Introduction to The Theory of Constraints TOC BA 341 Lean Operations Dr Bogdan Bichescu 1 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 Goal To make money now and in the future Provide security and satisfaction to Employees now and in the future Provide satisfaction to customers now and in the future The 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 MAXIMIZE Marketing Shipping Bidding Packaging Purchasing Production TOC Approach TOC Approach Local improvements result in system improvements only for a FEW variables Those variables are called CONSTRAINTS Marketing Bidding Purchasing Production Package Shipping Some 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 Let s consider Volunteer Insurance whose insurance process consists of five sequential steps as shown below Let s assume that market demand is 10 Agent Distribution Underwriting Rating policies day 20 policies day 15 policies day 7 policies day 9 policies day Agent Distribution Underwriting Rating How many bottlenecks are there 20 policies day 15 policies day 7 policies day 9 policies day Policy Writing 15 policies day Policy Writing 15 policies day Volunteer Insurance cont d How many constraints are there Agent 20 policies day Distribution Underwriting Rating Policy Writing 15 policies day 7 policies day 9 policies day 15 policies day 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 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 through TOC 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 Step 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 Agent 20 policies day Distribution Underwriting Rating 15 policies day 7 policies day 9 policies day Policy Writing 15 policies day Demand 10 policies day Step 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 Agent 20 policies day Distribution Underwriting Rating 15 policies day 7 policies day 9 policies day Policy Writing 15 policies day Demand 10 policies day Step 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 Agent Distribution 15 policies day 7 policies day 7 policies day Buffer 20 policies day Underwriting Rating 7 policies day 9 policies day 15 policies day 7 policies day 7 policies day 7 policies day Capacity Desired processing rate Policy Writing Demand 10 policies day Step 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 Agent 20 policies day Distribution Underwriting Rating 15 policies day 14 policies day 9 policies day Policy Writing 15 policies day Demand 10 policies day Step 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 Summary A five step process of focusing Identify Exploit Subordinate Elevate Start Over Some of Goldratt s Scheduling Rules Do not balance capacity balance flow Utilization of a non bottleneck resource is determined by the system constraints Utilization and activation of a resource are not the same An hour lost at the 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 Priorities can be set only by examining the system s constraints Measuring Progress Once the Goal is identified the next crucial need for success in achieving the goal is to identify which measurements will be used to judge success Tell me how you will measure me and I will tell you how I will behave The Goal What measures should be used Traditional measures Net Profit NP Efficiency Utilization Return On Investment ROI Cash Flow Are you using the right measurements The Goal What measures should be used Hard to determine at worker level the effect of their actions on NP or ROI Therefore measures like efficiency and utilization more frequent Utilization Actual output Total Capacity Efficiency Actual output Effective Capacity Are they are linked to NP and ROI How What if Efficiency and or utilization are increased for a non bottleneck resource Does NP increase How about ROI But then If traditional measures are not accurate what should be used TOC proposes Throughput T Inventory and Investment I I Operating Expense OE Throughput T The rate at which sales dollars money are entering the organization Only generated by your system get counted value added i e raw materials and purchased services e g heat treating don t count T Sales