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Theory of Constraints LT6 – TOOLBOX TRAINING COURSE 3-24-10.

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Presentation on theme: "Theory of Constraints LT6 – TOOLBOX TRAINING COURSE 3-24-10."— Presentation transcript:

1 Theory of Constraints LT6 – TOOLBOX TRAINING COURSE

2 Disclaimer and Approved Use »Disclaimer –This presentation is intended for use in training individuals within an organization. The handouts, tools, and presentations may be customized for each application. –THE FILES AND PRESENTATIONS ARE DISTRIBUTED ON AN "AS IS" BASIS WITHOUT WARRANTIES OF ANY KIND, EITHER EXPRESSED OR IMPLIED. »Copyright –This presentation is created and copyrighted by Factory Strategies Group LLC. »Approved Use –Each copy of this presentation can be used throughout a single Customer location, such as a manufacturing plant. Multiple copies may reside on computers within that location, or on the intranet for that location. Contact us for authorization to use this presentation at multiple locations. –The presentation may be customized to satisfy the customer’s application. –The presentation, or portions or modifications thereof, may not be re-sold or re-distributed without express written permission. »Current contact information can be found at:

3 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 and Lean Manufacturing 7. Benefits and Issues with TOC 8. Measurements & Financial Issues 9. Sustaining TOC 10. Knowledge Check

4 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

5 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”

6 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 Subsequently, he formally introduced the theory in his book, Theory of Constraints, which was originally published in 1990.

7 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.

8 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

9 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).

10 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.

11 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.

12 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.

13 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.

14 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.

15 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

16 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

17 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

18 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.

19 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.

20 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.

21 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.

22 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.

23 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

24 5- Buffer –Buffer –Stockpile of work in process in front of constraint Precaution to keep constraint running if upstream operations are interrupted

25 5- Ropes –Ropes –Limitations placed on production in upstream operations Necessary to prevent flooding the constraint

26 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 Constraint (Drum) Rope Buffer A Pull System

27 6- TOC and Lean Manufacturing »In general terms, Lean manufacturing focuses on eliminating waste whereas Theory of Constraints emphasizes on maximizing throughput. Nonetheless, the two approaches can be used together.

28 6- TOC and Lean Manufacturing »Similarities –Both Lean and TOC aim to optimize the performance of an entire system, not just one part of the system. Consequently, both approaches take into consideration the impact that various processes have on each other and try to improve the smooth collaboration between different processes. –Both Lean and TOC advocate continuously reevaluating when there are opportunities for improvement and pro-actively making those improvements.

29 1- Theory of Constraints Continuous Improvement Comparison

30 6- TOC and Lean Manufacturing Differences ▫ Lean Manufacturing aims to eliminate all forms of waste in the production process, whereas Theory of Constraints is a tool that focuses on eliminating the waste associated with underutilized capacity or labor. In other words, Theory of Constraints aims to spread fixed costs over a higher volume of production by increasing the volume of output, resulting in lower fixed costs per unit of output. Meanwhile, Lean Manufacturing is a broad set of tools that aims to reduce both fixed costs and variable costs per unit of output. ▫ In some cases, Theory of Constraints advocates the intentional use of buffer inventories to ensure that a constrained process never operates below capacity whereas Lean Manufacturing usually aims for one-piece- flow and the minimization of WIP, since excess WIP between processes often leads to defects and other costs.

31 6- TOC and Lean Manufacturing Engineer To Order Make to Order Assemble To Order Make to Stock Job Shop Low Volume, High Variety Batch Flow Medium Volume, Med. Variety Mixed-Model Repetitive High Volume, Fixed Variety Dedicated Repetitive High Volume, Standard Product Product Line Strategy Production Process Layout

32 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.

33 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.

34 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!

35 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

36 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

37 8- Finding the Goal »Before a company can properly focus, a necessary condition is that they answer the following question: –What is the Goal of a for profit enterprise? »Answer: To make more money now and in the future! »Some would argue that the goal of their company is to… –To satisfy customers now and in the future! –Provide satisfying jobs now and in the future! »The owners can choose the goal, but the other two become conditions necessary for achieving the goal

38 8- The Goal: Measuring Progress »Once the Goal is identified, one necessary condition to success in achieving the goal is to identify which measurements will be used to judge progress.

39 8- The Goal: Measurements »Conventional Wisdom –Net profit? –Efficiency? –Utilization? –Return on Investment? –Cash Flow? »TOC Wisdom –Throughput –Inventory –Operating Expense

40 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

41 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

42 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

43 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.

44 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.

45 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.

46 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.

47 8- Knowledge Check

48 What book was instrumental in developing the concept of Theory of Constraints? o A) The Objective o B) The Goal o C) The Strategy o D) The Constraint

49 49 © 2009 Factory Strategies Group LLC. All rights reserved. Match each of the five steps of the Theory of Constraints with its descriptions by dragging the description to the step. Step □ Identifying the constraint □ Decide how to exploit the constraint □ Subordinate everything else to the decision in step 2 □ Elevate the constraint □ Go back to step 1, but avoid inertia Description A.When one constraint has been broken another constraint will be created B.The capacity of the constraining process needs to be increased C.Solving the constraint should be a top priority. D.Identify the key factors that determine the capacity of that process, and which can be manipulated to increase the capacity. E.Measure the capacity of each process and then track actual throughput against the capacity E D C B A

50 What is the main tool used in drum, buffer, & rope to identify the bottleneck? o A) Kaizen o B) Throughput o C) Process Mapping o D) Kanban

51 51 © 2009 Factory Strategies Group LLC. All rights reserved. Match the word with its description by dragging the description to the word. Word □ Drum □ Buffer □ Rope Description A.A- The stockpile of WIP in front of the constraint. B.B- 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. C.C- This is the constraint itself since it sets the drumbeat (pace) for the other processes. C B A

52 What are some of the benefits of the Theory of Constraints? (Mark all that apply) A. Increased revenue B. Reduced cost per unit C. Constraining resource must be maximized D. On-time delivery

53 Which of the following will make production more stable and predictable? (Mark all that apply) »A) Measuring process and machine capacity and output in order to define the constraint point »B) Creating clearly defined production procedures and processes »C) Implementing the 5S system at shop floor level »D) Synchronizing the production layout to better arrange workstations so as to minimize transportation bottlenecks

54 How can you implement TOC in your operation?

55 Congratulations!!! »You have completed the course. »Contact your Continuous Improvement Facilitator for more information on Theory of Constraints. © 2007 Superfactory™. All Rights Reserved. 55


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