Theory of Constraints

constraint

any factor that limits the performance of a system and restricts its output

A business system/process would have at least one constraint or bottleneck, otherwise?

its output would only be limited by market demand

bottleneck method

pays attention to the contribution method at the bottleneck rather than each individual product

traditional method

producing products with the highest contribution margin (often used by non-manufacturing processes)

relevant performance and capacity measures for the TOC

- inventory - throughput (rate at which a system generates money through sales) - operating expense - utilization

contribution margin

the amount each product contributes to profits and overhead (fixed costs not considered)

capacity

the maximum rate of output of a process or a system

throughput time

the total elapsed time from the start to the finish of a job or a customer being processes at one or more work centers

3 kinds of constraints which can be identified:

1) *physical* - usually machine, labor, or workstation capacity or material shortages, could also be space or quality 2) *market* - demand is less than capacity 3) *managerial* - policy, metrics, or mindsets that create constraints which impede work flow

3 ways to identify a bottleneck

1) WIP build-up 2) longest processing time 3) utilization > 100%

Steps for implementation of the TOC

1) identify system bottleneck(s) 2) exploit the bottleneck(s) 3) subordinate all other decisions to step 2 4) elevate the bottleneck(s) 5) do not let inertia set in - continue to identify and manage constraints as they change

Bottleneck location can be identified in 2 ways

1) it has the highest total time per unit processed 2) it has the highest average utilization and total workload

7 key principles of the TOC

1. Focus should be on balancing flow, not on balancing capacity 2. Maximizing the output and efficiency of every resource may not maximize the throughput of the entire system 3. An hour lost at a bottleneck or a constrained resource is an hour lost for the whole system. In contrast, an hour saved at a non-bottleneck resource is a mirage, because it does not make the whole system more productive 4. Inventory is needed only in front of the bottlenecks to prevent them from sitting idle and in front of assembly and shipping points to protect customer schedules. Building inventories elsewhere should be avoided 5. Work, which can be materials, information to be processed, documents, or customers, should be released into the system only as frequently as the bottlenecks need it. Bottleneck flows should be equal to the market demand. Pacing everything to the slowest resource minimizes inventory and operating expenses 6. Activating a non-bottleneck resource (using it for improved efficiency that does not increase throughput) is not the same as utilizing a bottleneck resource (does lead to increased throughput). Activation of non-bottleneck resources cannot increase throughput, nor promote better performance on financial measures. 7. Every capital investment must be viewed from the perspective of its global impact on overall throughput (T), inventory (I), and operating expense (OE)

The GOAL Video: Repeat

Bearington: NCS-10 no longer a bottleneck, market became the constraint (subordinated all decisions to this, started manufacturing in small batches)

The GOAL Video: Elevate

Bearington: improved level of productivity of bottleneck machine by adding older machine for excess capacity Hike: spread items in Herbie's pack among everybody's packs

The GOAL Video: Identify

Bearington: new machine's capacity (NCS-10) couldn't handle demand Hike: Herbie was the slowest

The GOAL Video: Subordinate

Bearington: non-bottleneck machines output made to match max capacity of bottleneck Hike: Herbie started leading the group

The GOAL Video: Exploit

Bearington: staggered shifts, lunches and breaks; improved quality procedures; everybody in plant told to focus on improving capacity of NCS-10

bottleneck

a special type of constraint that relates to the capacity shortage of a process and is defined as any resource whose available capacity limits the organization's ability to meet the service or product volume, product mix, or fluctuating requirements demanded by the marketplace

theory of constraints (TOC)

a systematic management approach that focuses on actively managing those constraints that impede a firm's progress toward its goal of maximizing profits and effectively using its resources developed about 30 years ago by *Eli Goldratt* outlines deliberate process for identifying and overcoming constraints focuses not just on efficiency of individual processes but also on bottlenecks which constrain the system as a whole

Chief concept of the TOC

bottlenecks should be scheduled to maximize their throughput of services or products while adhering to promised completion dates *underlying assumption*: demand is greater than or equal to the capacity of the process that produces the service or product, otherwise instead of internal changes marketing must work toward promoting increasing demand

floating bottlenecks

can be created by variability in workload for front-office, high customer contact/divergence service processes in these situations, lower utilization rates are preferred (allow greater slack to absorb unexpected surges in demand)

According to the TOC view, what represents inventory?

every capital investment in the system (including machines and WIP) because they could all potentially be sold to make money

The exploit step focuses on?

maximizing throughput at the bottleneck

subordinate

means producing at the rate of the bottleneck