TOCICO CONFERENCE 2007 Using TOC principles to enhance the ...

Capacity Building International 

Germany 

1 

© 2007 © 2007 TOCICO. All rights All rights reserved. 

TOCICO 2007 Conference 


TOCICO CONFERENCE 2007 

Using TOC principles to enhance the 

Competitiveness of Small and 

Medium Size Enterprises in 

Developing Countries 

Presented by: Adolfo Held – Consultant for InWEnt 

Michael Funcke-Bartz 

Funcke Bartz – Senior Project Manager InWEnt 

Date: November 6, 2007 

1

InWEnt – Main Activities 

InWEnt – Capacity Building International 

• is a non-profit organization operating worldwide with 

headquarters in Bonn / Germany 

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© 2007 TOCICO. All rights reserved. 


• is dedicated to human resources development, advanced 

training and dialogue 

• works at the interface between the public and the private 

sectors by assisting people in key positions in shaping the 

corporate, organizational and political change processes 

• supports experience sharing and networking through 

North-South / South-South exchange programs 

• combines practice-oriented face-to-face training abroad and 

in Germany with e-learning, internships and special courses

InWEnt – Facts and Figures 

Headquarters in Bonn / Germany 

3 


Shareholders 2006 


Federal Republic of Germany 83,33 % 

Carl Duisberg Gesellschaft e.V. 8,33 % 

German Foundation for 

International Development 

8,33 % 

Finances 2006 Total: € 137.53 Mio. 

Federal Ministry for 

€ 102.33 Mio. 

Cooperation and 

Development (BMZ) 

German parliament, 

€ 15.05 Mio. 

federal ministries and 

federal states 

International clients, 

€ 20.15 Mio. 

foundations and business 

sector

InWEnt – Facts and Figures 

4 



Participants 2006 Total: 57,165 

Developing countries 33,858 

Germany 15,744 

CEE/SEE/NIS 5,910 

Industrialized countries 

(without Germany) 

1,653 

Offices + centers 2006 Total: 33 

Germany + Europe 23 

Africa 2 

Asia 4 

Americas 4 

Personnel 2006 Total: 853 

Executives 64 

Senior / project managers 700 

Laborers 57 

Trainees 32

InWEnt – Cooperation Partners 

5 



InWEnt – Capacity Building International is part of the official 

German international cooperation and collaborates with: 

• KfW Kreditanstalt für Wiederaufbau 

• GTZ German Technical Cooperation 

• DED German Development Service 

• European Union 

• World Bank 

• International Monetary Fund 

• World Trade Organization 

• United Nations

TOC at InWEnt 

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In 2001 InWEnt introduced TOC concepts in advanced professional 

training programs to strengthen the management capabilities of 

public water utilities in Peru, Ecuador and Bolivia. 

Due to the positive results attained with TOC, the concepts were used 

as a tool for planning strategic investments within the framework of 

financial cooperation projects in Peru. 

The TOC experiences in the water sector were the starting point for 

further applications in small and medium sized companies in Peru. 

These companies are under growing pressure to survive in a 

globalized environment. 

TOC has become one of the methodological backbones in a capacity 

building project for InWEnt alumni from the business sector in the 

Andean Region.

Results from an InWEnt Training Project 

APPLYING TOC PRINCIPLES 

TO ENHANCE 

THE COMPETITIVENES OF 

SMALL AND MEDIUM SIZE 

ENTERPRISES 

IN DEVELOPING COUNTRIES 

Based on an InWEnt Pilot Project in Lima / Peru 

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TOCICO 2007 Conference

Company’s Company s Products 

8 



Oven Model 860

Company’s Company s Background 

9 



• The company was founded in the 1970‘s as a manufacturer for kitchen 

appliances and public lighting 

• The company operated under high tariff protection until the 1990‘s and 

reached a maximum of approx. 300 employees 

• Due to the government‘s import liberalization policy, the company lost its 

lighting business to international competitors and concentrated on 

kitchen appliances 

• By 2005 the company was downsized to a mere 35 employees and 

started to be managed by the 2nd generation 

• The company is a family business typical for SMEs in many developing 

countries

Company’s Company s Situation 

Main problems: 

• Price decline = profitability decline due to 

imported goods 

• Decreasing profits due to cost increases 

Cost reduction program: 

10 



• Outsourcing of personnel in order to be more 

flexible and save costs on social security 

and other contributions 

• Unit cost reduction through lot size 

optimization

Production Process 

Painting 

Drying 

Cleaning / 

degreasing 

Enameling 

Burning 

Assembling External parts 

Shipping 

Purchasing 

own personnel 

Material 

11 


Burring / 

polishing 

Welding 

Straightening 


Cutting 

Boring / 

punching 

Bending / 

folding 

Deep-drawing


Painting 

Drying 

Cleaning / 

degreasing 

Enameling 

Burning 


Shipping 

Purchasing 

Material 

12 


Burring / 

polishing 

Welding 

Straightening 


Cutting 

Boring / 

punching 

Bending / 

folding 

Deep-drawing 

own personnel outsourced personnel

Introduction of Optimal Lot Size Production 

Cost / unit 

Optimal lot size for 

oven Model 860 

400 

13 



Inventory costs 

Cost degression 

Units


Painting 

Drying 

Cleaning / 

degreasing 

Enameling 

Burning 


Shipping 

Purchasing 

Material 

14 


Burring / 

polishing 

Welding 

Straightening 


Cutting 

Boring / 

punching 

Optimal 

lot size 

Bending / 

folding 

400 

Deep-drawing 


Production Based on Optimal Lot Size Concept 

E 

D 

C 

B 

A 

Resource 

Optimal 

lot size 

1 2 

5.6 

Lot = 400 

Set up 

15 



Final assembly 

1 2 3 4 5 Time 6 

1 

6.3 

2 

Spacing effect

Problems due to Optimal Lot Size Production 

Necessary parts 

do not reach the 

final assembly 

in time. 

16 



Production in large lots 

clog the material flow.

Effects of Production Outsourcing 

Value / unit 

400 

400 

Severe cash-flow 

problems 

400 

17 


400 


Lost control 

over production 

Policy of outsourcing contractor: 

“Do the big = higher value parts first“. 

1 2 3 4 5 Time 6 

400 

400

Blurred Perception of the Supply Chain 

Manufacturer Store 

18 



Direct customers Real customers 

End customer

Problems Caused by Optimal Lot Size Thinking 

Store A Store B Store C 

Order 

150 oven 

Model 860 

Order 

100 oven 

Model 860 

Order 

50 oven 

Model 860 

Optimal lot size for oven Model 860 = 400 

Manufacturer 

Producing for stock 

100 oven Model 860 

19 



Cash-flow problem 

Real 

customers 

must wait 

End customers

Wrong Constraint Solution 

400 

Painting 

“Tsunami“ 

Drying 400 

Enameling 

effect 

Constraint 

Cleaning / 

degreasing 

Burning 


Shipping 

400 

Purchasing 

Material 

20 


400 

Burring / 

polishing 

400 

Welding 

400 

Straightening 

400 


400 

Cutting 

Boring / 

punching 

400 

400 

Bending / 

folding 

400 

Deep-drawing 


Wrong Constraint Solution 

Old batch type 

electrical drying furnace 

Investment of approx. $ 20,000 

21 



New gas powered 

continuous drying furnace

Company’s Company s Situation after Cost Reduction 

Cost reduction program: 

• Outsourcing of personnel 

22 



• Unit cost reduction through lot size optimization 

Results: 

• Lower sales due to long delivery times and 

delays 

• Serious cash-flow problems 

• Operating losses due to higher expenses for 

overtime

Company Turn-around 

Turn around 

Training of management and 

personnel in TOC / Constraint 

Management 

23 



Training of personnel in 

TOC Thinking Process skills

Problem Analysis 

Not enough material 

can be purchased. 

There is not 

enough cash-flow. 

Payment by stores 

is delayed. 

Delivery to stores 

is delayed. 

Final products cannot 

be assembled. 

Some parts cannot 

be produced. 

SOLUTION 

More short term 

loans are required. 

1 


Production lots 

are too big. 

Optimal lot sizing is used 

to “improve“ costs / unit. 


Company Turn-around 

Turn around 

TOC Turn-around program: 

2 



• Reduction of delivery time through optimization of 

production constraints 

• Cash-flow improvement through reduction of workin-process 

and finished goods inventories 

• New compensation system for outsourcing 

services (complete kit concept)

Applying the 5 Focusing Steps 

1 

Fulfill client 

requirements 

Identify the active 

constraint 

3 



Constraint

Constraint Reduction through Smaller Lot Size 

E 

D 

C 

B 

A 

Resource 

1.7 


5.6 

4.8 

Fierce 1opposition 2 

from outsourcing 

contractor 

4 


Set up 


Lot 

1 

size = 

2 

400 Transfer lot = 100 

400 oven 

CONSTRAINT 

1 2 3 4 5 Time 6 

6.3


1 

2 


requirements 


constraint 

Exploit the constraint 

to its maximum 

5 



Constraint


1 

2 

3 


requirements 


constraint 



Subordinate non-constraints 

to the constraint 

6 



Constraint

Constraint Oriented Production - 1st Stage 

E 

D 

C 

B 

A 

Resource 

2.9 

1 

1 2 


Set up 

3.9 

7 


2 

400 oven 

Transfer lot = 100 


4.8 6.3 

CONSTRAINT 

1 2 3 4 5 Time 6


1 

2 

3 

4 


requirements 


constraint 



Subordinate non-constraints 

to the constraint 

Elevate or eliminate 

the constraint 

8 



Constraint

Constraint Oriented Production - 2nd Stage 

E 

D 

C 

B 

A 

Resource 

Off-loading work by using 

second deep-drawing press 

Constraint optimization 

Set-up Set up 

9 



Guiding system for faster mould 

change 

Investment approx. $ 3,500 

CONSTRAINT CONSTRAINT 

1 2 3 4 5 Time 6

Constraint Optimization through Off-loading 

Off loading 

Margin $ 29.78 

400 x $ 29.78 

Throughput $ 11,912.00 

Deep-drawing 

press 40 t 

Advantage: 

$ 6,561.00 

= 55% increase 

Further process steps 

CONSTRAINT 

Cutting 

10 


Deep-drawing 

press 100 t 


Margin $ 29.78 

- $ 1.36 

(400 + 250) x $ 28.42 

Throughput $ 18,473.00 

Extra capacity: 

approx. 250 oven 

Extra costs: 

$ 1.36 per oven


E 

D 

C 

B 

A 

Resource 

1.8 


1 

3.2 

1 2 

Set-up 

1 2 3 

11 


4 

2 

3.9 6.3 

400 oven 

Transfer lot = 100 

CONSTRAINT 


5 Time 6


E 

D 

C 

B 

A 

Resource 

1.8 


1 

1 2 

Set up 

1 2 3 

12 


4 

2 


3.2 5.5 Additional capacity 

6.3 

800 

oven 

5 Time 6

Company’s Company s New Situation 

Results of TOC Turn-around program: 

13 



• 32% higher sales after 2 months through a demand 

oriented production 

• 129% increase in production capacity through an 

investment of approx. $ 3,500 

• Reduction of overtime expenses 

• Important customer placed a large order for a 

customized model due to improved delivery reliability 

• Banks increased credit lines 

• Re-hiring of outsourced personnel

Generic Management Problems of SMEs 

Metal furniture 

manufacturer 

14 




Casual shoe 

manufacturer 

15 




Display doll 

manufacturer 

16 




Tricycle taxi 

manufacturer 

17 




Kids apparel 

manufacturer 

18 



Final Conclusions 

Competitiveness of SMEs in Developing Countries: 

19 



• The negative effects of globalization on SMEs in developing 

countries must be offset by improving their competitiveness. 

• A great deal of the problems of competitiveness are not 

necessarily caused by imported goods as such but can be 

directly traced to a lack of adequate management tools in local 

SMEs. 

Therefore: 

• Dissemination and training of adequate management tools 

is the only way out of the vicious cycle of growing 

unemployment in developing countries. 

SMEs are the backbone of the economy in many developing 

countries.

The Core Problem of Productivity 

Social standards 

get lower 

Poverty 

increases 

Unemployment 

increases 

Get more output 

with less personnel 

Rationalize 

processes 

Increase 

productivity 

Increase 

competitiveness 

20 



National Productivity Institute / South Africa

Miguel Abuhab 

CEO of DATASUL / Brazil 

21 



“I wrote an article after September 11, introducing the concept of 

polluting humanity. The world has not noticed that indiscriminate 

automation kills like an atomic bomb, but takes longer.“ 

“Unemployment pollutes the environment. Industrial policies must 

generate consumers. Everybody fires employees and thinks that these 

who will buy their products are the employees of the other companies.“ 

“By applying TOC it is possible to compete, maintain a given level of 

employment, and adopt more logical solutions, 

without firing employees.“ 

Article of ICARO 04/2003

Strategy Comparison 

Personnel 

lay-offs 

Conventional strategy 

COST REDUCTION 

Profit 

Costs 

Improve enterprise 

situation 

Innovative strategy 

THROUGHPUT INCREASE 

22 


Profit 

Costs 


Investments 

Personnel 

increase

Fundamental Question 

How can people and enterprises 

from developing countries 

survive in an environment of 

globalized competition? 

23 



Unequal Competition 

Imitating conventional 

management methods 

Industrialized world 

C 

A 

Developing world 

24 



Unequal Competition 

Imitating conventional 

management methods 

C 

A 

25 


B 

D 

Developing world 


Industrialized world

Development Shortcut 

26 



TOC / CONSTRAINT 

MANAGEMENT 

offers a realistic chance to 

escape the unequal and 

unfair competition.

About Adolfo Held 

After a career in marketing and sales 

management, Adolfo Held currently works as 

a consultant and trainer to enhance the 

performance of private companies and public 

organizations. 

His special field of interest is the 

dissemination and application of TOC to 

improve living conditions in developing 

countries. In a close cooperation with InWEnt 

– an official German capacity building 

institution – he has been working for many 

years in development projects in Africa, Asia 

and Latin America. 

He holds a degree in Mechanical Engineering 

from the University of Applied Sciences and a 

degree in Welding Engineering from the SLV 

in Munich / Germany. He graduated as M.B.A. 

from Columbia University in New York. 

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About Michael Funcke-Bartz 

Funcke Bartz 

Michael Funcke-Bartz spent several years in 

research activities in Latin American cities 

before joining the former Carl Duisberg 

Gesellschaft e.V. (CDG) – now InWEnt – as a 

Senior Project Manager. 

He is responsible for designing, implementing 

and monitoring capacity building programs 

for professionals and decision-makers in the 

field of urban development. 

In this context he started to introduce TOC as 

a tool for strategic decision-making for urban 

infrastructure management in Africa, Asia and 

Latin America. 

He holds a degree in Geography and Spanish 

from the University of Düsseldorf / Germany 

and the Second State Examination as High 

School Teacher. 

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