process was out of control. The
result was an intense effort to improve processes so that only a very few defects
existed (those that varied more than six sigma). The change from a three-sigma
to a six-sigma perspective resulted in a dramatic improvement in the quality of
many products. We’ve often wondered how it would impact the quality of gradu-
ates if it were applied in the same fashion in our schools.
Six Sigma—A Methodology

The Motorola approach is project oriented and driven by two similar problem-
solving methodologies: DMAIC for operational improvements and DFSS for
designing products and services. DMAIC consists of the following five phases:
• Define—Establish the project goals and customer deliverables.
• Measure—Determine the performance of the current process.
• Analyze—Investigate the root causes of the defects.
• Improve—Implement changes to eliminate the defects.
• Control—Ensure that the improved performance is maintained.
Each of these phases involves a number of steps and the use of a large variety of
statistical tools.
Step 1—Define
The champion identifies and/or validates the improvement opportunity, de-
velops the business processes, defines critical customer requirements, and selects
the project team leaders and members. The deliverables from this phase include

team charters, including a mission statement and team objectives, action plans,
process maps, quick-win opportunities, critical customer requirements, and a
prepared team.
Step 2—Measure
The objectives of this phase are to identify the critical measures that will
determine the success of the project in meeting critical customer requirements.
In addition, the project team will begin developing a methodology to collect the
data needed to measure process performance. This methodology will be used to
establish baseline sigma levels for the processes.
The team also maps the existing processes to understand the process flow and
extenuating factors. It’s interesting to note that TOC draws diagrams of networks
and Lean uses value-stream mapping to depict flow. Some of the tools that may
be used in this stage to ensure that the measurement system is sufficiently accu-
rate are cause and effect diagram (C&E), quality function deployment diagram
(QFD), preliminary FMEA (failure modes and effects analysis), and measure-
ment system analysis (MSA). The deliverables for this phase are:
• Input, process, and output indicators

• Operational definitions
• Data collection formats and plans
• Baseline performance
• Productive team atmosphere
Step 3—Analyze
The objective of this phase is to stratify and analyze the opportunity in order
to identify the major causes of unacceptable variation and describe it in an eas-
ily understood problem statement. It is critical to pinpoint and validate the root
causes that when eliminated resolve the unacceptable variation. Consequently,
the real sources of the variation that result in defects causing customer dissat-
isfaction must also be determined. This is done by applying statistical tools
to narrow the possibilities to a few, collecting and analyzing data, and testing
hypotheses to determine the significant input variables. The result is a list of a
few input variables that may be causing the excessive variation. Some statistical
tools typically employed are:
• Histograms • Multivariant studies • Regression
• Box plots • Correlation

Step 4—Improve
In this step of the methodology the objectives are to:
• Identify, evaluate, and select the right improvement solutions.
• Develop a change management approach to assist in implementing the
recommended changes.
In this phase, a new process model that demonstrates that the recommended
changes will yield the desired result needs to be established. Tools and activities
supporting this phase include:
• Design of experiments (DOE) to develop a mathematical prediction
model
• Structured decision tools to select the input variables needed to
optimize process performance
The deliverables of this stage are:
• Process maps and documentation
• Solutions
• Change maps
• Implementation milestones
• Improvement impacts and benefits
• Storyboards
Step 5—Control
Objectives of this phase are to:
• Maintain the gains, understand the importance of planning and
executing against the plan, and determine the approach to be taken to
assure achievement of the targeted results.
• Understand how to disseminate the lessons learned and standardize
the approach to improving other opportunities/processes.
• Develop related plans.
Typical activities are:
• Developing a pilot solution and plan
• Verifying that a reduction in the identified root causes actually
resulted in the expected improvement

• Determining if additional solutions are needed

• Implementing mistake-proof techniques, such as standard operating
procedures (SOP) and poka-yoke.
• Integrating the solution and lessons learned into daily work processes
• Identifying the next steps for additional improvements
• Comparing the actual improvement to the initial objectives
• Transferring the improved process to the process owners
The deliverables are:
• Process control systems
• Standards and procedures
• Training
• Team evaluation
• Change implementation plans
• Potential problem analysis
• Pilot and solution results
• Success stories
• Trained associates
• Replication opportunities
• Standardization opportunities
Design For Six Sigma (DFSS)

In addition to DMAIC, another methodology has been developed for achiev-
ing Six Sigma process capabilities on the design side. DFSS is a process similar
to DMAIC and stands for Design for Six Sigma. It is used in the design of new
products and services. This approach has proven to reduce rework and improve
first pass yield (FPY) because the design considers the process capabilities. The
goal is to achieve Six Sigma performances upfront in the design of the product
or service by matching production and operational processes capabilities with
design requirements.
Six Sigma—A Management System

Motorola created a multilevel organizational infrastructure to implement
Six Sigma headed by a senior management steering committee. The steering

committee is composed of representatives from all divisions or functions in the

company plus the Six Sigma program manager. The committee meets weekly to
review progress, select people and projects, and attend to administrative issues.
The infrastructure of a Six Sigma effort consists of:
• Site champions
• Process owners
• Green Belts
• Black Belts
• Master Black Belts
A site champion who is trained in Six Sigma also sits on the steering committee.
The site champion is responsible for several projects and for mentoring project
team leaders and clearing roadblocks.
Process owners are typically managers who are responsible for the area where
an improvement project is taking place. They set the goals and objectives of the
project and sometimes assume the role of the champion.
Green Belts are individuals trained in Six Sigma and are also called Six
Sigma specialists. They typically receive one or two weeks of training. They are
directed by Black Belts, and their responsibility is data collection and simple
data analysis. Green Belts may do individual projects in which in-depth knowl-
edge of statistical techniques is not required.
Black Belts are trained individuals who take on the role of project leaders,
team coaches, and change agents. They typically receive four weeks of training
spread over a four-month period. They may also train and mentor Green Belts.
They are responsible for the financial outcome of their projects.
Master Black Belts are Black Belts who typically go through an additional
one or two weeks of training focused on statistical approaches to problem solv-
ing, leadership skills, and project management. They are primarily trainers and
coaches for Green Belts and Black Belts. They provide technical guidance in the
proper application of the myriad of tools used in executing projects.
As noted earlier, Six Sigma efforts are largely project-oriented activities
geared to improving a particular process or area. The five-step DMAIC approach
is the vehicle for generating improvements. This methodology emphasizes ex-
tensive training and use of statistical quality tools. Essentially these practitioners
apply statistical inference tools to actual quantitative data to logically solve pro-
cess problems.
Summary/Evaluation
TOC ranks high in the primary measurements it proposes (T, I, OE) to evalu-
ate improvements. In addition to these measurements, the primary strength of

TOC is its laser-like focus on where to make improvements, i.e., where to de-
vote improvement energies. Typically, it requires first identifying either a core
problem or a constraint to additional throughput so that efforts are focused on
eliminating core problems and breaking constraints.
Because generating throughput (T) is the longest improvement lever, TOC
implementers often focus heavily on how much of constraints time is used to
actually produce products or deliver services (often referred to as “blue light”).
This is a good indicator of the available capacity that is actually being used. In
addition, its use of time buffers prior to constraints protects throughput and helps
prioritize the downstream disruptions that need the most attention. Because of its
focusing capabilities, the ratio between bottom-line benefits and effort expended
tends to be high.
TOC also offers several thinking process tools, one of which is useful in
identifying what to change, what to change to, and how to create the change.
While TOC’s strengths are where we should focus efforts, its shortcoming
lies in an absence of robust tools to solve the specific problems it identifies. For
example, it may correctly find that considerable capacity is being lost at a con-
straint due to long setups and excessive scrap. However, it lacks specific tools for
resolving these problems. In addition, while its use of time buffers prior to the
constraint is helpful in identifying the major disruptions like an out-of-control
process, it again lacks specific tools for fixing these problems.
In summary, TOC measures improvements through T, I, and OE, which are
excellent indicators of bottom-line benefits. It also focuses internal efforts on Archi-
medes’s long-lever opportunities by stressing the value of exposing hidden capac-
ity within the system or resolving core problems that limit performance. Although
it stresses the great value of using exposed capacity to generate more revenue with
little operating expense, its suggestions of how to accomplish this goal are largely
anecdotal. Its greatest shortcoming is a paucity of proven tools to reduce the waste
and variations that slow and disrupt the flow in our river systems.
Lean offers an impressive and proven array of tools to reduce waste, but it
lacks a focusing mechanism to point at the most important wastes to eliminate.
Lacking such a mechanism, we, like Ohno, are often relegated to improving ev-
erything rather than focusing on the long levers of Archimedes.
Six Sigma brings a variety of excellent statistical tools to our CPI efforts.
Their focus on reducing variations in activities and processes has contributed
mightily to improvement in the quality of products and reliability of processes.
The define step of the DMAIC process does assist in focusing efforts on higher
potential opportunities. However, it lacks TOC’s more rigorous measurements (T,
I, OE) and global approach to focusing on exposing and capitalizing on hidden
constraint capacity. In addition, because it is project-oriented, it often focused on
improving a part of the system, rather than the overall system.
Some firms have already combined the Lean and Six Sigma approaches and
generated good results. In just six years, Pella more than doubled its sales in a

relatively slow-growth industry while increasing its profits by 250%, without

any infusion of capital or resorting to layoffs. Mercedes Truck Operations in
Brazil, in the heart of the traditional automotive industry, has also had success,
demonstrating that manufacturing process excellence is cross-cultural. Maytag
is building an innovative machine to compete with developing economies’ labor
rates and manufacturing production methods. Vermeer is not only improving its
existing manufacturing, it is using Lean-Six Sigma concepts to design and de-
velop new machines and products.

Index
5S-CANDO, 140–141 Brue, G., 329

Brussee, W., 329
BSC. See balanced scorecard (BSC)
A business process reengineering (BPR),
A networks, 67–69, 268–273 26–27
accounting, cost, 7–9, 92–96 business value-add (BVA), 131
activities, control of, 227–230 BVA. See business value-add (BVA)
agility, 148–150
analysis of variance, 333
analyze, 159–160
C
Anderson, M. J., 329 calibration, 334
Aquilano, N. J., 329 capability, 334
Arai, K., 331 capability index, 334
assembly lines, 4 capability study, 334
assignable cause, 333 capable process, 334
Carnell, M., 330, 332
Cartier, Jacques, 11
B case studies
Bakerjian, R., 329 Celso Calia, 314–325
balanced scorecard (BSC), 240–244 electronics manufacturer, 296–306
components of, 244–249 inventory, 293–296
Ballis, J. P., Sr., 329 valve assembly, 306–314
Ballis, John, 110 Vorantim, 318–325
Barnard, W. W., 329 cause-and-effect diagram, 334–335
behaviors, motivating, 77–78 Cavanagh, R., 331
Benbow, D., 329 CCPM. See critical chain project management
Benson, G. P., 330 Celso Calia case study, 314–325
bias, 333 centerpoint, 335
Black Belts, 50 champion, 253
blocking, 333 Champy, J., 330
Bluman, A. G., 329 characteristic, 335
bottleneck, 16 characterization, 335
box plot, 333 Chase, R. B., 329
BPR. See business process reengineering checklist, 335
(BPR) Chowdhury, S., 331
Breyfogle, F. W., III, 329 common cause, 335
Brown, Donaldson, 6–7, 9, 83 confidence interval, 335
347
05_Index_pg347-352_Pirasteh_ASQ.indd 347 8/31/10 4:00 PM

348 Index
constraint, 334 Detriot Motor Company, 89

exploitation, 208–211 DFSS. See Design for Six Sigma (DFSS)
removing, 230–236 direct labor reductions, 169
constraint management, 129 distribution, 336
continuous improvement. See continuous DMAIC, 46–49, 158–161
productivity improvement (CPI) dot plot, 337
continuous productivity improvement (CPI), 108, DOV. See design, optimize, and verify (DOV)
195 DPM. See defects per million (DPM)
control, 160–161, 335 DPU. See defects per unit (DPU)
control chart, 335 drum-buffer rope system, 104
control factor, 335–336 Durant, William, 6
control group, 336 Dusharme, D., 329
control limits, 336
control point, 72–73
control process variability, 221–227
E
COPQ, 336 economic order quantity (EOQ), 9–10
correlation, 336 effect, 337
cost accounting, 7–9, 92–96, 100 EI-Haik, B. S., 332
cost of poor quality. See COPQ electronic manufacturer case study, 296–306
cost reduction programs, 25 enterprise resource planning (ERP), 26, 186
Cox, J., 330 EOQ. See economic order quantity (EOQ)
CPI. See continuous productivity improvement ERP. See enterprise resource planning (ERP)
(CPI) escaped detection, probability (DET), 216, 220
credibility, of measurements, 225 evolutionary operation (EVOP), 337
Creveling, C. M., 329 EVOP. See evolutionary operation (EVOP)
critical chain project management (CCPM), 42, expert, 253–254
249–250
critical characteristic, 336
critical parameters, 336
F
critical to quality, 336 factor, 337
Crosby, P. B., 329 factor level, 337
Crowther, S., 329 factor range, 337
CRT. See current reality tree factorial experiment, 337–338
Cupello, J. M., 32 failure mode effect analysis (FMEA), 215–217
current reality tree (CRT), 41 Farah, K., 331
customers, 244–245, 336 features, 246
Fisher, R. A., 329
five focusing steps, 39–41
D five whys, 214–215
data-driven, 336 Florida Power and Light, 28
De Feo, J. A., 329 flow rules, 73
defects per million (DPM), 337 FMEA. See failure mode effect analysis (FMEA)
defects per unit (DPU), 337 focus, 205–208
define, 158–159 focus groups, 338
delivery performance, 245 Ford Motor Company, 3–5, 89–91
demand driven, 143–144 Ford, H., 329
Deming, E. W., 329 Ford, Henry, 3–5, 17, 73, 83, 89–91
Design for Six Sigma (DFSS), 49, 161–166 Fourth Wave Management System, 23
design phase, 162–163 Fox, R. E., 330
Design, Measure, Analyze, Improve, Control Fox, Robert, 110
(DMAIC). See DMAIC frequency of occurrence (OCC), 215–216, 219
design, optimize, and verify (DOV), 161 FRT. See future reality tree (FRT)
DET. See escaped detection, probability future reality tree (FRT), 42

Index 349
G investment decisions, 92–93

iTLS, 19–22, 24, 53–60, 84, 106–110. See also
General Motors, 3, 5–10, 83, 91–92 TLS
George, M., 330 application, 202, 204
George, M. L., 329 applying, 56–60
global focus, 257–266 benefits, 250
Godfrey, B. A., 330 case studies, 293–325
Goldratt, E. M., 330 competitive advantage, 252
Goldratt, Eli, 15, 21, 39, 96–106, 110 customer benefits, 250
Goldratt, Eliyahu, 123 defined, 195–196
Gooch, J., 330 effectiveness, 62–66, 257–266
goodness-of-fit, 338 event sequence, 56–60
Great Depression, 91 examples, 293–325
Green Belts, 50 experiment, 61–66, 257–266
growth, 246–249 features, 55–56
Gryna, F. M., 330 function, 198–202
growth strategy, 251–252
H initial implementation, 197–198
inventory management, 294–296
Hammer, M., 330 versus Lean, 259–266
Harrington, J., 330 model, 198–202
Hibino, S., 331 monitoring systems, 230–231
histogram, 338 river, 109–110
Hobbs, D., 330 roadmap, 238–240
Hoffherr, G. D., 330 shareholder benefits, 250
Horn, S., 331 and Six Sigma, 196, 259–266
starting, 253
steps, 202–204
I successful implementation, 237–238
I networks, 71–72, 281–284 sustain strategy, 251–252
identify, 162 sustainable implementation, 250–251
Imai, M., 330 and TOC, 196, 259–266
improve, 160 and Toyota Production System, 196
improvement, 25, 31 training classifications, 253–254
failing, 35–37, 191–193 types of organizations, 250–251
history, 185–187 unique features, 202
measuring, 31–35, 187–191
missing link, 78–81
improvement challenges, 118–121
J
improvement dilemma, 111–121 Jacobs, R. F., 329
improvement efforts JIT. See just-in-time (JIT)
focusing, 76–77 Jones, D. T., 332
motivating, 77–78 Juran, J. M., 330
improvement programs, comparisons, 113 just-in-time (JIT), 61, 89, 257
in control, 338
Inamori, K., 330
increase throughput, 169–170
K
individuals chart, 338 Kaizen, 141–142
inspection, 339 kanban, 15–16, 20, 144–147, 339
interaction, 339 kanban system, 102–103
inventory case study, 293–296 KCIV. See key critical input variable (KCIV)
inventory management, case study, 293–296 key critical input variable (KCIV), 124
inventory optimization model, 294–295 key input variable (KIV), 124

350 Index
KIV. See key input variable (KIV) N

Kubiak, T. M., 329
Nadler, G., 330, 331
Nadler, Gerald, 110
L net profit, 32, 188
labor, improvements, 170–183 Neuman, R., 331
LaMarch, J., 330 noise factor, 339–340
Launsby, R. G., 331 non-value add (NVA), 131
leadership responsibilities, 285–291 normal distribution, 340
Lean, 17–18, 26, 37, 42–45, 106–110, 112–113, NVA. See non-value add (NVA)
130–150, 257
application, 211–212 O
versus iTLS, 259–266
learning, 246–249 OCC. See frequency of occurrence (OCC)
Levinson, W. A., 330 Ohdahl, T. P., 331
linearity, 339 Ohno, T., 331
Ohno, Taichi, 3, 12–17, 42, 74, 83, 96–106
operating expenses, 33, 189
M optimize phase, 163–165
make versus buy, 94–96 order fulfillment value stream, 135
Malcolm Baldrige Quality Award, 28 organize, 287–288
management issues, 75–81 orthogonal array, 340
Mann, D., 330 out of control, 340
markets, 244–245 outliers, 340
Master Black Belts, 50 overproduction, 133
materials requirement planning (MRP), 26,
186
P
McClaves, J. T., 330
Meadows, B., 329 Pande, P., 331
measure, 159 Pareto analysis, 341
measurement Parkinson’s Law, 249–250
credibility, 225 parts per million, 340
errors, 226 Pearson, K., 331
reliability, 225 perfection, 147–148
system validity, 225–227 Pirasteh, R.M., 331
Mills, C., 330, 332 poka-yoke, 143–144
missing link, 78–81 population, 341
mobilize, 204–208, 286–287 precision, 341
mobilize, organize, speed up, tie up. See MOST prerequisite tree (PRT), 42
model, 339 prevention, 341
Model T, 3–5, 83, 89–91 price, 245
monitoring systems, iTLS, 230–231 probability plot, 341
Montgomery, D., 330 process, 341
Moody, P. E., 331 capability index, 152
Moran, J. W., 330 flow matrix, 137
MOST, 176, 285–289 process capability study, 341
application, 289–290 process potential, 341
feedback, 291 production volumes, 9
motion, 133 production, seven sins, 133
MRP. See materials requirement planning products, 246
(MRP) project sponsor, 253
muda, 28, 131, 133, 339 PRT. See prerequisite tree (PRT)
multitasking, 249 Ptak, C., 330

Index 351
Q SPC. See statistical process control (SPC)

special cause, 344
quality, 245–246 specialist, 253–254
specification limits, 344
R speed-up, 288–289
Srikanth, M. L., 331
R chart, 342 stability, 344
R-squared, 343 stabilizing, 230–236
randomization, 341–342 stable process, 344
range, 342 standard deviation, 344
rational subgroups, 342 standard error, 344
reliability, of measurements, 225 statistic, 344
repeatability, 342 statistical control, 344
reproducibility, 342 statistical process control (SPC), 139–140, 344
Rerick, R. A., 330 stratification, 345
residual, 342 student syndrome, 249
resolution, 342 supporting activities, control of, 227–230
response, 342 survey, 345
response surface model (RSM), 342 sustainable operation, 179
return on investment (ROI), 32, 93, 126, 188, 190 system reevaluation, 236–244
River Rouge Plant, 4, 89
river system, 4–5, 12–16, 20, 67, 90, 97–106,
109, 267–284 T
ROI. See return on investment (ROI) T networks, 70–71, 279–281
Roos, D., 332 Taguchi, G., 331
rope, 73 takt, 136, 345
RSM. See response suface model (RSM) takt board, 232–236
target value, 345
The Goal, 39
S
theory of constraints (TOC), 17, 26, 37, 39–42,
S chart, 344 106–110, 112, 113, 123–129, 345
Salvendy, G., 331 application of tools, 205
sample, 343 and iTLS, 196
sample size, 343 thinking processes, 41–42
sampling error, 343 throughput, 33, 189
scatter plot, 343 improvements, 170–183
Schmidt, S. R., 331 increase, 169–170
Schonoberger, R. J., 331 throughput operating strategy (TOS), 18, 41,
Schragenheim, E., 330 67–74, 267–284
Sekine, K., 331 tie loose ends, 289
services feedback, 245 time buffer, 73
SEV. See severity (SEV) TLS, 18. See also iTLS
severity (SEV), 216, 218 TOC. See theory of constraints (TOC)
Sharma, A., 331 TOS. See throughput operating strategy (TOS)
sigma level, 344 total quality management (TQM), 26–27, 126,
Sincich, T., 330 186
Six Sigma, 17–18, 26–27, 37, 45–52, 106–110, Toyota, 83
112, 113, 150–161, 257 Toyota Motor Company, 3, 12, 15, 97–106
application of tools, 222 Toyota Production System (TPS), 12, 16, 42,
methodology, 157–161 97–106
metric, 151–157 TPS. See Toyota Production System (TPS)
versus iTLs, 196, 259–266 TQM. See total quality management (TQM)
Sloan, Alfred, 3, 5–8, 17, 73, 83, 91 transition tree (TT), 42

352 Index
transportation, 133 volumes, production, 9

Triola, M. F., 331 VOP. See voice of the process (VOP)
trust, building, 77–78 Vorantim case study, 318–325
TT. See transition tree
two-level designs, 345
W
Wallace Company, 28
U Wantuck, K. A., 332
UAW. See United Auto Workers (UAW) waste, eliminating sources, 211–221
UDE. See undesirable effects (UDE) Way, M., 332
Umble, M. M., 331 WCE. See work cycle efficiency (WCE)
undesirable effects (UDE), 41 Welch, J., 332
United Auto Workers (UAW), 91 Welch, S., 332
Wheat, B., 330, 332
Whitcomb, P. J., 329
V Womack, J. P., 332
V networks, 69–70, 273–278 work cycle efficiency (WCE), 131
validate phase, 165–166 workflow transportation logistics, 138
validity, measurement system, 225–227 Wu, Y., 331
value, 345
value added, 33, 130
value flow, 134–142
X
value specification, 130–132 X chart, 346
value stream, 132–134, 345 X-bar-R chart, 346
valve assembly case study, 306–314 X-bar-S chart, 346
variance components, 345–346
variation, 346
VOC. See voice of the customer (VOC)
Y
voice of the customer (VOC), 125 Yang, K., 332
voice of the process (VOP), 125 yield, 346

About the Authors
Dr. Reza (Russ) M. Pirasteh is founder of iTLS-ISO Group®. He has held

executive, staff, and line positions and has 25 years of solid experience in imple-
mentation of continuous improvement systems in manufacturing and transac-
tional environments. He has earned a Ph.D. in Engineering, an MBA in Industrial
Management, a BS in Industrial Engineering, and a PMP (PMI). He is also a
Certified Lean Six Sigma Master Black Belt and a Certified Lean Master. He has
formulated iTLS™® to fill the gaps among CPI methodologies he has experi-
enced. Reza has published numerous articles and conducted lectures for APICS,
IIE, TOC-ICO, Weber State University, UTA, OSU, and IndustryWeek. He is a
member of APICS, ASQ, IIE, and PMI.
Robert E. Fox is a founder of The Goldratt Institute, The TOC Center, Inc.,
and Viable Vision LLC. He earned an MS in Industrial Administration from
Carnegie Mellon and a BS in Engineering from the University of Notre Dame.
His has extensive industrial and consulting experience and has served as Vice
President of Booz & Co. and President of Tyndale, Inc. He authored The Race
and The Theory of Constraints Journal. In honor of his 50 years of contribution
to organizational improvement, the Fox Award was established to honor organi-
zations and individuals who have demonstrated excellence. Steven Covey and
Peter Senge have been recipients of a lifetime Fox Award.
353
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The Logical Thinking Process: A Systems Approach to Complex Problem Solving

The Executive Guide to Understanding and Implementing Lean Six Sigma:

The Certified Six Sigma Black Belt Handbook, Second Edition

The Certified Six Sigma Green Belt Handbook

5S for Service Organizations and Offices: A Lean Look at Improvements

Lean Kaizen: A Simplified Approach to Process Improvements

Root Cause Analysis: Simplified Tools and Techniques, Second Edition

The Certified Manager of Quality/Organizational Excellence Handbook, Third Edition

Enabling Excellence: The Seven Elements Essential to Achieving Competitive Advantage

To request a complimentary catalog of ASQ Quality Press publications,

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Reza (Russ) M. Pirasteh

ASQ Quality Press

00_FM_pg00i-xvi_Pirasteh_ASQ.indd iii 8/31/10 4:00 PM

Library of Congress Cataloging-in-Publication Data

Pirasteh, Reza M., 1956–

Publisher: William A. Tony

To place orders or to request a free copy of the ASQ Quality Press

Printed on acid-free paper

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Part I: Leadership Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

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WHAT IS UNIQUE ABOUT ITLS™®? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Part II: Practitioner’s Guide. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

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Step 3—Analyze . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

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Chapter 9: Real-World Application of iTLS Approach . . . . . . . . . . . . . . . . . . . . . . . . . . 293

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Figure 1.2 Drum buffer rope system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

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Table 3.8 DMAIC process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

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Figure 5.20 iTLS rapid problem-solving worksheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228

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This book is a result of a serendipitous meeting in 2007. Despite different ca-

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Ford’s system relied on relentless execution. Workers needed to produce a

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A single-product river system like Ford’s could be effectively managed in a

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Cost-accounting thinking was essentially a way to decompose an organiza-

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had to be equally flexible, necessitating very quick changeovers. The production

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He claimed that the resistance to small-batch production was strictly psycho-

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Ohno’s process of identifying problems came at a steep price. Whenever a line

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