Operations Management (OMMP19-3)

Sessions 03 & 04 → Theory of Constraints (TOC)

+ Project Management
OMMP19-3 – Details about this Part

◼ Teaching
◼ Session 03 to Session 04

◼ Evaluation
◼ Quiz 01 – 15 marks (45 minutes)
◼ Date → On March 14, 2020
◼ Quiz 02 – 15 marks (45 minutes)
◼ Date → After April 12, 2020
◼ Part of End-term – 5 Marks

◼ If you are absent

◼ There will be no Make-up Quiz/Re-exam
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Constrained Process

◼ Product A
◼ Profit = Rs. 80/unit
◼ Demand = 100/week
◼ Production = 0.4 hours/unit
◼ Product B
◼ Profit = Rs. 50/unit
◼ Demand = 200/week
◼ Production = 0.2 hours/unit

◼ What will be maximum profit?

◼ Case 1: Total available time = 60 hours/week
◼ Case 2: Total production limit = 200 units/week
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TOC – Some Important Terms

◼ Throughput → The rate at which products are sold

◼ Limited by internal constraints (plant capacity)
◼ Limited by external constraints (market demand)
◼ Limited by wrong policy/rules taken by management
◼ Constraint → Anything that limits a system’s performance
relative to its goal (Make Money) → Bottleneck
◼ Inventory → All the money used to purchase things the
system intends to sell
◼ Paid but not sold
◼ Buffer (Inventory) → ‘Time’ based (NOT ‘Quantity’ based)
◼ Operating expense → The money a system spends to turn
inventory into throughput
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TOC Principles – Some Difference
with Traditional Systems
◼ Efficiency should NOT be considered as
◼ Measure of performance

◼ Cost per unit should not be considered as

◼ Productivity measure

◼ Process classification should be done as

◼ I-V-A-T types

◼ Transfer batch ≤ Process batch

◼ Process batch should not be fixed

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Theory of Constraints – Steps

◼ Identify the systems constraints

◼ Decide how to exploit the constraints
◼ Subordinate everything else to the exploitation of
constraints
◼ Elevate the systems constraint
◼ If any of the constraints are violated, repeat the process

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 Drum-Buffer-Rope (DBR)

C
80

Supplier Customer

A B D E
80 90 60 75

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 Drum-Buffer-Rope (DBR)

C
80

Supplier Customer

A B D E
80 90 60 75

Constraint
(Drum)
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 Drum-Buffer-Rope (DBR)

C
80
60

Supplier Customer

A B D E
80 90 60 75
60 60 60

Constraint
(Drum)
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 Drum-Buffer-Rope (DBR)

C
80
60
Constraint Buffer

Supplier Customer

A B D E
80 90 60 75
60 60 60

Constraint
(Drum)
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 Drum-Buffer-Rope (DBR)

C
80
60
Constraint Buffer Shipping Buffer

Supplier Customer

A B D E
80 90 60 75
60 60 60

Constraint
(Drum)
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 Drum-Buffer-Rope (DBR)

C
80
60
RM Buffer Constraint Buffer Shipping Buffer

Supplier Customer

A B D E
80 90 60 75
60 60 60

Constraint
(Drum)
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 Drum-Buffer-Rope (DBR)

C
80
60
RM Buffer Constraint Buffer Shipping Buffer

Supplier Customer

A B D E
80 90 60 75
60 60 60

Rope
Constraint
(Drum)
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 Drum-Buffer-Rope (DBR)
Assembly Buffer

C
80
60
RM Buffer Constraint Buffer Shipping Buffer

Supplier Customer

A B D E
80 90 60 75
60 60 60

Rope
Constraint
(Drum)
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 Drum-Buffer-Rope (DBR)
Assembly Buffer

C
80
60
RM Buffer Constraint Buffer Shipping Buffer

Supplier Customer

A B D E
80 90 60 75
60 60 60

Rope
Constraint
(Drum)
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 Capacity Constrained Resource (CCR)
Assembly Buffer

C
80
60
RM Buffer Constraint Buffer Shipping Buffer

Supplier Customer

A B D E
80 90 60 75
60 60 60

Rope
Constraint
(Drum)
CCR Dipankar Bose - XLRI
 Capacity Constrained Resource (CCR)
Assembly Buffer

C
80
60
RM Buffer Constraint Buffer Shipping Buffer

Supplier Customer

A B D E 55

80 90 60 75
60 60 60
Changeover Time
=10 minutes

Rope
Constraint
Rope
(Drum)
CCR Dipankar Bose - XLRI
Theory of Constraints – Some
Principles
◼ Balance flow, not capacity
◼ An hour lost at a bottleneck is an hour lost forever
◼ An hour saved at a non-bottleneck has no value
◼ Bottlenecks govern both throughput and inventory in the
system
◼ Set the schedule by examining capacity and priority
simultaneously and sequentially
◼ The level of utilization of a non-bottleneck is determined
not by its own potential
◼ But by some other constraint in the system
◼ Utilization (for entire system) and activation (doing
independently) of a resource are not synonymous
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Example 1
Product A Product B Product C
Price = 50 Price = 75 Price = 60

Work Center Z Work Center X Work Center X

5 minutes/part 6 minutes/part 4 minutes/part
RM RM RM
= 10 Work Center X = 30 Work Center Y = 15 Work Center Y
4 minutes/part 3 minutes/part 3 minutes/part
RM RM RM
=4 Work Center Y = 18 Work Center Z =5 Work Center Z
10 minutes/part 2 minutes/part 5 minutes/part
RM RM RM
=6 = 12 = 20

◼ Maximize Sales revenue/Gross profit per unit/ Total gross

profit Dipankar Bose - XLRI
Example 2
Product A Product B Product C Product D
Price = 30 Price = 32 Price = 30 Price = 32

Worker 1 Worker 1 Worker 1 Worker 1

5 minutes/part 5 minutes/part 5 minutes/part 5 minutes/part
RM
RM RM RM
=3
Worker 1 =7 =3 Worker 2 =7
10 minutes/part 10minutes/part

Worker 2
RM 20 minutes/part RM
=5 =5
RM
= 10
◼ Max prod: Min prod = 10:1; Weekly 5 days3 shifts
◼ Weekly operating expenses = 3000
◼ Maximize Sales revenue/Gross profit per unit/ Total gross
profit Dipankar Bose - XLRI
Topic: Project Management

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Project Management

◼ Project
◼ A unique set of activities meant to produce a defined
outcome within an established time frame using
specific allocation of resources.
◼ A project is a temporary endeavor undertaken to
provide a unique product or service or result – PMBOK
Guide
◼ Project management
◼ Project management is a process of developing
substantive, systematic data about each parameter in
order to maximize the effectiveness of tradeoff decision.
◼ Parameters → Time/ Resource/ Result
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Project Management – Steps

◼ Define and organize the project

◼ Establish the project organization
◼ Define the project parameters
◼ Plan the project framework
◼ Assemble the project definition document
◼ Contract specification
◼ Plan the project
◼ Develop Work Breakdown Structure (WBS)
◼ Develop the schedule
◼ Analyze resources
◼ Optimize tradeoff
◼ Develop risk management plan
◼ Track, manage and close the project Dipankar Bose - XLRI
Stage 1 – Define and Organize the
Project
◼ Establish the project organization
◼ Roles and responsibilities → RACI matrix
◼ Designate Project manager – Skill-sets
◼ Knowledge about Application area, standards and
regulations
◼ Soft skills like general management and
interpersonal skill
◼ Knowledge about project environment
◼ Develop ‘Team Roster’
◼ Define the project parameters
◼ Project Objective Statement – Scope/Schedule/Resource
◼ Major deliverables – ‘Is/Is Not’ issues, Target dates
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Stage 2 – Plan the project – WBS
Components
◼ Clear, comprehensive Statement of Work (SOW)
◼ Resource requirements
◼ Time
◼ Cost
◼ Responsibility
◼ Outcomes
◼ Inputs
◼ Quality assurance

◼ If any of the properties can not be defined

◼ The task is too broad
◼ Must be broken down further
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Stage 2 – Plan the project – Develop
the Schedule

◼ Input → WBS
◼ Identify all the dependencies
◼ Finish – Start (FS)/ Start – Start (SS)
◼ If required → Add new tasks or identify redundant tasks
◼ Go back to WBS step to include/exclude task
◼ Create Network diagram
◼ Assign duration for each task
◼ May be expressed with range
◼ Critically examine if time requirement is long or can
not be identified
◼ Identify ‘Milestones’
◼ Create “Gantt Chart”
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Network Diagramming Method –
Example
Activity Duration Predecessor
A 2 --
B 2 --
C 1 --
D 4 A
E 5 B
F 8 B
G 3 C
H 1 D
I 4 E
J 5 F, G
K 3 H, I

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Network Diagramming Method –
Activity on Arc
Node Number

Late Start Time

Early Start Time

Duration, Resource

Predecessor Successor

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Network Diagramming Method –
Solution

2 5
D, 4
H, 1
A, 2

I, 4 8 9
1 B, 2 3 E, 5 6 K, 3

F, 8
C, 1
J, 5

4 G, 3 7

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Early Start and Late Start

◼ Early Start (ES) Rule → Forward pass

◼ For “one arrow” entering the Node → Early time =
Early time at previous Node + Activity time
◼ For “multiple arrows” entering the Node → Early time
= Max {Early time} considering all entering arrows

◼ Late Start (LS) Rule → Backward pass

◼ Last Node time = “Completion Date” from ES Rule
◼ For “one arrow” exiting the Node → Late time = Late
time at next Node – Activity time
◼ For “multiple arrows” exiting the Node → Late time =
Min {Late time} considering all exiting arrows
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Solution – Problem – ES

2 5
D, 4
2 6
H, 1
A, 2

I, 4 8 9
1 B, 2 3 E, 5 6 K, 3
11 15
0 2 7

F, 8
C, 1
J, 5

4 G, 3 7
1 10

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Solution – Problem – ES and LS

2 5
D, 4
2 7 6 11
H, 1
A, 2

I, 4 8 9
1 B, 2 3 E, 5 6 K, 3
11 12 15 15
0 0 2 2 7 8

F, 8
C, 1
J, 5

4 G, 3 7
1 7 10 10

◼ Which one is critical path?

◼ Answer: B-F-J Dipankar Bose - XLRI
Example – Gantt Chart with ES

Act 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
A
B
C
D
E
F
G
H
I
J
K

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Project Risk Management

◼ External (and uncontrollable)

◼ Unpredictable
◼ Regulatory/Natural hazard/Deliberate
◼ Predictable
◼ Market risk/Exchange rate/Inflation/Taxation
◼ Internal (and controllable)
◼ Non-Technical
◼ Management/Schedule/Cost/Cash flow
◼ Technical
◼ Design/Technology/Performance
◼ Legal (and controllable)
◼ Licenses/Patent rights/Contractual difficulty/Lawsuit
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Risk Handling Categories

◼ Risk assumption (i.e., retention)

◼ The project manager says, “I know the risk exists and
am aware of the possible consequences. I am willing to
wait and see what happens. I accept the risk should it
occur.”

◼ Risk avoidance
◼ The project manager says, “I will not accept this option
because of the potentially unfavourable results. I will
either change the design to preclude the issue or
change the requirements that lead to the issue.”

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Risk Handling Categories – Continued

◼ Risk control (i.e., prevention or mitigation)

◼ The project manager says, “I will take the necessary
measures required to control this risk by continuously
re-evaluating it and developing contingency plans or
fall-back positions. I will do what is expected.”

◼ Risk transfer
◼ The project manager says, “I will share this risk with
others through insurance or a warranty, or transfer the
entire risk to them. I may also consider partitioning the
risk across hardware and/or software interfaces.”

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Contract Types – Based on Design

◼ Mainly 4 Types
◼ Cost-plus fixed fee
◼ Cost-plus incentive fee
◼ Fixed price or lump sum
◼ Fixed price incentive fee

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Cost-Plus-Incentive-Fee (CPIF)
Contract – Example
◼ Total fee may be limited between maximum and minimum
fee

◼ Contract Agreement:
Cost estimate = Rs. 100,000
◼ All allowable costs will be reimbursed
Target Fee = Rs. 10,000
Minimum Fee = Rs. 5,000
Maximum Fee = Rs. 15,000
Target Price = 110,000
Gain Sharing Ratio = 70/30

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 CPIF Contract – Example – Continued

Contractor’s 70,000 80,000 90,000 100,000 110,000 120,000

Cost
Fee Min Min Min Min Max Max
(19000, (16000, (13000, (10000, (7000, (4000,
15000) 15000) 15000) 15000) 5000) 5000)
= 15000 = 15000 = 13000 = 10000 = 7000 = 5000
Final Price 85,000 95,000 103,000 110,000 117,000 125,000
Profit % 21.43% 18.75% 14.44% 10% 6.36% 4.16%

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Fixed-Price-Incentive-Fee (FPIF)
Contract

◼ Includes → Price Ceiling and Price Floor

◼ Point of total assumption
◼ Contractor assumes all liability for additional cost

◼ Example – Contract Agreement:

Cost estimate = 100,000
Fee = 10,000
Target price = 110,000
Gain Sharing Ratio = 70/30
Price Floor = 75,000
Price Ceiling = 125,000
◼ Minimum and Maximum payable by client
including fee and reimbursement Dipankar Bose - XLRI
 FPIF Contract – Example – Continued

◼ Point of total assumption (PTA) = ((Ceiling Price – Target

Price)/Buyer's Share) + Cost Estimate
Contractor’s
40,000 60,000 100,000 121,428 125,000 140,000
Cost
True Profit 28000 22000 10000 3572 3572 – 3572 –
(125000 (140000
– –
121428) 121428)
Final Price Max Max Max 125000 125000 125000
(58000, (82000, (110000,
75000) = 75000) = 75000) =
75000 82000 110000
Profit % 87.5% 36.67% 10% 2.94% 0% – 10.71%

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