Theory of Constraints (TOC) Systems

(Part 1)

Sistem Produksi dan Rantai Pasok

(ISE-183107)
References :
• Jacobs, F. Robert; Berry, William; Whybark, D. Clay; and Vollmann,
Thomas. Manufacturing Planning and Control for Supply Chain
Management. US: McGraw-Hill Professional, 2011. Chapter 8 & 8A.
• Umble, Michael and Srikanth, M.L., Synchronous Manufacturing,
The Spectrum Publishing Company, 1996.
• Narasimhan S.L., Mc Leavey D.W., and Billington P.J., Production
Planning and Inventory Control, Prentice-Hall, 1995. Chapter 16.
• Goldratt, Eliyahu M. and Jeff Cox, The Goal, Gower, 1993.
 Definitions
• Throughput : The quantity of money generated by the firm through sales over a specified period of
time. The money coming into the system.
• Inventory : The quantity of money invested in material that the firm intends to sell.
• Operating Expense : The quantity of money spent by the firm to convert inventory into throughput
over a specified period of time.
• Bottleneck Resource : Any resource whose capacity is equal to or less than the demand placed upon it.
• Non-bottleneck Resource : Any resource whose capacity is greater than the demand placed upon it.
• Activation : Refers to the employment of a resource or work center to process materials or products.
• Utilization : refers to activation of a resource that contributes positively to the performance of a
company (throughput)
• A constraint is any element that prevents the system from achieving the goal of making more money.
• Capacity Constraint Resource (CCR) : Any resource which, if not properly scheduled and managed, is
likely to cause the actual flow of product through the plant to deviate from the planned product flow.
 Definitions
• Process Batch : The quantity of a product processed at a resource before that resource changes over to
produce a different product.
• Transfer Batch : The quantity of units that are moved at the same time from one resource to the next.
• Synchronous manufacturing is an all-encompassing manufacturing management philosophy that
includes a consistent set of principles, procedures, and techniques where every action is evaluated in
terms of the common global goal of the organization.
• Time Buffers : Designed to protect the throughput of the system from the internal disruptions that
continually occur in manufacturing environments.
• Stock Buffers : Designed to improve responsiveness of the operation to market demand. This is
accomplished by holding inventories of finished or partially finished products in anticipation of future
market demand. This allows for orders to be filled in less than the normal production lead time.
Theory of Constraints: A New Perspective
• Dr. Eliyahu Goldratt, present his ideas on production scheduling by developing
software program known as Optimized Production Technique (OPT).
• The schedule would make more efficient use of capacity-constrained resources to
maximize the throughput.
• Umble and Srikanth presented a detailed look at these concepts then known as
Synchronous Manufacturing.
• Goldratt refined his ideas known as the Theory of Constraints (TOC).
• TOC is management philosophy on improvement based on identifying the constraints
to increasing profit.
Theory of Constraints: A New Perspective
• The traditional approach of most organizations has been to rely on what is
commonly referred to as the standard cost systems. This system has a number
of fundamental flaws that hinder management to become more competitive.
• The goal for a manufacturing firm is to make money.
• If the firm is to be successful, all of the various subsystems must be in harmony
with the common goal of the entire system.
• The local optima that might be achievable in each subsystems must be
subservient to the global optimum for the total system.
• There are operational measures and financial measures.
• A firm can improve product quality, increase customer service and become a
low-cost producer by adhering to the basic philosophy of synchronous
manufacturing.
The Operational Measures
• The Operational Measures and Competitive Edge : The chosen measures must
be common to all manufacturing processes and accurately describe the key
activities that govern a plant’s performance:
- The sale of finished products ( T= Throughput)
- The purchase of raw materials and component parts (I= Inventory)
- The transformation of material into finished products ( OE= Operating
Expense)

Umble, Michael and Srikanth, M.L.,

Synchronous Manufacturing, The
Spectrum Publishing Company, 1996
The Financial Performance Measures

1. Net profit. An absolute measurement in dollars.

Net profit = T – OE.
2. Return on investment. A relative measure based on investment.
ROI = Net profit / Inventory
3. Cash flow. A survival measurement.

The goal for a manufacturing firm is to make profit.

To achieve the goal : Focus decision making on increasing Throughput.
Determine the constraints that are preventing Throughput from increasing.
Types of Constraints
• Every organization has at least one constraint.
• A constraint is any element that prevents the system from achieving the goal of making more
money.
• Market constraints. Demand (Quantity, lead time, pricing, quality standard) is determined by
the marketplace.
• Material constraints. Vendor does not deliver as scheduled or the material is defective.
Material shortage in the marketplace.
• Capacity constraints. The available capacity at a resource may be insufficient to meet the
workload necessary to support the desired throughput. Resources seem to take turns being the
bottleneck → Temporary bottleneck , Wandering bottleneck.
• Logistical constraints. Constraints in manufacturing planning and control systems such as order
entry or material control system.
• Managerial constraints. Lead to a suboptimization of the system, or they may compound the
effect of the other constraints exist in the system.
• Behavioral constraints. The most difficult constraints to eliminate, ex: keeping machinery
busy so that it looks good to management.
 Goldratt’s rules and 7 Synchronous Manufacturing (SM) Principles

Goldratt’s rules: Synchronous Manufacturing (SM) Principles

The sum of the local optimums is not equal
to the global optimum 1. Do not focus on balancing capacities, focus on
synchronizing the flow.
1. Do not balance capacity, balance the flow.
2. The level of utilization of a nonbottleneck is determined by
2. The marginal value of time at a bottleneck resource is
equal to the throughput rate of the product processed
some other constraint. by the bottleneck
3. Utilization and activation of a resource are not the same. 3. The marginal value of time at a non-bottleneck resource
4. An hour lost at a bottleneck is an hour lost for the entire
is negligible.
system.
4. The level of utilization of a non-bottleneck resource is
5. An hour saved at a nonbottleneck is a mirage. controlled by other constraints within the system.

6. Bottlenecks govern both throughput and inventory. 5. Resources must be utilized, not simply activated.

7. The transfer batch does not have to equal the process batch. 6. The transfer batch need not, and many times should not,
equal the process batch.
8. A process batch should be variable.
9. Priorities can be set only by examining the system’s constraints.
7. A process batch may be variable both along its route and
over time.
Dependent events & variability

Two phenomena that are found in every plant:

1.Dependent events
An event, or a series of events, must takes place
before another can begin. The subsequent event
depends on the ones prior to it.

2.Statistical fluctuations
Some information can not be determined precisely.
 example.
Process Time (A) Process Time (B) Process Time (C)

Production target: 5 units/min.

Output rate A=B=C= 1-6 units/min.
A B C
1-4 units 1-2 units
Output rate
1-6 units (dependent to (dependent to
per minute
output A) output B)

Actual output 4 units 2 units 1 unit

per minute (1 unit short) (3 unit short) (4 unit short)

Dependency limits the opportunities of higher fluctuations → the fluctuations

are not averaging out, but accumulating: accumulation of slowness.
example.
Demand: 100 units in 5 hours. Capacity X (manual)=25 units/hour, capacity
Y (robot) =25 units/hour.
Plan:
1 pm 2 pm 3 pm 4 pm 5 pm Total
X (units) 25 25 25 25 100
Y (units) 25 25 25 25 100

Actual:
1 pm 2 pm 3 pm 4 pm 5 pm Total
X (units) 19 21 28 32 100
Y (units) 19 21 25 25 90

▪ Some resources must have more capacity than others.

▪ The one at the end of the line should have more capacity than the ones at the beginning – sometimes a
lot more.
OPT Rule #1: Balance the flow, not the capacity.
Bottleneck and non-bottleneck resource
Y (non-bottleneck) X ( bottleneck)
Capacity 6 min/ unit 10 min/ unit
Available Capacity 40 hours 40 hours

Output /week 400 units 240 units

• Bottleneck Resource : Any resource whose capacity is equal to or less than the demand placed
upon it.
• Non-bottleneck Resource : Any resource whose capacity is greater than the demand placed
upon it.
 The five basic resource interactions
1. From non-bottleneck to bottleneck : → Y → X →
• If Y produces 400 units/week →An inventory build up of 160 units/week. Blocking.
• If Y produces 240 units/week → No inventory, utilized only for 24 hrs/week. Utilization = 24/40
❖ Y must be synchronized with X to balance the flow. (Goldratt’s rule # 1 )
❖ The level of utilization of a non-bottleneck is determined by some other constraint. (Goldratt’s rule # 2)
❖ Utilization and activation of a resource are not the same. (Goldratt’s rule # 3)
• Y processes faster than X. Inventory build up in front of Bottleneck.
❖ Bottlenecks govern both throughput and inventory. (Goldratt’s rule # 6)
What happen if X down for an hour? Throughput decreases to 234 units → Bottleneck dictates throughput.
❖ An hour lost at a bottleneck is an hour lost for the entire system. (Goldratt’s rule # 4)
What happen if Y down for 1 hr? If process time in Y decreased? It will not effect the throughput.
❖ An hour saved at a nonbottleneck is a mirage. (Goldratt’s rule # 5)
The five basic resource interactions (2)
2. From bottleneck to non-bottleneck : → X → Y →
Is it possible for Y to produce 400 units/week? Y is Starving.
Manufacturing Lead Time depends on transfer batch.
❖ The transfer batch does not have to equal the process batch. (Goldratt’s rule # 7)
If Process batch 240 units : a) What happen if Transfer batch 240? b) What if 10?

❖ A process batch should be variable. (Goldratt’s rule # 8)

• At non-bottleneck resources, the process batches should generally be kept as small as possible
in order to keep the flow of material smooth and balanced.
• At bottleneck resources, the small transfer batches must be combined into relatively large,
economical process batches.
Umble, Michael and Srikanth, M.L., Synchronous
Manufacturing, The Spectrum Publishing Company, 1996
P116.
 Assume process batch = 240 units.
If transfer batch = 240 units, total lead time = 64 hours.

0 40 hours
X
Y
64 hours

If transfer batch = 10 units, total lead time = 41 hrs

(40 hours)
100 200 300 800 2400 min

160 260 760 2460 min

(41 hours)
(Narasimhan et al., 1995, p.564-566)
The five basic resource interactions (3)
3. From one non-bottleneck to another: → Y → Y →
If the demand for this product is only 240 units/week, there is no need
to produce at a rate of 400 units/week because there will be an
inventory build up of 160 units/week. Both nonbottleneck resources
must be synchronized with the demand.

4. From one bottleneck to another: → X → X →

The least constrained bottleneck should be activated to meet the
requirements of the most constrained bottleneck.
The five basic resource interactions (4)

5. A bottleneck and non-bottleneck

feed into an assembly operation
Assembly can not be performed until all of the
Market components are available.
Y resource must be synchronized at 240 units/week, or
Assembly inventory will build up after Y and before the assembly
operation.
So the rates of the resources should be set to match that
X Y of X.
5 Steps of Theory of Constraints
1. Identify the system’s constraints.
2. Describe how to exploit the system’s constraints.
3. Subordinate everything else to the above decision.
4. Elevate the system’s constraints.
5. If in the previous steps a constraint has been broken, go back to step 1.

Drum-Buffer-Rope
Goldratt used the concept of a troop of boy scouts on a hike through a forest to
illustrate the idea of synchronization.

(Narasimhan et al., 1995)

 Drum-Buffer-Rope approach

To prevent spreading, tie the weakest soldier to the front row. To protect overall pace, provide
some slack in the rope.

Drummer sets the pace of the slowest hiker.→ All hikers will be forced to march at the same pace.
drum-buffer-rope system
Bottleneck (Drum)

A B C D E F Market

Inventory buffer
Communication (time buffer)
(rope)

drum → production rate

buffer → time slack given to keep CCR 100% busy
rope → generate timely release of materials (synchronized with CCR)
(Narasimhan et al., 1995, p.570)
example 1
▪ What is the bottleneck in this process? Resource C.

▪ What is the throughput rate for the process? 240 units/ week

▪ Where should the time buffers be located? Before C & assy.

To A and E.
▪ Where do the ropes go?
(Narasimhan et al., 1995, p.571-572)
▪ What will be the production rate at each WC? 240 units/week
example 2
X

Assume that one unit of RM1 is used to produce one unit of X and that one unit of
RM1 and one unit of RM2 are required to produce one unit of Y.
Available capacity per week for each resource = 2400 minutes.
Create a production schedule that maximizes profit.
(Narasimhan et al., 1995, p.573)
 X

conventional accounting:
Net profit : X = $(100 – 40) = $60 → Set X as priority.
Y = $(110 – 20 – 40) = $50

Capacity required :
WC A for X = 90 units x (15 min + 10 min) = 2250 min
Number of Y produced in WC A = (2400 – 2250) / 15 = 10 units

→ Produce 90 units X, 10 units Y.

Total Profit = (90 units x $60) + (10 units x $50) = $5900
 TOC accounting
In every manufacturing plant, Focus only on Bottlenecks, they
X control the flow → the throughput → the profit.

An hour lost on the bottleneck is an hour lost for the entire system.
Y (Goldratt’s rule # 4)
The throughput is dependent on the bottleneck (system’s constraint)
Priorities can be set only by examining the system’s constraints
(Goldratt’s rule # 9) to improve profits.
profits/ time on bottleneck

X (profit: $60) uses 25 min of WC A per unit. → $2.4 /min of WC A.

Y (profit: $50) uses 15 min of WC A per unit. → $3.3 /min of WC A.

Exploit bottlenecks by processing the more profitable orders first.

→ Prioritize product Y!
 X

TOC accounting: profits/ time on bottleneck

Capacity required :
WC A for Y = 100 units x 15 min = 1500 min
Number of X produced in WC A = (2400–1500) / 25 = 36 units
→ Produce 100 units Y, 36 units X.
Total profit = (100 units x $50) + (36 units x $60) = $7160
If the transfer batch equal to the process batch, Can you produce 100 Y and 36 X in 2400 minutes?
Apply TOC (5 steps to manage a constraint):

STEP 1: Identify the system’s constraint.

Capacity constraint: Resource A.
(Note that there is also a market constraint: 100 units/week of Y are fully
produced and sold. An increase in demand for Y would also increase the profit).
Suppose we plan to focus on resource A as the system’s constraint.

STEP 2: Decide how to exploit the constraint.

Assume that through setup reductions we are able to reduce the processing times
on A for 5 minutes at each process (resource A capacity increases).
 X

STEP 3: Subordinate everything else.

WC A for Y = 100 units x 10 min = 1000 min
WC A for X = 90 units x 15 min = 1350 min
2350 min < 2400 min Total profit = $10400

STEP 4: Elevate the system’s constraint Resource A only uses 2350 min of 2400 min
available.

→ STEP 5: The constraint is broken, return to step one.

(Narasimhan et al., 1995, p.574)
We have market constraint now.
What would happen if we increase demand for X to the maximum allowed
by resource A capacity?
WC A for Y = 100 units x 10 min = 1000 min
No of X produced in WC A = (2400–1000)/15 = 93 units
Total profit = (100 x $50) + (93 x $60) = $10580.

What would happen if we increase demand for Y instead?

WC A for X = 90 units x 15 min = 1350 min
No of Y produced in WC A = (2400–1350)/10 = 105 units
Total profit = (105 x $50) + (90 x $60) = $10650.

→ Increasing demand for Y brings higher profit. How to do this?

example 3
A firm produce two products (W and X) on four work centers (A, B, C, and
D). The two products share a common manufactured part that requires
processing in centers B and C.

Product W, with a weekly market potential of 100 units and a selling

price of $90, is assembled in center D from two manufacture parts and a
purchase part that cost $5. Product X, with a weekly market potential of
50 units and a selling price of $100, is assembled in center D from two
manufactured parts.

There are 2400 minutes of capacity available at each work center per
week, setup times are zero, and operating expense are $6000 per week.

(Umble and Srikanth., 1996, p.97)

 W X

Resource D Resource D
15 min/unit 5 min/unit

RM = $5

Resource C Resource C Resource B

10 min/unit 5 min/unit 15 min/unit

Resource A Resource B Resource A

15 min/unit 15 min/unit 10 min/unit

RM = $20 RM = $20 RM = $20

Flow process chart for products W and X

 Resource B is the constraint.
1. What is the constraint?

Market Potential /week Cap. Requirements (min)

(units) A B C D
W 100 1500 1500 1500 1500
X 50 500 1500 250 250
Total Requirement 2000 3000 1750 1750
Available Capacity 2400 2400 2400 2400
 2. How many units of each product should be produced ?

Market Processing Gross

Price time/unit (min) RM cost
potential/ profit
/unit /unit
week (unit) A B C D /unit

W $90 100 15 15 15 15 $45 $45

X $100 50 10 30 5 5 $40 $60

Gross Profit / Constraint

Product Gross Profit / unit
Resource Minute
W $45 $45 / 15 = $3*
X 60 $60 / 30 = $2

W is priority:
W = 100 units, X = (2400 – 1500) / 30 = 30 units.
3. What is the net profit ?
Net profit = throughput – operating expense
= 100($45) + 30($60) - $6000
= $300
4. What is the capacity utilization for each work center ? If the transfer batch equal to the
process batch, Is it possible to finish 100 W and 30 X in 2400 minutes?

Avai. Cap. Utilization

WC Product Process Time (min)
(min) (%)
A W 100(15) = 1500
X 30(10) = 300
Total 1800 2400 75
B W 100(15) = 1500
X 30(30) = 900
Total 2400 2400 100
C W 100(15) = 1500
X 30( 5) = 150
Total 1650 2400 68,75
D W 100(15) = 1500
X 30( 5) = 150
Total 1650 2400 68,75
5. Where should time buffers be placed ?

A time buffer should be placed:

 Before work center B to protect the output capability (quantity) of
the constraint.
 Before work center D to ensure constraint parts previously
processed in B are not delayed by the late arrival (timing) of other
nonconstraint parts.
Terima kasih.