Theory of Constraints Handbook - James Cox Iii [580]
Rather than generating T from products, PSTS enterprises generate T from project deliverables and process service levels. Truly variable costs are for things consumed in the production of a service, such as parts used for repairs.
Rather than investing in plants and materials, PSTS enterprises invest more in skills, intellectual capital, assets, and service production systems. Furthermore, bids and proposals are significant investments.
Rather than including factory labor in OE, PSTS enterprises use labor from professionals, scientists, and technicians. SG&A costs include labor from partners and principals, whose job it is to sell services engagements.
Just as there is no product cost construct in TAG, there is no service cost construct in TAS. OE is simply summed. It’s not allocated to services. This avoids the distortions that make some services appear profitable when they are not.
TAS also has its own control measures with unconventional names. Project or Process Dollars per Day (PDD) indicates whether engagements are being completed on time. Resource Dollars per Day (RDD) indicates whether excess resources are present. PDD and RDD thus steer the service provider toward its goal.
TAS creates several benefits for service providers. Management priorities are realigned for profitable growth. Service mix decisions are not distorted by cost allocation. Control measures steer the enterprise toward its goal. Finally, optimization is achieved globally—across the enterprise—rather than locally within a single department or business unit.
Nonstandard TOC Applications
Standard TOC applications are largely consistent across enterprises within a given sector. They include the R, CC, DBR, and TA applications just seen.
In contrast, nonstandard TOC applications vary across enterprises because they have unique requirements. Nevertheless, the underlying TOC principles are still the same, even for nonstandard applications.
Marketing creates compelling offers.
Sales then close deals with customers.
By creating offers that address customers’ core problems, TOC offers business value that can be much higher than conventional offers heavily based on price.
Strategy defines the way an enterprise pursues its goal.
Change then realigns marketing, sales, and production to carry out that strategy.
By creating holistic solutions targeted at constraints, TOC uses leverage to generate large benefits from modest investments.
Implementation puts TOC applications into practice.
Technology is a necessary enabler.1
By using a specific set of steps to achieve adoption and by applying technology prudently, TOC addresses the biggest impediments to implementation.
These nonstandard TOC applications are just as relevant in services enterprises, of course. Details are beyond the scope of what can be covered here, however. See Ricketts (2008, Chapters 8–10) for more information.
How to Cause the Change
What managers know about TOC and what they do with TOC are seldom the same. There are several hurdles. First, when initially becoming aware of TOC, the word “theory” puts some managers off. If they misinterpret “theory” to mean “something that won’t work in practice,” they can’t even get over the first hurdle. On the other hand, if they correctly interpret “theory” to mean “a clear understanding of cause and effect,” they’re off to a good start (Avraham Y. Goldratt Institute, 2008).
As for the second hurdle, TOC is at odds with a lot of conventional management wisdom, as described in previous sections. When confronted with a demonstration that some conventional wisdom is actually incorrect, most managers react by clinging to it, if not actively defending it. After all, they ask, if so many people believe it, how can it be wrong?
Of course, paradigm constraints like this are the reason why a generation may pass before truly revolutionary ideas in any arena take