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A Guide to Implementing the Theory of
Constraints (TOC) |
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A Japanese Perspective – An Explanation This page is an attempt to resolve a conundrum over
what constitutes a goal and what constitutes a necessary condition. In Theory of Constraints, “The Goal” is
fairly well agreed upon for North American commercial activities. However, repeating that particular goal in
Japan did not have the resonance that might have been expected. Over a period of time I came to believe
that another goal, one which is equally valid, operates in parts of Japanese
commerce. I want to try and describe
this more fully. Part of the problem, I am sure, is cultural. Cultural not in the selection of a goal,
but rather cultural in failure to understand someone else’s selection of their goal.
Frequently on the internet there are discussions about Toyota and the
way it operates in North America as perceived by others living in North
America but not actually working for Toyota (it would seem that many people
believe that much of Toyota’s success can be ascribed to cheap non-union
contract labor). I usually want to
scream and shout “you are not working for Toyota so how can you understand,”
followed immediately by “hey, but this isn’t even Toyota Japan this is Toyota
North America.” We are not evaluating
paradigms now, but rather cultures – wholly more messy situations. Let’s try to explain matters with a couple of
analogies and hope that one of them resonates. Take pumpkin pies and carrot cakes. My childhood exposure to vegetables was
that they were a necessary component of a healthy diet but not a particularly
enjoyable experience. How on earth
could one turn vegetables into pies and cakes? After all, pies and cakes were the exact
opposite – an unnecessary component of a healthy diet and a very enjoyable
experience at that. Well, as with
green eggs and ham, you have to try them to understand. For a Japanese example there is a fermented Soya
bean – a little like moldy cheese – called natto. About half the country thinks the other
half is crazy for eating it and the other half of the country thinks that the
first half is truly crazy for not eating it.
And very rarely will the two halves meet. Which of course is a shame for those who
don’t eat natto – they don’t know what they are missing (yes but, they will
reply, we can smell it and we are not the least bit worried about missing
out). The point is, without direct experience, often we
can’t appreciate the other sides view.
We end up stating things like “yuk pumpkin pie and carrot cake.” Really it depends upon the cultural
perspective. So, too, with goals and necessary conditions. Of course one of the advantages of inventing a
theory such as Goldratt has is that he also gets to define the terms. And if you subscribe to a particular theory
then it rather behooves you to adhere to those definitions. So let’s make sure that we know what a goal
and a necessary condition is. A goal seems to
have two important features. Firstly;
it must be open-ended, you can not have too
much of the goal (1). Secondly; the owners have the sole right to determine what the goal is
(1). What about necessary conditions then? A necessary condition
is a boundary imposed by a group external
to the owners which can not be violated (1). Looking at it from a different direction this
is a minimum condition that must be
satisfied. A necessary condition can
also be internally imposed, such as a core corporate principle or value (2). Let’s see then how this is interpreted in North
America first, and then in Japan. The North American perspective for publicly traded
companies is fairly well defined by Goldratt (1). “If a company has even one share traded
on Wall Street, the goal had been loudly and clearly stated. We invest our money, through Wall Street,
in order to make more money now as well as in the future. That is the goal of any company whose
shares are traded in the open market.” What happens then if a company is privately held? “If we are dealing with a privately
held company, no outsider can predict its goal. We must directly ask the owners.” On the measurements page we expressed the goal for a
publicly traded company as small tree with two pre-requisite necessary
conditions. However in contrast to the
measurements page where we “dropped” the “more money” from the definition,
let’s make its inclusion explicit this time.
But why do we
choose this goal? What is it about
making more money now and in the future that is important to the owners of
the organization? Well, it allows the
company to prosper and if necessary also to grow. And let’s face it, if we develop a system
that is good at producing money, won’t we want to have more of it if we are
able to expand? Just ask the share
market if you are unsure. So really
making more money is a precursor for something else – organic growth. Organic growth as opposed to raising funds
for acquisition, merger, and consolidation (aka cost cutting). Let’s draw this.
What about Japan then? Let’s see. From my point of view I feel that the goal in many
Japanese corporations, especially the so-called “founders companies” on the
2nd tier of the Tokyo Stock Exchange and a good few from the first tier as
well, is different from that of the publicly traded companies of the United
States. Sure the espoused goal might be
the same, but the goal in reality is something a quite different. Let’s have a look at this.
But isn’t this
goal heretical? Well it might be if
your paradigm is the reductionism and efficiency, it might not be if your
paradigm is systemism and subordination.
Regardless of the paradigm; it is not heretical if we are after the
same end result as in the United States. But consider
also the following. There is no
revolving door for management in Japan, once you are in you are in and you
will remain in. You make a choice for
the rest of your life in your very early twenties just as you leave
university for the first time. If your
firm “stuffs-up,” you too are personally stuffed as well. Remember too that in a nation where women
do not often hold professional positions incomes are often from a single
source. Yes, it is becoming looser more recently, some
younger people actively seek to work for “American Companies,” nevertheless
for most this is not an option especially outside of the main centers. Thus there is an imperative for security in
Japan that is lacking in the US.
Changing firms in Japan is very difficult and often quite harmful. Employment
dynamics aside; why is this goal not heretical if we are after the same
results as in the United States? Well,
let’s have a look.
What we can be
certain of is that in neither system – North American nor Japanese – is the
customer the goal. Schonberger states
with reference to Japanese inspired World Class Manufacturing that; “The
direct goal of the firm is not to produce revenue or make money. It is to serve customers (4).” Codswallop!
Satisfying customers is a means to an end, in other words it is a
pre-requisite necessary condition. It
is not the end in itself, it is not the goal. In Japan the
customer and the guest are described by the same word. “We have guests in the factory” is how
Japanese usage describes such things.
And, well, if we had more guests, or if they would just pay us a
little more for our product, then we could justify borrowing enough money to
buy that neat new computer numerically controlled machine that we saw at the
show last year! Satisfying the
customer is not the goal in either system.
Its transportation to the U. S. as a goal, and its
institutionalization in various national award criteria, is the result of
misunderstanding. Ah, but I can hear you say, employee security and
satisfaction can’t be the goal because it’s not open ended. Oh really?
Then consider the following for a moment. A feature of Japanese corporate life is the twice
annual bonus payment. One half at New
Year and one half in mid-summer. Parts
of the economy revolve around these periodic lump payments. Generally these range from a standard 3
months salary to about 5 months salary per year. Now suppose you were on 3 months and were
offered 4, would you refuse it? I
doubt it. And once you were on 4
months would you limit yourself to that if the company continued to produce
more cash? Probably not. An additional month’s bonus each year would
make you more satisfied and certainly more secure. Employee satisfaction and security is open-ended. You can’t have too much. There are other non-cash incentives that add to
satisfaction and security for employees-for-life. Many corporations will have limited amounts
of company housing for younger families.
New unmarried employees will almost certainly take advantage of
company hostels because they are so much cheaper than the open market. There are usually special company deals on
hotels in popular holiday areas, the company ski lodge, the company mountain
house and so forth. In the context maybe
we should expect nothing less. Is it
open ended? It can be. There is one other aspect. Employment-for-life or at least allegiance
to the firm carries with it a need to expand.
Currently, most corporations pay seniority-based pay. Year after year the total base pay of the
corporation increases as the workforce ages.
Expanding the firm broadens the age base with increasing numbers of
younger graduates and reduces this effect.
Another need to expand comes from the need to find meaningful
positions for everyone. Unlike the
Army for instance where it is “up or out” when there is no out, you have to
keep creating “up and across.” For
many Japanese firms kaizen has enabled them to grow markets in size, type,
and geographic dispersion. Expanding
the firm means security. Once again
there is an imperative that does not exist in North America where up or out
(to a better firm) operates. Well, if the goal in this case is indeed open-ended,
then surely it is not what the owners of the system have declared as the
goal. Well let’s see. We need to look at the corporate structure
in Japan and the role of the banks. "At an average U.S. publicly
traded company, the board of directors has about 13 members, only two or
three of whom are from inside the company.
The remaining are appointed from outside." "But at an average company in
Japan, there are no outside board members.
The board often has more that 20 members and usually they all are
executives engaged in daily operations of the company (5).” Thus we can see that the governance structure of
Japanese corporations is somewhat different from what we would expect in
North American or European models.
Let’s continue. “The board rarely dismisses the
president because members have long been subordinate to the president, who
effectively has the final say in appointing board members, subject to the
approval at a shareholders' meeting. Cross-shareholdings also still account
for much of the total outstanding shares of the Japanese companies, and there
are fewer institutional investors on the market than in the U.S. Management
teams thus feel relatively little pressure from the stock market and
shareholders, a situation that allows them to operate at low return-on-equity
ratios (5).” Thus active
institutional investment in publicly traded companies is much less than in
North America and representation by such shareholders is non-existent. We can see some of the institutionalized
disenfranchisement in the fact that about 70% of publicly traded companies
which close their books in March have their annual shareholders meeting in
June – June the 27th to be exact!
Racketeers might be the stated reason for this coincidence (6) but I
invite you to consider this more fully. Tightly held ownership of shares is not unique to
Japan. For a North-American example we
can turn to Cummins Engine Company. By
developing tightly held ownership rather than cross-ownership Cummins Diesel
was able, in the early 1990’s, to fend-off the “efficiency” of the markets
through selling shareholdings to Ford, Tenneco, and Kubota; all of whom had
mutual interests in Cummins’ success.
It was a strategy to secure “patient capital” and achieve the position
of a “private company with public ownership.”
It is acknowledged that making the interests of the company and
several key customers congruent actually made the company paradoxically more
“Japanese” in its mode of operation (7). It was suggested in the quote that management feels
relatively little pressure to increased return-on-equity. Let’s examine this further. “According to U.S. ‑based consulting firm McKinsey
& Co., the average ROE of listed Japanese companies, excluding financial
institutions, has fallen from a peak of 16.6 percent in 1969 to 2 percent in
1999. The ROE of U.S. firms, on the
other hand, has gradually increased over the same period, hitting 23 percent
in 1999 (5)." If debt finance is important, then what is the role
of the banks in Japan? Here is one
view (8). "We have entered the realm of the
absurd, when it comes to credit and risk," said Takehiro Sato, economist
and executive director at Morgan Stanley. "Banks continue to be
nonprofit organizations whose sole purpose is to provide a safety net against
unemployment (by carrying ailing companies)." So who are the owners? The owners of debt financing, the banks,
are essentially ensuring that the goal of employee satisfaction and security
through continued employment is met.
The owners of equity finance are most often cross-shareholdings –
which amounts to owning yourself. So we could answer the question in two ways. Firstly to use Goldratt’s criterion that
the goal is set by the owners, we must agree then that the owners are the
employees – through cross-shareholding in each others’ firms and via
government sanctioned debt financing.
At least we are consistent with our definitions here. Secondly, we could consider that the portion of
shares freely traded on the stock exchange represent the real owners, but if
that is the case then those shareholders have abrogated their right to
determine the goal, and have instead assigned that right to the management. Regardless of the way we substantiate the matter it
seems fairly clear that for many companies in Japan the effective goal is the
satisfaction and security of their employees.
Moreover this goal is largely supported by society. Which goal is correct then? The North American one or the Japanese
one? Well, surely both are
correct. Correct within their
respective social contexts and correct within our prior definition. Moreover, they both create value; and they
both create a process of on-going improvement. One is maybe more capitalistic and the other more
socialistic – but then, this more like two end-points of a continuum rather
than two mutually exclusive positions.
During the 1920’s and 1930’s Japan tried a more purely capitalist
approach, but as in other countries at that time, industrial unrest was rife. Maybe the more collective model developed
in the 1950’s harks back to an earlier and more stable pre-industrial social
order. One that we see replicated to
some extent in several of the industrialized countries of Europe. Deming
certainly saw past this apparent dichotomy of employee versus investor; he
considered that management must signal their intent to “stay in business and
aim to protect investors and jobs (9).”
The accent is on investors and jobs; not either or. He addressed those comments to a North
American constituency. If neither then is incorrect as a goal within the
culture that it operates; what then is the problem? Let’s see. There is nothing wrong with the American perspective
– except that sometimes one of the necessary conditions is not met.
Goldratt has an important cloud that describes the
conflict that give rise to this problem.
The cloud is well known but hard to find. I know, I searched for a published
copy. Fortunately, Cox and Spencer
include it in the last chapter of their constraints management handbook (10). Here is the cloud as Goldratt originally
verbalized it.
Productivity
= Throughput / Operating Expense Under the systemic approach this means the
following; Improve Productivity = Increase Throughput / Maintain Operating Expense Improved productivity means increased throughput at
constant operating expense during the exploitation phase and if we have to
increase expenditure during the elevation phase then the increase in
expenditure must be significantly less than the increase in resultant
throughput. We must constantly strive
to decouple throughput from costs.
Constraints accounting shows us how to convert the investment sums
needed for the elevation phase into operating expense for management
accounting purposes so that we can evaluate the improvement using the
relationship above (11). Let’s be very clear, improved productivity does not
mean this; Improve Productivity = Maintain Throughput / Decrease Operating Expense This is the reductionist approach. This thinking is the cause of the cloud
before we broke it. This thinking is a
legacy of our pre-industrial past – leave it there, don’t bring it into the
present with us. I didn’t even want to
write it. Let’s erase it from our
minds.
Improved productivity means increased throughput at
constant operating expense – because we don’t want to layoff anyone at
all. We must
make more money for the system from the system as it exists now in order to
satisfy both of the needs. This may
eventually mean new markets or strategy.
Initially it may simply mean better exploitation of existing
circumstances. Whatever the intent, it
really means establishing an holistic approach at
the very outset of the journey towards a process of on-going improvement. Caspari and Caspari have a specific solution for
this problem which they outline in constraints accounting using a POOGI bonus
scheme (11). It is not far removed
from similar solutions in Japan. We shouldn’t
be surprised, after all the objective is the same. There is nothing wrong with the Japanese perspective
– except that sometimes one of the necessary conditions is not met.
We can build a cloud that describes the conflict
that gives rise to the problem that we observe. Let’s have a look.
Productivity
= Throughput / Operating Expense Under the systemic approach this means the
following; Improve Productivity = Increase Throughput / Maintain Operating Expense Improved productivity means increased throughput at
constant operating expense during the exploitation phase and if we have to
increase expenditure during the elevation phase then the increase in
expenditure must be significantly less than the increase in resultant
throughput. We must constantly strive
to decouple throughput from costs.
Constraints accounting shows us how to convert the investment sums
needed for the elevation phase into operating expense for management
accounting purposes so that we can evaluate the improvement using the
relationship above. We must improve productivity because we don’t want
to reduce current operating expenditure such as bonuses or benefits or divest
any of our “extra” facilities. We must make more money for the system from the system as it
exists now in order to satisfy both of the needs. This may eventually mean new markets or
strategy. Initially it may simply mean
better exploitation of existing circumstances. Whatever the intent, it really it means
establishing an holistic approach at the very outset
of the journey towards a process of on-going improvement. Taiichi Ohno understood the need to satisfy making
money and how to do it by increasing productivity (12). “What is the difference between traditional
IE [industrial engineering] and the Toyota system? In brief, Toyota-style IE is mokeru or profit-making IE.” Thus we can see that it is indeed possible
for companies in Japan to satisfy both necessary conditions in the cloud as
shown above. Toyota has been doing it
for years. Toyota is the largest corporate tax payer in Japan. You have to be quite profitable to do
that. It is imperative to make a
profit for the long-term success of the firm. We need to focus less on the goal, or the difference
between the goals and instead focus more on the insufficient fulfillment of
the complementary pre-requisite necessary conditions. Both countries; either directly or indirectly, fail
to understand the tremendous commercial advantage of increasing productivity
within their existing operations and instead look to cheaper labor rates and
develop “we can’t compete” attitudes towards other countries. This doesn’t have to be the case. It is an absolute shame that plants in the US
industrial belts can get a new die manufactured in China sooner and for a
much lower price compared to the established shop down the road. It is not the high cost of labor down the
road that is causing this disparity.
It is something else. “In 1986,
the Japanese industrialist Konosuke Matsushita predicted that America would
lose in the race for international markets because it was infected with a
disease, the disease of Taylorism (13).”
The disease of least cost. In a
business the quickest way to realize cost savings is to lay-off staff. To lay-off staff destroys one of the
necessary conditions for on-going improvement. Maybe this is why North American die makers
can’t compete. Japanese companies are not dissimilar. Many Japanese corporations have in recent
years invested heavily in new plants in low labor cost countries in
South-east Asia and mainland China.
Sometimes this is to support other Japanese firms which have set up
assembly lines in the same area, often times, however, it seems to be
motivated by a fear that domestic labor will become too expensive. However, often substantial production
exists within current domestic facilities, where the investment has already
been made in plant and personnel. The
potential for increased profitability from these facilities is immense. In many ways current Japanese business practice
appears to have strong parallels with North-American businesses in the late
1970’s. Donaldson characterized the
management during this period in North-America as conservative, operating
with low debt and high retained earnings (14). Debt excepted;
conditions are similar. In North
America the low debt and high earnings retention became a target of the
changing nature of the markets which began to demand better “efficiency” – if
not voluntarily, then involuntarily through hostile take-over. Donaldson argues that voluntary internal
restructuring in response to these market changes was often much more
effective and considerably less painful than eventual externally enforced
restructuring. We could draw from this
that maybe voluntary improvements now in Japanese businesses will be much
more effective than waiting until it is externally imposed. For that matter; why restructure? Why not simply reframe. We can use the wisdom of senior management and the
enthusiasm of younger management. There is a recent excellent account of the rise and
fall of the Long Term Credit Bank in Japan by Gillian Tett. The first third of the book mirrors the
development of Japanese economic and social norms since the 1950’s and
provides an excellent context for understanding the situation in Japan as it
is today. The remaining two thirds of
the book are an insightful description of the differences in current cultural
and economic approaches between Japan and North America and the interaction
that occurs when they meet head-on. Tett, G., (2003) Saving the sun; a Wall Street
gamble to rescue Japan from its trillion-dollar meltdown. Harper Business, 337 pp. (1) Goldratt,
E. M., (1990) The
haystack syndrome: sifting information out of the data ocean. North River Press, pp 8-13. (2) Dettmer, H. W., (2003) Strategic navigation: a systems approach to business strategy. ASQ Quality Press, pg 62. (3) Kawase, T.,
(2001) Human-centered problem-solving: the management of improvements. Asian Productivity Organization, pp 118-119. (4) Schonberger, R. J., (1996) World class manufacturing: the
next decade: building power, strength, and value. The Free Press, pg 231. (5) Yoshida,
R., (2002) Japan gropes for ideal corporate governance model. Japan Times, Friday August 23rd edition. (6) Japan Times
(2003) Some firms hold early stock meetings.
Japan Times, Friday June 20th edition. (7)
Cruikshank, J. L., and Sicilia, D. B., (1997) The engine that could: 75 years
of values-driven change at Cummins Engine Company. Harvard Business School Press, pp 413-442. (8) Negishi,
M., (2003) Foreign banks excel in lending with measure of risk, realism. Japan Times, Friday July 18th edition. (9) Deming, W.
E., (1982) Out of the crisis.
Massachusetts Institute of Technology, Centre for Advanced Education,
pg 23. (10) Cox, J.
F., and Spencer, M. S., (1997) The constraints management handbook. St Lucie Press, pg 298. (11) Caspari,
J. A. and Caspari, P., (2004) Constraint management: using constraints
accounting measurement to lock in a process of ongoing improvement. John Wiley & Sons Inc., (draft). (12) Ohno, T.,
(1978) The Toyota production system: beyond large-scale production. English Translation 1988, Productivity
Press, pg 71. (13) Kanigel, R., (1997) The one best
way: Frederick Winslow Taylor and the enigma of efficiency. Viking, pg 486. (14)
Donaldson, G., (1994) Corporate restructuring: managing the change process
from within. Harvard Business School
Press, 227 pp. This Webpage
Copyright © 2004-2009 by Dr K. J. Youngman |
