Slide 1Finding the focal pointThe GoalThe Goal (continued)Theory of Constraints (TOC)How to Cope?TOC ApproachSome TOC TerminologyLet’s consider Volunteer InsuranceVolunteer Insurance (cont’ed)So, the essence of TOC is…TOC - A Process of Ongoing ImprovementStep 1Step 2Step 3Step 4Step 5SummarySome of Goldratt’s Scheduling RulesMeasuring ProgressWhat measures should be used?What measures should be used?What ifBut then…Throughput (T)Inventory and Investment (I&I)Operating Expense (OE)Are measurements interrelated?Relating TOC with traditional measuresMeasurement RelationsAccording to “Throughput World”An Example: A manufacturing company1BA 341 – Lean OperationsDr. Bogdan BichescuIntroduction to The Theory of Constraints (TOC)Finding the focal pointBefore a business can properly focus, one necessary condition is that they answer the following question: What is the Goal of a for profit enterprise?The GoalTo makeMONEYnow and in the futureProvide security and satisfaction toemployeesnow and in the futureProvide satisfaction tocustomersnow and in the futureThe Goal (continued)That is… If your goal is to satisfy customers, it is absolutely necessary that you make money and that you provide security and satisfaction to employees... Likewise, if your goal is to provide secure and satisfying jobs, you also have to make money and satisfy your customers...…or you won’t be in business in the future!Theory of Constraints (TOC)What is blocking you from getting closer to your Goal?How to Cope?Conventional Wisdom suggests that:Break the organization into smaller unitsMaximize performance of each unitGlobal optimum = sum of local optima ?MarketingBiddingPurchasing ProductionPackagingShippingMAXIMIZETOC ApproachTOC ApproachLocal improvements result in system improvements only for a FEW variablesThose variables are called CONSTRAINTSMarketing Bidding Purchasing Production Package ShippingSystem constraintSome TOC TerminologyConstraint - variable where a significant improvement in local performance causes a significant improvement in global performanceBottleneck - Any resource whose capacity is less than the demand placed on itLet’s consider Volunteer Insurancewhose insurance process consists of five sequential steps as shown below. Let’s assume that market demand is 10 policies/dayHow many bottlenecks are there?Distribution Underwriting Rating Policy WritingAgent20 policies/day 15 policies/day 7 policies/day 9 policies/day 15 policies/dayDistribution Underwriting Rating Policy WritingAgent20 policies/day 15 policies/day 7 policies/day 9 policies/day 15 policies/day20 policies/day = capacity of the Agent. Process Time of a Station – the time needed to produce a single unit or a batch of units; the reciprocal of capacity, e.g., process time of the agent is 1/20 (policies/day) = 0.05 days/policy.Volunteer Insurance (cont’ed)How many constraints are there?Can Volunteer Insurance meet demand?What if Rating could process 11 policies/day?What if we hire an additional underwriter and now Underwriting can process 14 policies/day?Distribution Underwriting Rating Policy WritingAgent20 policies/day 15 policies/day 7 policies/day 9 policies/day 15 policies/dayBottleneck Time – the time of the longest process (or slowest step) in a system  the process time of the constraint/bottleneck. In our case, it is 0.14 days.Throughput Time – the time it takes the product (e.g., an insurance policy) to go through the entire system, from start (Agent) to finish (Policy Writing). In our example, the throughput time is 0.05 + 0.07 + 0.14 + 0.11 + 0.07 = 0.44 (days).So, the essence of TOC is…If you want to achieve (get closer to) your goal, you mustIdentify your constraintFocus on itFollow throughTOC - A Process of Ongoing Improvement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 the decisions in Step 2Step 4: Elevate the system's constraint(s)Step 5: If a constraint is broken in Step 4, go back to Step 1Step 1Identify the constraint The constraint limits the organization’s performance relative to its goal. Why? The constraint(s) can be internal to the organization or external (e.g., demand is less than the organization’s capacity) Distribution Underwriting Rating Policy WritingAgent20 policies/day 15 policies/day 7 policies/day 9 policies/day 15 policies/dayDemand=10 policies/dayStep 2Decide how to Exploit the constraint Get the most that is reasonably possible out of the capacity-constrained resource Utilization and efficiency are crucial. Why? Distribution Underwriting Rating Policy WritingAgent20 policies/day 15 policies/day 7 policies/day 9 policies/day 15 policies/dayDemand=10 policies/dayBufferStep 3Subordinate all other decisions to the necessity to exploit the constraint Be a good customer of the constraint. Utilization and efficiency are not factors to emphasize at the non-constraint resources. BufferDistribution Underwriting Rating Policy WritingAgent20 policies/day 15 policies/day 7 policies/day 9 policies/day 15 policies/dayDemand=10 policies/day7 policies/day 7 policies/day 7 policies/day 7 policies/day 7 policies/dayCapacityDesired processing rateStep 4If after #2 and #3 more capacity is needed to meet demand, then Elevate the constraint Add more capacity through capital investment or outsourcing, or off-load the constraint by process or product redesign Exploitation and Subordination are often sufficient to reach the needed output Distribution Underwriting Rating Policy WritingAgent20 policies/day 15 policies/day 14 policies/day 9 policies/day 15 policies/dayDemand=10 policies/dayStep 5Go back to #1, and don’t let inertia become the system’s constraintwhen a new constraint is identified, it is often necessary to change policies you just made! CAUTION! The long term strategic application of TOC does not call for the continuous removal of the constraint; the idea is to choose where the constraint should be in order to best exploit business opportunities, then keep the constraint stationary!E.g., consider our previous example, is it profitable to further increase capacity in order to meet demand?SummaryA five-step process of focusing…IdentifyExploitSubordinateElevateStart OverSome of Goldratt’s Scheduling