Theory of Constraints

Theory of Constraints
30th Dec12
Whats TOC
A New management Philosophy
As TQM, JIT, Flow manufacturing, Lean Manufaturing, BPR, SMED Continuous improvement and Business/organizations reengineering Tools and methods Production scheduling, Finances, Marketing, Project management, Conflict resolution,
Do not contradict them: Help focusing effort.
Thinking Process
Applications
ISAThe Instrumentation, Systems, and Automation Society
Basics of Business
The goal of the business is to make Money now & in Future
Generally accepted measures are: Profit Return on Investment Cash Flow We do not Question the validity of these measures. However we do question the usefulness of these measures as operational measures. For the average employee, seeing the effect that any given action has on Net Profit (NP) or Return on Investment (ROI) is almost impossible. As a result we have created local measures such as efficiency & utilization & we believe that they are linked to NP or ROI. However inspite of improvement in these operational metrics more than 99% of the organizations fail to achieve the above goal* * - The Economic times 24th Sept 2005)
New Operational measures

Throughput (T) Investment (I) Operating Expenses (OE)
Throughput: The rate at which Contribution Rupees are coming into organization Thus T = (net Sales All truly variable cost) Investment (I): All the money currently tied up inside the system (Inventory, Assets, Receivables etc) Operating Expenses (OE): All the money that system spends on converting inventory into throughput. All the expenses are clubbed together as OE and are thought as fixed (Employee expenses etc)
Financial links with the new Operational Measures

P = T OE ROI = P / I = (T OE) / I Thus improving Throughput, Investment & Operating expenses have a positive Co-relation with improving the financial metrics. All the new operational metrics should be used to guide our day to day actions to make money now and in future.
Theory of constraints
The core idea in Theory of constraints is that every real system such as an enterprise must have at least one constraint (such as Supply, Operations or Market) that limits the system to achieving its goal. The constraint is not static and may shift; but there can not be any situation when there is no constraint. If there is no constraints then the profit of the organization would have been infinite!
Basics of TOC
The Constraints are neither good or bad but are the facts of life. There is really no choice in the matter. Either you manage the constraints or the constraints will manage you. The constraints decide the output of the organization
Organization as Chain
In TOC the organization is compared to a chain. The activities that constitute a business are Chain of dependant events. As the strength of the chain is decide by the weakest of its link; similarly the output of the organization is decided by the constraints or the weakest area.
Steps of TOC
The TOC process seeks to identify the constraint and restructure the rest of the organization around it, through the use of the Five Focusing Steps:
1. Identify the Constraint
2. Exploit the Constraint
3. Sub ordinate everything (Policies, decisions and proced to exploiting the Constraint 4. Elevate the Constraint
5. Avoid inertia i.e. Repeat Constraint
Application of TOC
There are various applications of TOC: Operations Finance & accounting Project Management Sales & Marketing
THEORY OF CONSTRAINTS area
For production Drum-BufferRope scheduling
For people Management Skills
For projects Critical Chain Project Management
For distribution and supply chain Replenishment
TOC
For finance and measures Throughput Accounting
For anything else, Thinking Processes For sales Buy-In Process
For marketing the compelling, un-refusable Mafia Offer
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Throughput World vs Cost World

Because The only way to achieve good cost inventory performance is through good lcal goes up
performance everywhere
Control Cost Manage well Protect Throughput Manage according to Throughput World Manage according to Cost World
There is no way to achieve good throughput performance through good local performance everywhere
TRADITIONAL MODEL :
Instead of focusing on the actual capacity of the entire system, capacities are determined for individual stages, limiting the companys ability to make money.
TRADITIONAL MODEL
EFFICIENCY
FORECASTING
In many cases, this model is on a microlevel because it accounts for specific areas of the system instead of focusing on the entire system.
The goal is constantly to reduce cost of production and keep processes running at maximum efficiency.
It is most efficient to have every worker and all machines running constantly at 100%. If this is the case, a company gets the most out of their investment in the labor force.
Companies realize that 100% is a utopian figure and scale it to an acceptable range of 85% to 95%.
This efficiency rating is then used to forecast how long it will take for processes to occur and a production schedule can be determined.
Oftentimes this schedule is inaccurate and companies miss out on opportunities to make money.
13
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THINKING PROCESSES
Instead of using physical evidence, you have to start with the evidence that is available; the negative events that are apparent in the system
It is assumed that managers are not dumb. If there is an easy solution to this core problem it would have been solved a long time ago. There must be some conflict that underlies the core problem. Once this is identified, the thinking process is used to develop a breakthrough idea that will resolve a conflict.
WHAT TO CHANGE TO?? HOW TO CAUSE THE CHANGE?
WHAT TO CHANGE ?
Undesirable Effects, or UDEs.
PROCESS OF CHANGE
The challenge is to map out the interrelated web of cause-and-effect that links the undesirable effects together.
Once completed, one is generally able to identify a core problem at the bottom of the map. 14
In order to cause the change you must induce the appropriate people to invent such solutions
Drum-Buffer-Rope Scheduling
Embraces the concept that there is one constraint for the entire organization. If the constraint is internal, the company cannot sell all that is demanded from the company. Due-date performance is probably less than 99%, lead-times may be longer than desired. On the other hand if the constraint is external, the company does not have enough sales to fully utilize its available resources. More sales are desired. Implementing DBR brings a company to 99+% due-date performance (DDP) and maintains that level even with rapid sales growth. It can be implemented in a very short time. Typically, 50% capacity can be freed up to sell with little or no investment or added expense.
15
Mafia - Offer
A Mafia Offer is an offer so good that your customer cant refuse it and your competition cant or wont offer the same. Developing and implementing a Mafia Offer is not trivial, but having one improves typical closing rates from less than 5% to as much as 80%, So Additional sales people arent required, but sales funnel management is.
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TOC : Tools
CRT : Current Reality Tree
Describe the present situation Resolve hidden conflicts
CRD : Conflict Resolution Diagram
FRT : Future Reality Tree

Verify the action produces what is expected Identify negative outcomes of the intended action Identify obstacles and the best way to overcome them Build the sequence we need to complete the major milestones Detailed step-by-step instruction for implementing a course of actions Rules that govern the construction and review of trees
PRT : Prerequiste Tree

TT : Transition Tree
CLR : Categories of Legitimate Reservations
Tools overview
Current Reality Tree Undesirable Effects Intermediate Effects Root Causes, Core Problem Conflict Resolution Diagram Objective Requirements Prerequisites Future Reality Tree Desired Effects Intermediate Effects Injections
Transition Tree Objective Intermediate Effects Specific Action Prerequisite Tree Objective Obstacles, Intermediate Objectives
CRT : Current Reality Tree
Describe the present situation Problem analysis tool Identify the constraint, the Core Problem From UDE to Core Problem
The plant grows
Ambiant temperature range is available
Adequat water exist
Adequat nutrition exist
Adequat sunlight exist
Water is available
Water is not polluted
Nutrition is available
Nutrition is appropriate for the plant
Plant requires sunlight
Direct sunlight is available
CRT : Identify the Core Problem

The Core problem is responsible for 70 % or more for the majority of UDEs UDE = Undesirable Effect RC = Root Cause CP = Core Problem
UDE UDE UDE
UDE RC
UDE
RC RC
CP
CRD : Conflict Resolution Diagram

Most core problems exist because of some underlying conflicts Resolve hidden conflicts Creative Engine or Idea Generator No compromize, win-win solutions
I must In order to have
Requirement #1 Ensure Sharon safety
In order to have
I must
Prerequisite #1 Sharon home before 10 Injection Daddy gives her a ride
Check Assumptions
R1->PR1 Anxious about the return travel Bad boys may be there R2->P2
Do not leave before the party ends
Objective Have a good family life
Creat injection
R1->PR1 Daddy gives her a ride => The conflict is broken
Requirement #2 Sharon is accepted by her friends
Prerequisite #2 Sharon home around 12

Testing of new ideas Reveals potential devastating effects Gasoline consumption Reveals negative branches that worsen is reduced problems Elaboration of positive reinforcing I increase tire loops Higher tire pressure Persuading tool to pressures convince decision reduce makers gasoline Initial planning tool consumption
Gasoline expenses go down even more
Gasoline expenses are down
My engine runs smoothly
Smooth engine use less gasoline
I have an engine setup
My cars engine runs poorly
FRT Notation
DE = Desirable Effect Injections = Proposed actions
DE DE DE
DE Injection Injection
Injection
PRT : Prerequisite Tree

I always get to work on time
(Objective) (Obstacle)
Identify obstacles in realizing an objective Identifies remedies to obstacles Identify required sequence of actions Identify unknown steps Bridge the gap between FRT (major milestones) and TT (step-by-step implementation plan)
My transportation is unreliable
I am delayed in traffic
(Condition)
I use alternate transportation
I use alternate (Intermediate Objective) routes

Alternate routes take longer
Riding the bus takes longer (Action) I dont have the right clothes to wear
I leave early
Unexpected crises occur at home as Im leaving
I keep a ready I have back-ups supply of clean to deal with clothes on hand crises
Build downward until branches converge / the lowest IO is within control
PRT Notation
PRT OBJECTIVE
OBS = Obstacles IO = Intermediate objectives
OBS
OBS
OBS
IO
OBS OBS
IO
OBS
IO
IO
OBS
IO
OBS
IO
IO
OBS
IO
IO
TT : Transition Tree
I have located for job opportunities suitable for my qualifications
Provide step-by-step I have a short list of method for I apply for jobs on action/implementation job opportunities in my my short list Enable effective navigation chosen field that match through a change process my qualifications. Detect deviation in progress toward a limited objective Adapt or redirect effort, should plans change I have little jobCommunicate reasons for I narrow my chhoice All possible job action to others related experience to entry-level openings in my Execute the injections in my chosen field. positions chosen field are developped in CRD/FRT identified Attain intermediate objectives identified in PRT Develop tactical from conceptual / strategic plans Preclude UDE from arising I dont know where I ask respected I research resources out of implementation to look for possible faculty members at the campus career action
job opportunities. for career advice. center
TT Notation
Objective
Reality / Need
Effect
Action
Reality / Need
Effect
Action
Reality / Need
Effect
Action
Reality / Need
Effect
Action
CLR : Categories of Legitimate Reservations
Clarity
Meaning concern, no reasonnable cause-effect connection Completness, Structure (compound), Validity (The sky is falling) Does the cause really result in effect The stated cause for the considered effect seems not enough Other causes may result in the same effect If many fishermen are fishing and their stringers are full of fish then fishing is good Most causes result in more than one effect Circular logic : France football team lost the game because they played poorly
Entity Existence
Causality Existence
Cause insufficiency
Additional Cause
Cause-Effect Reversal
Predicted Effect Existence
Tautology
Summary
TOC is a management philosohy

Common sense based Apply in all domains of life
TOC is a prescriptive theory
That provides effective tools to support and apply concepts
TOC Thinking processes
Applying to all situations (what to change, what to change to, how to cause the change)
Proven results in many areas Often chokes common practices
TOC applications
Relatively slow spread
Glossary

PRT : Prerequisite Tree CLR : Categories of Legitimate Reservations
CP : Core Problem
CRT : Current Reality Tree CRD : Conflict Resolution Diagram = Evaporating Cloud DBR : Drum-Buffer-Rope DE : Desired effect

IO : Intermediate objective OBS : Obstacles POOGI : Process Of OnGoing Improvement PRT : Prerequisite Tree RC : Root Cause UDE : Undesirable effect

Theory of Constraints

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Theory of Constraints

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Theory of Constraints

A New management Philosophy

ISAThe Instrumentation, Systems, and Automation Society

New Operational measures

Financial links with the new Operational Measures

5. Avoid inertia i.e. Repeat Constraint