Chase and Shankar

14
Operations and
Supply Chain
Management
CHASE | SHANKAR | JACOBS
231
THEORY OF
CONSTRAINTS
Chapter Twenty-
McGraw-Hill/Irwin
Three
Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
232
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Learning Objectives
LO231: Explain the Theory of Constraints
(TOC).
LO232: Analyze bottleneck resources and apply

TOC principles to controlling a process.
LO233: Compare TOC to conventional

approaches.
LO234: Evaluate bottleneck scheduling

problems by applying TOC principles.
233
Goldratts Rules of Production
reserved.
Scheduling
Do not balance capacity, balance the flow.
The level utilization of a non-bottleneck
resource is not determined by its own potential
but by some other constraint in the system.
Utilization and activation of a resource are not
the same.
An hour lost at a bottleneck is an hour lost for
the entire system.
An hour saved at a non-bottleneck is a mirage.
234
Goldratts Rules of Production
reserved.
Scheduling (continued)
Bottlenecks govern both throughput and
inventory in the system.
Transfer batch may not, and many times
should not, be equal to the process batch.
A process batch should be variable both
along its route and in time.
Priorities can be set only by examining the
systems constraints, and lead time is a
derivative of the schedule.
235
Goldratts Theory of
reserved.
Constraints (TOC)
Identify the system constraints.

Decide how to exploit the system
constraints.
Subordinate everything else to that decision.
Elevate the system constraints.
If, in the previous steps, the constraints have
been broken, go back to step 1, but do not
let inertia become the system constraint.
236
money.
Firm
The goal of a firm is to make

Goldratts Goal of the
237
reserved.
Performance Measurement
reserved.
Financial
Net profit
An absolute measurement in dollars
Return on investment
A relative measure based on investment
Cash flow
A survival measurement
238
Performance Measurement
reserved.
Operational
Throughput
The rate at which money is generated by the
system through sales
Inventory
All the money that the system has invested in
purchasing things it intends to sell
Operating expenses
All the money that the system spends to turn
inventory into throughput 239
reserved.
Productivity
Productivity typically measured in terms of
output per labor hour.
Does not guarantee profitability.

Has throughput increased?
Has inventory decreased?
Have operational expenses decreased?
Productivity is all the actions that bring a

company closer to its goals.
2310
reserved.
Unbalanced Capacity
In earlier chapters, we discussed balancing
assembly lines.
The goal was a constant cycle time across all
stations.
Synchronous manufacturing views constant

workstation capacity as a bad decision.
Random variations must be handled using
inventory.
When one process takes longer than the average,
the time can not be made up.
2311
Bottlenecks and Capacity-
reserved.
Constrained Resources
Capacity: the available time for production
Bottleneck: what happens if capacity is less than

demand placed on resource
Non-bottleneck: what happens when capacity is

greater than demand placed on resource
Capacity-constrained resource (CCR): a resource

where the capacity is close to demand on the
resource 2312
Blocks
Basic Manufacturing Building
2313
reserved.
Methods for Control
2314
reserved.
reserved.
Time Components
Setup time: the time that a part
spends waiting for a resource to be
set up to work on this same part
Process time: the time that the part
is being processed
Queue time: the time that a part
waits for a resource while the
resource is busy with something else
2315
Time Components of
reserved.
Production Cycle (Continued)
Wait time the time that a part waits
not for a resource but for another
part so that they can be assembled
together
Idle time the unused time that

represents the cycle time less the
sum of the setup time, processing
time, queue time, and wait time
2316
reserved.
Finding the Bottleneck
Run a capacity resource profile
Obtained by looking at the loads placed
on each resource by the products that
are scheduled through them
Use your knowledge of the particular

plant
Look at the system in operation
Talk with supervisors and workers
2317
reserved.
Saving Time
Bottlenecks govern both throughput
and inventory in the system.
An hour lost at a bottleneck is an

hour lost for the entire system.
An hour saved at a non-bottleneck is

a mirage.
2318
Drum, Buffer, Rope
2319
reserved.
reserved.
Importance of Quality
More tolerant than JIT systems

Excess capacity throughout system
Except for the bottleneck

Quality control needed before
bottleneck
2320
reserved.
Batch Sizes
What is the batch size?
One?
Infinity?
Larger batch sizes require fewer setups
and therefore leave more time for
processing.
Desirable for bottleneck resources.
For non-bottleneck resources, smaller
batch sizes are desirable.
Reduces WIP inventory.
2321
How to Determine Process
reserved.
Batch and Transfer Batch Sizes
A bottleneck
With no setup required when changing from one
product to another
Process jobs in the order of the schedule.
Without setups, only sequence is important.
With setup times required to change from one
product to another
Large batch sizes combine separate jobs into the
sequence.
This means reaching ahead in the schedule.
Some jobs will be done early.
Large batches saves setup and increases throughput.
2322
How to Determine Process Batch
reserved.
and Transfer Batch Sizes (Continued)
A capacity constrained resource (CCR)

With no setup required to change from one
product to another
With setup time required when changing
from one product to another
Handling similar to a non-bottleneck

Smaller batches so there can be more
frequent changes of product
Decreased lead time
2323
How to Treat
reserved.
Inventory
Traditional view is the only negative
impact of inventory is carrying cost.
However, can also lengthen lead

times and create problems with
engineering changes.
Less WIP reduces the number of
engineering changes.
2324
Benefits from Dollar Day
reserved.
Measurement
Marketing
Discourages holding large amounts of finished goods
inventory
Purchasing
Discourages placing large purchase orders that, on the
surface, appear to take advantage of quantity discounts
Manufacturing
Discourage large work-in-process and producing earlier
than needed
Project management
Quantify a projects limited resource investment as a
function of time
2325
Comparing Synchronous
reserved.
Manufacturing to MRP and JIT
MRP
Uses backward scheduling.
Schedules through a BoM explosion.
MRP develops capacity utilization profiles.
Trying to smooth capacity is difficult.
Synchronous manufacturing
Uses forward scheduling.
This ensures a feasible schedule.
Batch sizes can vary.
2326
reserved.
JIT Drawbacks
JIT is limited to repetitive manufacturing.
JIT requires a stable production level.
JIT does not allow very much flexibility in the
products produced.
JIT still requires work-in-process when used
with Kanban so that there is something to
pull.
Vendors need to be located nearby because
the system depends on smaller, more frequent
deliveries.
2327
Relationship with Other
reserved.
Functional Areas
Accountings influence
Global measurements show net profits, ROI, and
cash flow.
Local cost accounting measurements show
efficiency or utilization rates.
Marketing and production

Marketing and production should work in harmony.
In practice, they act independently.
Data for evaluating marketing and manufacturing
are different.
2328
Theory of Constraints Problems
reserved.
about What to Produce
For a set of production processes
described in Exhibit 23.14, with the data
given in the table below, what should be
the products produced and what should be
the quantities of those products?
Sales
Time Number
Limiting Selling revenue
Product Required produced
Resources price ($) per hour
(min) per hour
($)
A Y 10 6 50 300
B X 6 10 75 750
C Z 5 12 60 720
2329
Exhibit 23.14: Prices and
Production Requirements
2330
reserved.
Theory of Constraints Problems
reserved.
about What to Produce (Continued)
Solution
Three different objectives could exist that lead
to different conclusions
1. Maximize sales revenue because marketing
personnel are paid commissions based on total
revenue.
2. Maximize per unit gross profit.
3. Maximize total gross profit.
In this example, we use gross profit as the
objective and provide a solution. Other
objectives can be worked out similarly.
2331
Objective 3 Maximize Total
reserved.
Gross Profit
We can solve this problem by finding either
Total gross profit for the period
Rate at which profit is generated
We use rate to solve the problem both because
it is easier and because it is a more appropriate
measure. We use profit per hour as the rate.
Note that each product has a different work
center that limits its output. The rate at which
the product is made is then based on this
bottleneck work center.
2332
Profit per Hour
reserved.
Calculations
Conclusion: It is clear that product C
provides the highest profit per hour
and in order to maximize total gross
profit, one should produce as much
of the C as possible.
Limitin Number Raw Profit Profit
Time Selling
Produc g produce materi per per
Require price
t Workce
d (min) d per al unit hour
n-ter ($)
hour cost($) ($) ($)
A Y 10 6 50 20 30 180
B X 6 10 75 60 15 150
C Z 5 12 60 40 20 240
2333

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14

LO232: Analyze bottleneck resources and apply

LO233: Compare TOC to conventional

LO234: Evaluate bottleneck scheduling

Identify the system constraints.

The goal of a firm is to make

Does not guarantee profitability.

Productivity is all the actions that bring a

Synchronous manufacturing views constant

Bottleneck: what happens if capacity is less than

Non-bottleneck: what happens when capacity is

Capacity-constrained resource (CCR): a resource

Idle time the unused time that

Use your knowledge of the particular

An hour lost at a bottleneck is an

An hour saved at a non-bottleneck is

More tolerant than JIT systems

Except for the bottleneck

A capacity constrained resource (CCR)

Handling similar to a non-bottleneck

However, can also lengthen lead

Marketing and production

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