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UT Knoxville BUAD 341 - Theory of Constraints
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BA 341 1st Edition Lecture 3 Outline of Last Lecture I. Productivity measuresII. Importance of productivityIII. Impact of productivityOutline of Current Lecture IV. Theory of Constraints (TOC)V. The GoalVI. Example of TOCVII. VocabVIII. Review Current LectureThe Theory of ConstraintsBefore a business can properly focus, one necessary conditions is that they answer the followingquestion: What is the Goal of a for profit enterprise?- The Goal is to make money now and in the futureo Provide security and satisfaction to employees now and in the futureo 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 unitso 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 optimao Maximize  Marketingo Maximize Biddingo Maximize Purchasingo Maximize Productiono Maximize Packagingo Maximize ShippingTheory 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- 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.VocabDistribution Underwriting Rating Policy WritingAgent20 policies/day 15 policies/day 7 policies/day 9 policies/day 15 policies/dayProcess Time of a Station – the time needed to produce a single unit or a batch of units; the reciprocal of capacityProcess 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 improvementStep 1: Identify the system’s constraints.Step 2: Decide how to exploit the system’s constraintsStep 3: Subordinate everything else to the decisions in Step 2Step 4: Elevate the system’s constraintsStep 5: If a constraint is broken in Step 4, go back to Step


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UT Knoxville BUAD 341 - Theory of Constraints

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