Review of How to Resolve Conflicts, Part 3
In my last post, I continued this series on resolving conflicts by presenting the opposite side of the conflict in our evaporating cloud example. That is, A, C and D’ in the figure below.
I explained that, in cost accounting, to maximize the performance measure (A), the plant must produce parts at the least cost per unit (C). To produce parts at the least cost per unit, all resources must operate at maximum efficiency (D’). The assumption connecting C to D’ is that maximizing all individual processes will result in minimum product cost. However, this assumption is flawed and is the source of enormous amounts of waste and excess cost. For now, I explained that if the plant cannot create a faster throughput rate than the constraint, then maximizing the output at non-constraints will only serve to (1) create excess WIP, (2) increase the overall cycle time and (3) decrease cash flow. The conflict arises between the prerequisites, D and D’.
Why is it so important that our assumptions are sensible?
Now I will turn your attention to the assumptions made in this example and why it’s important to have assumptions that make sense. The key to breaking conflicts is evaluating the assumptions surrounding the conflict and understanding what they really mean.
As  Debra Smith rightfully points out, “assumptions are the glue holding logic together.” She explains, “Our conclusions are only as good as the assumptions on which they are based.” Understanding assumptions allows the logic of the desired actions to be challenged openly. In our evaporating cloud figure below, the assumption behind the D-B arrow is that, in order to ship on time, we must have all resources operating at the pace of the constraint. As I stated, the key to breaking conflicts is understanding the assumptions.
We must operate at the same pace as the constraint
Operating at the pace of the constraint is essential for the following reasons:
- Out-pacing the constraint drives up work-in-process inventory (WIP).
- Excess WIP ties up cash and lengthens the overall cycle time.
- Lengthening the cycle time of product through the process negatively impacts on-time delivery.
- Late shipments depress future sales.
- Without future sales, profitability is negatively impacted.
Determining which assumptions are true and which are faulty is the key to breaking conflicts
The assumption underlying the D’-C arrow is that to produce parts at the least cost per unit, we must have all resources running at maximum efficiency. This is true for two reasons:
- Maximum efficiency, guarantees parts are produced at the least cost per unit.
- Least cost per unit ensures maximum profitability.
The conflict arises between D and D’, so we must look at the assumptions for both and determine which are correct and incorrect. If you are a traditional cost accounting proponent, then you believe the assumptions (the “because” statements) associated with D’. If you are a proponent of TOC and throughput accounting, then you believe the assumptions associated with D. In this example, the assumptions behind the D’-C arrow were found to be faulty and the conflict was broken.
Coming in the next post
In the next post, I will introduce a concept that  Debra Smith refers to as a Spider Web Conflict Cloud, which she presents in her book, The Measurement Nightmare.
Until next time.
 Debra Smith, The Measurement Nightmare—How the Theory of Constraints Can Resolve Conflicting Strategies, Policies, and Measures (CRC Press, Boca Raton, FL, 2000)
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