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’d)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 pointBefore 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 make money now and in the futureProvide security and satisfaction toEmployees now and in the futureProvide satisfaction to customers now 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 unitsMaximize performance of each unitGlobal optimum = sum of local optima ?MarketingBiddingPurchasing ProductionPackagingShippingMAXIMIZETOC ApproachTOC ApproachLocal improvements result in system improvements only for a FEW variablesThose variables are called CONSTRAINTSMarketing Bidding Purchasing Production Package ShippingSome TOC TerminologyConstraint - variable where a significant improvement in local performance causes a significant improvement in global performanceBottleneck - Any resource whose capacity is less than the demand placed on itLet’s consider Volunteer Insurancewhose insurance process consists of five sequential steps as shown below. Let’s assume that market demand is 10 policies/dayHow 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/dayVolunteer Insurance (cont’d)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/daySo, the essence of TOC is…If you want to achieve (get closer to) your goal, you mustIdentify your constraintFocus on itFollow throughTOC - A Process of Ongoing ImprovementStep 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 2Step 4: Elevate the system's constraint(s)Step 5: If a constraint is broken in Step 4, go back to Step 1Step 1Identify 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 2Decide 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/dayStep 3Subordinate 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 4If 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 5Go back to #1, and don’t let inertia become the system’s constraintwhen 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?SummaryA five-step process of focusing…IdentifyExploitSubordinateElevateStart OverSome of Goldratt’s Scheduling RulesDo not balance capacity – balance flowUtilization of a non-bottleneck resource is determined by the system constraintsUtilization and activation of a resource are not the sameAn hour lost at the bottleneck is an hour lost for the entire systemAn hour saved at a non-bottleneck is a mirageBottlenecks govern both throughput and inventoryPriorities can be set only by examining the system’s constraintsMeasuring ProgressOnce 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
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