Applying the Theory of Constraints to Projects

John L. Homer, BMW Constructors Inc.

In 1984, Dr. Eliyahu M. Goldratt published The Goal (Goldratt, 1984), a book about application of the Theory of Constraints (TOC). This book has had profound impact on manufacturing management. Dr. Goldratt has stated that the book was intentionally presented as a business parable (its literary form is that of a novel) so that readers would hopefully have several ahhh! experiences in the course of reading the book (Goldratt, 1990). The Goal drives several points home, quite forcefully: Improvements in a production system are real only if they have impact on customers, are reflected in increased system throughput, or reduce inventory. Most measures of the system are so superficial, or are such distortions of the performance picture that the improving numbers do not accurately indicate improved system performance. Local improvements in a process only improve the system when they are applied at bottlenecks. When we understand our throughput constraints, we attack them to improve the system. The first and second points work together. If we can agree conceptually on what constitutes improvement, then we can examine our measurement systems to see if they reflect system improvement. In traditional accounting systems, we sometimes turn this equation inside out. If the numbers are looking better, then we act like the system must have improved. By managing to the numbers we drive managers to implement standard cost efficiencies, schedule longer run production cycles, increase inventory, install more expensive production equipment, and unintentionally create bottlenecks. All of this destroys delivery schedules and offends customers. In our measurement systems, assumptions about the spread of fixed cost across the production cycle can make us conclude that extra business at lower prices would be a profit drain when, in fact, it might be the only hope we have for increasing profit. As a simple example, take a plant whose standard cost basis on a product consists of assumed production of 100,000 units year, with a fixed cost of $500,000 and a variable cost of $5.00/ unit. Thus, the standard cost basis is (500,000 + 5*100,000) or $1,000,000. Divided by 100,000 units, this gives us a cost basis of $10.00/ unit. On this basis, the sales department may well be told that no order for less than, say, $12.50 unit is acceptable.

What happens when a salesman gets a take it or leave it offer from a customer for 100,000 units, at $9.75/unit, for a volume that would double production of that product? He declines the offer! What if he had accepted? On a standard cost basis, every unit produced loses money. The entire order looks like a drain of $25,000. On a fully costed basis, however, the equation might look different: ($500,000 + 200,000 * $5) for a cost of $1,500,000, or a unit cost of $7.50/unit. Gross profit calculated on the production (1,250,000 + 975,000) - 1,500,000 is now $725,000. We have nearly tripled gross profit by taking an order that was initially rejected as unprofitable. Of course, the whole example rests precariously on a number of assumptions. The point to be made is that the assumptions that underlie the standard cost method are no less ridiculous than those on the positive side of this example. We must understand what is going on in our system, not just whether some set of arbitrary measures is rewarding specific outcomes. The next point is that, without a perspective of the entire system, we may well move into the feel-good improvement cycle, optimizing the pieces of the system without regard to impact on the entire system. An example would be a capacity increase at a non-constrained process. The ability to produce more, or more cheaply, may have no impact on the containing system. In The Goal, Dr. Goldratt constrains a system by introducing Herbie (Goldratt, 1988). In the example, Herbie is a character closely identified as a physical constraint on system performance. Since the books publication, Herbie has entered the production management language to mean any constraint. Now the act of improving the system can be seen as an effort to identify and deal with Herbie. How do we act on Herbie? In Goldratts language, We elevate the constraint. We identify actions that will maximize the throughput at the constraint, and then we will make the rest of the system subject to this elevation. We do this by operating the Herbie twenty-four hours a day, by keeping buffers in front of Herbie, or by moving work away from Herbie. The classic example is a workstation that has the lowest unit cost for some production processes and is also the main system constraint. Moving some goods away from this process may cause an apparent increase in cost, but the move simultaneously increases the system throughput.

Proceedings of the 29th Annual Project Management Institute 1998 Seminars & Symposium Long Beach, California, USA: Papers Presented October 9 to 15, 1998

A real project example of such a situation, drawn from the authors early experience in highway construction, is useful to highlight elevation of a constraint. On a certain project, the soil engineers had determined that a few thousand yards of soil under the approach to a grade separation would likely settle unacceptably over time. The specified corrective approach was to saturate this soil with water and let it sit for several months. The belief was that this would lead to a much quicker consolidation, eliminating the settlement problem. The constraint came from the fact that the operation would take several months to accomplish, and it would start in the fall of the year. At best, this meant that the grade separation could not be built until the next spring. The contractor offered an alternative. He said, Let us excavate the material in question and replace it with properly compacted, select fill. The engineer responded, It cant possibly be cheaper to remove that material than to saturate it. With this conversation, the issue shifted from what was cheapest in a local sense to what the impact was on throughput. The delay of several months before the work could be undertaken was potentially much more expensive than the additional cost of removing the material. In summary, the theory of constraints suggests that making improvement requires understanding the system in which we operate and the meaningful measures of performance for that system. We must be careful in this, since faulty understanding and misleading measurements can easily occur. Further, we can only improve throughput of the system by operating at the points of constraint (Herbies), and we must elevate management attention on these points to reduce or remove the constraints before real improvement is possible. In 1997, Dr. Goldratt published Critical Chain (Goldratt, 1997), a look at the application of TOC in the project environment. Again leading us by the hand through a parable, Dr. Goldratt addressed some issues from the project world that constrain our systems. From this book I draw the support for the following conclusions: Cost and schedule are critical metrics of projects. The very approaches we use to reduce cost are likely to lengthen schedule The greatest impact on project cost may come from increased duration. Lengthening a projects duration will, in some cases, have more impact on the project viability than any other deviation from plan. Most projects take longer than they should. Critical path analysis of the schedule is not adequate to clarify our project strategy.

The measurement systems we use on projects often mislead and confuse our management effort. We will take the first three points together. Assume for the moment that the duration of the project is the length of time from when a necessary change is identified until the change is totally in place; when the results of the project are being fully realized. The possible deviations from the project plan are now confined to two areas. We can overrun or underrun both the schedule and the cost budget. (This definition intentionally eliminates quality as an issue for deviation. If we do not get the expected result, the project is not finished. We can compromise on the expected result or make quality tradeoffs, but this is not a deviation from our plan, it is a part of our plan.) Either deviation is a demon project managers must constantly deal with. Which of these two we fear most greatly is the product of our culture. For instance, a government bureaucrat will generally fear cost overruns much more than schedule overruns. The consequence is a project system optimized to assure compliance of the project cost to the published budget and ignoring schedule as an issue. That culture results in projects that take much longer than they need to, but are cost optimized in terms of writing the smallest dollar value of checks to get to the end result. Our very approach to cost reduction lengthens schedule. An example might be a small county bridge project. The county commission decides that their accountability is to minimize cost, measured as the final amount of the checks written to contractors. The engineer aids them in doing this by producing bid tabulations. Typically, the firm that wants the least cash for the project gets the award. How long will it take to build? Approximately forever. The decision to optimize the amount of the checks written determined that. It will take as long as the low bidder wants. The engineer has, of course, set limits, such as no bids will be accepted calling for a construction time of greater than four hundred fifty working days. Is this a practical maximum? It better be. Again, the decision to go low bid means we risk complaints if the schedule pinches anyone who might feel that longer is cheaper. We normally set the schedule long enough to avoid any possible complaint. Whether we will make this schedule is a very different question. See below. A real example of this tension occurred for the author in the construction of two hospitals of very similar size in suburbs of the same city. In the first case, the authors company was low bidder at approximately $3,000,000 on one phase of the work, to be performed in eleven months. On the other project, the authors company was a distant third on the bidding, again at approximately $3,000,000. In this case, the project duration was thirty months. The author was of the opinion that his bid would have been

Proceedings of the 29th Annual Project Management Institute 1998 Seminars & Symposium Long Beach, California, USA: Papers Presented October 9 to 15, 1998

Exhibit 1. Probability Distribution for Activity Duration

Median

Safe Guess

50%

80% Time

Safety

lower if the duration had been shorter. Others had a different opinion. The low bidder felt that a thirty-month schedule lowered his costs by approximately 10 percent. The author has always felt that nineteen months of revenue stream would have more than offset the difference in cost for the owner. In most businesses, we do not have the luxury of such an easy standard of accountability. Were the bridge being built for corporate purposes, someone would surely be asking what the costs are of not having the bridge open. What is the value of the lives saved and delays avoided by the prompt completion of the bridge? The corporation might even develop an equation that says time is money, so lets get the project done in two hundred working days. (In the case of the earthquake rebuild on I-10 in Los Angeles, completion was much faster than that.) In the business world, we would more fully count our opportunity costs alongside the project costs. What we would find is that the costs of not getting the project done quickly could be high indeed. Is this unusual? Goldratt says no. He supports the authors conclusion that lengthening a projects duration will generally have more impact on project viability than any other deviation from plan. Above, the set of possible deviations was reduced to combinations of two variables, cost and budget. Of the two, cost often gets the greater attention, but it is the wrong metric. The success of the project will more often be determined by project duration. The critical metric may be time to market or time to achieve a production level. For example, the author is aware of a project that involved building a manufacturing plant, with a cost of almost one billion dollars that never opened. A delay in completing the project meant the firm had missed the

market. What had been projected as a highly profitable project sits today as an empty albatross. Consider the current production ramp-up of the 737. Reportedly, Boeing is paying substantial penalties, and losing customers, because of their inability to deliver on time. Cost is important, but in this case delay is probably the biggest determiner of cost overruns (Biddle, 1998). So is the answer that we lengthen our project duration expectations in order to have fewer late projects? The answer to that question must be a resounding no! Projects take too long to do. We must find a way to complete them faster. Goldratt, of course, suggests that the answer to this is found in our understanding of the TOC: Understand the process, identify the constraints, and elevate the constraints. Why do projects take as long as they do? Goldratt suggests several mechanisms: Overly long duration estimates for individual activities. One way schedule deviation. Inadequate understanding of resource allocation. The argument that we systematically make overly long activity duration estimates is persuasive. It ties to a perception that negative deviations in either schedule or budget have far more negative consequences than favorable ones. The traditional mechanism taught in scheduling classes is to take the resource requirement of the activity and divide it by the practical resource consumption rate to arrive at the duration. This method works for a small percentage of project activities. More realistically, the expected duration of most activities is determined by a judgment call or educated guess. The closer this guess is delegated to the person who will be doing the work, the better the understanding of the work complexities we can expect. With an understanding of the complexities comes an understanding of conflicting activities that are likely to impact the performance in a particular time frame. There is also a very real awareness of the personal cost of missed schedule. A duration given as thirty days makes no automatic distinction between thirty days of intense activity, or twenty-nine days of inactivity followed by one day of activity. If we suppose that analysis of activity duration reveals a probability distribution, it might look like Exhibit 1, which is taken from Critical Chain. Some items of information become obvious. The distribution is not symmetrical, and the variance is not small. Given this curve, where do we set a deterministic duration? Goldratt suggests will be set at about the 80 percent probability level (Goldratt, 1997). If most, or all, activity durations are thus estimated, we have added considerable length to the project schedule. Have we increased the likelihood of beating the schedule? Goldratt suggests the answer is no! A simplified version of his argument runs like this: If we have projected that the

Probability

Proceedings of the 29th Annual Project Management Institute 1998 Seminars & Symposium Long Beach, California, USA: Papers Presented October 9 to 15, 1998

earliest finish of activity A is June 11, 1998 what is the likely planned start of succeeding activity B? Certainly, it will be no earlier than June 12, and much more likely June 15. What happens if A finishes June 5? B most likely starts June 15. What happens if A finishes June 16? B probably starts June 22, and a bigger allowance is included between similar activities involving the same resources in the future. What we experience in such a system operation is that deviations are all one way. Since the system is not capable of capitalizing on early finishes, the schedule will only get longer. A schedule that was built with lots of extra performance time will, in all probability, run still later! The third major influence on overly long schedules comes from fundamental lack of understanding about critical resources. When a resource conflict arises, we have several possible actions, all anticipated from The Goal and its treatment of the means of elevating constraints. These are: We can increase the available resource. We can substitute some other resource. We can delay some of the activities to let the bottleneck resolve itself. Classic CPM analysis assumes that we can shuffle resources very freely. Resources are available for the asking with interchangeable skills. This was never the case, but the theory has had its adherents. The author remembers one construction study from the University of Illinois that proposed a time-sharing terminal on the construction site, so that every morning the superintendent could assess his available manpower and then dynamically assign them to the most critical tasks. Clearly, this ignores reality. While that study was dealing with carpenters and laborers, the argument makes little more sense there than if we were dealing with programmers and brain surgeons. Skill sets are not interchangeable, rhythm and teamwork do count, and spare resource units are rarely inventoried near at hand. Neither increasing nor substituting resources can be ignored as a constraint reduction issue, but neither is a guaranteed practicality. The third strategy points out both a different common analysis problem and a common, though flawed, means of dealing with it. The analysis problem is the existence of demands upon project resources from multiple projects simultaneously. Schedules drawn for a single project in a multiple project environment will often encounter the conflict of a resource scheduled on several projects. How do we handle this issue? We obviously let some decision rule set determine the allocation of the resource. Is the rule set that the first request governs? Or that the loudest Project Manager wins? If communication is not good, we will often just grouse about delay as the resource sets the rule set.

Consider Exhibit 2, Scheme A. (adapted from Goldratt, 1997) the serial march through the conflict. Only A can be happy. Commonly, the fix attempted is the King Solomon solution of splitting the baby. This might look like Scheme B. Significantly, while project teams B and C might feel better about getting some early attention, no project reaches final output any earlier than in the first assignment, two projects are later. This is a classic TOC problem. There is no easy answer. Because multiple projects are involved, there are no easy communication paths. It is from problems like this that the book title, Critical Chain, is drawn. The conclusion drawn is that we must manage projects, not from the critical path alone, but in full recognition of the impact of resource allocation across projects and between conflicting priorities within projects. This chain of resource allocation may be more important than our critical path analysis can identify. Goldratt rejects out of hand the idea that the critical path of a schedule can change frequently through the project. His argument is that, while this works mathematically, it does not work in management practice. This is the project level version of the reallocation of manpower to dynamically allocated crews and the allocation of those crews to the most critical work daily. It doesnt work in practice. Our approach to the project must be guided by our schedule analysis, but we can not redirect our strategy at every unexpected constraint. Once the line of approach is set, we must elevate the constraint and subjugate other activities to this line of attack. Goldratts explanation of this idea is rather thin. He states it as a given, but he does not give supporting evidence for it. The authors support comes by way of two examples. Early in his career, the author was excited by the prospects of CPM analysis in projects and proposed that a logic network be constructed on a difficult project his firm was bidding. The answer was, I wont have any of that foolishness here. I have a good friend who ran a project governed by that kind of schedule, and he told me he was up on the river bank in the dry season and down in the river bottom in the spring floods. You cant run a project that way. This was, of course, right. You cant run a project that way, but the fault is not in the schedule tool. It is in not setting a strategy and sticking to it. As a second example, some years ago the author was called in to consult on a major paper mill project involving construction of a recovery boiler. Upon examining the schedule, he found that the delivery of boiler components was not even referenced. When he asked why, he was told, They will be here when we need them. In fact, we are preparing to pay a penalty for not being prepared to accept them on the original delivery date. We have slipped so far

Proceedings of the 29th Annual Project Management Institute 1998 Seminars & Symposium Long Beach, California, USA: Papers Presented October 9 to 15, 1998

Exhibit 2. Alternate Allocations of Resource Across Multiple Projects

Scheme A
Project A Project B Project C

Scheme B
Project A Project B Project C Project A Project B Project C

on our schedule that we will not be ready for them. In the end, the project paid a $100,000 penalty to the manufacturer for late delivery. The project focus was in the wrong place. The schedule identified a critical path that ran through engineering, rather than making the only real constraint on the project subject to the critical constraint. What is often lacking is the leadership of the crusty old Regional Vice President I once heard tell a Project Manager, I dont care if moving that dirt isnt on your critical path. You get those scrapers moving and redraw your critical path. This outfit makes money by moving dirt. The final conclusion the author draws from Critical Chain is an echo of the issue of our measures. Project measures such as activities on schedule, or absorbed manhours of activity, are very likely to miss the critical determiners of the project success. Are we completing the critical activities on schedule? Are we productively absorbing the man-hours in the right work? In perhaps fifty construction planning seminars taught to audiences that include pipefitter supervision, the author has yet to encounter an audience where at least some of the supervision do not appreciate the futility of show pipe. The supervision understands that credit taken for pipe in the air is not a good indicator of a path to systems complete. Project management is far less likely to endorse this concept, as they are hesitant to criticize the measures their bosses use. Our measurement systems need to be examined and improved.

Summary
What can we do to improve project performance based on the lessons available from the TOC? We can: Ensure that our project have clear focus on business objectives. Undertake to educate all project team members on the relative impact of late delivery vs. deviation from budget. In most cases, the schedule should dominate the strategy. Use our early planning opportunities to set the right line of approach and not get diverted by hectic activity driving out the right actions. Learn to be consistent in the methods we use for setting activity duration. Successful short schedules may well involve chain buffers, out-of-project resource scheduling, and a tolerance for late activities as the means to take advantage of favorable deviations. Examine our control systems for their ability to accurately reflect the state of the project, and develop measures to differentiate progress from absorbed activity. Recognize the sources and management of variation in our projects. The Critical Chain and an understanding of the TOC can help with our understanding and success. References
Biddle, Frederic M. and John Helyar. 1998. Flying Low Behind Boeings Woes: Clunky Assembly Line, Price War With Airbus. New York: Wall Street Journal. Goldratt, Eliyahu M. and Jeff Cox. 1984. The Goal A Process of Ongoing Improvement. Croton on Hudson, New York: North River Press Inc. Goldratt, Eliyahu M. 1990. What is this Thing Called the Theory of Constraints and How Should it be Implemented? Great Barrington, Mass.: North River Press. Goldratt, Eliyahu M. 1997. Critical Chain. Great Barrington, Mass.: North River Press.

Herbie in Projects
The specific subject of the impact of variation on project outcomes will not be dealt with here in depth. The short answer is that extending the work of Dr. Goldratt others have shown cost effective means of increasing throughput through the reduction in variation. Exploration of this issue will have to await another day.

Proceedings of the 29th Annual Project Management Institute 1998 Seminars & Symposium Long Beach, California, USA: Papers Presented October 9 to 15, 1998