BA 341 1st Edition Lecture 4 Outline of Last Lecture I. Theory of Constraints (TOC)II. The GoalIII. Example of TOCIV. VocabV. Review Outline of Current Lecture VI. Steps of the Theory of ConstraintsVII. Goldratt’s scheduling rulesVIII. MeasurementsCurrent LectureTheory of Constraints – The steps for the process of ongoing improvementStep 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 constraintThese 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 OverSome 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 stationMeasuring 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 successWhat measure should be used?- Traditional measureso 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 Capacityo 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&IProductivity = Throughput / Operating Expense =