2 How Constraint Management fits the Operations Management Philosophy Operations As a CompetitiveWeaponOperations StrategyProject ManagementProcess StrategyProcess AnalysisProcess Performance and QualityConstraint ManagementProcess LayoutLean SystemsSupply Chain StrategyLocationInventory ManagementForecastingSales and Operations PlanningResource PlanningScheduling
3 Eastern Financial Florida Credit Union What was the problem?How did they solve it?
4 Capacity PlanningCapacity is the maximum rate of output of a process or system.Output MeasuresInput MeasuresUtilization
5 Output and Capacity What is a Constraint? A Bottleneck Any factor that limits system performance and restricts its output.A BottleneckAn output constraint that limits a company’s ability to meet market demand.Also called Capacity Constraint Resource or CCR
6 Theory of Constraints (TOC) A systematic approach that focuses on actively managing constraints that are impeding progress.Constraint ManagementShort-Term Capacity PlanningTheory of ConstraintsIdentification and management of bottlenecksProduct Mix Decisions using bottlenecksLong-term Capacity PlanningEconomies and Diseconomies of ScaleCapacity Timing and Sizing StrategiesSystematic Approach to Capacity Decisions
7 7 Key Principles of TOCThe 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.
8 7 Key Principles of TOCInventory 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.
9 7 Key Principles of TOCActivation 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).
10 Application of TOC Identify The System Bottleneck(s). Exploit The Bottleneck(s).Subordinate All Other Decisions to Step 2Elevate The Bottleneck(s).Do Not Let Inertia Set In.
11 Bal Seal Engineering Managerial Practice 7.1 Theory of Constraints in PracticeBal 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 upExtra capacity was experienced everywhere but at the constraintTotal production increased over 50%Customer response time decreased from 6 weeks to 8 daysOn-time shipments went up to 97%
12 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.
13 Setup TimeIf 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.
14 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 loan4. Enter loan application data into the system(12 minutes)Customer5. Is loan approved?(5 min)YesNo
15 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-bTypeType AType BWhat 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?
16 Long-Term Capacity Planning Constraint ManagementShort-Term Capacity PlanningTheory of ConstraintsIdentification and management of bottlenecksProduct Mix Decisions using bottlenecksLong-term Capacity PlanningEconomies and Diseconomies of ScaleCapacity Timing and Sizing StrategiesSystematic Approach to Capacity Decisions
17 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 throughLower fixed costs per unitQuantity discounts in purchasing materialsReduced construction costsProcess advantages
18 Average unit cost (dollars per patient) Economies of ScaleEconomies 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 increases250-bed hospital500-bed hospital750-bed hospitalEconomies of scaleDiseconomies of scaleOutput rate (patients per week)Average unit cost (dollars per patient)
19 Capacity Timing and Sizing Strategies Sizing Capacity CushionsTiming and Sizing ExpansionsLinking Process Capacity and other operating decisions.
20 Capacity CushionsA capacity cushion is the amount reserve capacity a firm has available.Capacity Cushion = 100% − Utilization Rate (%)How much capacity cushion depends onThe uncertainty and/or variability of demandThe cost of lost businessThe cost of idle capacity23
21 Capacity Expansion Expansionist Strategy Staying ahead of demandPlanned unused capacityTimeCapacityForecast of capacity requiredTime between incrementsCapacity increment23
22 Capacity Expansion Wait-and-See Strategy Chasing demandTimeCapacityForecast of capacity requiredPlanned use of short-term optionsTime between incrementsCapacity Increment28
23 Linking Process Capacity and Other Decisions Competitive PrioritiesQualityProcess DesignAggregate Planning