BA 341 1st Edition Lecture 4 Outline of Last Lecture I Theory of Constraints TOC II The Goal III Example of TOC IV Vocab V Review Outline of Current Lecture VI Steps of the Theory of Constraints VII Goldratt s scheduling rules VIII Measurements Current Lecture Theory of Constraints The steps for the process of ongoing improvement 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 Step 2 Decide how to Exploit the constraint Get the most that is reasonably possible out of the capacity constrained resource Cannot afford any down time Utilization and efficiency are crucial 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 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 Step 5 Go back to 1 and don t let inertia become the system s constraint 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 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 Recap A five step process of focusing Identify Exploit Subordinate Elevate Start Over Some of Goldratt s Scheduling Rules 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 Capacity rate Process time of the system the process time of the slowest station 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 What measure should be used Traditional measures o Net Profit NP o Efficiency o Utilization o Return On Investment ROI o Cash Flow Hard to determine at worker level the effect of their actions on NP or ROI Therefore measures like efficiency and utilization more frequent o Utilization Actual output Design Capacity o Efficiency Actual output Effective Capacity If traditional measures are not accurate what should be used o 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 Revenue Variable Costs Direct Material Costs Inventory and Investment I I All the money currently tied up inside the system Consists of two categories 1 Investment in machinery buildings etc 2 Inventory in the form of raw materials work in process WIP and finished goods FG Operating Expense OE All the money the system spends to turn inventory into throughput All expenses are lumped together and usually considered as one big expense All employee labor expenses are almost always Operating Expense direct indirect sick operating etc Are measurements interrelated If I monitor Throughout T Inventory and Investment I I and Operating Expense OE How do I know that my Net Profit NP Return on Investment ROI and Cash Flow CF are according to targets Relating TOC with traditional measures Net Profit Throughput Operating Expense T OE Return on Investment Net Profit Inventory Investment T OE I I Inventory Turns Throughput Inventory Investment T I I Productivity Throughput Operating Expense T OE