Theory of Constraints Handbook - James Cox Iii [79]
1. Costs of Capacity: Costs of people, equipment, and facilities fall into this category. The faster projects are done, the earlier the capacity is freed up, and the capacity costs incurred by individual projects are lower. This applies if projects are done faster without increasing the rate of expenditure on resources (e.g., by expediting, spending overtime, etc.). If resources are fixed, and these resources can complete more projects within a fixed time, then the average cost of the completed projects declines. Similarly, if projects are delayed, the (assigned) cost of individual projects could increase.
2. Costs of Purchased Items: Costs of material and components, and firm-fixed price work done by subcontractors, fall into this category. Such costs likely will not change with project duration, except if supplies are expedited. Such costs are best controlled with traditional methods, within the framework of Critical Chain policies and practices.
3. Costs of Expediting: The exceptions to the previous characterizations are the costs that can be incurred to recover buffers; this includes costs of extra capacity as well as paying premium prices to expedite materials, buying materials that are more expensive, or transporting materials using faster modes of transportation, and the like. Of course, such costs should be incurred only if the benefits of improved delivery or reduced risk outweigh the costs.
Potential conflict between timelines and expediting costs can be mitigated by recognizing that buffer recovery actions at additional expense may be required during execution. A useful and prudent practice is to set aside monies to help recover buffers as necessary. This “budget reserve” is part of the total budget, not in addition to it. Experience says that 10 to 20 percent of the total budget is appropriate for “budget reserve,” and setting it aside upfront helps prevent cost overruns while delivering projects on time.
Do we need project-level budgets in multi-project operations?
Since costs of capacity in multi-project operations are not incurred project-by-project but in aggregate, it is not necessary to budget these costs at the project level. An aggregate budget is generally sufficient for controlling the costs of capacity. However, a project-level budget may be helpful for managing the costs of purchased items. In addition, organizations might still need project-level budgets for reporting to their customers and for financial accounting purposes.
Does Critical Chain work with Earned Value Reporting?
It is quite straightforward. Organizations contractually obligated to report Earned Value metrics continue doing so even after they implement Critical Chain. However, they do not use CPI20 or SPI21 to measure Execution and drive execution priorities. They use Buffer Management for that.
How does Critical Chain work with Lean?
Lean has three well-known elements: Kanban, which is about synchronizing execution priorities and tying them to the actual demand; Flow Lines, which are an alternative to Kanban; and Kaizen, which is about a process of continuous improvement.
Kanban normally does not apply to projects. Flow Lines have been tried in project-based manufacturing but without much success. The reason is that Flow Lines require reliable estimates of time and effort required to do a task, which are not possible in projects. In short, there is no alternative to Critical Chain for synchronizing project execution.
The difficulty with Kaizen in projects is that on the one hand, almost everything can be improved, and on the other, most local improvements do not translate into better project performance. Buffer diagnostics can enable Kaizen by helping to isolate and prioritize meaningful improvement opportunities.
In other words, Critical Chain is Lean for projects.
What are the likely causes of failure in implementing Critical Chain?
The implementation process presented in this chapter is the fruit of over 200 enterprise-level