EMBA 512
Theory of Constraints
December 13, 2012
Patrick Shannon
Phil Fry
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Theory of Constraints
• Popularized by Eliyahu Goldratt
“The Goal”
“Its Not Luck”
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Today’s Outline
 Processes and Process Terminology
 Theory of Constraints – Lessons to be
Learned
 The Goal
 The “Hike”
 Managing Under a TOC Philospohy
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Analyzing Process Flows
A few years ago, the Wall Street Journal
reported, “… although GM and Toyota are
operating with the same number of inventory
turns, Toyota’s throughput is twice that of
GM’s.” The discrepancy, concluded the writer,
“could be due to much faster flow times and
lower inventories by virtue of Toyota’s
production system.”
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Process Flow Analysis
Nearly one billion wafers each year. That’s the number of
communion wafers produced by a family-owned business in
Rhode Island reports the New York Times (Bread of Life,
Baked in Rhode Island, December 24, 2008). When producing
wafers, the company turns out wafers at the rate of about 100
per second. After coming out of the oven, wafers spends
approximately 15 minutes in a cooling tube that keeps them
from becoming brittle.
As a part of your process analysis of the baking process, you
need to estimate the number of wafers in the cooling tube on
average.
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Process Flow Analysis
 Every process wants to transform
inputs into outputs to satisfy
customer needs.
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Process Flow Analysis
What is a process?
A process coverts inputs into
outputs.
What is a process flow chart?
A symbolic representation of the
processes and their relationships to
each other.
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Process Flow Chart Example
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Purposes of Process Flow Analysis
 Document the process
 Evaluate process performance
measures
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Process Flow Analysis
What is a resource?
Resources are those things
needed to operate the process.
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Process Flow Analysis
Process Capacity
The maximum rate at which
output can be withdrawn from
a process.
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Process Flow Analysis
Bottleneck—the resource in the system
having the smallest capacity.
System Capacity—the capacity of a
system is the capacity of the
bottleneck.
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Process Flow Analysis
Cycle Time
The average time between
successive units leaving the
process. It is the inverse of the
capacity.
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Process Flow Measures
 The study of process flows requires
the answer to 3 questions:
 1. On average, how many flow units
move through the process per unit of
time?
 2. On average, how much time does a
typical flow unit spend in the process?
 3. On average, how many flow units are
in the process at any point in time?
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Process Flow Measures
 Throughput Rate
 An important measure of process-flow
dynamics—the number of flow units that
move through a specific point of the
process per unit of time
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Throughput Rate TR:
Demand vs. Capacity Constrained
Capacity constrained
Demand constrained
Bottleneck
(Capacity)
Input
Input
Throughput Rate
Flow Rate
Bottleneck
(Capacity)
Throughput
Rate
Flow Rate
Demand
Excess
capacity
Excess
capacity
Demand
Throughput Rate=Min{Demand, Capacity}
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Process Flow Measures
Flow Time
The total time spent by a flow
unit in the system, where the
system is the set of all
processes viewed as a whole.
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Process Flow Measures
 Inventory
 The number of flow units present within
the process at time t is the inventory at
time t.
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Process Flow Measures
 Relating Throughput Rate, Flow Time,
& Inventory
 The 3 performance measures are linked
by a fundamental relation of process
flows known as Little’s Law. It relates
average throughput rate TR, average
flow time FT, and average inventory I as
I =TR*FT
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Process Flow Measures
 Inventory Turns (Turnover Ratio)
 Inventory turns, or turnover ratio, is
defined as the ratio of throughput to
average inventory
Turns = TR/I
Using Little’s Law the turnover ratio equals
the inverse of average flow time.
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Process Flow Measures
 Of the three related operationalperformance measures- throughput rate,
flow time, and inventory- a manager can
select any two on which to focus, with the
third being determined by Little’s Law. The
manager has the responsibility of deciding
which two measures to manage.
 For a given level of throughput in any
process, the only was to reduce flow time is
to reduce inventory, and vice versa.
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Key-points From Process
Analysis
•Simplify a complex process using a PFD
• Bottleneck analysis: analyze the process by
looking at the bottleneck
• Bottleneck may depend on the product mix
• Time to complete X units starting with an empty system
Time to make X units= Time through empty system +
X  1 units
Flow Rate
- For continuous flow processes: “(X-1)=X”
- If capacity constrained, flow rate is dictated by the bottleneck
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TOC Lessons Through
Simulation Exercises
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Situation # 1: The Factory
Basic Layout
1
2
3
4
5
5
4
5
4
2
6
FGI
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•Product is processed at each of the 6 work stations.
Product moves sequentially from station 1 (far left) to
station 6 (far right).
•Once product has been processed at station 6 , it is
completed and ready to go into finished goods
inventory
•Production output of each work station indicated by
number in box.
•Process starts in the Empty State
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Situation 1: Data
Collection
Situation # 1: The Factory
Basic Layout
Lesson(s) Learned?
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Situation 2: The Factory
Add Capacity
1
2
3
4
5
5
5
4
5
2
6
FGI
5
•Scenario is as before with capacity added to work
station Two. The capacity of work station two has been
increased by 1 unit from 4 units to 5 units.
•Simulate production.
•Explain results.
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Situation 2: Data
Collection
Situation 3: The Factory
Add Resources to Station 5
1
5
2
5
3
4
5
4
5
?
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FGI
5
•We need to add capacity to work station 5 – the
bottleneck. What do you recommend?
•Simulate production.
•Explain the results.
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Situation 3: Data
Collection
Situation # 3: The Factory
Resources Added to Bottleneck
Lesson(s) Learned?
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Situation 4: The Factory
Add Complexity
1
5
2
5
3
4
5
4
Component
supplier
5
4
6
FGI
5
2
•Scenario is as before. However, in this scenario there
are two suppliers to work station 5.
•Work Station 5 needs 4 units from Station 4 and 4
units from the component supplier.
•Supplier can only produce 2
•Simulate production.
•Explain results.
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Situation 4: Data
Collection
Situation # 4: The Factory
Component Supplier to the Bottleneck
Lesson(s) Learned?
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Situation 5: The Factory
Add Customer Demand
1
5
2
5
3
4
5
4
5
4
6
FGI
5
4
1
•Scenario is as before with complexity.
• Component Supplier Output increased to match WC 5
• Add Customer Demand
• Demand is 1 unit per day
•Simulate production and demand.
•Explain results.
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Situation 5: Data
Collection
Situation # 5: The Factory
Add Customer Demand
Lesson(s) Learned?
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Situation 6: The Factory
Increased Customer Demand
1
5
2
5
3
4
5
4
5
4
6
FGI
5
4
4
•Scenario is as before with complexity and customer
demand. However, in this scenario the customer’s
demand has increased to 4 per day
•Simulate production and increased demand.
•Explain results.
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Situation 6: Data
Collection
Situation # 6: The Factory
Increased Customer Demand
Lesson(s) Learned?
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Dealing With Variability
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Controllable Variation – results
from decisions
Random variation – outside our
control.
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Causes of Variability
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Natural Variability
Random Outages
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Preemptive (No control)
Non-preemptive (Have Some control)
Setups
Operator Availability
Re-work
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Situation 7: The Factory
Add Variability
1
1-6
2
1-6
3
4
1-6
1-6
5
1-6
6
1-6
•Return to the simple process we had initially.
However, unlike, our initial scenario, each work station
exhibits variability in its output.
• The process begins with 4 units in WIP at each station
(Unlimited going into station 1
•A work station’s output is uniformly distributed
between 1 & 6. Average output is 3.5
•Customer demand rotates between 3 and 4 (Average
is 3.5)
•Simulate process and explain results.
•Explain results.
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FGI
3 or
4
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Situation 7: Data
Collection
Situation # 7: The Factory
Variability
Balanced Capacity or Balanced Flow?
Lesson(s) Learned?
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Situation # 8: The Factory
Basic Layout – Reduced Variability
1
3 or
4
2
3 or
4
3
3 or
4
4
3 or
4
5
3 or
4
•All work stations produce 3 or 4 with equal
probability. Output is independent between work
stations
• Average output is 3.5 units at each work station
•Demand varies between 3 and 4 with equal
probability
•Beginning WIP is 4 at each work station
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3 or
4
FGI
3 or
4
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Situation 8: Data
Collection
Situation # 8: The Factory
Balanced Flow - Reduced Variability
Lesson(s) Learned?
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Paying the Price for
Variability
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Lost throughput
Wasted Capacity
High Cycle times
High Inventory
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Lessons from “The Goal”
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Measurements
Conventional Wisdom
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Net profit?
Efficiency?
Utilization?
Return on Investment?
Cash Flow?
“Are you using the right measurements?”
Jonah in The Goal
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The Goal
TOC recognizes that only the “owners” of a company can
choose THE goal. However, once chosen, the other 2 become
conditions necessary to achieving the goal.
Make money now
and in the Future
Satisfy customers
now and in the future.
Satisfy employees
now and in the future
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Measurements
TOC Wisdom
 Throughput
 Inventory
 Operating Expense
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Throughput
The rate at which the system generates
money through sales. (Or, the
money coming into the
organization.)
 Building inventory is not throughput
 Only $ generated by the system get
counted; e.g., raw materials and
purchased parts are not throughput.
 Throughput = Selling Price –
Materials Cost
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Inventory
All the money the system has
invested in purchasing things which it
intends to sell.
 Inventory is a liability (not an asset)
 Raw materials, work in process,
finished goods and scrap are “I”
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Operating Expense
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All the money the system spends in
order to turn inventory into
throughput. (Or, the money leaving
the organization.)
All employee time is “OE” (direct,
indirect, operating, etc.)
Materials
Depreciation of a machine is “OE”
Operating supplies are “OE”
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Let’s Discuss the Hike
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Theory of Constraints
 Based on the concepts of drum,
buffer and ropes
 Drum
 Output of the constraint is the drumbeat
 Sets the tempo for other operations
 Tells upstream operations what to
produce
 Tells downstream operations what to
expect
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Theory of Constraints
 Buffer
 Stockpile of work in process in front of
constraint
 Precaution to keep constraint running if
upstream operations are interrupted
 Ropes
 Limitations placed on production in
upstream operations
 Necessary to prevent flooding the
constraint
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Drum Buffer Rope
 Drum-Buffer-Rope for Shop Floor Control
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Drum: The Pace Setting Resource - constraint
Buffer: The amount of protection in front of the resource
Rope: The scheduled staggered release of material to be
in line with the Drum’s schedule.
A Pull System
Buffer
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70
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Rope
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Constraint
(Drum)
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Theory of Constraints
Six Steps Of TOC
2. Identify the
bottlenecks
3. Use bottlenecks
properly
1. Identify the
appropriate
measures of value
4. Synchronize all
other processes to
the bottlenecks
6. Avoid inertia and
return to Step #1
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5. Increase the
bottleneck’s capacity
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