BA 341 5th Edition Lecture 5 Outline of Last Lecture I Steps of the Theory of Constraints II Goldratt s scheduling rules III Measurements Outline of Current Lecture IV Objectives V Throughput Perspective VI Continuing with the Process VII Cost World Approach Current Lecture Application of the Theory of Constraints P Q Exercise Objectives Understanding the role played by the Theory of Constraints in decision making Which products to make New equipment necessary How should we price our products These questions aren t only about finding constraints this process can be applied to other things Which products should we produce Goldratt s P Q example The Haystack Syndrome Goldratt 1991 A process can produce 2 products P and Q P Process Time 10 D 10 15 C A 5 10 C B Q 5 5 10 C B D 25 10 B A 20 20 GradeBuddy 25 is best These notes 5 represent a 20 detailed interpretation of the professor s lecture used as a supplement to your own notes not as a substitute Component P3 P 1 P2 Q1 Q2 Component Cost Cost and Demand Info Raw materials sum of P3 P1 P2 P Q require processing on four machines processing time minutes per product are Each machine runs 2400 mins week fixed costs 4000 week Decision Analysis Goal maximize our profit Decision output How many units of P and Q should we make Model Inputs Costs of components of P and Q machining times for components sales price of P and Q maximum machine time available etc Using the Throughput Perspective Step 1 can we make 110 units of P and all 60 units of Q o Ex Time needed on machine A o 110 units of P x 15 min unit 60 units of Q x 10 min unit 2250 min o Cannot satisfy demand for both products because Machine B is over 2 400 minutes Step 2 Exploit the constraint o Which product generates the most throughput on the bottleneck machine Why Product Q 55 per unit 35 mins 1 57 min Product P 45 per unit 10 mins 4 50 min o Which product is most profitable to produce Answer P generates the highest profit per unit of time on the bottleneck machine o Which is the most profitable product mix Answer 2400mins 10 mins unit 240 units Demand 110 produce 110 units to meet demand 1100 mins Make product Q in the remaining time i e 1300 mins 35 mins unit 37 units o The Throughput World Approach Profit is 110 units of P x 45 unit 37 units of Q x 55 unit 4 000 6 985 4 000 2 985 Going on with the process o Now how can we Subordinate the system to our production plan Make sure that all resources work toward producing 110 units of P and 37 units of Q o How about elevating the constraint Increase Capacity What changes would you make if we increased capacity of machine B to 3 300 minutes Does the constraint change There would be no constraint What is the maximum acceptable cost for this elevation Can produce 110 units of P and 60 units of Q 60 37 23 more units of Q Additional profit 23 55 1 265 This is not beneficial because the company would be paying more than it is getting in return 2000 1265 An alternative approach Cost World approach How would the P Q problem be approached using conventional wisdom i e the cost world approach o Rank the products in order of revenues margin per unit Highest to lowest Answer Q 55 P 45 Which product appears to be the one that you would like to produce the most Why o Answer Q as it has the highest profit margin per unit Which is the most profitable product mix o 2400mins 35mins unit 68 units Demand 60 produce 60 units of product Q 2 100 minutes to meet demand o Use remaining time to produce product P produce 300mins 10mins unit 30units The Cost World Approach Profit is o 60 units of Q x 55 unit 30 units of P x 45 unit 4 000 4 650 4 000 650 o This is 2 335 less than the Theory of Constraints approach