THEORY OF CONSTRAINTS

Prof. Preetam BasuIIM Calcutta

Constrained Production System

A B C D E

Capacity

60 units/hr

40 units/hr

50 units/hr

30 units/hr

80 units/hr

Assuming there is infinite supply of raw materials, how many units would this system produce per hour?

Constrained Production System

A B C D E

Capacity

60 units/hr

40 units/hr

50 units/hr

30 units/hr

80 units/hr

Assuming there is infinite supply of raw materials, how many units would this system produce per hour?

This system will produce 30 per hr. Here resource D is the bottleneck. Bottleneck determines the system output

Does not guarantee profitability Has throughput increased?

Has inventory decreased?

Have operational expenses decreased?

Productivity

The Theory of Constraints

Eli Goldratt, a physicist.

OPT: a scheduling package.

The Goal and the Theory of

Constraints.

Goldratt challenges the conventional approach to managing organizations.

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

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.

Goldratt’s Rules of Production Scheduling Do not balance capacity, balance the flow

The level of utilization of a non-bottleneck resource is not determined by its own potential but by some other constraint in the system

An hour lost at a bottleneck is an hour lost for the entire system

An hour saved at a non-bottleneck is a mirage

Bottlenecks govern both throughput and inventory in the system

Transfer batch may not and many times should not be equal to the process batch

A process batch should be variable both along its route and in time

Priorities can be set only by examining the system’s constraints and lead time is a derivative of the schedule

TOC vs. Sig Sigma and Lean TOC vs. Sig Sigma and Lean ManufacturingManufacturing

Six Sigma and Lean Manufacturing focus on cost reduction through elimination of waste and reduction of variability at every step in a process

TOC concentrates its improvement efforts only on the operation that is constraining a critical process or on the weakest component that is limiting the performance of the system (bottleneck)

Goldratt’s Five Focusing Steps in TOC

Identify the system constraints

Decide how to exploit the system constraints

Subordinate everything else to that decision

Elevate the system constraints

If, in the previous steps, the constraints have been broken, go back to Step 1, but do not let inertia become the system constraint

To Identify the Resource Constraint

Compute the load on each production resource assuming market demands.

Compare the resource loads with the resource capacities.

Those resources for which the loads exceed the capacities are constraints (bottlenecks).

If no production resource load exceeds its capacity, the market demands are the constraints. the constraints are external to the

manufacturing system.

Compute the loads and compare with capacities.

A: Load =2000, Capacity = 2400 B: Load =3000, Capacity = 2400 C: Load =1750, Capacity = 2400 D: Load =1250, Capacity = 2400 What is the constraint?

P roduct A P roduct B0.4 hrs ./un it 0 .2 hrs ./un it

P roductB

P roductA

U nlim ited

P rofit/un it = $80M arket dem and =

100/w eek

P rofit/un it = $50

M arket dem and =200/w eek

P roduction process

A va ilab ility : 60 hrs ./w eek

R aw m ateria ls

A Constrained Production ProcessA Constrained Production Process

Product Mix (without TOC)

A has a higher profit/unit max. A Production process for A:

100 units x 0.4 hours/unit = 40 hours Remaining time for B:

60 hours - 40 hours = 20 hours 20 hours / (0.2 hours/unit) = 100 units

Profit: For A: 100 units x $80/unit = $8,000 For B: 100 units x $50/unit = $5,000 Total = $13,000

Constrained Resource Utilizationfor Each Product

Product Mix (with TOC)

B has a higher profit/hour maximize B. Production process for B:

200 units x 0.2 hours/unit = 40 hours Remaining time for A:

60 hours - 40 hours = 20 hours 20 hours / (0.4 hours/unit)= 50 units

Profit: For A: 50 units x $ 80/unit = $4,000 For B: 200 units x $50/unit = $10,000 Total = $14,000 vs. $13,000 (without TOC)

Drum, Buffer, Rope

A B C D E F

Bottleneck (Drum)

Inventorybuffer

(time buffer)Communication

(rope)

Market

Keep a buffer inventory in front of the bottleneck to make sure that it always has something to work on Communicate back upstream to A what D has produced so that A only provides the reqd. amount. This communication is called rope.

Importance of Quality

What happens if a defective part is produced upstream of the bottleneck?

Where do you think stringent quality checks should be put in synchronous manufacturing?

TOC Applied to Services

Example: Bank Loan Application Processing Step 1: Identify the system’s constraints

Loan officers are unable to process all the loan applications in a timely manner

Step 2: Decide how to exploit the system constraints: Calculate the throughput yield per unit time for each type of

loan request eg. home loans, auto loans, small business loans

Sequence of loans processed would be based on the profitability of each type of loan

Step 3: Subordinate everything else to the preceding decisions Need to change the other processes so that there is always

adequate supply of loan requests for the officers to work on Step 4: Elevate the constraint if possible Step 5: Monitor the system to check if other processes become

bottlenecks.

By Eliyahu M. Goldratt

By Robert C Newbold

By Willian H. Dettmer

How can you Learn More?How can you Learn More?