Экономические науки/ 15.Государственное регулирование экономики

Undergraduate student Nikolaichuk A.V.

Vadym Hetman Kiev National Economic University, Ukraine

Adjustment of theory of constraints to management in the public sector of Ukraine: the needs and opportunities

Modern economic situation in prevailing quantity of countries all over the world is an evidence of significant drawbacks existing in financial systems functioning. It seems that the world hasn’t recovered yet from the consequences of global crisis of 2008 with its sources in the USA but we are faced with new crisis phenomena that appeared in Europe. Such a state of facts requires immediate decisions and reforms to save the situation therefore it’s a point of great importance for countries leaders nowadays. Today’s economic occurrences and namely: budget deficiency and incapability to serve the debts should trigger the activities resulting in not only momentary improvement of situation but also in long-lasting economic development. Actually, if the methods applied now are not efficient enough, it would be reasonable to take into account the alternatives that might have the overwhelming effect. It would be a real mistake of any government of any state not taking a view of new ideas because the moment you stop searching for new ways you are under threat to halt the development itself. That’s why the time to look for innovations has come just now, so the Theory of Constraints is well worthy to be researched. It has already been successfully applied in some enterprises and caused the results that considered to be almost impossible before. Taking into account the fantastic results of the theory application, why shouldn’t we try to put it into practice on the whole state level? The Theory of Constraints is able to change the elements of government expenditures rising their effectiveness and provoking tremendous outcomes! This theory on the state level is being applied now in Japan, widely recognized state-leader in innovative elaborations and implementations of not only tomorrow technologies but also of day-after-tomorrow ones. As K.Marx said: “Any nation can and should learn from other nation’s experience.”. So, the careful analysis of modern problems’ solutions possibilities is an objective and necessary issue to settle.

Basic points of Theory of Constraints and its application possibilities

To realize better the Theory of Constraints application possibilities in state sector that is really a new sphere for this theory we need to observe and analyze the emergence and development of the idea itself. We can notice the appearance of the notion “Theory of Constraints” in 1984 with the publication of the first book titled “The Goal” that should be supposed the general basement for further speculations on that subject. It reveals the first Elliahu Goldratt’s revolutionary ideas, the author and the founder of this theory. Despite this work was written in an innovative for business literature style and namely in the form of novel, right this kind of presentation provides with clearly understandable and easy to access information. The main idea of Goldratt lies in existence of so-called “constraints” the removal of which can enable any enterprise to get the main goal of its work, i. e. great profits.

Fig. 1. What prevents us from achieving the goal? (Goldratt Group 2009)

The first step, that Elliahu Goldratt does, is his drastic change of enterprise’s evaluation. For example, he claims that any enterprise should be appraised as a whole with a conditional division into departments. But the situation (especially at some modern Ukrainian enterprises) when every department having the best intentions to get maximum profits and to minimize its expenses raises too high prices for raw materials for other departments of the same enterprise, arises very often. It leads to a paradox when the sectors of the same company do not cooperate on favorable conditions, but look for some intermediaries. The result of it is evident: the sum of optimal enterprise’s shares is not equal to the optimal income of the whole enterprise. This example features the way of thoughts and, at first sight, the elementary logic of the author, which is proclaimed as a life style. After the book “The Goal” came out, The Theory of Constraints has been developed and enriched by new ideas and elaborations. Generalization of ideas’ evolution and the theory’s application spheres can be performed with the help of the following scheme:

Fig. 2. The evolution of TOC (Goldratt group 2009)

The Theory of Constraints can be based on 3 main assumptions that stimulate our thinking and provoke us to find solutions for almost improbable situations. Those are the following:

· Everything within a system is connected by cause and effect relationships. Identification of the causes leads us to converge onto an apparent core problem/contradiction/conflict.

· All contradictions can be resolved without compromise – our level of understanding and our assumptions hold the contradiction in place. A compromise is not usually a “winwin” solution.

· There is no resistance to improvement - people do not embrace change because we have not brought them to see the win for them.( Goldratt Group 2009)

To sum up, I can define the Theory of Constraints as a complex of principles, notions and instruments, the application of which give the possibility to the enterprise to get higher profits without additional money investments, so TOC finds definite limitations or constraints(production, logistics, marketing and so on) and removes them. For example, the factual demands oriented goods supply contributes to better performing of assortment and results in vanishing of that part of consumers who didn’t find the necessary goods; consequently, the profits rise. Just try to realize that any index used to evaluate the work of the enterprise doesn’t highlight the part of consumers that didn’t find required goods!

The Critical Chain Project management

The Theory of Constraints was successfully implemented in a number of various enterprises and it had great, sometimes even surprising results. This idea urged me on asking the question: “Why can’t we put TOC into practice at the macro level?”. In order to answer this question we should examine notions of the Theory of Constraints that are applicable in a Government sector and in fact have already being used in Japan. This approach is reflected in the method of Critical Chain Project Management that is actually a method of planning and managing projects that puts the main emphasis on the resources required to execute project tasks. This is in contrast to more traditional critical path and PERT methods, which emphasize task order and rigid scheduling. A Critical Chain project network will tend to keep the resources levelly loaded, but will require them to be flexible in their start times and to quickly switch between tasks and task chains to keep the whole project on schedule.

Let’s provide a brief explanation of a Critical path and PERT methods that are traditionally used in most European countries in order to understand the affinities of the Critical Chain Project Management.

PERT (Program Evaluation and Review Technique) is a method of analyzing the involved tasks in completing a given project, especially the time needed to complete each task, and to identify the minimum time needed to complete the total project, the PERT method is more actual in case time but not the cost management.(Dwivedi U. 2009)

The critical path method is a project modeling technique which was created on the basis of PERT and generally deals with identifying the longest – critical time needed to complete the work. During the implementation of these approaches the following problems arise:

· Student syndrome – don’t always start right away;

· Bad multi-tasking – inability to run the resources needed on several projects concurrently;

Of course there are many other issues that challenge the implementation of the project, however the main ones are listed above. Consequently, in order to improve existing situation the Critical Chain was developed.

Critical Chain Project Management (CCPM) puts an accent on the alternative way of buffering the project – means providing the time periods to insure that it will be completed in time. As opposed to Critical path which buffers each task, the CCPM creates a time reserves only at the end of a project. Let’s illustrate this statement:

Fig. 3. CCPM and Critical Path modeling (Stratton R. 2009)

In a simplified version of CCPM exactly this assertion enables to shorten the time required for the projects.

The theory of Constraints also is able to provide a possibility of cost reduction of a project by decreasing the duration of execution this particular project. On the one hand, it can be achieved by saving on the salary which automatically would be cut down as a result of time reduction. On the other hand, the planned value of the project is the highest possible amount as it includes the cost of contingencies. However, the real price is not always the planned amount, but the managers tend to spend the whole sum. Consequently, there has to be some stimulus for managers (for example incentive payment) to encourage them to spend less money with the greater effect.

The opportunities of TOC implementation in government expenditure management in Ukraine

Ukraine is a young, independent and perspective country that is now on the stage of active development. During its twenty years of independency Ukraine managed to create the effective judicial system and the competitive economic environment. But Ukrainian economy is far too weak to stop the process of growth. That is the reason why our government should be open to various new offers that might be put into practice. From year to year Ukraine faces the issue of budget deficit and problem of scarce funding of public needs. This situation creates a constant society’s dissatisfaction with the actions of the government. Moreover, the quality of public works leaves much to be desired.

In 2007 Ukraine won the opportunity to hold the event of the International importance – Euro 2012. Of course, the event of this level required a number of modifications in Ukrainian infrastructure and building of modern stadiums. Unfortunately, the majority of the projects concerning Euro 2012 weren’t finished on time(Cabinet of ministers 2011 The Governmental program of the preparation and realization of Euro-2012 in Ukraine). The situation was so serious that Ukraine was at the edge of losing the possibility to hold this significant event. That’s why, to our mind, Ukrainian government should think over this issue and look for the optimal solution.

Table 2. Euro-2012 funding (Cabinet of Ministers 2011)

The sources of funding	Amount, mln ghrivnas
Government funds	57837,0919
Local funds	5346,598
Other sources	51783,374
Total	114967,0639

The Table(The Governmental program of the preparation and realization of Euro-2012 in Ukraine) records the investment required to organize Euro-2012. It should be mentioned that the budget of this particular event changed three times during the implementation, the duration of the project was prolonged twice. According to this information I can make a conclusion that existing system of project implementation is absolutely unsatisfactory and it must be reorganized and modernized.

Let’s compare the calculation of the sums needed for the building of “Olimpiyskyi” stadium with other foreign structures of the same scope and quality. The cost of Kyiv main stadium is 428,54 mln dol. while the value of Poznan’s stadium is $236,4 million., the cost of stadium in Pittsburg is $150 million, the price of stadium in Johannesburg $211 million. It is obvious that the value of “Olimpiyskyi” is much greater comparing to other typical stadiums, however, its quality is approximately the same.

In my opinion, this information proves the assertion that Ukraine has to change the approach of managing the projects. That’s why Critical Chain Project management can be very helpful in the cost reduction and the project duration decrease. The application of TOC in Ukraine will obviously result in cost reduction and in better management of government expenditures.

Conclusions

In my opinion, the Theory of Constraints can be a powerful tool in government expenditure management. In order to prove this assertion I started with identifying the general ideas and notions of TOC. Critical Chain Project management is one of the methods that points out the drawbacks of typical management systems. In this article I tried to summarize the difference between PERT, Critical path and CCPM highlighting the opportunities of its application to the government sector. By means of CCPM we can diminish the duration of the project and as a result the cost of it.

Although the TOC implementation on the macro level is a new and challenging idea, Japan has already made first steps in this direction. I also tried to represent the opportunities of TOC implementation in Ukraine, that’s why I analyzed the information about Euro-2012 preparation and made a conclusion that Ukraine spent great amounts and didn’t manage to finish most of the projects on time. So, the consideration of CCPM is reasonable and can force to achieve goals in shorter time.

This article avers the new idea of TOC implementation in public sector and analyses the benefits of the theory’s application. After the accurate examination of expenses related to the preparation for Euro-2012, I can state that Theory of Constraints must be investigated by the government and in future implemented as it can result in great expenditure reduction. Also I’d like to emphasize that the implementation of this theory in other countries will lead to the decrease in spending and as a result may be one of the measures taken to prevent the budget deficit.

References:

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2. Barnard A. 2007 Do more with less and less time [online] Available from Internet: <http://www.tocico.org/?page=public_sector>;

3. Cabinet of Ministers 2011. The Governmental program of the preparation and realization of Euro-2012 in Ukraine [online] [accessed November 28] Available from Internet <http://zakon1.rada.gov.ua/cgi-bin/laws/main.cgi?nreg=357-2010-%EF>;

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5. Goldratt E. 1984. The Goal . Moscow, Mann, Ivanov, Ferber; p. 36-49;

6. Goldratt group 2009, What is theory of Constraints – TOC? [online] Available from Internet:<www.tocico.org/default.asp?page=intl_conference_2009>;

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8. Jacob D. B., McClelland T. W. 2001 Theory of Constraints Project Management, Goldratt Institute; p. 1-11;

9. Lang L. 2008 Critical Chain Project Management Overview [online] Available from Internet: <http://www.youtube.com/watch?v=BRMDCRPGYBE>';

10. Stratton R. 2009 Critical Chain Project Management Theory and Practice, Nottingham Business School, Nottingham Trent University; p.13-19;