Basics of Supply Chain Management

Theory of Constraints & Review Activity

Session 10

APICS Certified in Production and Inventory Management (CPIM)

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Basics of Supply Chain Management
1. 2. 3. 4. 5.

Capacity
Introduction to Material Management
Demand Master
Supply Chain Requirements and Production
Management Planning
Management Planning Activity
Control

Theory of
Aggregate Purchasing Lean/JIT and
Item Inventory Constraints
Inventory and Physical Quality
Management and Review
Management Distribution Systems
Activity

6. 7. 8. 9. 10.

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Learning Objectives

Introduction to Theory of Constraints

– Explain the importance of managing the constraint to maximize system throughput

General Applications
– Describe the four basic types of logical product flows in the materials
transformation process (V, A, T, and I)
– Explain the difference between a bottleneck and a capacity-constrained resource,
and between an internal and external constraint
– Explain the purpose of the drum, buffer, and rope in planning and scheduling
– Differentiate between the three types of buffers and their use
– Explain the role of buffer management in controlling the process
– List the criteria for the strategic placement of stock buffers
– Explain the five focusing steps
– Describe the relationship between theory of constraints and the critical chain
– Describe how a pull system works with the theory of constraints philosophy

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Theory of Constraints & Review Activity
Session 10

Introduction to
Theory of
Constraints

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Philosophy and Basic Principles

Holistic philosophy
Throughput-based thinking
Focus on the constraint

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Types of Constraints

Throughput-Based
– Internal: physical resource constraint
– External: market constraint

Behavior-Based
– Lack of understanding of causes and effects of problems
– Not knowing where to start making improvements

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Problem-Solving Tools

Five focusing steps

Thinking process—answers these questions:
– What to change?
– What to change to?
– How to create a change?

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Theory of Constraints & Review Activity
Session 10

General
Applications

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VATI Analysis

Logical Product Diagrams

= Finished Products

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Problem 10.1
Match these products to the flow that fits their
production:

a. Jet engine

b. Steel products

c. Packaged food products

d. Personal computers

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Problem 10.1 Solution
Match these products to the flow that fits their
production:

a. Jet engine

b. Steel products

c. Packaged food products

d. Personal computers

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Drum-Buffer-Rope Planning
Step 1 Identify the Constraint

Capacity shown assumes 24-hrs-per-day, 7-days-per-week operations schedule.

A B C D E
150/hr 140/hr
110/hr 80/hr 140/hr
140/hr 210/hr
Raw
Material Ship

If the market demand = 500/hr, C = the active bottleneck

If the market demand = 75/hr, C = capacity-constrained resource
If the market demand = 50/hr, the market is the constraint

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Problem 10.2

A B C D E
150/hr
300/hr 140/hr
280/hr 280/hr
80/hr 140/h
160/hr 210/hr
420/hr
Raw
Material Ship

a. If the market demand = 600/hr, what is the active bottleneck?

b. If the market demand = 80/hr, what is the constraint?
c. If the market demand = 150/hr, what is the role of resource D?

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Problem 10.2 Solution

A B C D E
150/hr
300/hr 140/hr
280/hr 280/hr
80/hr 140/h
160/hr 210/hr
420/hr
Raw
Material Ship

a. If the market demand = 600/hr, D is the active bottleneck

b. If the market demand = 80/hr, the market is the constraint
c. If the market demand = 150/hr, resource D is the CCR

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Drum-Buffer-Rope Planning
Step 2 Exploit the Constraint

Market demand = 75 per hour

A B C D E
150/hr 140/hr
110/hr 80/hr 140/hr
140/hr 210/hr
Raw
Material Ship

Exploit = use the constraint to the maximum:

• Ensure quality of material
• Stagger work breaks
• Perform preventive maintenance
• Create a realistic finite schedule at resource C (the drum)
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Drum-Buffer-Rope Planning
Step 3 Subordinate Everything to the Constraint(s)

Market demand = 75 per hour

Rope
Drum Protective
Capacity

A B C D E
150/hr
150/hr 110/hr
140/hr 80/hr
80/hr r
140/hr
140/h 210/hr
210/hr
Raw
Material Ship
Ship

Constraint Buffer Shipping Buffer

(5-hr. lead time) (3-hr. lead time)

Stock Buffer Stock Buffer Stock Buffer

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Problem 10.3

A
G B
H C
I D
J K
E
150/hr
10 140/hr
5 80/hr
9 140/h
8 210/hr
7
Raw
Material Ship
Capacity = units/day

Where is the drum?

Where should stock buffers be located?

Where is the rope?

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Problem 10.3 Solution

A
G B
H C
I D
J K
E
150/hr
10 140/hr
5 80/hr
9 140/h
8 210/hr
7
Raw
Material Ship
Capacity = units/day

The drum is at H

The stock buffers should be located before raw

material, H, and shipping
The rope goes from H to raw material

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Buffer Management
Monitoring the buffers
Red zone Red zone: expedite
Yellow zone Yellow zone: monitor
Green zone Green zone: don’t worry

Red Zone Red Zone

Green Zone Yellow Zone Green Zone Yellow Zone

A B C D E
150/hr
150/hr 110/hr
140/hr 80/hr
80/hr 140/hrr
140/h 210/hr
210/hr
Raw
Material Ship
Ship

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Drum-Buffer-Rope Planning
Step 4 Elevate the Constraint

Market demand = 75 per hour

A B C D E
150/hr
150/hr 110/hr
140/hr 80/hr
80/hr 140/hrr
140/h 210/hr
210/hr
Raw
Material Ship
Ship

If Steps 2 and 3 are not sufficient or market conditions change:

• Add new equipment
• Reorganize
• Make other productivity improvements

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Drum-Buffer-Rope Planning System
Step 5 Find New Constraint and Repeat Cycle

Identify the
constraint

Five
Focusing Exploit the
Steps Start over
constraint

A process to continuously
improve organizational
profit by evaluating the
production system and
market mix to determine
how to make the most profit Elevate the Subordinate
using the system constraint. constraint everything else

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Simplified Drum-Buffer-Rope
The Market is the Constraint

Market demand = 20 per hour

A B C D E
150/hr
150/hr 110/hr
140/hr 80/hr
80/hr 140/hrr
140/h 210/hr
210/hr
Raw
Material Ship
Ship

Shipping Buffer
(8-hour lead time)

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Throughput Accounting
Theory of constraints relies on three global measures that, as a group,
constitute a managerial accounting system called throughput accounting.

(T) Throughput ($)

Throughput $ = Sales Revenue – True Variable Costs

(I) Investment TVC = cost of raw materials

(OE) Operating Expense and sales commissions

Operational decisions are evaluated in the following order:

Priority 1 Priority 2 Priority 3

Improvement Improvement Improvement

increases T reduces I reduces OE

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Critical Chain

TOC principles have had a significant influence on the use

of the critical chain method in project management:

Individual tasks are not as important as the goal of the

system (production process)
Manage the constrained resource(s)
Protect (minimize) manufacturing lead time by strategic
buffering to prevent delays

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Distribution

Hold inventory near the factory

Pull-based; distributors replenish from factory
Use periodic review system to reorder
Monitor inventory against target levels as in buffer
management (zones)
Place orders frequently and in small quantities
Combine orders for economies of full-truckload deliveries

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Theory of Constraints & Review Activity
Session 10

―Wiki‖ Review
Activity

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―Wiki‖ Review Activity

Objectives:
Build and reinforce knowledge on BSCM topics.
Understand, write, and practice exam questions.

Complete this instructor-led group activity in class.

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Theory of Constraints & Review Activity
Session 10

Wrap-Up and
Homework

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Learning Objectives

Introduction to Theory of Constraints

– Explain the importance of managing the constraint to maximize system throughput

General Applications
– Describe the four basic types of logical product flows in the materials
transformation process (V, A, T, and I)
– Explain the difference between a bottleneck and a capacity-constrained resource,
and between an internal and external constraint
– Explain the purpose of the drum, buffer, and rope in planning and scheduling
– Differentiate between the three types of buffers and their use
– Explain the role of buffer management in controlling the process
– List the criteria for the strategic placement of stock buffers
– Explain the five focusing steps
– Describe the relationship between theory of constraints and the critical chain
– Describe how a pull system works with the theory of constraints philosophy

10  29 © APICS CONFIDENTIAL AND PROPRIETARY

Vocabulary Check

Objective: Reinforce terminology used in this session.

Complete the activity in class, individually or in pairs, or as
homework.

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Vocabulary Check
1 2
C R I T I C A L C H A I N M E T H O D
O I
3
N E X C E S S C A P A C I T Y
4
S D T
5 6
T B T H E O R Y O F C O N S T R A I N T S
R O U I
A T M B
7
I T B F I V E F O C U S I N G S T E P S
N L U T
8
T E F P R O T E C T I V E C A P A C I T Y
N F O
E E N
9
T O C P E R F O R M A N C E M E A S U R E S
K R Y
O S
10
T H R O U G H P U T A C C O U N T I N G
E E
11
B U F F E R M A N A G E M E N T

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