Transcript Throughput World Complex solutions do not work, the more complex the problem the simpler the solution must be. Eli Goldratt. These sides and note were.

Throughput World
Complex solutions do not work,
the more complex the problem
the simpler the solution must be.
Eli Goldratt.
These sides and note were prepared using
1. The book Streamlined: 14 Principles for Building and Managing the Lean
Supply Chain. 2004. Srinivasan. TOMPSON ISBN: 978-0-324-23277-6.
2. The slides originally prepared by Professor M. M. Srinivasan.
3. Operations Management. Jacobs and Chase. McGraw-Hill.
Theory of Constraints (TOC)
 TOC owes its origin to Eliahu Goldratt, an Israeli physicist. The
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basic idea was published in his book; The Goal (1984).
TOC Premise 1: The Goal of a business is to make more
money, … in the present and in the future  Max NPV.
Just like the links of a chain, the processes within the enterprise
work together to generate profit for the stakeholders.
The chain is only as strong as its weakest link.
TOC Premise 2: There is one or at most few constraint(s)
determine its output.
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April-2011
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Systems Thinking and TOC
 Focus on maximizing the productive use of the bottleneck.
Schedule it to maximize throughput. The other resources can be
schedule subsequently since they have available capacity by
definition.
 Principle: Time lost at a bottleneck resource results in a loss of
throughput for the whole enterprise. Time saved a nonbottleneck resources is a mirage.
 The traditional management lives in a cost world; minimizing
costs and improving efficiencies. A complex system is broken
down into smaller parts; cost or profit centers with local
targets. Cost or profit centers  achieve/beat targets; if every
unit improved locally then the entire enterprise would improve
globally. Managers in cost world think locally.
Theory of Constraints 1- Basics
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April-2011
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Cost World – Local Optimization
 To improve performance of the total system, it is not enough to
improve performance of the isolated functions; it is Local
Optimization, it ignores the interactions between the various
functions. Cost world thinks locally. The throughput world
thinks globally.
 An increase in the cost of an engine of $30 would have
decreased the cost of the transmission by $80. The center
producing the engine is reluctant to do so.
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April-2011
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Systems Approach
The story of the blind men and an elephant originated in India,
where it was widely disseminated. Rumi, the 13th Century
Persian poet and teacher of Sufism, included it in his retelling,
"The Elephant in the Dark," uses this story as an example of the
limits of individual perception.
Some Hindus had brought an elephant for exhibition and placed it
in a dark house. Crowds of people were going into that dark place
to see the beast. Finding that ocular inspection was impossible,
each visitor felt it with his palm in the darkness.
The palm of one fell on the trunk. This creature is like a waterspout, he said.
The hand of another rested on the elephant’s ear. To him the beast
was evidently like a fan.
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Systems Approach
Another rubbed against its leg. “I found the elephant’s shape is
like a pillar,” he said.
Another laid his hand on its back. Certainly this elephant was like
a throne, he said.
Rumi ends his poem by stating; if each had a candle and they
went in together the differences would disappear.
Jalaluddin Rumi is not only the teacher of Sufism, but among
other things, the messenger of system-thinking.
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April-2011
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The 5 Step TOC Focusing Process
Step 1:
Step 2:
Step 3:
Step 4:
Step 5:
Identify the System’s Constraint(s)
Decide how to Exploit the System’s Constraints
Subordinate Everything Else to that Decision
Elevate the System’s Constraints
If a Constraint Was Broken in previous Steps, Go to
Step 1
Performance of subsystems to be linked to the performance of
the total system.
The 5-Steps in a continuing Process.
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Step 1: Identify the Constraint(s)
 Physical Constraints. Tangible; easy to recognize as
constraint. H/C/F Resources. Machine capacity, material,
space, cash availability.
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Eliminate idle time, reduce setup time and run time, Improve
quality control, buy more capacity.
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First Focus on where you have more WIP.
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April-2011
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Market Constraints
 Demand for company’s products and services is less than
capacity, or not in desired proportion.
 Harder to identify than physical constraints.
 Excess capacity is easily identified as a market constraint.
 Make an offer the customer cannot refuse! P > V
Theory of Constraints 1- Basics
Ardavan Asef-Vaziri
April-2011
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Policy Constraints
 Methods Constraints. Never producing a batch of units below an
EOQ; producing products for which there is no current demand.
A flawed method of absorption costing that adds value to a
product as it moves through a series of process steps.
 Measures Constraints. Buying large quantities for quantity
discounts. Paying sales commission based on volume of sale.
Rewarding managers if they utilize their resources to produce
more output because a higher output better absorbs labor and
overhead. Tell me how you measure me and I will tell you how I
behave.
 Mindset Constraints. Shop supervisor believes operators should
be busy all of the time. The enterprise can become profitable
through outsourcing. You don't understand, we are different, that
won't work here!
Theory of Constraints 1- Basics
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Step 2 : Decide How to Exploit the System’s
Constraint(s)
 Exploiting the constraint means using the constraint as
profitably as possible
 Until the constraints are overcome by other means, the
enterprise should work them as profitably (effectively) as
possible.
 The real meaning of the word exploit?
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If constraint is physical resource, ensure the resource is never idle.
If the market is the constraint, exploit by ensuring not a single sale
is lost as a result of our action or inaction.
Market constraint implies extra capacity, so we exploit this by
guaranteeing 100% on time delivery to customer.
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Step 3 : Subordinate Everything Else to that
Decision
 We do not want non-bottleneck resources becoming bottlenecks
because of our negligence of focusing on constraints.
 Work must be started and sequenced so the constraint can
always work or work smarter
 Drum-buffer-rope (DBR), or pull-from-the-bottleneck model,
is similar to kanban system.
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Except the input process of DBR is linked to the rate or
production of the constraint to utilize it as much as possible
Theory of Constraints 1- Basics
Ardavan Asef-Vaziri
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Step 4 : Elevate the System’s Constraints
 Lift the restriction that is preventing the enterprise from
making more money
 Identifying ways that the performance of the system can be
improved, relative to its goals
 This step should only be performed after the exploit step, step
2
 If the constraint still exists, or another emerges, then it is time
to execute the fourth step.
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April-2011
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Step 5 : If a Constraint Was Broken in a Previous
Step, Go Back to Step 1
 Can we stop with the fourth step?
 If we elevate the constraint, it will probably not remain a
constraint
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Performance will not be dictated by another element that has
become the weakest link
To find this new weak link, we must revisit all the steps once
again
 Goldratt adds this warning: “Do not allow inertia to cause a
system’s constraints.”
 Step 5 is crucial because it prevents inertia from derailing
continuous improvement process
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Long-term Increase or Short-term Gain?
 A chain can demonstrate how the cost world focus sacrifices
long term throughput increases for short-term gains.
 Instead of strengthening the weakest link (improving
Throughput in the throughput world), we focus on improving
efficiency at the current level of performance (improving
Operating Expenses in the cost world).
 Chain of 10 links, each with carrying capacity of 100 lbs except
for one with only 50 lbs.
 Management unhappy with cost of maintaining the nine strong
links so it sells the nine heavy links.
Theory of Constraints 1- Basics
Ardavan Asef-Vaziri
April-2011
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Long-term Increase or Shortterm Gain?
 It replaces each link with a capacity of 50 which makes an
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efficient chain; every link is carrying exactly same load.
The enterprise is now locked into the current performance
level; it now has ten links, any one of which can break.
In the future, if improved performance is desired, it will have to
work all ten links in the chain
The same problem occurs when enterprises eliminate
overcapacity. If business picks up, it will be harder to recruit
employees, why?
Fearful of being fired in the next downsize.
Theory of Constraints 1- Basics
Ardavan Asef-Vaziri
April-2011
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The Paradise Plant!
IF:
Clients never change their mind,
Vendors always supply what we ask for, on time,
Our workers are excellently trained,
Our processes are extremely reliable,
Our quality is superb,
We do not have any absenteeism,
Data is readily available and accurate, and
You can decide on whatever policies you want.
THEN:
Managing production will be a piece of cake, …
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April-2011
right?
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Effect of Performance Measures
 Tell me how you will measure me and I will tell you how I
will behave.
 If you measure me in an illogical way, … do not complain
about illogical behavior.
 If you measure me in an unreasonable way, no one knows
how I will behave....
 Not even me.
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Ardavan Asef-Vaziri
April-2011
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TOC Performance Measures
 Throughput (T): The rate at which the system
generates money through sales. Sales – Row
Material and Component costs.
 Investment (I): All the money invested in
purchasing things needed by the system to sell its
products. Raw Material, WIP, and Finished Goods
inventory as well as Capital Resources owned.
 Operating Expenses (OE): All the money the
system spends, turning inventory into throughput.
Direct labor, Administrative and Non
Administration overhead, Depreciation, Rent.
Theory of Constraints 1- Basics
Ardavan Asef-Vaziri
April-2011
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Priorities in Traditional World
First:
OE
Second:
T
Distant Third:
I
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Ardavan Asef-Vaziri
April-2011
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Where is the Bang for the Buck? (T vs. OE)
$
Leverage from
Decreasing OE
Leverage from
Increasing T
Revenue
RM
DL
OH
Cost
100
40
10
40
90
100
40
8
40
88
98
NP
10
12
16
0.95(100) = 95
1.20(95) = 114
114
48
10
40
Assume a) you have 20% excess capacity, and b) sales
will increase by 20% if you can effect a 5% price
reduction.
Theory of Constraints 1- Basics
Ardavan Asef-Vaziri
April-2011
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Throughput Profit Multiplier
Since a large fraction of the operating costs of are fixed, small
changes in throughput could be translated into large changes in
profits.
Throughput profit multiplier = % change in profit / % change in
throughput
Suppose FC = $180,000 per month. P = 22, and V = 2. In July, the
process throughput was 10,000 units.
10000(22-2) – 180,000 = $20,000 profit
A process improvement increased throughput in August by 1%
to 10,100 units, without any increase in the fixed cost.
10100(22-2) – 180,000 = $22,000 profit
(22000-20000)/20000 = 10%
1% throughput improvement  10% profit improvement
Theory of Constraints 1- Basics
Ardavan Asef-Vaziri
April-2011
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Throughput Profit Multiplier
The throughput profit multiplier could be computed directly.
Throughput profit multiplier =contribution margin per unit /
profit per unit
In our example, profit was 20,000 for July when throughput was
10,000. Profit per unit sold is then 20000/10000=$2
profit margin per unit is $20.
For each additional unit sold, we get a throughput profit
multiplier yielding a factor of 20/2 = 10.
If the throughput profit multiplier is large, the financial impact of
increasing throughput is significant.
Theory of Constraints 1- Basics
Ardavan Asef-Vaziri
April-2011
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Shifting Paradigms
First:
Current Priority
OE
New Priority
T
Second:
T
I
Third:
I
OE
Theory of Constraints 1- Basics
Ardavan Asef-Vaziri
April-2011
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TOC/Lean Principle
 Decisions should promote a growth strategy.
 While enterprises should attempt to simultaneously
increase throughput, decrease inventory, and
decrease operating expenses, the focus must be on
improving throughput.
 Link the goal of the subsystem to the goal of the total
system. Measure the performance of the subsystem
based on the performance of the total system.
Theory of Constraints 1- Basics
Ardavan Asef-Vaziri
April-2011
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Lean Operations: The Real Cost of Inventory
Inventory adversely affects all competing edges (P/Q/V/D)
 Has cost
 Physical carrying costs
 Financial costs
 Has risk of obsolescence
 Due to market changes
 Due to technology changes
 Leads to poor quality
 Feed back loop is long
 Hides problems
 Unreliable suppliers, machine breakdowns, long changeover
times, too much scrap.
 Causes long flow time
Theory of Constraints 1- Basics
Ardavan Asef-Vaziri
April-2011
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