1. MEL751: Module on Theory of Constraints

2. Opening remarks about “Theory of Constraints”
Developed by Eliyahu Goldratt in the mid 1980’s with his business novel The Goal.
Has a close relationship with other modern techniques
Just-in-Time
Manufacturing Resource Planning
Quality Management, Six-Sigma
Activity-Based Management.

3. Brief abut Goldratt Born in Israel in the late 1940’s.
Bachelor’s degree in Physics.
Masters and Doctorate degrees in Philosophy.
Founder of a production scheduling software company.
Has helped many companies such as: GM, RCA, Kodak, Westinghouse, Philips, etc.
Wrote several books:
The Goal.
The Race.
What is this thing called TOC?
Critical Chain.

4. Goldratt’s “The Goal” Brief overview:
Midsize company having difficulty shipping products on time.
Managed by a plant manager desperate to turn things around.
With the help of a Physicist, the plant manager is able to locate the bottleneck and find a solution.
Symptoms noted in the book:
Obsolete inventory.
Low inventory turnover and high amount of inventory in storage.
Idle workers or machines.
Machine breakdown.
A large amount of scrap pieces.
A large amount of retooling and rework needed.

5. Brief about “Theory of Constraints”
Looks at the entire supply chain and synchronizes the chain to achieve ultimate performance.
Based on two assumptions:
Every organization has a set of processes working together to achieve a common goal.
Every process has a [single] constraint that limits it from higher performance.
Typical constraints: Time, Capacity, Materials, Human Resources, Capital Resources, Financial Resources

6. Types of Constraints Physical Constraints Market Constraints
Physical, tangible; easy to recognize as constraint. Machine capacity, material availability, space availability, etc.
Market Constraints
Demand for company’s products and services is less than capacity of organization, or not in desired proportion.
Policy Constraints
Not physical in nature. Includes entire system of measures and methods and even mindset that governs the strategic and tactical decisions of the company.

7. Policy Constraints Mindset Constraints Measures Constraints
A constraint if thought process or culture of the organization blocks design & implementation of measures & methods required to achieve goals.
Measures Constraints
A constraint if they drive behaviors that are incongruous with organizational goals.
Methods Constraints
A constraint when procedures and techniques used result in actions incompatible with goals.

8. Theory of Constraints 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
Bottlenecks must be identified and improved if the process is to be improved

9. TOC and Systems Thinking
TOC promotes “Systems Thinking”: global optimization (not local optimization).
The performance measures advocated by TOC are global measures.

10. The Theory of Constraints
The Theory of Constraints (TOC) is based on two premises:
The Goal of a business is to make more money, … in the present and in the future.
A system’s constraint(s) determine its output.

11. TOC Performance Measures
Throughput (T): The rate at which the system generates money through sales.
Inventory (I): All the money invested in purchasing things needed by the system to sell its products.
Operating Expenses (OE): All the money the system spends, turning inventory into throughput.

12. Relating TOC Measures to Traditional Measures
T = Sale Price - Direct Material Cost
OE = Direct Labor Cost + Overhead
Net Profit = T - OE
Return on = Net Profit =( T - OE ) / I Investment inventory
Inventory = throughput Turns inventory

13. The Throughput World: Process of TOC
Step 1: Identify the System’s Constraint(s)
Step 2: Decide how to Exploit the System’s Constraints
Step 3: Subordinate Everything Else to that Decision
Step 4: Elevate the System’s Constraints
Step 5: If a Constraint Was Broken in Previous Steps, Go to Step 1

14. How can we get the most from Physical Constraints?
Techniques for optimizing capacity constraints:
Eliminate periods of idle time
Reduce setup time and run time per unit
Improve quality control
Reduce the workload
Purchase additional capacity

15. Steps in the TOC Process
Identify the system constraints
Internal
Process constraints
Machine time, etc.
Policy constraints
No overtime, etc.
External
Material constraints
Insufficient materials
Market constraints
Insufficient demand
How is a constraint identified?

16. Steps in the TOC Process
Subordinate everything else to the preceding decision
Plan production to keep constraint working at 100%
May need to change performance measures to conform upstream activities to the “rope” speed

17. Steps in the TOC Process
Alleviate the constraint
Determine how to increase its capacity
Repeat the process
Always a new constraint

18. Theory of Constraints
Purpose is to identify bottlenecks or other constraints and exploit them to the extent possible
Identification of constraints allows management to take action to alleviate the constraint in the future
Reduce cycle time
Time from receipt of customer order to shipment
Improve manufacturing cycle efficiency (MCE)
Processing time / total cycle time

19. Theory of Constraints
Assumes current constraints cannot be changed in the short-run
What should be produced now, with current resources, to maximize profits?
Question cannot be answered by traditional accounting methods

20. Theory of Constraints Management tool, not an accounting tool
Not used to determine inventory values
Not used to allocate overhead to inventory
Does indicate how to use available resources most effectively

21. The Need for TOC Standard costing Can promote undesirable behavior
Work to keep people busy
Local optimization
Inventory is produced regardless of need
Does indicate what it should cost to produce a product

22. The Need for TOC
Does not indicate which products will maximize profits given the constraints
Doesn’t take constraints into account
Does not consider the demands each item places on limited resources

23. The Need for TOC Theory of Constraints
Uses linear programming to determine best use of limited resources
Indicates what should be produced and in what quantities

24. Theory of Constraints Constraining resource must be maximized
All other operations must be geared toward this goal
May require suboptimization in other areas
Upstream operations must provide only what the constraint can handle
Downstream operations will only receive what the constraint can put out

25. Theory of Constraints Focus is on maximizing throughput
Constraint must be kept operating at its full capacity
If not, the entire process slows further
Focus is on maximizing throughput
Sales – totally variable costs
All other costs treated as fixed operational expenses
Cannot vary much in the short-run

26. Theory of Constraints Based on the concepts of drum, buffer and ropes
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

27. Theory of Constraints Buffer Rope
Stockpile of work in process in front of constraint
Precaution to keep constraint running if upstream operations are interrupted
Rope
Sequence of processes prior to and including the constraint
Want to “pull” the rope at the maximum speed
Speed of the constraint

28. Evaluation of TOC Advantages
Improves capacity decisions in the short-run
Avoids build up of inventory
Aids in process understanding
Avoids local optimization
Improves communication between departments

29. Evaluation of TOC Disadvantages
Negative impact on non-constrained areas
Diverts attention from other areas that may be the next constraint
Temptation to reduce capacity

30. Evaluation of TOC Ignores long-run considerations
Introduction of new products
Continuous improvement in non-constrained areas
May lead organization away from strategy
Not a substitute for other accounting methods

31. Challenges Identifying goals? Identifying bottlenecks?
How to apply this theory to service context?
How to extend the logic to unorganized sector, say , especially in India?

32. Thanks