Ricardo Ernst Top Management Program in Logistics & Supply Chain Management (TMPLSM) Production and Operations Management 6: Theory of Constraints

2 The Goal is to “make money” But what measures of “making money” do we use?

3 Financial Measures Net Profit – an absolute measure Return on Investment (ROI) – a relative measure (profit relative to investment) Cash Flow – a survival measure

4 Productivity Measures 1. Has throughput increased? Throughput rate = the sales rate 2. Has inventory decreased? Inventory = $$ invested in things it intends to sell 3. Have operational expenses decreased? Operating expenses = $$ spent to turn inventory into throughput

Net profit an absolute measurement in dollars Return on investment a relative measure based on investment Cash flow a survival measurement.... Throughput the rate at which money is generated by the system through sales Inventory all the money that the system has invested in purchasing things it intends to sell Operating expenses all the money that the system spends to turn inventory into throughput.... Performance Measurement Financial 5

6 Du-Pont Ratio Analysis Market Book Objective: Maximize Market/Book ratio Income Sales Assets Equity (book) Market value Income = Market Book = (ROS) (Turnover) (Leverage) (P/E ratio)

7 “A plant in which everyone is working all the time is very inefficient” “A plant in which everyone is working all the time is very inefficient” What do you think?

8 The Statistics of Dependent Events Per Goldratt, Rather than balancing capacities, the flow of product through the system should be balanced Process Time (B)Process Time (A)

Inventory (L) 1.0 Utilization,  Variability can create long queues when  ( utilization) approaches 1 L goes sky-high

Terminology Used in “The Goal” Capacity Expected output in period of time Bottleneck Capacity less than (or at most equal to) demand Non-bottleneck Capacity is greater than demand placed on resource Capacity-Constrained Resource (CCR) Capacity is close to demand

Upstream Bottleneck Demand < or = Bottleneck Capacity XY BottleneckNonbottleneck Demand / reqs200 units Process time/unit1 hour40 mins Sched. time200 hours XY Market Case A What happens ?

Upstream Bottleneck Demand > Bottleneck Capacity XY BottleneckNonbottleneck Demand / reqs300 units Process time/unit1 hour40 mins Sched. time200 hours XY Market Case B What happens ? How to manage ?

YX Market Case C XY BottleneckNonbottleneck Demand / reqs200 units Process time/unit1 hour40 mins Sched. time200 hours Downstream Bottleneck Demand < or = Bottleneck Capacity What happens ?

YX Market Case D XY BottleneckNonbottleneck Demand / reqs300 units Process time/unit1 hour40 mins Sched. time200 hours Downstream Bottleneck Demand > Bottleneck Capacity What happens ? How to manage ?

How can Bottleneck set the pace if it is in the middle? ABCDEF Market

16 ABCDEF Bottleneck (Drum) Inventory buffer Communication (rope) Market Pull from the bottleneck “Drum & Rope”

Managing with Constraints Identify pacing operations Bottlenecks & capacity constrained resources Balance throughput across operations Drive CCRs to max capacity Manage idle time on non-CCRs Supplement CCR output to level of demand Overtime Alternate routings Multiple-sourcing

18 Is a Bottleneck a “Good Thing” or a “Bad Thing”? A bottleneck indicates the process is unbalanced (The bottleneck has a lower capacity than other stations). A balanced process has constant capacities across all stations (no bottlenecks).