1. Theory of Constraints for Distribution “In the midst of complexity, there is inherent simplicity.” Dr. Eliyahu M. Goldratt, 1947-2011

2. Outline 1.Introduction to Constraints 2.Background and History 3.Components and Implementation 4.Five Steps Of Theory of Constraints 5.Drum, Buffer, Rope 6.TOC in Distribution 7.Benefits and Issues with TOC 8.Measurements & Financial Issues 9.Sustaining TOC

3. 1- What is Theory of Constraints? The Theory of Constraints (TOC) is a systems-oriented process improvement methodology that is based on the theory that a system has a single goal which is to make money, and that systems are composed of multiple linked activities, one of which acts as a constraint on the whole system. TOC is a methodology to focus on removing and exploiting the constraint in order to optimize throughput. Identification of constraints allows management to take action to alleviate the constraint in the future

4. 1- What is the Theory of Constraints? “The core idea in the Theory of Constraints is that every real system such as a profit-making enterprise must have at least one constraint”. “There really is no choice in the matter. Either you manage constraints or they manage you. The constraints will determine the output of the system whether they are acknowledged and managed or not”

5. 2- Background and History The Theory of Constraints was first described by Dr. Eliyahu M. Goldratt in his novel, The Goal, which was originally released in 1984. Subsequently, he formally introduced the theory in his book, Theory of Constraints, which was originally published in 1990.

6. 3- Constraints A constraint is anything that limits a system from achieving its goal or a level of performance desired. A constraint can be viewed as a structural bottleneck which determines the maximum capacity of a system.

7. 3- Constraints Any system can produce only as much as its critically constrained resource 70 units Per day 40 units Per day 60 units Per day Constraint Maximum Throughput = 40 units per day 60 units Per day

8. 3- Constraints Constraints can be internal to the company (i.e. something which they company can easily control or change) or external (i.e. a constraint for which the company had no immediate control, but is often something for which the company can take some action to resolve in the medium to long term).

9. 3- Internal Constraints Internal constraints may include: Capacity of particular machines or workstations; Salary levels or work environment within the company which constrain the company’s ability to hire capable employees; Transportation bottlenecks in the production process; Ability of the production management team to manage certain production processes; Ability of the production planning team to schedule/allocate production efficiently; Incorrect assumptions about maximum capacity by relevant managers.

10. 3- External Constraints External constraints may include: Availability of sufficient raw materials; Availability of labor or managers in a particular location; Brand awareness of the company’s products; Distribution channels for the company’s products.

11. 3- Constraints and Variation Extra costs exist when there is a significant variation between the capacities of different processes within a company. This is because the processes with higher capacity will be underutilized, resulting in unnecessary depreciation, labor or operating expenses associated with those processes. In addition, in a “push type” manufacturing company, the unbalanced capacity often creates an excessive amount of work-in-progress, which is likely to result in higher financing costs and higher defects.

12. 3- Constraints and Variation A key idea behind the Theory of Constraints is that by identifying and resolving the most significant constraint in a system, it will allow for all of the other processes to operate at a higher volume. Consequently, significant value will accrue to the company insofar as this will lower the fixed costs per unit (depreciation, labor, factory overhead) while increasing the company’s volume of output, thereby leading to higher revenues.

13. 3- Constraints and Variation Therefore, a company applying the Theory of Constraints will prioritize solving whatever is the most significant constraint to the business because solving that problem is likely to have the biggest positive impact on the business compared to other possible improvements. A similar concept can also be applied within particular departments or processes.

14. 3- Significance of Bottlenecks Maximum speed of the process is the speed of the slowest operation. Any improvements will be wasted unless the bottleneck is relieved.

15. 4- Five Steps Of TOC 1.Identifying the constraint 2.Decide how to exploit the constraint 3.Subordinate everything else to the decision in step 2 4.Elevate the constraint 5.Go back to step 1, but avoid inertia

16. 4- Step 1: Identify the constraint A company or system is like a chain so, if the goal is to increase the capacity of the chain, strengthening any link other than the weakest is a waste of time and effort. In order to identify the constraint, the company should find a way to measure the capacity of each process and then track actual throughput against the capacity to determine where capacity utilization rates are the highest. Internal Process constraints  Machine time, etc. Policy constraints  No overtime, etc. External Material constraints  Insufficient materials Market constraints  Insufficient demand

17. 4- Step 2: Exploit the constraint Once the constraint has been identified, the next step is to identify the key factors that determine the capacity of that process, and which of those can be manipulated to increase the capacity of the process. For example, it may be a shortage of machines, the speed at which machines run, the amount of downtime due to poor preventative maintenance, a shortage of certain tools or spare parts, etc.

18. 4- Step 3: Subordinate everything else At this stage, actually solving the constraint should be a top priority. This includes overcoming any emotional resistance to solving the constraint, including any incorrect assumptions by managers that prevent the constraint from being solved. Consequently, strong leadership from the company’s General Director will often be required at this stage so that any internal resistance to solving the problem can be overcome.

19. 4- Step 4: Elevate the constraint The capacity of the constraining process needs to be increased up to above the next most significant constraint in the system in order to remove the bottleneck. Even better would be to elevate the capacity of the constraining process up to a level which is equal to the target capacity of the entire system.

20. 4- Step 5: Go back to step 1 The Theory of Constraints is a continuous improvement process. When one constraint has been broken (the weakest link of the chain has been strengthened) another constraint will be created (the new weakest link). Therefore, it requires the team go back to step 1 to continue the loop to remove the constraints.

21. 5- Drum, Buffer, Rope Drum, Buffer, Rope is a method to identify and exploit the constraints in a production system. It uses Process Mapping as a main tool to identify the bottleneck and then apply solutions. Drum: This is the constraint itself since it sets the drumbeat (pace) for the other processes. Also, the drumbeat signals the upstream operations what to produce and tells the downstream operations what to expect. Buffer: This is the stockpile of WIP in front of the constraint. It is a precaution to keep the constrained resource running at the highest possible capacity since it determines the output of the entire system. However, to some degree this may conflict with lean manufacturing principles which consider that buffers are typically a source of waste so they should always be minimized to the extent possible. Rope: Limitations placed on production in upstream operations which are necessary to prevent flooding the constraint with excess work-in-progress (WIP) which are above its capacity.

22. 5- Drum Drum Output of the constraint is the drumbeat Sets the tempo for other operations Tells upstream operations what to produce Tells downstream operations what to expect

23. 5- Buffer Buffer Stockpile of work in process in front of constraint Precaution to keep constraint running if upstream operations are interrupted

24. 5- Ropes Ropes Limitations placed on production in upstream operations Necessary to prevent flooding the constraint

25. 5- Drum, Buffer, Rope Drum-Buffer-Rope for Process Control Drum: The Pace Setting Resource - constraint Buffer: The amount of protection in front of the resource Rope: The scheduled staggered release of material to be in line with the Drum’s schedule. 60704060 Constraint (Drum) Rope Buffer A Pull System

26. TOC in Distribution TOC is a focusing technique that searches for the inherent simplicity in the midst of complexity. Dr. Goldratt theorized that improvement in the throughput of any system is governed by very few factors, the critical one being the overall constraint. Depending on the environment of the company, this constraint can be located in different areas, sometimes internally (production, warehouse, purchasing, policies, etc.) and sometimes externally (in the market). In distribution, the constraint is usually in the market (an estimated 70 percent of the time).

27. 2 Main Questions that a Distributor needs to Address How much stock to keep upstream in the supply chain? How much stock to keep downstream in the supply chain?

28. The common practice, hence, would be the Push Behavior!!! I.E if a product is at the consumption point, the chances of it being sold are more. This is as “logical” as a distributor could get and manage to be as downstream as possible so as to increase consumption. However, this push behavior requires a good forecasting model, in order to predict where and when the stock will be needed at the stock locations.

29. However, Forecasting cannot ALWAYS account for the following: The more specific (the narrower the aggregation), the less accurate the answer becomes — meaning that the question of “How much will be sold overall?” will be answered much more accurately than “How much will be sold at this specific location?” Many times, data is incorrectly interpreted. It is common practice to use statistics without a good understanding of the “law” of aggregation. The more sophisticated the algorithm, the more sophisticated the end user has to be in order to correctly apply it. No forecasting model can take into account a sudden change in consumption patterns.

30. So, first let’s kill all of the forecasts! The TOC solution for distribution does call for a shift away from the common-practice push (forecast-driven) approach and towards a “pull” mechanism. The TOC solution is built on constant renewal of the consumed stock.

31. The following steps define the ‘pull mechanism’ Aggregating as much stock as possible as close to the source as possible the supplier or central warehouse. Setting a higher inventory target there — called the Stock Buffer Size. Creating the transfer of real sales data on a frequent basis from all stock locations.Shrinking the replenishment time as much as possible. Replenishing the stock locations as frequently as possible, with a strict focus on shipping only to replenish to real consumption or to re-adjust the buffer sizes.Continually monitoring the buffer sizes and making adjustments according to consumption.

32. The Discipline!!! A disciplined approach to implementing these steps can build a Decisive Competitive Edge (DCE) when linked to the timing of the constraint in the market. A DCE means satisfying a customer’s core need to an extent that no competitor can or will (as most companies do not have a DCE). It will also significantly improve cash flow—another possible constraint in today’s operating environment.

33. “Finding the inherent simplicity in the midst of complexity can certainly pay off.”

34. 7- Benefits of TOC Increased revenue Assuming that the market demand exists, by eliminating the most significant constraint, the company will be able to generate higher revenues by producing a higher volume. Reduced cost per unit If many processes or departments within a company have capacity which isn’t fully being utilized, it means that fixed costs associated with those processes or departments are not being used efficiently. There are also other hidden costs associated with significant constraints – such as management time spent dealing with the negative consequences of the constraint, or increased wastage due to overproduction at the processes upstream of the constraint.

35. 7- Benefits of TOC On-time delivery Often the part of the company which is the most significant constraint is not as controlled or predicable as the other processes within the company. Consequently, the constraint itself is often the source of shipment delays. As such, removal of the most significant constraint can lead to more predicable lead times and better on-time delivery performance.

36. 7- How does TOC help companies? 1.Focusing improvement efforts where they will have the greatest immediate impact on the bottom line. 2.Providing a reliable process that insures Follow Through!

37. 7- Issues with TOC Constraining resource must be maximized ▫ All other operations must be geared toward this goal  May require sub optimization in other areas Upstream operations must provide only what the constraint can handle Downstream operations will only receive what the constraint can put out Constraint must be kept operating at its full capacity ▫ If not, the entire process slows further Advantages ▫ Improves capacity decisions in the short-run ▫ Avoids build up of inventory ▫ Aids in process understanding ▫ Avoids local optimization ▫ Improves communication between departments

38. 7- Issues with TOC Disadvantages Negative impact on non-constrained areas Diverts attention from other areas that may be the next constraint Temptation to reduce capacity Ignores long-run considerations Introduction of new products Continuous improvement in non-constrained areas

39. 8- Throughput The rate at which the system generates money through sales. (Or, the money coming into the organization.) Building inventory is not throughput Only $ generated by the system get counted; e.g., raw materials and purchased parts are not throughput. T = Selling Price - Materials

40. 8- Inventory All the money the system has invested in purchasing things which it intends to sell. Inventory is a liability (not an asset) Raw materials, work in process, finished goods and scrap are inventory

41. 8- Operating Expense All the money the system spends in order to turn inventory into throughput. (Or, the money coming into the organization.) All employee time (direct, indirect, operating, etc.) Depreciation of a machine Operating supplies

42. 8- The Goal: Financial Issues Viewing an organization from the operation expense world perspective causes one to believe that almost everything is important – that the organization is composed of independent variables. But viewing the organization from throughput world perspective forces the realization that the organization is a collection of dependent variables and that the artificial barriers between these variables, or functions, must be eliminated. Managing the parts of an organization as if they were isolated kingdoms is not the dominated measurement.

43. 8- The Goal: Financial Issues In the throughput world, constraints become the main tools of management and the previous tool, product cost, can be discarded.

44. 9- Sustaining TOC: Process Stability The following steps will make production more stable and predicable, therefore allowing for a greater level of confidence in the impact of removing the most significant constraint: Measuring process and machine capacity and output in order to define the constraint point; Creating clearly defined production procedures and processes; Implementing the 5S system at shop floor level; Synchronizing the production layout to better arrange workstations so as to minimize transportation bottlenecks.

45. 9- Sustaining TOC: Assumptions In many cases the root cause of the constraint is the incorrect assumptions of one of several key people, which in turn results in resistance when trying to remove the constraint. This can sometimes be solved by getting all key people to agree on a common goal and getting the resistant people involved in the process of identifying solutions for achieving the goal.