Throughput World

2Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

Systems Thinking and TOC

TOC Premise 1: The Goal of a business is to make more money, … in the present and in the future Max NPV.

TOC Premise 2: There is one or at most few constraint(s) determine its output.

Lean Principle: Time lost at a bottleneck resource results in a loss of throughput for the whole enterprise (entire supply chain). Time saved a non-bottleneck resources is a mirage.

3Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

Systems Thinking and TOC

Just like the links of a chain work together to pull or lift objects, the processes within the enterprise work together to generate profit for the shareholders.

The ability of the chain is limited because the chain is only as strong as its weakest link.

Integrated decision making. “Big Picture” Thinking. Thinking “Globally” rather than “Locally”;

understanding how localized decision making can affect the overall goal.

4Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

Local vs. Global Optimization

Local optimization: the complex problem of optimizing system performance is addressed by breaking down the system into smaller, more manageable pieces.

Units were treated as either cost centers or profit centers and assigned targets.

The logic if every unit improved then, ipso facto, the entire enterprise would improve. (Lean Principle)

However it is not enough to promote isolated efforts that focus on improving specific functions.

5Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

Local Optimization vs. Global Optimization

Global Optimization: Install measures that are truly global, i.e., measures that encourage actions consistent with the overall goals of the enterprise.

These measures are based on the a throughput world perspective, an approach that focuses on meeting the goals through a growth strategy rather than through cutting costs.

6Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

The 5 Step TOC Focusing Process

Step 1: Identify the System’s Constraint(s)Step 2: Decide how to Exploit the System’s

ConstraintsStep 3: Subordinate Everything Else to that

DecisionStep 4: Elevate the System’s ConstraintsStep 5: If a Constraint Was Broken in previous

Steps, Go to Step 1

THIS IS THE PROCESS OF ONGOING IMPROVEMENT

7Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

Types of Constraints

Physical Constraints. Physical, tangible; easy to recognize as constraint. Machine capacity, material availability, space availability, etc. H/C/F Resources. Eliminate periods of idle time Reduce setup time and run time per unit Improve quality control Purchase additional capacity

The easiest to identify

8Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

Identifying Physical Constraints; Look for WIP

A Typical WIP Inventory Profile

Ave

. WIP

Inv

ento

ry

R1 R2 R3 R4 R5 R6

9Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

Market Constraints

Market Constraints. Demand for company’s products and services is less than capacity of organization, or not in desired proportion.

Harder to identify than physical constraints A market constraint exists if the demand for

the enterprise’s products and services is less than the enterprise’s installed capacity or limits the bottom-line performance

Excess capacity is easily identified as a market constraint

10Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

Policy Constraints

Policy Constraints. Not physical in nature. the system of measures, methods and mindset that governs the strategic and tactical decisions of the company. Mindset Constraints. When thought process or culture

of the organization blocks design & implementation of measures & methods required to achieve goals. Example: Shop Supervisor has the attitude that all operators should be busy all of the time.

Measures Constraints. When the measurement system drive behaviors incongruous with organizational goals. Example: Aggressively seeking quantity discounts would lead to increased raw material inventory.

Methods Constraints. When procedures and techniques used result in actions incompatible with goals. Example: Never producing a batch of units below an EOQ.

11Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

A 1% sales commission: 2 products: Cadillacs: $40,000 Beetles: $20,000

Which product will the sales person push?Suppose the profit margins are

Cadillac: $1,500 Beetle: $2,500

Which product will the CEO want you to push?Conflicting goals (local and global).

Example of a Measures Constraint

12Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

Tell me how you will measure me and I will tell you how I will behave.

If you measure me in an illogical way, … do not complain about illogical behavior.

If you measure me in an unreasonable way, no one knows how I will behave....

Not even me.

Effect of Performance Measures

13Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

Long-term Increase or Short-term Gain?

A chain can demonstrate how the cost world focus sacrifices long term throughput increases for short-term gains

Instead of strengthening the weakest link (improving T), we focus on improving efficiency at the current level of performance (improving OE)

Example: Assume a chain of 10 links Each link = 100 lbs of carrying capacity except for one link has only 50 lbs of carrying capacity

Management unhappy with cost of maintaining the nine strong links so it sells the nine heavy links

14Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

Long-term Increase or Short-term Gain? It replaces each link with a carrying capacity of 50 lbs

which makes a truly efficient chain since every link is capable of carrying exactly same load

What is the problem? The problem is the enterprise is locked into the current performance level

It now has ten links, any one of which can break In the future, if improved performance is desired, it will

have to work all ten links in the chain The same problem occurs when enterprises eliminate

overcapacity. If business picks up, it will be harder to recruit employees, why?

Fearful of being fired in the next downsize

15Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics

The Throughput World: Five Step Focusing Process of TOC

Step 1 Identify the System’s Constraint(s)

Step 2 Decide how to Exploit the System’s Constraint(s)

Step 3 Subordinate Everything Else to that Decision

Step 4 Elevate the System’s Constraints Step 5 If a Constraint Was Broken In a

Previous Step, Go Back to Step 1