Theory Of Constraints: Chapter Twenty-three

THEORY OF CONSTRAINTS

Chapter Twenty-Three McGraw-Hill/Irwin

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives  





LO23–1: Explain the Theory of Constraints (TOC). LO23–2: Analyze bottleneck resources and apply TOC principles to controlling a process. LO23–3: Compare TOC to conventional approaches. LO23–4: Evaluate bottleneck scheduling problems by applying TOC principles.

23-2

Goldratt’s Rules of Production Scheduling 1. 2.

3. 4.

5.

Do not balance capacity, balance the flow. The level utilization of a nonbottleneck resource is not determined by its own potential but by some other constraint in the system. Utilization and activation of a resource are not the same. An hour lost at a bottleneck is an hour lost for the entire system. An hour saved at a nonbottleneck is a mirage.

23-3

Goldratt’s Rules of Production Scheduling (continued) 6.

7.

8.

9.

Bottlenecks govern both throughput and inventory in the system. Transfer batch may not, and many times should not, be equal to the process batch. A process batch should be variable both along its route and in time. Priorities can be set only by examining the system’s constraints, and lead time is a derivative of the schedule.

23-4

Goldratt’s Theory of Constraints (TOC) 1. 2. 3. 4. 5.

Identify the system constraints. Decide how to exploit the system constraints. Subordinate everything else to that decision. Elevate the system constraints. If, in the previous steps, the constraints have been broken, go back to step 1, but do not let inertia become the system constraint.

23-5

Goldratt’s Goal of the Firm 

The goal of a firm is to make money.

23-6

Performance Measurement – Financial 1.

Net profit 

2.

Return on investment 

3.

An absolute measurement in dollars

A relative measure based on investment

Cash flow 

A survival measurement

23-7

Performance Measurement – Operational 1.

Throughput 

2.

Inventory 

3.

The rate at which money is generated by the system through sales All the money that the system has invested in purchasing things it intends to sell

Operating expenses 

All the money that the system spends to turn inventory into throughput 23-8

Productivity 



Productivity typically measured in terms of output per labor hour. Does not guarantee profitability.  Has

throughput increased?  Has inventory decreased?  Have operational expenses decreased? 

Productivity is all the actions that bring a company closer to its goals.

23-9

Unbalanced Capacity 

In earlier chapters, we discussed balancing assembly lines.  The



goal was a constant cycle time across all stations.

Synchronous manufacturing views constant workstation capacity as a bad decision.  Random

variations must be handled using inventory.  When one process takes longer than the average, the time can not be made up.

23-10

Bottlenecks and Capacity-Constrained Resources  





Capacity: the available time for production Bottleneck: what happens if capacity is less than demand placed on resource Nonbottleneck: what happens when capacity is greater than demand placed on resource Capacity-constrained resource (CCR): a resource where the capacity is close to demand on the resource

23-11

Basic Manufacturing Building Blocks

23-12

Methods for Control

23-13

Time Components 1.

2.

3.

Setup time: the time that a part spends waiting for a resource to be set up to work on this same part Process time: the time that the part is being processed Queue time: the time that a part waits for a resource while the resource is busy with something else

23-14

Time Components of Production Cycle (continued) 4.

5.

Wait time – the time that a part waits not for a resource but for another part so that they can be assembled together Idle time – the unused time that represents the cycle time less the sum of the setup time, processing time, queue time, and wait time

23-15

Finding the Bottleneck 1.

Run a capacity resource profile 

2.

Obtained by looking at the loads placed on each resource by the products that are scheduled through them

Use your knowledge of the particular plant  

Look at the system in operation Talk with supervisors and workers

23-16

Saving Time 





Bottlenecks govern both throughput and inventory in the system. An hour lost at a bottleneck is an hour lost for the entire system. An hour saved at a nonbottleneck is a mirage.

23-17

Drum, Buffer, Rope

23-18

Importance of Quality 

More tolerant than JIT systems  Excess



capacity throughout system

Except for the bottleneck  Quality

control needed before bottleneck

23-19

Batch Sizes 

What is the batch size?  One?  Infinity?



Larger batch sizes require fewer setups and therefore leave more time for processing.  Desirable



for bottleneck resources.

For nonbottleneck resources, smaller batch sizes are desirable.  Reduces

WIP inventory.

23-20

How to Determine Process Batch and Transfer Batch Sizes 

A bottleneck 1.

With no setup required when changing from one product to another  

2.

Process jobs in the order of the schedule. Without setups, only sequence is important.

With setup times required to change from one product to another    

Large batch sizes combine separate jobs into the sequence. This means reaching ahead in the schedule. Some jobs will be done early. Large batches saves setup and increases throughput.

23-21

How to Determine Process Batch and Transfer Batch Sizes (continued) 

A capacity constrained resource (CCR) 3.

4.



With no setup required to change from one product to another With setup time required when changing from one product to another

Handling similar to a nonbottleneck 



Smaller batches so there can be more frequent changes of product Decreased lead time

23-22

How to Treat Inventory 



Traditional view is the only negative impact of inventory is carrying cost. However, can also lengthen lead times and create problems with engineering changes.  Less

WIP reduces the number of engineering changes.

23-23

Benefits from Dollar Day Measurement 

Marketing 



Purchasing 



Discourages placing large purchase orders that, on the surface, appear to take advantage of quantity discounts

Manufacturing 



Discourages holding large amounts of finished goods inventory

Discourage large work-in-process and producing earlier than needed

Project management 

Quantify a project’s limited resource investment as a function of time

23-24

Comparing Synchronous Manufacturing to MRP and JIT 

MRP  Uses

backward scheduling.  Schedules through a BoM explosion.  MRP develops capacity utilization profiles.  Trying to smooth capacity is difficult. 

Synchronous manufacturing  Uses

forward scheduling.  This ensures a feasible schedule.  Batch sizes can vary. 23-25

JIT Drawbacks 1. 2. 3.

4.

5.

JIT is limited to repetitive manufacturing. JIT requires a stable production level. JIT does not allow very much flexibility in the products produced. JIT still requires work-in-process when used with Kanban so that there is “something to pull.” Vendors need to be located nearby because the system depends on smaller, more frequent deliveries.

23-26

Relationship with Other Functional Areas 

Accounting’s influence 1. 2.



Global measurements show net profits, ROI, and cash flow. Local cost accounting measurements show efficiency or utilization rates.

Marketing and production  



Marketing and production should work in harmony. In practice, they act independently. Data for evaluating marketing and manufacturing are different. 23-27

Theory of Constraints – Problems about What to Produce For a set of production processes described in Exhibit 23.14, with the data given in the table below, what should be the products produced and what should be the quantities of those products? Product

Limiting Resources

Time Required (min)

Number produced per hour

Selling price Sales ($) revenue per hour ($)

A

Y

10

6

50

300

B

X

6

10

75

750

C

Z

5

12

60

720

23-28

Exhibit 23.14: Prices and Production Requirements

23-29

Theory of Constraints – Problems about What to Produce (continued) Solution  Three different objectives could exist that lead to different conclusions  1.

Maximize sales revenue because marketing personnel are paid commissions based on total revenue.  2. Maximize per unit gross profit.  3. Maximize total gross profit. 

In this example, we use gross profit as the objective and provide a solution. Other objectives can be worked out similarly. 23-30

Objective 3 – Maximize Total Gross Profit 

We can solve this problem by finding either  Total

gross profit for the period  Rate at which profit is generated 



We use rate to solve the problem both because it is easier and because it is a more appropriate measure. We use profit per hour as the rate. Note that each product has a different work center that limits its output. The rate at which the product is made is then based on this bottleneck work center. 23-31

Profit per Hour Calculations Product Limiting Time Workcen Require -ter d (min)

Number produced per hour

Selling price ($)

Raw material cost($)

Profit per unit ($)

Profit per hour ($)

A

Y

10

6

50

20

30

180

B

X

6

10

75

60

15

150

C

Z

5

12

60

40

20

240

Conclusion: It is clear that product C provides the highest profit per hour and in order to maximize total gross profit, one should produce as much of the C as possible. 23-32