Constraint Management Chapter 7 1

How Constraint Management fits the Operations Management Philosophy Operations As a Competitive Weapon Operations Strategy Project Management Process Strategy Process Analysis Process Performance and Quality Constraint Management Process Layout Lean Systems Supply Chain Strategy Location Inventory Management Forecasting Sales and Operations Planning Resource Planning Scheduling

Eastern Financial Florida Credit Union What was the problem? How did they solve it?

Capacity Planning Capacity is the maximum rate of output of a process or system. Output Measures Input Measures Utilization

Output and Capacity What is a Constraint? A Bottleneck Any factor that limits system performance and restricts its output. A Bottleneck An output constraint that limits a company’s ability to meet market demand. Also called Capacity Constraint Resource or CCR

Theory of Constraints (TOC) A systematic approach that focuses on actively managing constraints that are impeding progress. Constraint Management Short-Term Capacity Planning Theory of Constraints Identification and management of bottlenecks Product Mix Decisions using bottlenecks Long-term Capacity Planning Economies and Diseconomies of Scale Capacity Timing and Sizing Strategies Systematic Approach to Capacity Decisions

7 Key Principles of TOC The focus is on balancing flow, not on balancing capacity. Maximizing output and efficiency of every resource will not maximize the throughput of the entire system. An hour lost at a bottleneck or constrained resource is an hour lost for the whole system. An hour saved at a non-constrained resource does not necessarily make the whole system more productive.

7 Key Principles of TOC Inventory is needed only in front of the bottlenecks to prevent them from sitting idle, and in front of assembly and shipping points to protect customer schedules. Building inventories elsewhere should be avoided. Work should be released into the system only as frequently as the bottlenecks need it. Bottleneck flows should be equal to the market demand. Pacing everything to the slowest resource minimizes inventory and operating expenses.

7 Key Principles of TOC Activation of non-bottleneck resources cannot increase throughput, nor promote better performance on financial measures. Every capital investment must be viewed from the perspective of its global impact on overall throughput (T), inventory (I), and operating expense (OE).

Application of TOC Identify The System Bottleneck(s). Exploit The Bottleneck(s). Subordinate All Other Decisions to Step 2 Elevate The Bottleneck(s). Do Not Let Inertia Set In.

Bal Seal Engineering Managerial Practice 7.1 Theory of Constraints in Practice Bal Seal had problems with excessive inventory, long lead times and long work hours. They were operating above capacity but on-time shipment rate was 80-85% Bal Seal implemented TOC with dramatic and almost immediate results. Excessive inventory dried up Extra capacity was experienced everywhere but at the constraint Total production increased over 50% Customer response time decreased from 6 weeks to 8 days On-time shipments went up to 97%

Identification and Management of Bottlenecks A Bottleneck is the process or step which has the lowest capacity and longest throughput. Throughput Time is the total time from the start to the finish of a process. Bottlenecks can be internal or external to a firm.

Setup Time If multiple services or products are involved, extra time usually is needed to change over from one service or product to the next. This increases the workload and could be a bottleneck. Setup Time is the time required to change a process or an operation from making one service or product to making another.

Where is the Bottleneck? Example 7.1 1. Check loan documents and put them in order (10 minutes) 2. Categorize loans (20 minutes) 3. Check for credit rating (15 minutes) 6. Complete paperwork for new loan 4. Enter loan application data into the system (12 minutes) Customer 5. Is loan approved? (5 min) Yes No

Barbara’s Boutique Application 7.1 Two types of customers enter Barbara’s Boutique shop for customized dress alterations. After T1, Type A customers proceed to T2 and then to any of the three workstations at T3, followed by T4, and then T7. After T1, Type B customers proceed to T5 and then T6 and T7. The numbers in the circles are the minutes it takes that activity to process a customer. T1 (12) T6 (22) T5 (15) T2 (13) T7 (10) T4 (18) T3-a (14) T3-c (11) T3-b Type Type A Type B What is the capacity per hour for Type A customers? If 30% of customers are Type A customers and 70% are Type B, what is the average capacity? When would Type A customers experience waiting lines, assuming there are no Type B customers in the shop? Where would Type B customers have to wait, assuming no Type A customers?

Long-Term Capacity Planning Constraint Management Short-Term Capacity Planning Theory of Constraints Identification and management of bottlenecks Product Mix Decisions using bottlenecks Long-term Capacity Planning Economies and Diseconomies of Scale Capacity Timing and Sizing Strategies Systematic Approach to Capacity Decisions

Long-Term Capacity Planning Deals with investment in new facilities and equipment. Plans cover a minimum of two years into the future. Economies of scale are sought in order to reduce costs through Lower fixed costs per unit Quantity discounts in purchasing materials Reduced construction costs Process advantages

Average unit cost (dollars per patient) Economies of Scale Economies of scale occur when the average unit cost of a service or good can be reduced by increasing its output rate. Diseconomies of scale occur when the average cost per unit increases as the facility’s size increases 250-bed hospital 500-bed hospital 750-bed hospital Economies of scale Diseconomies of scale Output rate (patients per week) Average unit cost (dollars per patient)

Capacity Timing and Sizing Strategies Sizing Capacity Cushions Timing and Sizing Expansions Linking Process Capacity and other operating decisions.

Capacity Cushions A capacity cushion is the amount reserve capacity a firm has available. Capacity Cushion = 100% − Utilization Rate (%) How much capacity cushion depends on The uncertainty and/or variability of demand The cost of lost business The cost of idle capacity 23

Capacity Expansion Expansionist Strategy Staying ahead of demand Planned unused capacity Time Capacity Forecast of capacity required Time between increments Capacity increment 23

Capacity Expansion Wait-and-See Strategy Chasing demand Time Capacity Forecast of capacity required Planned use of short-term options Time between increments Capacity Increment 28

Linking Process Capacity and Other Decisions Competitive Priorities Quality Process Design Aggregate Planning