Managing Processes: Theory of Constraints

By Dr.T.V.Subramanian

Theory of Constraints

Summary of Goal Applying the Theory Ten Commandments

Three Operational Measures

(Adapted from the publications by E. Goldratt)

Throughput (TP): The money coming into the firm Inventory: The money invested in materials intended for sale Operating Expense (OE): Money spent to convert inventory into throughput over a specified period of time
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Net Profit

ROI

Cash Flow

TP

Inventory

OE

Net Profit

ROI

Cash Flow

TP

Inventory

OE

Cost World vs. Throughput World

Cost World
Measures:
1. 2. 3.

Operating Expense Throughput Inventory

Objective: Reduce cost Improvement by reducing cost of any sub-process

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Cost World vs. Throughput World..

1. 2. 3.

Throughput world
Measures:
Throughput Inventory Operating Expense

Objective: Increase throughput Improvement by.

Hike Analogy

trail = work scouts = people/work centers walking rate = rate of work lead scout = first worker raw material = untraversed trail distance between scouts = WIP

Problem: reduce spreading without increasing the total time to complete the hike
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A Troop Analogy
Raw Material Finished Goods

Work-In-Process
(Next few slides adapted from, The Race, by Goldratt)
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Solution 1: Arrange troops so that the slowest is in front

Solution 2: Put a drummer at the front to set the pace. Have the sergeants constantly urge the soldiers to close any gaps.

Drummer: material management system Sergeant: expeditor

Solution 3: Rope the soldiers together like mountain climbers

Henry Ford Dr. Ohno

The Just-in-Case or Push System

Drum that dictates when raw material will be released is held by the excess capacity of the first operation

Raw Material

Finished Goods

Result

Inventory is high Current throughput is protected Future throughput is in danger

Just-in-time System

The drum is held by the marketing demands

Raw material
Finished Goods

Result

Inventory is low Current throughput is in danger Future throughput is protected

Drum-Buffer-Rope Approach

Since the weakest soldier dictates pace

tie weakest soldier to the front row to protect overall pace, provide some slack in the rope

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Synchronized Manufacturing: The Drum-Buffer-Rope Way

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Synchronized Processes

Identify the constraint(s) Ensure maximum throughput through the constraint Release work according to the schedule determined by the process constraints Do not release work in order to keep other resources busy Focus continuous improvement on the critical resource
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Need a process of on-going improvement

The Process Of On Going Improvement

1. Identify the constraint 2. Exploit the constraint 3. Subordinate all other decisions to the necessity to exploit the constraint 4. If after #2 and #3 more capacity is needed to meet market demand, Elevate the constraint. 5. Go back to #1, but dont let inertia become the systems constraint.

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Step 1 Identify the constraint The constraint(s) can be internal or external to your enterprise; an internal constraint is preferable. The constraint(s) can be tangible (like a piece of machinery), or intangible (like a policy). Most of the time, (80%?), the constraint(s) is a policy.

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Step 2
Exploit the constraint

Get the most possible out of the existing capacity at the constraint. Utilization and efficiency are crucial at the constraint. This step is often treated as indistinguishable from step 4, but it is vital to Exploit before elevating.

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Step 3 Subordinate all other decisions to the necessity to exploit the constraint The focus is on being a high quality, reliable supplier to, or customer of the constraint. Utilization and efficiency are not factors to measure at the non-constraint resources. This step is often skipped, and thereby the majority of financial benefit of TOC is lost! This is the toughest step, because you must change your measurements/culture.

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Step 4
If after #2 and #3 more capacity is needed to meet market demand, Elevate the constraint.

Add more capacity through capital investment or outsourcing, or off-load the constraint by defining alternative routings, process or product redesign, etc. Often times, Exploitation and Subordination are sufficient to reach the needed output; do not increase investment too soon!

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Step 5
Go back to #1, but dont let inertia become the systems constraint.

Often times, when a new constraint is identified, it is necessary to change many of the policies you just made! CAUTION! The long term strategic application of TOC does not call for the continuous removal of constraints; rather, the idea is to choose where the constraint should be in order to best exploit market opportunities, and then keep it there!
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The TOC Bottom Line

There really is no choice in the matter. Either you manage constraints or they manage you. The constraints will determine the output of the system whether they are acknowledged and managed or not.
Noreen, Smith, and Mackey, The Theory of Constraints and its Implications for Management Accounting (North River Press, 1995)

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Exercise 1

The market potential (demand) for Product A and Product B exceeds the plants capacity. Both these products are equally profitable. W and V are two different skills required to produce these products. There is only one worker W and one worker V at any given time in the plant. The plant operates 24 hours a day, 5 days a week (total 7200 min./week). A set-up of 180 minutes is required of worker W to start production and whenever she switches from one product to another. No scrap occurs in this set-up. What should be batch size of Product A and Product B that worker W must produce? Worker W 5 min/unit Worker W 5 min/unit -> -> Worker V 10 min/unit Worker V 10 min/unit -> -> Product A Product B
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Batch size
X 10 50 36

W
180+5X 230 430 360

V
10X 100 500 360

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Drum-Buffer-Rope
Raw Materials

Drum

A Rope tying Market Demand to the CCR schedule

A
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B
30

C
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D
15

E
30

F
30
Finished Goods

Market Demand

Major Capacity Constraint A Rope tying the gating operation to the buffer

Time Buffer

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Drum-Buffer-Rope

Two major constraints on a firm

The market demand for its products The capacity of the CCR

Thus, we need to base the schedule on the CCR by taking into account only its limited capability and the market demands that it is trying to satisfy
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Drum-Buffer-Rope

Once the CCRs schedule is established,

we need to determine how to schedule all the non-constraining resources Schedule for succeeding operations can be derived easily

After a part has been processed at the CCR it is scheduled to start at the next operation

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Drum-Buffer-Rope

The challenge is to schedule the preceding operations and to protect the CCR from disturbances that might occur at the preceding resources

If disturbances at preceding operations can be overcome in two days, then set the time buffer at three days Schedule the operation immediately preceding the CCR to complete the needed parts three days before they are scheduled to run at the CCR Then back schedule the remaining operations
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Drum-Buffer-Rope

The procedure laid down so far will protect the throughput of the plant BUT, meeting customer due dates is also important and needs to be protected

Need to create a buffer of parts at final assembly for items that do not go through the CCR to protect against disturbances in procurement and manufacturing
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Drum-Buffer-Rope
Final Assembly

Subassembly CCR Subassembly

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How to Beat the Drum

A CCR limits the throughput of the plant and controls due-date performance Must ensure that the CCR is not scheduled to produce more than its capacity and not to waste any of its capacity by allowing any slack in its schedule
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How to Beat the Drum

First:

Schedule forward in time form the present

Decide what product to schedule first, second, etc... When the available capacity of the CCR for the first day is used up, begin scheduling the second day, etc...

The only remaining problem is how to choose the sequence in which the various products are to be done by the CCR
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How to Beat the Drum

Customers due dates for the various products will provide the first cut schedule There are four case where we may need to modify the customer due-date schedule for sequencing products through the CCR

Completion times for the various products are greatly different One CCR feed another CCR Setups on the CCR A CCR produces more than one part for the same product
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Locating the Time Buffers

Concentrate protection not at the origin of disturbance, but before critical operations Inventory of the right parts in the right quantities at the right times in front of the right operations gives high protection Inventory anywhere else is destructive
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Ropes

Release and process materials according to the schedule determined by the plants constraints Do not release materials in order to supply work to workers, or for any other reason

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The following diagram contains the product structure, routing, and processing time information for product A. The process flows from the bottom of the diagram upward. Assume one unit of items B, C, and D are needed to make each A. The manufacturing of each item requires three operations at machine centers 1, 2, and 3. Each machine center contains only one machine. a machine setup time of 60 minutes occurs when ever a machine is switched from one operation to another (within the same item or between items) Design a schedule of production for each machine center that will produce 100 As as quickly as possible 38

Example

Example
A
1 1 1

B
B3 1 7 C3

C
2 15

D
D3 3 5

B2 2

C2

10

D2 2

B1 1

C1

D1 3 10
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Example

Solution:

Identify the bottleneck machine To keep the bottleneck busy, schedule the item first whose lead time to the bottleneck is less than or equal to the bottleneck processing time Forward schedule the bottleneck Backward schedule the other machines to sustain the bottleneck schedule Remember that the transfer batch size does not have to match the process batch size

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Example

The bottleneck machine is calculated by summing the processing times of all operations to be performed at a machine

Machine 1 B1 5 B3 7 C2 10 22

Machine 2 Machine3 B2 3 C1 2 C3 15 D3 5 D2 8 D1 10 26* 17

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Example

Machine 2 is identified as the bottleneck, so we schedule machine 2 first. From the product structure diagram, we see three operations that are performed at machine 2 B2, C3, and D2. If we schedule item B first, a B will reach machine 2 every 5 minutes (since B has to be processed through machine 1 first), but B takes only 3 minutes to process at machine 2, so the bottleneck will be idle for 2 minutes of every 5 minutes. A similar result occurs if we schedule item D first on machine 2. The best alternative is to schedule item C first
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Example

We will process the items in batches of 100 to match our demand requirements
Bottleneck Completion Time Total Idle Total Sequence for 100 As (mins) Time (min) Processing Time (min) C3, B2, D2 2,737 994 3,731 C3, D2, B2

3,135

1,447

4,582

The bottleneck sequence is C3, B2, D2 Machine center 1 sequence is C2, B1, B3 Machine center 3 sequence is C1, D1, D3
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Quality Implications

More tolerant than JIT systems

Excess capacity throughout system, except at the bottleneck

Quality control needed before bottleneck Want quality assurance at each process downstream from the bottleneck to ensure passing product is not scrapped

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Batch Sizes

What is the batch size?

One?

Transfer batch

Infinity?

Process batch

Using transfer batches that are smaller than the process batch quantity causes shorter production times and less WIP inventory
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How to Treat Inventory

The negative impact of inventory is not only in its additional carrying costs, but in

longer lead times creating problems with engineering changes A measurement of the value of inventory and the time it stays within an area

Dollar Days

(value of inventory)(number of days within a department)

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How to Treat Inventory

Benefits from Dollar Day Measurement

Marketing

discourages holding large amounts of finished goods inventory discourages placing large purchase orders that on the surface appear to take advantage of quantity discounts discourage large work in process and producing earlier than needed
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Purchasing

Manufacturing

Comparing SM to MRP

MRP uses backward scheduling

Works backward in time from the desired completion date (BOM explosion)

Synchronous manufacturing uses forward scheduling

Focuses on the critical resources which are scheduled forward in time, ensuring the loads placed on them are within capacity The non-bottleneck resources are then scheduled to support the resource
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JIT:

Comparing SM to JIT
is limited to repetitive manufacturing requires a stable production level does not allow very much flexibility in the products produced still requires work in process when used with kanban so that there is "something to pull"

Vendors need to be located nearby because the system depends on smaller, more frequent deliveries
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Other Books by Goldratt

The critical chain

project management

Necessary but not sufficient

ERP/distribution/supply chain

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Goldratts Rules of Production Scheduling

Do not balance capacity balance the flow. The level utilization of a nonbottleneck resource is not determined by its own potential but by some other constraint in the system. Utilization and activation of a resource are not the same. An hour lost at a bottleneck is an hour lost for the entire system. An hour saved at a nonbottleneck is a mirage.

Goldratts Rules of Production Scheduling (Continued)

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 systems constraints. Lead time is a derivative of the schedule.

Thank You

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