Theory of Constraints Handbook - James Cox Iii [561]
For nonprofit organizations, there are difficulties in measuring performance and TOC is perceived as a business-oriented philosophy.
What Do TOC and Focused Management Have to Offer?
Our experience in implementing TOC and Focused Management concepts and techniques show that despite the difficulties listed previously, there exist tools, practices, and methodologies that bring about major improvements for service organizations.
Later in this chapter, we will present concepts and tools for successful implementation in service organizations.
TOC Concepts and Tools for Service Organizations
This section describes a coherent methodology for managing service organizations based on TOC literature and the experience of the authors in implementing TOC in dozens of service organizations of different kinds.
The Seven Focusing Steps of TOC
The seven focusing steps of TOC (Pass and Ronen, 2003) form a very effective framework for managing service organizations. The seven-step framework adds two preliminary steps to the common five-step framework introduced by Goldratt (Goldratt and Cox, 1992). The first step deals with the definition of the goal, while the second step deals with the definition of a corresponding set of performance measures. The addition of these first two steps is highly important for nonprofit service organizations. Thus, the Five Focusing Steps (5FS) framework comprises the following steps:
1. State the goal of the organization.
2. Define global performance measures.
3. Identify the system constraints.
4. Decide how to exploit the system constraints.
5. Subordinate everything else to the constraints, and to the above decisions.
6. Elevate the system’s constraints.
7. If a constraint has been broken, go back to Step 3. Warning: Do not let inertia become the system’s constraint.
In the first step, the goal of the organization is defined. The goal of profit organizations is to increase shareholders’ value. Shareholders’ value is the discounted cash flow of the organization. The value-centered definition of the goal is important in service organizations because it focuses everybody on the organization’s value. In nonprofit organizations, focusing the whole organization on the goal is even more important because the definition of the goal is usually more complicated and requires incorporation of the resources limitations typical to many nonprofit organizations.
In the second step, a set of performance measures is defined for the organization and its units. Performance measurement is not widespread in service organization but its importance is high—it serves as a compass for management to monitor and control how the organization is functioning and, eventually, the achievement of its goal.
Bottleneck Management
Similar to most organizations, the overall constraint of service organizations is the market constraint. Namely, many of them have excess capacity for selling more of their services and the ability of earning more money is governed by the demands of the market. In other words, service organizations are able to cope with a substantial increase in the number of customers and serve them properly. This becomes even more important because most of the costs of a typical service organization are fixed costs.
As noted by Pass and Ronen (2003), most service organizations have two bottlenecks: one in their Sales and Marketing departments and the other in their IT department. These internal bottlenecks will remain bottlenecks even if more resources are added to the respective departments and therefore are referred to as permanent bottlenecks. The IT department is the heart of service organizations such as banks, insurance companies, cellular providers, telecommunication firms, and credit cards companies.
No matter how many more salespersons or marketing employees we add to the Sales and Marketing