Chapter 2 Theory of Constraints ERP Presented By

Chapter 2: Theory of Constraints & ERP Presented By T. Shagufta Iqbal

Theory of constraints Ø Theory of Constraints (TOC) is an overall management philosophy introduced by Dr. Eliyahu M. Goldratt in his 1984 book titled The Goal, that is geared to help organizations continually achieve their goal. Ø Theory of Constraints(TOC) is an organizational change method that is focused on profit management. Ø The essential concept of TOC is that every organization must have at least one constraint.

Definitions Ø A bottleneck is a resource on which the load placed exceeds its available capacity. If demand exceeds capacity, there must be at least one bottleneck in the production process. There can be one or more bottlenecks, and their location may change. Ø A constraint is any factor that limits the organization from getting more of whatever it strives for, which is usually profit

Assumptions of Toc The underlying assumption of Theory of Constraints is that organizations can be measured and controlled by variations on three measures: ü Throughput(How much money is the company generating? Rate at which a system generates money through sales (not through production). Not the same as sales. Subtract all money not generated by the company (materials, commissions, etc. ). ü Operating expense(is defined as the costs of converting the inventory into throughput. Operating expense includes all costs other than direct materials, e. g. , direct labor and factory overhead, as well as selling and administrative costs. Conceptually, operating expense is the money flowing out of the system. . ) ü Inventory(How much money does the company capture? Money a system invests in purchasing things it intends to sell, including buildings & machinery. includes only the cost of direct materials that remain unsold in the form of raw materials, work in process and finished goods. Note that the TOC definition of product inventory does not include direct labor or factory overhead costs, only direct material costs. All labor and overhead costs are expensed as in the throughput costing) • According to TOC, the goal of company is to make money.

TOC Terms of Productivity Term of Productivity

Constraints A constraint is anything that prevents the system from achieving more of its goal. There are many ways that constraints can show up, but a core principle within TOC is that there are not tens or hundreds of constraints. There is at least one and at most a few in any given system. Constraints can be internal or external to the system.

Types of Constraints: Physical Constraints Logical Constraints Most constraints are not physical. They are result of policies. So there should a focus on decreasing operating expenses, inventory and investment while increasing throughput.

Fundamental Principles of the Theory Of Constraints… Ø As a numerical example, consider the operation producing product A in Figure.

TOC Problem 1 Problem: TOC Company produces two products, Y and Z that are processed in four departments, A, B, C and D. Product Y requires three types of materials, M 1, M 2 and M 4. Product Z requires two types of materials, M 2 and M 3. Required: Find the constraint and the product mix needed to maximize throughput.

TOC Problem 1

Steps of TOC The TOC process seeks to identify the constraint and restructure the rest of the organization around it, through the use of the Five Focusing Steps: 1. Identify the Constraint 2. Exploit the Constraint 3. Sub ordinate everything to the Constraint 4. Elevate the Constraint 5. Repeat for the new Constraint

Improving the Process using TOC Principles… Identify the Constraint – Look at your production plan as a whole and determine which resource is preventing you from achieving better performance and limits the throughput. – Look at the cause (old machine, untrained employee, long setup times, machine breakdown). – According to Goldratt, an entire plant’s throughput (productivity) is limited to the bottleneck’s productivity. For example, in the example on slide 8, suppose the sales department was only selling the product output at the rate of 3 per hour.

Exploit the Constraint Ø Find methods to maximize the utilization of the constraint toward productive throughput. Ø For example, in many operations all processes are shut down during lunchtime or during breaks. Ø If a process is a constraint, the operation should consider rotating lunch periods so that the constraint is never allowed to be idle. Ø External constraints, such as weak demand are exploited by increased advertising, market promotion and developing new distribution channels, e. g. , direct sales, mail order, and wholesalers. A constraint caused by a shortage of quality raw materials is exploited by actions such as locating new vendors and certifying vendors that meet standards concerning quality and delivery schedules.

Subordinate Everything to the Constraint ØAccording to theory, other activities must be subordinated to the actions taken to fix the bottleneck in hand. Elevate the Constraint Ø At this point, management has to decide whether to purchase additional capacity (new machine, better trained employee) Ø Essentially this means to find ways to increase the available hours of the constraint, including adding more of it.

Once the constraint is a constraint no longer, find the new one and repeat the steps Ø As the constraint effective utilization increases, it may cease to be a constraint as another process becomes one. Ø In that case the emphasis shifts to the new process constraint. Ø It is also possible that a sales-related change in the product mix will cause a different process to become the constraint.

Understanding and Managing The Constraints Ø A system Optimal performance is not the sum of local Optima. Any system that is performing as well as possible usually implies that not more than one part of the system is performing at an optimal level.

1. Identify And How To Exploit The System Constraint 2. Subordinate The Constraint 3. Elevate The System Constraint

Benefits of implementing TOC Ø Reduction in inventory Ø More productive machines Ø More flexible Ø Better customer service Ø Better product mix Ø Better customer relationship

Shortfalls or criticisms of TOC • Focus on short-term goals as opposed to long-term with ABC. • Main emphasis on increasing sales and volume, not quality. • May lose overall picture when only looking at specific constraints. • Focuses on the push approach as opposed to pull approach of JIT.

Drum-Buffer-Rope (DBR) • Logistical tool that balances flow of a system Ø Drum: A schedule for capacity of the constraint Ø Buffer: Built in time for parts to reach the constraint early (in process inventory). Buffers are placed before the key constraint, thus ensuring that the constraint is never starved. Buffers used in this way protect the constraint and should allow for normal variation of processing time and the occasional upset before the constraint. Ø Rope: A schedule, or information connection, for releasing raw materials

Drum-Buffer-Rope (DBR)

Drum-Buffer-Rope: Case Study #1 Ø Oregon Freeze Dry: Four step process o wash/prepare food o freeze food in cold room o dry food to remove ice crystals (sublimation) o packaging/shipping Ø Difficulty finding space in cold room wash/preparation was very quick Ø Considered buying new cold room

Drum-Buffer-Rope: Case Study #1 Ø Reduced the amount of raw food going into wash phase Ø Cold room scheduled by using a BTU calculation for max efficiency Ø Less product in cold room created faster freezing rates. Ø Oregon Freeze uses only 30% of cold room capacity and produces a higher quality product

Applications of Theory of Constraints There are various applications of TOC: Ø Operations Ø Finance and accounting Ø Project management Ø Marketing and sales

Real business example • The Lessons plant of Baxter International makes medical products such as sterile bags. Management of the plant is actually aware of the necessity to actively manage its constraints. For example, when materials are a constraint, management may go to a secondary vendor and purchase material at a higher cost than normal. When a machine is the constraint, a weekend shift is often added on the machine. If a particular machine is chronically the constraint and management has exhausted the possibilities of using it more effectively, then additional capacity is purchased. For example when the constraint was the plastic extruding machines, a new extruding machine was ordered. However even before the machine arrived, management had determined that the constraint would shift to the blenders once the new extruding capacity was added. Therefore a new blender was already planned. By thinking ahead and focusing on the constraints, management is able to increase the plant's real capacity at the lowest possible cost.

The End