Operations Management Theory of Constraints (TOC) Handout Dr. Ahmad Syamil, CFPIM, CIRM, CSCP asyamil at yahoo dot com c

1. Operations ManagementTheory of Constraints (TOC)HandoutDr. Ahmad Syamil, CFPIM, CIRM, CSCPasyamil at yahoo dot comhttp://www.clt.astate.edu/asyamil/

2. APICS www.apics.org • Old Name: The American Production and Inventory Control Society • New Name: The Association for Operations Management - Advancing Productivity, Innovation, and Competitive Success. • APICS offers four internationally recognized professional certification programs: • CPIM: Certified in Production and Inventory Management • CFPIM: Certified Fellow in Production and Inventory Management = CPIM + extensive knowledge sharing with others through presenting, teaching, publishing, and other APICS educational activities. • CIRM: Certified in Integrated Resource Management • Beginning 2006: Certified Supply Chain Professional (CSCP) designation is designed for professionals interested in increasing their knowledge of supply chain management, those currently working in the field of supply chain management (SCM), and for those individuals working with enterprise resources planning (ERP) systems.

3. 20-3 OBJECTIVES • Introduction • Goldratt’s Rules • Goldratt’s Goal of the Firm • Performance Measurement • Capacity and Flow issues • Synchronous Manufacturing

4. Main References • Operations Management by Mark Vonderembse and Gregory P. White • Operations Management by Chase, Jacobs, and Aquilano

5. Theory of Constraints (TOC) A management philosophy developed by Dr. Eliyahu Goldratt that can be viewed as four separate but interrelated areas: • Logistics, e.g., buffer management • Performance measurement, e.g., throughput • The five focusing steps • Thinking process

6. Dr. Eliyahu Goldratt wrote many books including: • The Goal: A Process of Ongoing Improvement (sold more than 3 million copies) • It's Not Luck (how to apply TOC in conflict resolution and marketing) • Critical Chain (how to apply TOC in project management)

8. Related Terms • Constraint management • Synchronous/synchronized manufacturing (General Motors) • Optimized Production Technology (OPT) software • Drum-Buffer-Rope system • Throughput technology

9. Want to learn more about TOC? • Search “EliyahuGoldratt” or “Theory of Constraints” on the Internet. • For-profit Avraham Y. Goldratt Institute (named after Dr. Eliyahu Goldratt’s father): http://www.goldratt.com/ Providing “Jonah”, i.e., “expensive” TOC certificate) • Non-profit the Theory of Constraints International Certification Organization (TOCICO): http://www.tocico.org/ Providing “affordable” TOC certificate. • One of the best free online TOC learning materials: http://www.dbrmfg.co.nz/ • APICS Constraint Management Group

10. 20-10 Goldratt’s Rules of Production Scheduling • Do not balance capacity balance the flow • The level utilization of a nonbottleneck resource is not determined by its own potential but by some other constraint in the system • Utilization and activation of a resource are not the same • An hour lost at a bottleneck is an hour lost for the entire system • An hour saved at a nonbottleneck is a mirage

11. 20-11 Goldratt’s Rules of Production Scheduling (Continued) • Bottlenecks govern both throughput and inventory in the system • Transfer batch may not and many times should not be equal to the process batch • A process batch should be variable both along its route and in time • Priorities can be set only by examining the system’s constraints and lead time is a derivative of the schedule

12. 20-12 Goldratt’s Five Focusing Steps in TOC • Identify the system constraints • Decide how to exploit the system constraints • Subordinate everything else to that decision • Elevate the system constraints • If, in the previous steps, the constraints have been broken, go back to Step 1, but do not let inertia become the system constraint

13. 20-13 Goldratt’s Goal of the Firm The goal of a firm is to make money

14. 20-14 Performance Measurement:Financial • Net profit • an absolute measurement in dollars • Return on investment • a relative measure based on investment • Cash flow • a survival measurement

15. 20-15 Performance Measurement:Operational • 1. Throughput • the rate at which money is generated by the system through sales • 2. Inventory • all the money that the system has invested in purchasing things it intends to sell • 3. Operating expenses • all the money that the system spends to turn inventory into throughput

16. 20-16 Goldratt: Traditional Productivity Measurement is Wrong • Productivity Does not guarantee profitability • Has throughput increased? • Has inventory decreased? • Have operational expenses decreased?

17. Relationships Between Throughput, Inventory, Operating Expenses and Profit Transparency 17.10 (Exhibit 17.9)

18. 20-18 Unbalanced Capacity • In earlier chapters, we discussed balancing assembly lines • The goal was a constant cycle time across all stations • Synchronous manufacturing views constant workstation capacity as a bad decision

19. 20-19 The Statistics of Dependent Events (Variable) (Constant) When one process takes longer than the average, the time can not be made up Process Time (B) Process Time (A) • Rather than balancing capacities, the flow of product through the system should be balanced 10 6 8 10 12 14 (Constant) (Variable) Process Time (B) Process Time (A) 10 6 8 10 12 14

20. 20-20 Capacity Related Terminology • Capacity is the available time for production • Bottleneck is what happens if capacity is less than demand placed on resource • Nonbottleneck is what happens when capacity is greater than demand placed on resource • Capacity-constrained resource (CCR)is a resource where the capacity is close todemand placed on the resource

21. 20-21 Case A X Y Market Capacity Example Situation 1 There is some idle production in this set up. How much? 25% in Y

22. 20-22 Case B Y X Market Capacity Example Situation 2 Is there is going to be a build up of unnecessary production in Y? Yes, 25% in Y

23. 20-23 Case C Market Assembly X Y Capacity Example Situation 3 Is there going to be a build up in unnecessary production in Y? Yes, 25% in Y

24. 20-24 Case D Market Market X Y Capacity Example Situation 4 If we run both X and Y for the same time, will we produce any unneeded production? Yes, 25% in Y

25. 20-25 Bottlenecks and CCRs: Flow-Control Situations • A bottleneck • (1) with no setup required when changing from one product to another • (2) with setup times required to change from one product to another • A capacity constrained resource (CCR) • (3) with no setup required to change from one product to another • (4) with setup time required when changing from one product to another

26. 20-26 Time Components of Production Cycle • Setup time is the time that a part spends waiting for a resource to be set up to work on this same part • Process time is the time that the part is being processed • Queue time is the time that a part waits for a resource while the resource is busy with something else

27. 20-27 Time Components of Production Cycle (Continued) • Wait time is the time that a part waits not for a resource but for another part so that they can be assembled together • Idle time is the unused time that represents the cycle time less the sum of the setup time, processing time, queue time, and wait time

28. 20-28 Nonbottleneck Bottleneck Saving Time What are the consequences of saving time at each process? • Rule: Bottlenecks govern both throughput and inventory in the system. • Rule: An hour lost at a bottleneck is an hour lost for the entire system. • Rule: An hour saved at a nonbottleneck is a mirage.

29. Exhibit 1 A Constrained Production Process

30. Exhibit 2 (without TOC) • A has a higher profit/unit --> max. A • Production process for A: • 100 units x 0.4 hours/unit = 40 hours • Remaining time for B: • 60 hours - 40 hours = 20 hours • 20 hours / (0.2 hours/unit) = 100 units • Profit: • For A: 100 units x $80/unit = $8,000 • For B: 100 units x $50/unit = $5,000 Total = $13,000

31. Types of Constraints • Internal Resource = resource within organization which limits performance • Market = market demand less than production capacity • Policy = Any policy that limits performance

32. The Five Focusing Steps in Theory of Constraints 1. Identify the system’s constraints 2. Determine how to exploit system’s constraints 3. Subordinate everything else to the decision made in step 2 4. Elevate the constraints in order to reach higher performance level 5. Go back to step 1. Do not let inertia become new constraint

33. Constrained Resource Utilizationfor Each Product

34. Exhibit 3 (with TOC) • B has a higher profit/hour --> maximize B. • Production process for B: • 200 units x 0.2 hours/unit = 40 hours • Remaining time for A: • 60 hours - 40 hours = 20 hours • 20 hours / (0.4 hours/unit)= 50 units • Profit: • For A: 50 units x $ 80/unit = $4,000 • For B: 200 units x $50/unit = $10,000 Total = $14,000 vs. $13,000 (without TOC)

35. Effect of Increasing Size of Process Batch

36. Effect of DecreasingTransfer Batch Size

37. 20-37 Bottleneck (Drum) A B C D E F Market Inventory buffer (time buffer) Communication (rope) Drum, Buffer, Rope

38. The Drum = Constraint = Bottleneck Operation • It sets the rate of all other operations to match its own • The Rope = linkage = communication to prevent the buildup or the shortage of inventory. • Examples: formal production schedule and informal discussions between employees. • Locations: • a rope communicating from finished-goods inventory back to the drum to increase or decrease output • a rope from the drum back to the material release point, specifying how much material is needed. TOC: Drum, Buffer, and Rope

39. The Buffer = Inventory • Time buffers = constraint buffers • = raw materials or work in process (WIP) inventory • Location: • Before bottleneck processes/operations • At locations where parts from the bottleneck are combined with parts from other processes/operations • Function: To prevent those operations from having to shut down • (=“starving” = no materials) due to problems at non-bottleneck resources. • 2. Stock buffers = shipping buffers = inventories of finished goods held in anticipation of market demand. • Location: After the final operation/assembly process TOC: Drum, Buffer, and Rope (cont.)

40. Network Flow Diagramwith One Bottleneck

41. TOC and Accounting • Dr. Goldratt does not approve the use of traditional cost accounting. • He disapproves the use of Activity Based Costing (ABC) method invented by Dr. Robert Kaplan of Harvard University. Dr. Kaplan also invented Balanced Score Card (BSC).

42. 20-42 Inventory Cost Measurement:Dr. Goldratt suggested Dollar Days • Dollar Days is a measurement of the value of inventory and the time it stays within an area

43. 20-43 Benefits from Dollar Day Measurement • Marketing • Discourages holding large amounts of finished goods inventory • Purchasing • Discourages placing large purchase orders that on the surface appear to take advantage of quantity discounts • Manufacturing • Discourage large work in process and producing earlier than needed

44. Comparison ofMRP, JIT and TOC MRP JIT TOC Loading of operations Batch sizes Importance of data accuracy Speed of scheduled development Flexibility Cost Goals Planning focus Production basis Checked by capacity requirements Planning afterward One week or more Critical Slow Lowest Highest Meet demand Have doable plan Master schedule Plan Controlled by kanban system Small as possible Unnecessary Very fast Highest Lowest Meet demand Eliminate waste Final assembly schedule Need Controlled by bottleneck operation Variable to exploit constraint Critical for bottleneck and feeder operations Fast Moderate Moderate Meet demand Maximize profits Bottleneck Need and plan Transparency 17.17 (Exhibit 17.15)

45. 20-45 Quality Implications • More tolerant than JIT systems • Excess capacity throughout system • Except for the bottleneck • Quality control needed before bottleneck

46. 20-46 Question Bowl Which of the following are examples of Goldratt’s Theory of Constraints? • Identify the system constraints • Decide how to exploit the system constraints • Elevate the system constraints • All of the above • None of the above Answer: d. All of the above

47. 20-47 Question Bowl Which of the following is Goldratt’s “Goal of the Firm”? • Reduce costs • Increase jobs • Increase market share • All of the above • None of the above Answer: e. None of the above (The Goal of the Firm is to “make money”.)

48. 20-48 Question Bowl Which of the following are Goldratt’s Financial Measurements used to measure a firm’s ability to make money? • Net profit • Return on investment • Cash flow • All of the above • None of the above Answer: d. All of the above

49. 20-49 Question Bowl Which of the following are Goldratt’s Operational Measurements used to measure a firm’s ability to make money? • Throughput • Inventory • Operating expenses • All of the above • None of the above Answer: d. All of the above

50. 20-50 Question Bowl According to Goldratt, any resource whose capacity is less than the demand placed on it, is considered which of the following? • Nonbottleneck resource • Bottleneck resource • Capacity-constrained resource • A buffer resource • None of the above Answer: b. Bottleneck resource