Operations and Production Management: Toc Msc. Małgorzata Zalewska-Traczyk

Warsaw University of Technology
Faculty of Production Engineering

Institute for Organization of Production Systems
OPERATIONS AND
PRODUCTION MANAGEMENT
TOC
MSc. Małgorzata Zalewska-Traczyk
OPMAN
exercises ©M.Zalewska-Traczyk
Theory of Constraints
1
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2 Reserved.
Outline
1. Introduction to Constraints
2. Five Steps Of Theory of Constraints
3. Drum Buffer Rope
4. Evaporating Cloud Method
5. The Batch Size Problem
6. Chain Analogy
7. Issues with TOC
8. Measurements & Financial Issues

3 Reserved.
Constraints
Any system can produce only as much as its critically constrained resource
Constraint
60 units 70 units 40 units 60 units

Per day Per day Per day Per day
Maximum Throughput = 40 units per day

4 Reserved.
Significance of Bottlenecks
 Maximum speed of the process is the
speed of the slowest operation
 Any improvements will be wasted
unless the bottleneck is relieved

5 Reserved.
 Purpose is to identify constraints and
exploit them to the extent possible
◦ Identification of constraints allows
management to take action to alleviate
the constraint in the future

6 Reserved.
 Assumes current constraints cannot
be changed in the short-run
◦ What should be produced now, with
current resources, to maximize profits?
 Question cannot be answered by traditional
accounting methods

7 Reserved.
 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

8 Reserved.
◦ 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

9 Reserved.
Do we really want or need another new theory?
“The significant problems we face today

can not be resolved at the same level
of thinking we were at when we
created them.”
- Einstein

10 Reserved.
What is the Theory of Constraints?
“The core idea in the Theory of

Constrains
is that every real system such as a
profit-making enterprise must have at
least one constraint”.

11 Reserved.
What is TOC? (continued)
“There really is no choice in the matter.

Either you manage constrains or they
manage you. The constraints will
determine the output of the system
whether they are acknowledged and
managed or not”
Noreen, Smith, and Mackey, The Theory of Constraints and its Implecations for Management Accounting (North River Press, 1995)

12 Reserved.
How does TOC help
companies?
1. Focusing improvement efforts
where they will have the greatest
immediate impact on the bottom line.
2. Providing a reliable process that

insures Follow Through!

13 Reserved.
Five Steps Of TOC
1. Identifying the constraint
2. Decide how to exploit the constraint
3. Subordinate everything else to the

decision in step 2
4. Elevate the constraint
5. Go back to step 1, but avoid inertia

14 Reserved.
2. Identify the 3. Use bottlenecks

bottlenecks properly
1. Identify the 4. Synchronize all

appropriate other processes to
measures of value the bottlenecks
6. Avoid inertia and 5. Increase the

return to Step #1 bottleneck’s capacity
15 Reserved.
Steps in the TOC Process
Identify the system constraints
 Internal
 External
◦ Process constraints
◦ Material constraints
 Machine time, etc.
 Insufficient materials
◦ Policy constraints
◦ Market constraints
 No overtime, etc.
 Insufficient demand

16 Reserved.
 Decide how to exploit the constraint
◦ Want it working at 100%
◦ How much of a buffer?

17 Reserved.
 Subordinate everything else to the
preceding decision
◦ Plan production to keep constraint
working at 100%
◦ May need to change performance
measures to “rope” upstream activities

18 Reserved.
 Elevate the constraint
◦ Determine how to increase its capacity
 Repeat the process

◦ Always a new constraint

19 Reserved.
Drum Buffer Rope
 Drum-Buffer-Rope for Shop Floor Control
◦ 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
60 70 40 60
Rope Constraint
(Drum)
20 Reserved.
Lean: How DBR Supports it
Fundamentally, Don’t Build Until Needed
 Overproduction avoided because DBR is “pull” system
 Inventory minimized because only buffer at constraint
 Transportation reduced because “unbuilt material” doesn’t move
 Processing waste minimized because “unbuilt material”
 Unnecessary Motion decreased because don’t build unneeded
 Waiting is eliminated at the constraint –only place that counts
 Defects avoided because of “small lot”, non conformance, and corrective action

21 Reserved.
Evaporating Cloud Method
 Implementing step 2:
Decide how to exploit the system‘s
constraints
 Idea:
Find the minimum number of changes
that are needed to create an eviroment
where the core problem (big black cloud)
cannot exist. You don‘t try to solve the
problem, but instead cause the problem
not to exist.
23 Reserved.
 „as long as we think we already know,
we don´t bother to rethink the
situation“
◦ Problem of „accepted“ solutions (compromise)
 „You can‘t have your cake and eat it

too“
◦ Existence of compromising solutions
 „God does not limit us, we are

limiting ourselves“
◦ Whenever we face a solution that requires a compromise, there is always a simple solution
that does not require a compromise

24 Reserved.
Define a problem precisely
 Declaration of the desired objective

 Define the requirements that must be
fulfilled
 Define shared prerequisite

25 Reserved.
Define a problem precisely
 Declaration of the desired objective

 Define the requirements that must be
fulfilled
Verbalize the hidden assumptions
 Define shared prerequisite
Find invalid assumptions
Check the local objective versus the global goal

26 Reserved.
The Batch Size Problem
Cost per unit
Carrying cost/unit
Setup cost/unit
Batch size
Best optimum size

27 Reserved.
 Hidden assumptions:
• Setup costs cannot be reduced
Just-in-time
• Does setup really cost us money?
Distortion of the definition of cost

28 Reserved.
 Hidden assumptions:
• Large batch is the opposite of small batch
improper use of terminology

29 Reserved.
local objective “less costs” global objective “more money”

30 Reserved.
Chain Analogy
A company can be compared to a

chain. The activities businesses
perform is really a “chain” of
dependent events. That is to say that
we don’t ship parts until they are
packaged, and we don’t package parts
until they are manufactured, etc.

31 Reserved.
Chain Analogy
Marketing Bidding Purchasing Production Finishing Shipping

32 Reserved.
Chain Analogy
Conventional Wisdom believes that…

•Improvement of any link is an improvement to the chain.
•Global improvement is the sum of the local improvements.
•Primary Measurement: Link Weight
Result: Every link wants/needs more resources all the time

33 Reserved.
Chain Analogy
“Take actions that will maximize any/all local operations.” (i.e. Fight
constantly for scarce resources.)
MAXIMIZE
Marketing Shipping
Bidding
Finishing
Purchasing Production
34 Reserved.
Chain Analogy
Throughput World Approach believes

that…
 Most improvement of most links do not
improve the the chain.
 Global improvement is NOT the sum of
the local improvements.
 Primary Measurement: Chain Strength
Result: Resources are channeled to the
weakest link (aka: Herbie, the
constraint, “CCR”).
35 Reserved.
Chain Analogy
“Think Globally. Take only those local actions that will strengthen the
chain.” (i.e. Focus scarce resources on the constraint.)
Management & Resources
Marketing Bidding Purchasing Production Finishing Shipping

36 Reserved.
Common Sense Throughput
A Lean Approach to Managing the Shop Floor
Constraint- Throughput
Based Management
Scheduling
Central
Database
DBR
Shop Floor

37 Reserved.
Shop Floor Control Techniques
Product Line Strategy
Engineer Make to Assemble Make to

To Order Order To Order Stock
Job Low Volume,

Production Process Layout
High Variety
Shop
Batch
Flow TOC/DBR
Medium Volume,
Med. Variety
Mixed-
High Volume,
Model Fixed Variety
Repetitive
Dedicated
Repetitive JIT/KANBAN High Volume,
Standard
Product

39 Reserved.
Issues with TOC
 Constraining resource must be
maximized
◦ All other operations must be geared
toward this goal
 May require suboptimization in other areas

40 Reserved.
Issues with TOC
◦ Upstream operations must provide only
what the constraint can handle
◦ Downstream operations will only receive
what the constraint can put out
◦ Constraint must be kept operating at its
full capacity
 If not, the entire process slows further

41 Reserved.
Issues with TOC
 Advantages
◦ Improves capacity decisions in the short-run
◦ Avoids build up of inventory
◦ Aids in process understanding
◦ Avoids local optimization
◦ Improves communication between
departments
42 Reserved.
Issues with TOC
 Disadvantages
◦ Negative impact on non-constrained
areas
 Diverts attention from other areas that may be
the next constraint
 Temptation to reduce capacity

43 Reserved.
Issues with TOC
 Ignores long-run considerations

◦ Introduction of new products
◦ Continuous improvement in non-
constrained areas
 May lead organization away from
strategy
 Not a substitute for other accounting
methods
44 Reserved.
Financial Issues: Finding the Goal
Before a company can properly focus,

one necessary condition is that they
answer the following question:
◦ What is the Goal of a for profit enterprise?

45 Reserved.
The Goal?
 To make more money now and in the

future!

46 Reserved.
The Goal
Some would argue that the goal of
their company is to…
 To satisfy customers now and in the

future!
Or to..
 Provide satisfying jobs now and in the
future!

47 Reserved.
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 Satisfy employees

now and in the future. now and in the future

48 Reserved.
The Goal
That is…
 If your goal is to satisfy customers, it is
absolutely necessary that you make
money and that you satisfy
employees…
 Likewise, if your goal is to satisfy
employees, you also have to make
money and satisfy your customers…
…or you won’t be in business in the
future! 49
Reserved.
The Goal
The choice is yours, choose any of

the three as the goal of your
organization.
For the duration of this presentation,

we will assume that the goal is:
 To make more money now and in the
future! © 2004 Superfactory™. All Rights
50 Reserved.
Measuring Progress
Once the Goal is identified, one

necessary condition to success in
achieving the goal is to identify which
measurements will be used to judge
progress.

51 Reserved.
Measurements
Conventional Wisdom
 Net profit?
 Efficiency?
 Utilization?
 Return on Investment?
 Cash Flow?
“Are you using the right measurements?”

Jonah in The Goal

52 Reserved.
Measurements
TOC Wisdom
 Throughput
 Inventory
 Operating Expense

53 Reserved.
Throughput (“T”)
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.
 T = Selling Price - Materials

54 Reserved.
Inventory (“I”)
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”

55 Reserved.
Operating Expense (“OE”)
All the money the system spends in
order to turn inventory into throughput.
(Or, the money coming into the
organization.)
 All employee time is “OE” (direct,
indirect, operating, etc.)
 Depreciation of a machine is “OE”
 Operating supplies are “OE”

56 Reserved.
Financial Links
“Wait a minute” someone exclaims. “If
I monitor Throughput, Inventory, and
Operating Expense in the short term,
how can I be sure that I will have a
Profit, with a reasonable Return On
Investment in the long term, and
maintain a positive Cash Flow?”

57 Reserved.
Financial Links (continued)
Question 1: If we can increase “T”

while maintaining level “I” and level
“OE, what will the impact be on Net
Profit, ROI and Cash Flow?
If…
T I OE
Then...
NP ROI CF
58 Reserved.
Question 2: If we can decrease “I” while

maintaining level “T” and level “OE”,
what will the impact be on Net Profit,
ROI, and Cash Flow?
If…
T I OE
Then...
NP ROI CF
59 Reserved.
Question 3: If we can decrease “OE”

while maintaining level “T” and level “I”,
what will the impact be on Net Profit,
ROI, and Cash Flow?
If…
T I OE
Then...
NP ROI CF
60 Reserved.
 So the answers to these 3 questions

show unquestionable that by
determining the impact that an action
will have now on Throughput,
Inventory, and Operating Expense we
will know the future impact on Net
Profit, ROI, and Cash Flow.

61 Reserved.
Question 4: What about Inventory?
Because it has no direct impact on Net
Profit, it would seem to be less
powerful at impacting the bottom line.
Even though when…
I
There is no Direct impact on...
NP
62 Reserved.
However, reducing Inventory levels
does also reduce some operating
expenses.
If… Carrying
Then...
I Costs

63 Reserved.
And…
Carrying
If…
Costs
Then...
NP ROI CF
64 Reserved.
Therefore, there is an indirect link…
If… Then…
And since we already saw that a

reduction in inventory causes a direct
increase in ROI and Cash Flow, we
I NP
can see that reducing inventory has a
significant financial impact.

65 Reserved.
 Throughput, Inventory, and Operating
Expense are valuable operational
measures that can be used to guide
our decisions.
 The next question must be: Which of

these 3 is the most important -- or do
they all have equal weight?

66 Reserved.
Where should we focus?
Increasing Throughput
Decreasing Inventory, or
Decreasing Operating Expense?

67 Reserved.
Traditional vs JIT, TQM and
TOC
Traditional Ranking JIT, TQM and TOC
 Operating expense  Throughput
 Throughput  Inventory or Assets
 Inventory or Assets  Operating 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 ?

68 Reserved.
Why do we need inventory to protect throughput ?
We need inventory to protect throughput, because

there are statistic fluctuations ( variations ) and dependent
resources

69 Reserved.
TOC, TQM and JIT
 All 3 methods attempt to reduce variation and
recognize the interdependencies.
 Statistical process control is emphasized in the

quality area to help identify ways to reduce
variations.
 Cells are used to reduce the dependencies „..U

cell configurations , where one worker is moving
with the processed piece from one machine to
another“
 Predetermined schedules, in TOC, reduce both

statistical fluctuation and dependent resources.
70 Reserved.
The “Cost World”
 Decreasing “OE” is definitely #1
because we have relatively high control
of our expenses.
 Increasing “T” is always important, but
it ranks #2 because we are at the
mercy of the marketplace and have
less control over sales.
 Inventory tends to fall into a “grey area”
that we don’t know exactly what to do
about; it is a “necessary evil” that must
be lived with to protect sales.

71 Reserved.
The “Throughput World”
 Increasing “T” is unquestionably #1
because it has the greatest potential
impact on the bottom line.
 Decreasing “I” is #2 because excess
WIP and finished goods jeopardize
future throughput.
 Decreasing “OE” is #3 because
significant reductions (workforce
reductions) usually jeopardize future
throughput.
72 Reserved.
Financial Issues
 TOC is a management tool, not a
financial tool
 Not used to determine inventory
values
 Not used to allocate overhead to
inventory
 Does not comply with GAAP
 Does indicate how to use available
resources most effectively
73 Reserved.
Financial Issues
 Standard costing promotes
undesirable behavior
◦ Work to keep people busy
 Local optimization
 Inventory is produced regardless of need

74 Reserved.
Financial Issues
 Does indicate what it should cost to
produce a product
 Does not indicate which products will
maximize profits given the constraints
◦ Doesn’t take constraints into account
◦ Standard cost does not consider the
demands each item places on limited
resources

75 Reserved.
Financial Issues
 Traditional absorption costing
promotes undesirable behavior
◦ Production costs are assets until sold
 Accumulation of inventory keeps costs off the
income statement
 Illusion of profitability

76 Reserved.
Financial Issues
 Does indicate what it costs to produce
a product
 Doesn’t indicate which products will
maximize profits given the constraints
◦ Doesn’t take constraints into account
◦ Absorption cost does not consider the
demands each item places on limited
resources

77 Reserved.
Financial Issues
 Variable (direct) costing identifies the
incremental costs of producing a
product
◦ Identifies product that provides the greatest contribution margin, or
contribution margin per unit of constrained resource
 Cannot deal with more than one constraining

resource at a time

78 Reserved.
Financial Issues
 Traditional definition of variable cost
doesn’t hold in the short-run
◦ Labor, variable overhead aren’t really variable on a day-to-day
basis
 Some costs are truly variable in the

short-run
◦ Material, commissions, delivery costs, out-of-pocket selling costs

79 Reserved.
Profit
 Profit is defined in terms of throughput
◦ Sales – totally variable costs
◦ All other costs treated as fixed operational expenses
 Cannot vary much in the short-run

80 Reserved.
TOC Question...
How do you manage a company in a

world where increasing Throughput is
the #1 priority, reducing Inventory is
#2, and reducing Operating Expense
is a tactic only after serious efforts at
#1 and #2?

81 Reserved.
TOC Summary
The theory of Constraints is about 2

things
 Focus
 Follow Through

82 Reserved.
TOC Summary: Focus
 A company must first know its Goal

 Then it must identify the thing(s), the
constraint(s), that are limiting the level
of achievement of that goal.

83 Reserved.
TOC Summary: Follow
Through
The Process Of On Going Improvement
1. Identify the constraint
2. Exploit it
3. Subordinate all other operations to
the necessity to exploit the
constraint.
4. If after #2 and #3 more capacity is
needed to meet market demand,
Elevate the constraint.
5. Go back to #1, but don’t let inertia
become the system.s constraint.
84 Reserved.
Conclusion
 Viewing an organisation from the operation expense
world perspective causes one to believe that almost
everything is important – that the organization is
composed of independent variables.
 But viewing the organization from throughput world

perspective forces the realization that the organization
is a collection of dependent variables and that the
artificial barriers between these variables, or functions,
must be eliminated.
 Managing the parts of an organization as if they were

isolated kingdoms is not the dominated measurement.

85 Reserved.
Conclusion
 In the throughput world, constraints

become the main tools of
management and the previous tool,
product cost, can be discarded.

86 Reserved.
Thank you!
OPMAN
exercises ©M.Zalewska-Traczyk

Operations and Production Management: Toc Msc. Małgorzata Zalewska-Traczyk

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Warsaw University of Technology

Faculty of Production Engineering

 Current contact information can be found at: www.superfactory.com

© 2004 Superfactory™. All Rights

© 2004 Superfactory™. All Rights

60 units 70 units 40 units 60 units

Maximum Throughput = 40 units per day

© 2004 Superfactory™. All Rights

© 2004 Superfactory™. All Rights

© 2004 Superfactory™. All Rights

© 2004 Superfactory™. All Rights

© 2004 Superfactory™. All Rights

“The significant problems we face today

© 2004 Superfactory™. All Rights

“The core idea in the Theory of

© 2004 Superfactory™. All Rights

“There really is no choice in the matter.

© 2004 Superfactory™. All Rights

2. Providing a reliable process that

© 2004 Superfactory™. All Rights

2. Decide how to exploit the constraint

3. Subordinate everything else to the

4. Elevate the constraint

5. Go back to step 1, but avoid inertia

© 2004 Superfactory™. All Rights

2. Identify the 3. Use bottlenecks

1. Identify the 4. Synchronize all

6. Avoid inertia and 5. Increase the

© 2004 Superfactory™. All Rights

© 2004 Superfactory™. All Rights

© 2004 Superfactory™. All Rights

 Repeat the process

© 2004 Superfactory™. All Rights

 Overproduction avoided because DBR is “pull” system

 Inventory minimized because only buffer at constraint

 Transportation reduced because “unbuilt material” doesn’t move

 Processing waste minimized because “unbuilt material”

 Unnecessary Motion decreased because don’t build unneeded

 Waiting is eliminated at the constraint –only place that counts

© 2004 Superfactory™. All Rights

 „You can‘t have your cake and eat it

 „God does not limit us, we are

© 2004 Superfactory™. All Rights

 Declaration of the desired objective

© 2004 Superfactory™. All Rights

 Declaration of the desired objective

Check the local objective versus the global goal

© 2004 Superfactory™. All Rights

Cost per unit

© 2004 Superfactory™. All Rights

• Setup costs cannot be reduced

• Does setup really cost us money?

Distortion of the definition of cost

© 2004 Superfactory™. All Rights

• Large batch is the opposite of small batch

improper use of terminology

© 2004 Superfactory™. All Rights

local objective “less costs” global objective “more money”

© 2004 Superfactory™. All Rights

A company can be compared to a

© 2004 Superfactory™. All Rights

Marketing Bidding Purchasing Production Finishing Shipping

© 2004 Superfactory™. All Rights