What is the Main Purpose for Combining and Implementing the Theory of Constraints, Lean, and Six Sigma?

Back in May, Bob Sproull and Matt Hutcheson published a book entitled The New Beginning: A Business Novel on How to Successfully Implement the Combination of The Theory of Constraints, Lean, and Six Sigma to Drive Profit Margins. Essentially, this book teaches the reader how to successfully combine and implement the Theory of Constraints, Lean, and Six Sigma to produce results that many companies only dream of having. It covers a variety of different company types including manufacturing and healthcare.

When I spoke with Bob in July, I asked him: "What is the main purpose for combining and implementing the Theory of Constraints, Lean, and Six Sigma?" Here is his full answer:

The main purpose for combining and implementing the Theory of Constraints, Lean, and Six Sigma is quite simply to maximize a company’s profitability.  Each of the three individual components serves a completely different purpose, but it all starts with the Theory of Constraints. The Theory of Constraints provides the needed focus and leverage point, meaning that the primary reason many improvement initiatives fail to deliver hoped-for profit levels is that many times they are focused on the wrong area of the system. It matters not whether the system is a manufacturing or service system, because each type of system has a constraining factor that encumbers the output of the system.  While the Theory of Constraints locates the correct focal point for improvement, Lean works to reduce waste, while Six Sigma reduces and controls variation. Both waste and variation encumber systems and therefore reduce the system output, which translates into less than desired profitability. By combining the Theory of Constraints, Lean, and Six Sigma, maximum profitability will be achieved.

The Theory of Constraints offers so many different tools and techniques that are completely different from many continuous improvement professionals utilize.  In the book The New Beginning, I insert these tools as part of the business novel format.  One of the tools is a different form of accounting known as Throughput Accounting.  It’s not a replacement for traditional Cost Accounting, but it is used throughout The New Beginning, as a way to make better financial decisions.  When I learned this form of accounting, it changed my entire approach to maximizing profitability.  While traditional Cost Accounting emphasizes that the key to profitability is through how much money can be saved, Throughput Accounting teaches the reader that the real key to improving profits is through how much money can be made. The difference between saving money and making money is profoundly different. In The New Beginning, I use numerous examples of how to use Throughput Accounting to drive profit margins upward.

Another valuable addition that can be realized by using the Theory of Constraints is the method used to order parts and raw materials. While most companies use something referred to as the Min/Max System, the Theory of Constraints utilizes something referred to as the TOC Replenishment Method, and the results are dramatically different!  In The New Beginning, I go to great lengths to explain this methodology and the results are dramatically different when compared to the Min/Max System.  By using the TOC Replenishment Method, companies can reduce their inventory by about fifty percent while virtually eliminating stock-outs!  Imagine a company being able to reduce their on-hand inventory by fifty percent and not worrying about stock-outs of needed parts and/or raw materials. Think about what that would do to a company’s profitability!

Another Theory of Constraints tool brought forth in The New Beginning is a logic tool known as The Goal Tree.  The Goal Tree is an important tool that can be used to develop a company’s improvement plan. In The New Beginning, I have provided examples from two distinctly different companies.  One company is a manufacturing company while the other one is oriented in healthcare. That is a series of completely different hospital types. It matters not what type of company attempts to use The Goal Tree, because of the logical method it uses to construct it. The method developed in this book is first, the creation of The Goal Tree which has an overall Goal at the top, followed by critical success factors need to achieve the company’s goal, and finally necessary conditions needed to achieve each of the critical success factors. When the Goal Tree is completed, it can then be used to assess the status of each of the Goal Tree entities. When the assessment is complete, The Goal Tree is then used to develop an improvement plan. As is demonstrated in The New Beginning, The Goal Tree is an important tool used to develop a company’s improvement plan.

The New Beginning was written as a sequel to another business novel I wrote entitled The Secret to Maximizing Profitability and both have been well received by the readers. The good news is, both books are centered on completely different company types, but in both books, I go into great detail on how to combine the three initiatives, namely Theory of Constraint, Lean, and Six Sigma.  It is my hope that both books will be enjoyed by all readers, but not only enjoyed, but also used to maximize your company’s profitability. I co-authored this book with Matt Hutcheson who is such a valuable contributor to the book’s success!

What do you think of Bob's perspective? Have you tried to combine Theory of Constraints, Lean, and Six Sigma in your organization? If so, what results did you expect and what did you receive? 

Medicare Should Not Base Payments on Hospital Productivity

While I generally support financial incentives to drive improvements in healthcare – such as Medicare deciding it will no longer pay for treatment of certain medical mistakes – I’m concerned about an approach built into some of the reform proposals making their way through Congress.

According to The Wall Street Journal Health Blog, the proposals claim they will save $172.8 billion over 10 years by making productivity improvements a factor in increases of Medicare payments.

Every year, the feds adjust Medicare payments to hospitals, nursing homes and other facilities to account for inflation. The House bill would add in a second factor: productivity. Because workers’ productivity tends to increase over time, factoring in productivity increases would make Medicare payment increases lower than if they were tied only to inflation.

I can understand the thinking behind that idea. If productivity improvements reduce expenses, Medicare payments shouldn’t have to increase. And if payments are adjusted for productivity improvements industry-wide (I’m not sure whether that would be the case), that gives individual hospitals an incentive to improve their productivity.

The problem is first, productivity can be difficult to measure, and second (and more importantly), it’s the wrong metric.

What exactly will the government use as a measure of increased productivity? The number of patients served by a hospital? The staff-to-patient ratio? The number of procedures, such as X-rays, performed in a given time period?

None of these is a true indicator of whether a hospital is providing the best care to the greatest number of patients. Financial incentives should be tied to outcomes. Not paying for treatment of “never event” medical mistakes is one approach. Another might be to reward a hospital for a reduction in its rate of in-hospital infections – or in its mortality rate. I’m sure there are plenty of others.

I worry that tying payments to productivity will give us more treatment without better quality.