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1 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics Purchased Part $5 / unit RM1 $20 per unit RM2 $20 per unit RM3 $25 per unit $90 / unit 110 units / week $100 / unit 60 units / week P: Q: D 10 min. D 5 min. C 10 min. C 5 min. B 25 min. A 15 min. B 10 min. A Practice: A Production System Manufacturing Two Products, P and Q Time available at each work center: 2,400 minutes per week. Operating expenses per week: $6,000. All the resources cost the same.

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2 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics 1. Identify The Constraint(s) Contribution Margin: P($45), Q($55) Market Demand: P(110), Q(60) Can we satisfy the demand? Resource requirements for 110 P’s and 60 Q’s: Resource A: 110 (15) + 60 (10) =2250 minutes Resource B: 110(10) + 60(35) = 3200 minutes Resource C: 110(15) + 60(5) = 1950 minutes Resource D: 110(10) + 60(5) = 1400 minutes

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3 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics Resource B is Constrained - Bottleneck Product P Q Profit $ 45 55 Resource B needed (min) 10 35 Profit per min of Bottleneck 45/10 =4.5 55/35 =1.6 Per unit of bottleneck Product P creates more profit than Product Q Produce as much as P, then Q 2. Exploit the Constraint : Find the Throughput World’s Best Solution

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4 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics For 110 units of P, need 110 (10) = 1100 min. on B, leaving 1300 min. on B, for product Q. Each unit of Q requires 35 minutes on B. So, we can produce 1300/35 = 37.14 units of Q. We get 110(45) +37.14(55) = 6993 per week. After factoring in operating expense ($6,000), we make $993 profit. 2. Exploit the Constraint : Find the World’s Best Solution to Throughput

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5 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics How much additional profit can we make if market for P increases from 110 to 111; by 1 unit. We need 1(10) = 10 more minutes of resource B. We need to subtract 10 min of the time allocated to Q and allocate it to P. For each unit of Q we need 35 min of resource B. Our Q production is reduced by 10/35 = 0.29 unit. One unit increase in P generates $45. But $55 is lost for each unit reduction in Q. Therefore if market for P is 111 our profit will increase by 45(1)-55(0.29) = $29. 2. Exploit the Constraint : Find the World’s Best Solution to Throughput

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6 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics Decision Variables x1 : Volume of Product P x2 : Volume of Product Q Resource A 15 x1 + 10 x2 2400 Resource B 10 x1 + 35 x2 2400 Resource C 15 x1 + 5 x2 2400 Resource D 10 x1 + 5 x2 2400 Market for P x 1 110 Market for Q x 2 60 Objective Function Maximize Z = 45 x 1 +55 x 2 -6000 Nonnegativity x 1 0, x 2 0 Practice: LP Formulation

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7 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics Practice: Optimal Solution Continue solving the problem, by assuming the same assumptions of 20% discount for the Japanese market.

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8 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics A Practice on Sensitivity Analysis What is the value of the objective function? Z= 45(?) + 55(37.14)-6000! 2400(0)+ 2400(1.571)+2400(0) +2400(0)+110(29.286)+ 60(0) =6993 Is the objective function Z = 6993? 6993-6000 = 993

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9 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics A Practice on Sensitivity Analysis How many units of product P? What is the value of the objective function? Z= 45(???) + 55(37.14)-6000 = 993. 45X1= 4950 X1 = 110

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10 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics Step 4 : Elevate the Constraint(s). Do We Try To Sell In Japan? $/Constraint Minute 4.5 1.57 2.7 1 Even without increasing capacity of B, we can increase our profit.

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11 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics For 110 units of P, need 110 (10) = 1100 min. on B, leaving 1300 min. on B, for product P in Japan. Each unit of PJ requires 10 minutes on B. So, we can produce 1300/10 = 130 units of PJ. We get 110(45) +130(27) = $8460 - $6000 = $2460 profit. Check if there is another constraint that would not allow us to collect that much profit. Let’s see. 2. Exploit the Constraint : Find the World’s Best Solution to Throughput

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12 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics 1. Identify The Constraint(s) Contribution Margin: P($45), PJ($27) Market Demand: P(110), PJ(infinity) Can we satisfy the demand? Resource requirements for 110 P’s and 130 PJ’s: Resource A: 110 (15) + 130 (15) = 3600 minutes Resource B: 110(10) + 130(10) = 2400 minutes Resource C: 110(15) + 130(15) = 3600 minutes Resource D: 110(10) + 130(10) = 2400 minutes We need to use LP to find the optimal Solution.

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13 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics Step 4 : Exploit the Constraint(s). Not $2460 profit, but $1345. The $6000 is included. Let’s buy another machine B at investment cost of $100,000, and operating cost of $400 per week. Weekly operating expense $6400. How soon do we recover investment?

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14 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics Original Profit: $993 No Machine but going to Japan: $1345 profit. Buy a machine B: $2829 profit. The $6400 is included. Going to Japan has no additional cost. Buying additional machine has initial investment and weekly operating costs. $2829-$1345 = $1484 $100,000/$1484 = 67.4 weeks Step 4 : Elevate the Constraint(s). New Constraint

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15 Ardavan Asef-Vaziri Nov-2010Theory of Constraints 1- Basics Also add one machine A. Initial investment 100,000. Operating cost $400/week. Buying a machine A at the same cost From $2829 to $3533 = $3533 - $2829 = $704. The $6800 included.. $100,000/$704 = 142 weeks Now B & C are a bottleneck

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