theory of constraints - memorial university of newfoundlandadfisher/7943-05/lean/10 toc.pdf · 2...

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Theory of ConstraintsTheory of Constraints

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OutlineOutline

1.1. Introduction to ConstraintsIntroduction to Constraints2.2. Five Steps Of Theory of ConstraintsFive Steps Of Theory of Constraints3.3. Drum Buffer RopeDrum Buffer Rope4.4. Issues with TOC Issues with TOC 5.5. MeasurementsMeasurements

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ConstraintsConstraints

Any system can produce only as much as its critically constraineAny system can produce only as much as its critically constrained d resourceresource

60 unitsPer day

70 unitsPer day

40 unitsPer day

60 unitsPer day

Constraint

Maximum Throughput = 40 units per day

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Significance of BottlenecksSignificance of Bottlenecks

Maximum speed of the process is the speed of the slowest Maximum speed of the process is the speed of the slowest operationoperation

Any improvements will be wasted unless the bottleneck is Any improvements will be wasted unless the bottleneck is relievedrelieved

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Purpose is to identify constraints and exploit them to the Purpose is to identify constraints and exploit them to the extent possibleextent possible

Identification of constraints allows management to take Identification of constraints allows management to take action to alleviate the constraint in the futureaction to alleviate the constraint in the future

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Assumes current constraints cannot be changed in the Assumes current constraints cannot be changed in the shortshort--runrun

What should be produced now, with current resources, What should be produced now, with current resources, to maximize profits?to maximize profits?

Question cannot be answered by traditional accounting methodsQuestion cannot be answered by traditional accounting methods

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Based on the concepts of drum, buffer and ropesBased on the concepts of drum, buffer and ropes

DrumDrumOutput of the constraint is the drumbeatOutput of the constraint is the drumbeat

Sets the tempo for other operationsSets the tempo for other operations

Tells upstream operations what to produceTells upstream operations what to produce

Tells downstream operations what to expectTells downstream operations what to expect

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BufferBufferStockpile of work in process in front of constraintStockpile of work in process in front of constraint

Precaution to keep constraint running if upstream operations Precaution to keep constraint running if upstream operations are interruptedare interrupted

RopesRopesLimitations placed on production in upstream operationsLimitations placed on production in upstream operations

Necessary to prevent flooding the constraintNecessary to prevent flooding the constraint

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What is the Theory of Constraints?What is the Theory of Constraints?

““The core idea in the Theory of ConstrainsThe core idea in the Theory of Constrainsis that every real system such as a is that every real system such as a profitprofit--making enterprise must have at least one constraintmaking enterprise must have at least one constraint””..

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What is TOC? What is TOC? (continued)(continued)

““There really is no choice in the matter. Either you manage There really is no choice in the matter. Either you manage constraints or they manage you. The constraints will constraints or they manage you. The constraints will determine the output of the system whether they are determine the output of the system whether they are acknowledged and managed or notacknowledged and managed or not””

Noreen, Smith, and Mackey, Noreen, Smith, and Mackey, The Theory of Constraints and its The Theory of Constraints and its ImplecationsImplecations for Management Accountingfor Management Accounting (North River Press, 1995)(North River Press, 1995)

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How does TOC help companies?How does TOC help companies?

1. Focusing improvement efforts where they will have the 1. Focusing improvement efforts where they will have the greatest immediate impact on the bottom line.greatest immediate impact on the bottom line.

2. Providing a reliable process that insures Follow 2. Providing a reliable process that insures Follow Through!Through!

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Five Five Steps Steps Of TOCOf TOC

1.1. Identifying the constraintIdentifying the constraint

2.2. Decide how Decide how to to exploit the constraintexploit the constraint

3.3. Subordinate Subordinate everything else everything else to to the decision the decision in in step step 22

4.4. Elevate the constraintElevate the constraint

5.5. Go back to Go back to step step 1, 1, but avoid but avoid inertiainertia

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5. Increase the bottleneck’s capacity

1. Identify the appropriate

measures of value

4. Synchronize all other processes to

the bottlenecks

6. Avoid inertia and return to Step #1

2. Identify the bottlenecks

3. Use bottlenecks properly

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Steps in the TOC ProcessSteps in the TOC Process

InternalInternal

Process constraintsProcess constraintsMachine time, etc.Machine time, etc.

Policy constraintsPolicy constraintsNo overtime, etc.No overtime, etc.

ExternalExternal

Material constraintsMaterial constraintsInsufficient materialsInsufficient materials

Market constraintsMarket constraintsInsufficient demandInsufficient demand

Identify the system constraints

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Decide how to exploit the constraintDecide how to exploit the constraint

Want it working at 100%Want it working at 100%

How much of a buffer?How much of a buffer?

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Subordinate everything else to the preceding decisionSubordinate everything else to the preceding decision

Plan production to keep constraint working at 100%Plan production to keep constraint working at 100%

May need to change performance measures to May need to change performance measures to ““roperope””upstream activitiesupstream activities

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Elevate the constraintElevate the constraint

Determine how to increase its capacityDetermine how to increase its capacity

Repeat the processRepeat the process

Always a new constraintAlways a new constraint

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Drum Buffer RopeDrum Buffer Rope

DrumDrum--BufferBuffer--Rope for Shop Floor ControlRope for Shop Floor ControlDrumDrum: The Pace Setting Resource : The Pace Setting Resource -- constraintconstraintBufferBuffer: The amount of protection in front of the resource : The amount of protection in front of the resource RopeRope:The:The scheduled staggered release of material to be in line with scheduled staggered release of material to be in line with the Drumthe Drum’’s schedule.s schedule.

60 70 40 60

Constraint(Drum)

Rope

BufferA Pull System

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Lean: How DBR Supports itLean: How DBR Supports it

Overproduction avoidedOverproduction avoided because DBR is because DBR is ““pullpull”” systemsystem

Inventory minimizedInventory minimized because only buffer at constraintbecause only buffer at constraint

Transportation reducedTransportation reduced because because ““unbuiltunbuilt materialmaterial”” doesndoesn’’t movet move

Processing waste minimizedProcessing waste minimized because because ““unbuiltunbuilt materialmaterial”” left until left until requiredrequired

Unnecessary Motion decreasedUnnecessary Motion decreased because donbecause don’’t build unneededt build unneeded

Waiting is eliminated at the constraintWaiting is eliminated at the constraint ––only place that countsonly place that counts

Defects avoidedDefects avoided because of because of ““small lotsmall lot””, non conformance, and corrective action, non conformance, and corrective action

Fundamentally, Don’t Build Until Needed

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Why Drum Buffer Rope?Why Drum Buffer Rope?

A proven method to*:A proven method to*:Reduce Lead times an average of 70%Reduce Lead times an average of 70%Reduce inventory an average of 49%Reduce inventory an average of 49%Reduce Operating Expenses Reduce Operating Expenses Improve on time delivery performance an average of 44%Improve on time delivery performance an average of 44%Increase Revenue an average of 63%Increase Revenue an average of 63%Better controlBetter control

DBR delivers ALL of these results AT THE SAME TIME.DBR delivers ALL of these results AT THE SAME TIME.

*The World of the Theory of Constraints by Mabin & Balderstone, St. Lucie Press 2000

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Issues with TOCIssues with TOC

Upstream operations must provide only what the Upstream operations must provide only what the constraint can handleconstraint can handle

Downstream operations will only receive what the Downstream operations will only receive what the constraint can put outconstraint can put out

Constraint must be kept operating at its full capacityConstraint must be kept operating at its full capacityIf not, the entire process slows furtherIf not, the entire process slows further

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AdvantagesAdvantages

Improves capacity decisions in the shortImproves capacity decisions in the short--runrun

Avoids build up of inventoryAvoids build up of inventory

Aids in process understandingAids in process understanding

Avoids local optimizationAvoids local optimization

Improves communication between departmentsImproves communication between departments

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DisadvantagesDisadvantages

Negative impact on nonNegative impact on non--constrained areasconstrained areasDiverts attention from other areas that may be the next constraiDiverts attention from other areas that may be the next constraintnt

Temptation to reduce capacityTemptation to reduce capacity

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Ignores longIgnores long--run considerationsrun considerations

Introduction of new productsIntroduction of new products

Continuous improvement in nonContinuous improvement in non--constrained areasconstrained areas

May lead organization away from strategyMay lead organization away from strategy

Not a substitute for other accounting methodsNot a substitute for other accounting methods

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MeasurementsMeasurements

Conventional WisdomConventional WisdomNet profit?Net profit?Efficiency?Efficiency?Utilization?Utilization?Return on Investment?Return on Investment?Cash Flow?Cash Flow?

“Are you using the right measurements?”Jonah in The Goal

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Measurements Measurements

TOC WisdomTOC WisdomThroughputThroughputInventory Inventory Operating ExpenseOperating Expense

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Traditional Traditional vsvs JIT, TQM and TOCJIT, TQM and TOC

Traditional RankingTraditional Ranking

Operating expenseOperating expense

ThroughputThroughput

Inventory or AssetsInventory or Assets

JIT, TQM and TOCJIT, TQM and TOC

ThroughputThroughput

Inventory or AssetsInventory or Assets

Operating expenseOperating expense

All Three methods attack the underlying assumption that crated a problem related to inventory levels. They ask:

WHY DO WE NEED INVENTORY TO PROTECT THROUGHPUT ?

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The The ““Cost WorldCost World””

Decreasing Decreasing ““OEOE”” is definitely #1 because we have is definitely #1 because we have relatively high control of our expenses.relatively high control of our expenses.Increasing Increasing ““TT”” is always important, but it ranks #2 is always important, but it ranks #2 because we are at the mercy of the marketplace and because we are at the mercy of the marketplace and have less control over sales.have less control over sales.Inventory tends to fall into a Inventory tends to fall into a ““grey areagrey area”” that we donthat we don’’t t know exactly what to do about; it is a know exactly what to do about; it is a ““necessary evilnecessary evil””that must be lived with to protect sales.that must be lived with to protect sales.

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The The ““Throughput WorldThroughput World””

Increasing Increasing ““TT”” is unquestionably #1 because it has the is unquestionably #1 because it has the greatest potential impact on the bottom line.greatest potential impact on the bottom line.Decreasing Decreasing ““II”” is #2 because excess WIP and finished is #2 because excess WIP and finished goods jeopardize future throughput.goods jeopardize future throughput.Decreasing Decreasing ““OEOE”” is #3 because significant reductions is #3 because significant reductions (workforce reductions) usually jeopardize future (workforce reductions) usually jeopardize future throughput.throughput.

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Financial IssuesFinancial Issues

TOC is a management tool, not a financial toolTOC is a management tool, not a financial tool

Not used to determine inventory valuesNot used to determine inventory values

Not used to allocate overhead to inventoryNot used to allocate overhead to inventory

Does not comply with GAAPDoes not comply with GAAP

Does indicate how to use available resources most Does indicate how to use available resources most effectivelyeffectively

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ConclusionConclusion

In the throughput world, constraints become the main tools In the throughput world, constraints become the main tools of management and the previous tool, product cost, can be of management and the previous tool, product cost, can be discarded.discarded.

theory of constraints - memorial university of newfoundlandadfisher/7943-05/lean/10 toc.pdf · 2...

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