1. Introduction to Theory of Constraints
Competitive Manufacturing Management

2. Where it all began
In 1984, Eli Goldratt wrote an international best seller on operations management -- The Goal. In this text, which was written in the form of a novel, he outlined his views of operations management -- specifically, finite capacity scheduling.
Since it was first published, he and others have continued to expand the systems thinking he laid out in The Goal.

3. Three Primary Areas of Contribution
“New” measures
TIOE
Constraint management
Five focusing steps
Systems Thinking
Thinking Process (5 tools)

4. Weekly OE = $6000
1 each of resources A, B, C, & D
2400 min/week
Product P
$90/unit
100 units/week
Product Q
$100/unit
50 units/week
Purchased
Part
$5/unit
Resource D
15 min/unit
Resource D
5 min/unit
Resource C
10 min/unit
Resource C
5 min/unit
Resource B
15 min/unit
Resource A
15 min/unit
Resource B
15 min/unit
Resource A
10 min/unit
RM 2
$20/unit
RM 3
$20/unit
RM 1
$20/unit

5. Base Scenario What is the most profitable product mix?
How much money can be made in 1 week given the above information?

6. Base Scenario: Accounting Profit per Unit
P Q
Selling price $90 $100
Materials
Contribution
Total Direct labor 60 min min.
CM/DL min $ $1.20
therefore make Q’s first, then P’s

7. Base Scenario: Resource Requirements
WC P Q Required Avail A B C D

8. Base Scenario: Making the “Most Profitable” Product First
If we make Q’s first then P’s, we can make 50 Q’s and then 60 P’s
P Q CM
make *60 *50
Profit = 5700
-6000 OE
-300 profit

9. Base Scenario: Making the “Least Profitable” Product First
If we make P’s first then Q’s, we can make 100 P’s and then 30 Q’s
P Q CM
make *100 *30
Profit = 6300
-6000 OE
+300 profit

10. The PQ Problem: Why is it More Profitable to Make the “Least Profitable” Product?
We must determine how to make local decisions (in this case, how to best run our resources) align with organizational goals (how to make more money now, as well as, in the future.)

11. Aligning Functional Decisions with Organizational Goals
At the organizational level, companies use three main types of measures: profitability, returns, and solvency. Often companies use Net Profit, ROI, and Cash Flow. All three should increase (or at least not decrease.
The impact of decisions made at lower levels in the organization on these three measures is not readily apparent, so companies use other measures (e.g. commissions, utilizations, etc.)

12. Throughput, Inventory and Operating Expense
Goldratt suggests three measures:
Throughput - the rate at which a company makes money through sales (Cash coming in should increase)
Inventory - all things purchased by the company which might be resold (Cash going out should decrease)
Operating Expense - the money a company spends turning Inventory into Throughput (Cash going out should decrease)

13. How do T, I, and OE Relate to Net Profit, ROI and Cash Flow?
Net Profit = T - OE
As T increases so does profit
As OE decreases profit increases
ROI = (T - OE) / I
As T increases so does ROI
As OE and/or I decreases ROI increases
Cash Flow = T- I - OE
As T increases so does Cash Flow
As OE and/or I decreases Cash Flow increases

14. How do T, I, and OE Relate to Net Profit, ROI and Cash Flow?
increase
ROI
increase
Cash Flow
increase T
increase I
decrease OE
decrease

15. Prioritizing TIOE First, increase Throughput.
Second, decrease Inventory.
Third, decrease Operating Expense.
This is the opposite of what most companies will do.

16. Paradigm Shifts
Cost accounting (Cost World Thinking) and T, I, OE (Throughput World Thinking) are different paradigms. You should be able to recognize both paradigms. You will certainly encounter cost accounting where you work, and you should know how to tell when it is misleading.

17. Constraint Management: Throughput World Thinking
The constraint determines Throughput.
An hour lost on the constraint is an hour lost for the system.
An hour saved on a non-constraint is a mirage.

18. Five Focusing Steps of TOC
Identify the constraint.
Decide how to exploit the constraint
Subordinate everything else to the decision made in step 2.
Elevate the constraint.
If the constraint is broken in step 4, start over and do not allow inertia to become a constraint.

19. Base Scenario: Throughput per Unit of Constraint
P Q
Selling price $90 $100
Materials
Throughput
Constraint labor 15 min min.
T/Constraint min $3 $2
therefore make P’s first, then Q’s

20. Alternate scenario 1: changes to the base scenario
Your engineer is all kinds of excited and tells you that he has found a way to modify one of the processes -- a process is a chain of work centers -- so that it will take now take 21 minutes to to complete rather than 20 minutes AND it will only cost $3000 to do it.
Should you fire the guy on the spot or allow him to finish his explanation?
If you haven't fired the engineer, he continues his explanation by telling you that the middle process can be revised such that WC B can do the job in 14 minutes if WC C works an additional 2 minutes.
What would be the result of the revision in terms of product mix and weekly profit? How long will it take to recover the investment?

21. Alternate scenario 2: changes to the base scenario
Your marketing department has found an alternate market for your products in Japan. The US and Japanese markets are perfectly segmented (i.e. the sales price in one country will not affect the sales price in the other country). The catch is that while the Japanese will buy P and Q in the same quantities as the US they are only willing to pay 80% of the US price -- $72 for P and $80 for Q. Additionally, you can purchase another B machine for $100,000. You will need to hire another person to run it for $400/week which brings weekly operating expenses to $6400.
Should you sell to the Japanese? What about product mix and weekly profit?
How long will it take to recover the investment in new machinery?

22. A Setup Example
We could minimize total setup time per week by executing only one per week; however W can make 444/week and U (or V) can only make 120/week. Inventory increases.
Resource V
20 min/unit
Resource U
20 min/unit
Or we could examine the constraint(s) U & V. Forgetting setup time; what percent of the time must W run to keep both U & V busy?
Resource W
5 min/unit
(3 hour setup)
Resource W
5 min/unit
(3 hour setup)
Since W only needs to run 50% of the time, the other 50% can be spent in setup - run 3 hours then setup for 3 hours - 36 units.
If the market will take all that we can make, how many units should Resource W run on each setup?

23. A Make/Buy Example Resource A 25 min/unit
This is your current process (a greatly simplified example). You have two resources A & B. You currently purchase a part that costs $5/unit.
Purchased part
$5/unit
Resource B
5 min/unit
Option 1: You could make the part for 5 minutes of “A” time and a $3/unit raw material. The cost to make the part is $4/unit.
Option 2: You could make the part for 15 minutes of “B” time and a $4/unit raw material. The cost to make the part is $7/unit.
Which is the better decision?

24. Make/Buy: Option 1 Resource A 25 min/unit
You could make the part for 5 minutes of “A” time and a $3/unit raw material; given that you pay workers $12/hour, the cost to make the part would be less than the purchase price. [Calculated as follows: ($12/hr * .083 hr + $3/unit) = $4/unit to make].
Shouldn’t you make the part?
Resource A
5min/unit
Resource B
5 min/unit
Raw Material
$3/unit
Given that Resource A is the constraint, the true cost to make must include the impact on T -- which would be lower. You would be better off buying the part for $5/unit.

25. Make/Buy: Option 2 Resource A 25 min/unit
You could make the part for 15 minutes of “B” time and a $4/unit raw material; however, given that you pay workers $12/hour, the cost to make the part would be greater than the purchase price. [Calculated as follows: ($12/hr * .25 hr + $4/unit) = $7/unit to make].
Shouldn’t you buy the part?
Resource B
15 min/unit
Resource B
5 min/unit
Raw Material
$3/unit
Given that you are already paying someone to man Resource B and it is not the constraint, the only variable cost to make is $4/unit of raw material. You would be better off making the material -- T would increase.

26. Thinking Process Tools
What to change?
Current Reality Tree
To what to change?
Evaporating Cloud
Future Reality Tree & Negative Branch
How to change?
Prerequisite Tree
Transition Tree

27. Current Reality Tree
Current Reality Tree -- a logic-based tool for using cause-and-effect relationships to determine root problems that cause the undesirable effects of the system (APICS Dictionary, p. 19.)

28. Evaporating Cloud
Evaporating Cloud -- a logic-based tool for surfacing assumptions related to a conflict or problem. Once the assumptions are surfaced, actions to break an assumption and hence solve (evaporate) the problem can be determined (APICS Dictionary, p. 28.)

29. Future Reality Tree
Future Reality Tree -- a logic-based tool for constructing and testing potential solutions before implementation. The objectives are to (1) develop, expand, and complete the solution, and (2) identify and solve or prevent new problems created by implementing the solution (APICS Dictionary, p. 35.)

30. Negative Branch Reservation
Negative Branch Reservation -- a logic- based tool using cause-and-effect relationships to identify the possible negative effects created by the implementation of the solution.

31. Pre-Requisite Tree
Prerequisite Tree -- a logic-based tool for determining the obstacles that block the implementation of a problem solution or idea. Once obstacles have been identified, objectives for overcoming obstacles can be determined (APICS Dictionary, p. 62.)

32. Transition Tree Transition Tree
a logic-based tool for identifying and sequencing actions in accomplishing an objective. The transitions represent the states or stages in moving from the present situation to the desired objective (APICS Dictionary, p. 87.)