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Theory of ConstraintsTheory of Constraints
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OutlineOutline
1.1. Introduction to ConstraintsIntroduction to Constraints2.2. Five Steps Of Theory of ConstraintsFive Steps Of Theory of Constraints3.3. Drum Buffer RopeDrum Buffer Rope4.4. Issues with TOC Issues with TOC 5.5. MeasurementsMeasurements
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ConstraintsConstraints
Any system can produce only as much as its critically constraineAny system can produce only as much as its critically constrained d resourceresource
60 unitsPer day
70 unitsPer day
40 unitsPer day
60 unitsPer day
Constraint
Maximum Throughput = 40 units per day
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Significance of BottlenecksSignificance of Bottlenecks
Maximum speed of the process is the speed of the slowest Maximum speed of the process is the speed of the slowest operationoperation
Any improvements will be wasted unless the bottleneck is Any improvements will be wasted unless the bottleneck is relievedrelieved
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Theory of ConstraintsTheory of Constraints
Purpose is to identify constraints and exploit them to the Purpose is to identify constraints and exploit them to the extent possibleextent possible
Identification of constraints allows management to take Identification of constraints allows management to take action to alleviate the constraint in the futureaction to alleviate the constraint in the future
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Theory of ConstraintsTheory of Constraints
Assumes current constraints cannot be changed in the Assumes current constraints cannot be changed in the shortshort--runrun
What should be produced now, with current resources, What should be produced now, with current resources, to maximize profits?to maximize profits?
Question cannot be answered by traditional accounting methodsQuestion cannot be answered by traditional accounting methods
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Theory of ConstraintsTheory of Constraints
Based on the concepts of drum, buffer and ropesBased on the concepts of drum, buffer and ropes
DrumDrumOutput of the constraint is the drumbeatOutput of the constraint is the drumbeat
Sets the tempo for other operationsSets the tempo for other operations
Tells upstream operations what to produceTells upstream operations what to produce
Tells downstream operations what to expectTells downstream operations what to expect
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Theory of ConstraintsTheory of Constraints
BufferBufferStockpile of work in process in front of constraintStockpile of work in process in front of constraint
Precaution to keep constraint running if upstream operations Precaution to keep constraint running if upstream operations are interruptedare interrupted
RopesRopesLimitations placed on production in upstream operationsLimitations placed on production in upstream operations
Necessary to prevent flooding the constraintNecessary to prevent flooding the constraint
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What is the Theory of Constraints?What is the Theory of Constraints?
““The core idea in the Theory of ConstrainsThe core idea in the Theory of Constrainsis that every real system such as a is that every real system such as a profitprofit--making enterprise must have at least one constraintmaking enterprise must have at least one constraint””..
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What is TOC? What is TOC? (continued)(continued)
““There really is no choice in the matter. Either you manage There really is no choice in the matter. Either you manage constraints or they manage you. The constraints will constraints or they manage you. The constraints will determine the output of the system whether they are determine the output of the system whether they are acknowledged and managed or notacknowledged and managed or not””
Noreen, Smith, and Mackey, Noreen, Smith, and Mackey, The Theory of Constraints and its The Theory of Constraints and its ImplecationsImplecations for Management Accountingfor Management Accounting (North River Press, 1995)(North River Press, 1995)
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How does TOC help companies?How does TOC help companies?
1. Focusing improvement efforts where they will have the 1. Focusing improvement efforts where they will have the greatest immediate impact on the bottom line.greatest immediate impact on the bottom line.
2. Providing a reliable process that insures Follow 2. Providing a reliable process that insures Follow Through!Through!
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Five Five Steps Steps Of TOCOf TOC
1.1. Identifying the constraintIdentifying the constraint
2.2. Decide how Decide how to to exploit the constraintexploit the constraint
3.3. Subordinate Subordinate everything else everything else to to the decision the decision in in step step 22
4.4. Elevate the constraintElevate the constraint
5.5. Go back to Go back to step step 1, 1, but avoid but avoid inertiainertia
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Theory of ConstraintsTheory of Constraints
5. Increase the bottleneck’s capacity
1. Identify the appropriate
measures of value
4. Synchronize all other processes to
the bottlenecks
6. Avoid inertia and return to Step #1
2. Identify the bottlenecks
3. Use bottlenecks properly
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Steps in the TOC ProcessSteps in the TOC Process
InternalInternal
Process constraintsProcess constraintsMachine time, etc.Machine time, etc.
Policy constraintsPolicy constraintsNo overtime, etc.No overtime, etc.
ExternalExternal
Material constraintsMaterial constraintsInsufficient materialsInsufficient materials
Market constraintsMarket constraintsInsufficient demandInsufficient demand
Identify the system constraints
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Steps in the TOC ProcessSteps in the TOC Process
Decide how to exploit the constraintDecide how to exploit the constraint
Want it working at 100%Want it working at 100%
How much of a buffer?How much of a buffer?
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Steps in the TOC ProcessSteps in the TOC Process
Subordinate everything else to the preceding decisionSubordinate everything else to the preceding decision
Plan production to keep constraint working at 100%Plan production to keep constraint working at 100%
May need to change performance measures to May need to change performance measures to ““roperope””upstream activitiesupstream activities
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Steps in the TOC ProcessSteps in the TOC Process
Elevate the constraintElevate the constraint
Determine how to increase its capacityDetermine how to increase its capacity
Repeat the processRepeat the process
Always a new constraintAlways a new constraint
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Drum Buffer RopeDrum Buffer Rope
DrumDrum--BufferBuffer--Rope for Shop Floor ControlRope for Shop Floor ControlDrumDrum: The Pace Setting Resource : The Pace Setting Resource -- constraintconstraintBufferBuffer: The amount of protection in front of the resource : The amount of protection in front of the resource RopeRope:The:The scheduled staggered release of material to be in line with scheduled staggered release of material to be in line with the Drumthe Drum’’s schedule.s schedule.
60 70 40 60
Constraint(Drum)
Rope
BufferA Pull System
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Lean: How DBR Supports itLean: How DBR Supports it
Overproduction avoidedOverproduction avoided because DBR is because DBR is ““pullpull”” systemsystem
Inventory minimizedInventory minimized because only buffer at constraintbecause only buffer at constraint
Transportation reducedTransportation reduced because because ““unbuiltunbuilt materialmaterial”” doesndoesn’’t movet move
Processing waste minimizedProcessing waste minimized because because ““unbuiltunbuilt materialmaterial”” left until left until requiredrequired
Unnecessary Motion decreasedUnnecessary Motion decreased because donbecause don’’t build unneededt build unneeded
Waiting is eliminated at the constraintWaiting is eliminated at the constraint ––only place that countsonly place that counts
Defects avoidedDefects avoided because of because of ““small lotsmall lot””, non conformance, and corrective action, non conformance, and corrective action
Fundamentally, Don’t Build Until Needed
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Why Drum Buffer Rope?Why Drum Buffer Rope?
A proven method to*:A proven method to*:Reduce Lead times an average of 70%Reduce Lead times an average of 70%Reduce inventory an average of 49%Reduce inventory an average of 49%Reduce Operating Expenses Reduce Operating Expenses Improve on time delivery performance an average of 44%Improve on time delivery performance an average of 44%Increase Revenue an average of 63%Increase Revenue an average of 63%Better controlBetter control
DBR delivers ALL of these results AT THE SAME TIME.DBR delivers ALL of these results AT THE SAME TIME.
*The World of the Theory of Constraints by Mabin & Balderstone, St. Lucie Press 2000
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Issues with TOCIssues with TOC
Upstream operations must provide only what the Upstream operations must provide only what the constraint can handleconstraint can handle
Downstream operations will only receive what the Downstream operations will only receive what the constraint can put outconstraint can put out
Constraint must be kept operating at its full capacityConstraint must be kept operating at its full capacityIf not, the entire process slows furtherIf not, the entire process slows further
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Issues with TOCIssues with TOC
AdvantagesAdvantages
Improves capacity decisions in the shortImproves capacity decisions in the short--runrun
Avoids build up of inventoryAvoids build up of inventory
Aids in process understandingAids in process understanding
Avoids local optimizationAvoids local optimization
Improves communication between departmentsImproves communication between departments
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Issues with TOCIssues with TOC
DisadvantagesDisadvantages
Negative impact on nonNegative impact on non--constrained areasconstrained areasDiverts attention from other areas that may be the next constraiDiverts attention from other areas that may be the next constraintnt
Temptation to reduce capacityTemptation to reduce capacity
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Issues with TOCIssues with TOC
Ignores longIgnores long--run considerationsrun considerations
Introduction of new productsIntroduction of new products
Continuous improvement in nonContinuous improvement in non--constrained areasconstrained areas
May lead organization away from strategyMay lead organization away from strategy
Not a substitute for other accounting methodsNot a substitute for other accounting methods
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MeasurementsMeasurements
Conventional WisdomConventional WisdomNet profit?Net profit?Efficiency?Efficiency?Utilization?Utilization?Return on Investment?Return on Investment?Cash Flow?Cash Flow?
“Are you using the right measurements?”Jonah in The Goal
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Measurements Measurements
TOC WisdomTOC WisdomThroughputThroughputInventory Inventory Operating ExpenseOperating Expense
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Traditional Traditional vsvs JIT, TQM and TOCJIT, TQM and TOC
Traditional RankingTraditional Ranking
Operating expenseOperating expense
ThroughputThroughput
Inventory or AssetsInventory or Assets
JIT, TQM and TOCJIT, TQM and TOC
ThroughputThroughput
Inventory or AssetsInventory or Assets
Operating expenseOperating expense
All Three methods attack the underlying assumption that crated a problem related to inventory levels. They ask:
WHY DO WE NEED INVENTORY TO PROTECT THROUGHPUT ?
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The The ““Cost WorldCost World””
Decreasing Decreasing ““OEOE”” is definitely #1 because we have is definitely #1 because we have relatively high control of our expenses.relatively high control of our expenses.Increasing Increasing ““TT”” is always important, but it ranks #2 is always important, but it ranks #2 because we are at the mercy of the marketplace and because we are at the mercy of the marketplace and have less control over sales.have less control over sales.Inventory tends to fall into a Inventory tends to fall into a ““grey areagrey area”” that we donthat we don’’t t know exactly what to do about; it is a know exactly what to do about; it is a ““necessary evilnecessary evil””that must be lived with to protect sales.that must be lived with to protect sales.
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The The ““Throughput WorldThroughput World””
Increasing Increasing ““TT”” is unquestionably #1 because it has the is unquestionably #1 because it has the greatest potential impact on the bottom line.greatest potential impact on the bottom line.Decreasing Decreasing ““II”” is #2 because excess WIP and finished is #2 because excess WIP and finished goods jeopardize future throughput.goods jeopardize future throughput.Decreasing Decreasing ““OEOE”” is #3 because significant reductions is #3 because significant reductions (workforce reductions) usually jeopardize future (workforce reductions) usually jeopardize future throughput.throughput.
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Financial IssuesFinancial Issues
TOC is a management tool, not a financial toolTOC is a management tool, not a financial tool
Not used to determine inventory valuesNot used to determine inventory values
Not used to allocate overhead to inventoryNot used to allocate overhead to inventory
Does not comply with GAAPDoes not comply with GAAP
Does indicate how to use available resources most Does indicate how to use available resources most effectivelyeffectively
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ConclusionConclusion
In the throughput world, constraints become the main tools In the throughput world, constraints become the main tools of management and the previous tool, product cost, can be of management and the previous tool, product cost, can be discarded.discarded.