BA 341 1st Edition Lecture 3 Outline of Last Lecture I Productivity measures II Importance of productivity III Impact of productivity Outline of Current Lecture IV Theory of Constraints TOC V The Goal VI Example of TOC VII Vocab VIII Review Current Lecture The Theory of Constraints Before a business can properly focus one necessary conditions is that they answer the following question What is the Goal of a for profit enterprise The Goal is to make money now and in the future o Provide security and satisfaction to employees now and in the future o Provide satisfaction to customers now and in the future 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 The next question that needs to be answered What is blocking you from getting closer to your Goal Convention Wisdom suggests that o Break the organization into smaller units o Maximize performance of each unit output These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute o Global optimum does not equal the sum of local optima o Maximize Marketing o Maximize Bidding o Maximize Purchasing o Maximize Production o Maximize Packaging o Maximize Shipping Theory of Constraints Approach local improvements result in system improvements only for a few variables These variables are called Constraints Marketing Bidding Purchasing Production Package Shipping These are all Constraints which is a variable where a significant improvement in local performance causes a significant improvement in global performance A Bottleneck is any resource whose capacity is less than the demand placed on it An example Let s Consider Volunteer Insurance Whose insurance processs consists of five sequential steps as shown below Let s assume that market demand is 10 policies day Agent 20 policies day Vocab Distribution Underwriting Rating Policy Writing 15 policies day 7 policies day 9 policies day 15 policies day How many bottlenecks are there o 2 Underwriting and Rating are bottlenecks because they are under 15 policies day How many constraints are there o 1 Underwriting because it has the least amount of policies day Can Volunteer Insurance meet demand o No because they can only produce as much as the slowest system What if Rating could process 11 policies day o No it would not improve Volunteer Insurance because it did not improve the restraint step What if we hire an additional underwriter and now underwriting can process 14 policies day o Volunteer Insurance is improved but Rating is now the constraint o The slowest system dictates the measurement of the whole system Process Time of a Station the time needed to produce a single unit or a batch of units the reciprocal of capacity Process Time of a System the time of the longest process in a system Process Cycle Time the time it takes the product to go through the entire system from start to finish Theory of Constraints A process of ongoing improvement Step 1 Identify the system s constraints Step 2 Decide how to exploit the system s constraints Step 3 Subordinate everything else to the decisions in Step 2 Step 4 Elevate the system s constraints Step 5 If a constraint is broken in Step 4 go back to Step 1
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