Week 10 Lecture Material MOIS

MANAGEMENT OF INVENTORY SYSTEMS
Theory of Constraints and Materials Management
PROF PRADIP KUMAR RAY

DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING
IIT KHARAGPUR
1
Sub Topics
1. Basic Concept and Issues
2. Bottleneck and Non-bottleneck Resources
3. Process and Transfer Batches, Dependent Events and Statistical Fluctuations,

Capacity Constraint Resources, TOC Principles
4. How to achieve Continual Improvement of System Performance using TOC

approach, Drum-Buffer-Rope Scheduling, Steps in DBR Scheduling, Types of
Production Systems
5. Types of Production Systems, Typical Questions

IIT KHARAGPUR 2
 Basic concept and Issues

IIT KHARAGPUR 3
Basic Concept and Issues
• It is a general problem, in almost all manufacturing plants, that the flow
of materials through the production stages/processes is not smooth,
rather erratic, most of the time.
• The inventory control system is thus linked with production control system
and researchers/practitioners have suggested a number of tools and
techniques to achieve the condition of smooth flow of materials under
several types of constraints, considered unavoidable in majority of the
cases.

IIT KHARAGPUR 4
• Theory of Constraints, or TOC in short, is considered such a technique or
approach, adopted by a large number of manufacturing organizations in
different countries, including India.
• TOC is a continual improvement methodology that focusses on identification

and management of constraints for achievement of organizational goal.
• In majority of the cases, only a few or limited number of constraints may

affect organization performance negatively and hence, removal of the
constraints in a systematic way helps improve the organizational
performance significantly.
IIT KHARAGPUR 5
• With organizational performance improved, TOC ensures smooth flow of
materials through the resources of a plant matching with market demand.
• TOC, developed by Eliyahu Goldratt, is applied at plant level of an

organization, and is also known as Optimized Production Technology
(OPT), Synchronous Manufacturing, and Drum-Buffer-Rope (DBR)
scheduling.
• As per TOC concept, there are two generic goals of any business
organization: to make more money now and in future, and to establish a
process of continuous improvement.
IIT KHARAGPUR 6
• TOC assumes that these goals may not be achieved due to existence of
several types of constraints, and hence, it is necessary to assess the
impact of such constraints on organizational performance and take
effective steps for removal of the constraints in a systematic manner.
• The starting point for development of TOC methodology is defining a

constraint: What is a constraint?
• A constraint is defined as anything that prevents a system from

achieving high performance relative to its goals.

IIT KHARAGPUR 7
• Constraints can be of two types: external and internal.
• Examples of external constraints: market demand limitations, supply

limitations, etc.
• Examples of internal constraints: capacity limitation of resources, say

workcentres, etc., management
policies, produce to capacity, inflexible
lot size, etc.
• Internal constraints are basically bottlenecks.

IIT KHARAGPUR 8
• Next step is to make effort to achieve the stated goals. What are the
goals of a business firm?
• There are three goals to be achieved simultaneously:
i. Increasing net profit
ii. Increasing return on investment
iii. Increasing cash flow

IIT KHARAGPUR 9
• TOC attempts to achieve these goals by using three operational
measures: Throughput, Inventory, and Operating Expense.
• These three terms are defined differently, in the context of TOC, from
their usual definitions in other contexts.
• Throughput: It is defined as the quantity of money that the system

generates through sales over a specified period of time. It is defined as
‘sales - direct variable cost’. As materials cost is the main direct
variable cost, throughput is measures as ‘sales - materials
cost’(equivalent to contribution margin).
IIT KHARAGPUR 10
• Throughput: If the system produces products but is unable to sell them,
there is no throughput.
• Inventory: It is not defined as it is usually defined elsewhere. It is

defined as the quantity of money that the system has invested in objects
like plant, property, and equipment. The labour and overhead cost is
excluded, but cost for purchased materials and parts is included.
• Operating expense: It is defined as the quantity of money spent by the

system to turn inventory into throughput over a specified period of time.
It includes all costs other than direct variable costs. Mainly the
conversion costs it considers.
IIT KHARAGPUR 11
• Understood simply, throughput is money coming into the system,

inventory is money invested in the system, and operating expense is
money paid out of the system.
• The financial performance of the system is evaluated with respect to a

number of financial measures.

IIT KHARAGPUR 12
• The important financial measures, in terms of TOC-specific terms, are
defined as
i. Net profit = throughput – operating expense
ii. Return on investment = (throughput – operating expense)/inventory
iii. Inventory turnover = throughput/inventory
iv. Productivity = throughput/operating expense

IIT KHARAGPUR 13
• Waste is any expense that does not turn inventory into throughput.
• However, idle resource time is not considered waste.
• By employing TOC logic and methodology, we need to improve the

above financial measures simultaneously (goal is: increased throughput,
reduced inventory, and decreased operating expense).
• As increased performance of individual resources does not guarantee

improved performance of the systems as per systems theory, TOC
emphasizes on the overall system performance improvement
considering optimization of the entire logistical chain of activities.
IIT KHARAGPUR 14
 Bottleneck and Non-bottleneck Resources

IIT KHARAGPUR 15
Bottleneck and Non-bottleneck Resources
• As has been stated, internal constraints are nothing but the bottlenecks.
• For TOC concept to be used in a manufacturing plant, the first

consideration is identification of ‘bottleneck’ and ‘non-bottleneck’
resources.
• A resource may be a workcentre, a process, a machinery, a facility, a

department, and similar such entities.

IIT KHARAGPUR 16
• There may be two types of resources:
i. Bottleneck resource: capacity is less than demand placed on the

resource.
ii. Non-bottleneck resource: capacity is more than demand placed on it.
• Bottleneck resource should process those materials providing throughput.

With increased utilization of this resource, it is essential that appropriate
product mix for the resource is selected so that throughput is maximized.

IIT KHARAGPUR 17
• Non-bottleneck resource has excess capacity. If its capacity is fully
utilized, it does not increase throughput, rather inventory level increases
hampering performance of the plant.
• The excess capacity of non-bottleneck resource can be used in a number

of ways: (i) preventive maintenance, (ii) special problems, (iii) improving
quality of setup.
• There must be a proper plan of work considering possible future

requirements of the resources.

IIT KHARAGPUR 18
• There are three ways the available time at a resource can be spent:
i. Production time: processing time of the ‘throughput time’.
ii. Setup time: one of the important components in throughput time.
iii. Idle time: waiting time at the resource.

IIT KHARAGPUR 19
• For bottleneck resource: minimization of setup and idle time is the goal.
Appropriate quality control techniques are to be used to ensure that
defective parts coming from the previous stage are processed. Demand
beyond capacity may be transferred to other non-bottleneck resources,
capable of producing the parts/components/products as per their
specifications.

IIT KHARAGPUR 20
• Controlling idle time at a resource is an important issue. For non-

bottleneck resources, it is not a problem. For bottleneck resources, the
setup procedure, a non-value adding activity, needs to be continuously
improved so that extra time available by setup time reduction can be
utilized for processing meeting the demand imposed on the demand as
quickly as possible.

IIT KHARAGPUR 21
• An hour lost at a bottleneck resource is an hour lost for the plant.
• If we increase the productivity of a bottleneck resource, productivity of

the plant increases. Hence, bottleneck resource must be continuously
used, and production technology with new/state-of-the-art/appropriate
technology needs to be upgraded for the bottleneck resource.

IIT KHARAGPUR 22
• In this context, as far as use of a resource is concerned, we refer to two
terms:
i. Activation of resource: an act of processing at a resource, not

necessarily resulting in throughput.
ii. Utilization of resource: an act of processing at a resource resulting in

throughput, sufficient condition.
• TOC requires that the resources are utilized, not only activated.

IIT KHARAGPUR 23
• Thus, producing to capacity for all types of resources may lead to high
level of inventory.
• As throughput of the plant/system is determined by utilization of

bottleneck resource, utilization of non-bottleneck resources is controlled
by bottleneck resource requirements, and hence, we say
• Bottleneck resources are the ‘masters’ and non-bottleneck resources are

the ‘servants’.

IIT KHARAGPUR 24
• Thus, the main purpose of TOC is:
“to balance the flow of work through the plant, not to balance the
capacities of ‘resources”.
• We attempt to model the actual dynamics of the system/plant

operations with TOC approach.
• In a manufacturing/production system, there is incremental changes in

capacity over time, but demand and product mix may change
continuously.
IIT KHARAGPUR 25
• It is necessary that for improving/optimizing total system performance of

a plant, we need to consider bottleneck resources simultaneously for flow
and inventory control.
• It is also necessary to model the interaction between bottleneck and non-

bottleneck resource: there may be different types of interactions.

IIT KHARAGPUR 26
• Let bottleneck resource is A, and non-bottleneck B. The possible
interactions are as follows:
i. A B: B is activated as per requirements of A
ii. B A: B is activated as per requirements of A
iii. B1 B2: Both be activated as per the demand of another resource
considered vital for throughput production.
iv. A1 A2: the least constrained resource is activated as per requirements
of the most constraint resource.
v. A and B Assembly/End Product: Production rate at end product or
assembly stage is controlled by that of A.
IIT KHARAGPUR 27
 Process and Transfer Batches

 Dependent Events and Statistical Fluctuations
 Capacity Constraint Resources
 TOC Principles

IIT KHARAGPUR 28
Process and Transfer Batches
• TOC defines two types of batch or lot sizes: process batch and transfer
batch.
• A process batch is production quantity of a product at a resource against

a setup.
• A transfer batch is quantity of units transferred from one resource to the

next while the production of process batch is on.
• A transfer batch is less than process batch, should be small to maintain

continuous flow of parts/products between resources.
IIT KHARAGPUR 29
• A non-bottleneck resource has idle time, a process batch at a non-
bottleneck resource is less than that of a bottleneck resource it feeds.
• Process batch at a non-bottleneck resource should be as small as possible,

almost equal to transfer batch.
• Transfer batch from a bottleneck resource should be as small as possible

so as to avoid discontinuity in flow of materials/parts/products.
• A small transfer batch reduces throughput time significantly particularly

when there are large number of parts are processed.
IIT KHARAGPUR 30
• A process batch may be a variable along its route and over time.
• The classical EOQ does not consider the types of resources, and is not
applicable in TOC. Cost-based approaches without considering throughput
may lead to system sub-optimization.

IIT KHARAGPUR 31
Dependent Events and Statistical Fluctuations
• These two factors make a condition ‘smooth and continuous flow of
products matching with their demand’ difficult to achieve.
• Dependent events: products are produced in a sequence of operations

and these operations are dependent on one another or two or more
products may need the same operation. Dependency condition is
unavoidable.
• Statistical fluctuations: variability in a process may lead to variability in

output/outcome due to several reasons: time variability in human
activities, absenteeism, breakdown, non-supply of materials on time, etc.
IIT KHARAGPUR 32
Dependent Events and Statistical Fluctuations
• Both these factors may result in discontinuous and lumpy product flow.
• The key question is: how to synchronize the flow of materials among
different resources in a plant or a manufacturing process?
• Product flow depends on quantity and timing.

IIT KHARAGPUR 33
Capacity Constraint Resources
• In TOC, resources are classified at the next level of analysis, as capacity
constraint resource (CCR) and non-capacity constraint resource (non-
CCR).
• CCR and non-CCR: a resource which if not properly scheduled is expected

to cause the actual product flow through the plant to deviate from the
planned product flow.
• The most severe bottleneck resource controls the flow quantity, and
• Hence, not all bottleneck resources are CCRs.

IIT KHARAGPUR 34
• Non-bottleneck resources may control the flow timing, and
• Hence, non-bottleneck resources can be CCRs.
• Identification of all CCRs is the first step in the development of TOC in a

system.
• The difference between CCR and non-CCR can be explained in terms of

their influence of flow control in quantity and timing for product flow
planning.

IIT KHARAGPUR 35
Bottleneck Non-bottleneck Remarks

CCR Constrains actual Constrains timing Must be
flow in quantity of actual flow only considered in
and timing product flow
planning
Non-CCR May constrain Does not constrain Not considered

actual flow in flow in quantity or in product flow
quantity and time timing planning

IIT KHARAGPUR 36
TOC Principles
• There are a number of principles in TOC. These principles are as follows:
i. Flow, not capacity, should be balanced.
ii. An hour lost in a bottleneck resource is an hour lost for the system.
iii. Marginal value of time saving at a non-bottleneck resource is negligible.
iv. Resources should be utilized, not simply activated.

IIT KHARAGPUR 37
TOC Principles
v. A transfer batch is necessarily less than a process batch.
vi. A process batch may be a variable both along its route and over time.
vii. All types of constraints need to be considered for scheduling.
viii. Scheduling process starts from identification of all CCRs.
ix. Constraints govern throughput and inventory.
x. Constraints determine utilization of non-bottleneck resources.

IIT KHARAGPUR 38
 How to achieve Continual Improvement of System

Performance using TOC approach
 Drum-Buffer-Rope Scheduling
 Steps in DBR Scheduling
 Types of Production Systems

IIT KHARAGPUR 39
How to achieve Continual Improvement of System
Performance using TOC approach
Identify constraints
Optimize constraints
output
Subordinate all decisions to

constraint optimization
Expand the constraint
Yes No
Constraint
still active

IIT KHARAGPUR 40
Drum-Buffer-Rope Scheduling
• The working of TOC approach closely resembles a scheduling system,
referred to as ‘Drum-Buffer-Rope’ scheduling or DBR scheduling.
• DBR logistical system is a finite scheduling technique, balancing the

workflow in the system.
• It attempts to control the flow of materials within a plant in such a way

that it meets the market demand with minimum inventory and operating
expense.

IIT KHARAGPUR 41
• It identifies all types of constraints related to three aspects: processing,

resources, and marketing.
• The objective is to get a continuous and smooth flow of materials

through the plant with no or minimum disruptions.

IIT KHARAGPUR 42
Steps in DBR Scheduling
It consists of the following three steps:
Step-1: Develop a master production schedule (MPS) matching with CCRs. It

is equivalent to a drum that establishes production rate for the system.
Step-2: Ensure the production of throughput by controlling the effect of

statistical fluctuations (variability) with the use of ‘time buffers’ at critical
locations. It also ensures meeting due dates of the throughput.

IIT KHARAGPUR 43
Steps in DBR Scheduling
Step-3: Tie the production rate for CCRs to each resource by using time-
phased logistical ropes. The ropes synchronize all non-CCRs to help timely
release of required materials with required quantity at required time into the
system. Ropes ensure that product flow is maintained from upstream to CCRs
and subsequently to downstream operations.
• Establishment of a synchronous manufacturing system is the main

objective of DBR scheduling.
• Hence, the buffer protects CCRs from any kind of disruption and the rope
ensures timely release of raw materials into system.
IIT KHARAGPUR 44
• In this context, identification of schedule release points, out of many
possible release points in a production system, is a critical issue, as only
the schedule release points are tightly controlled, there may not be any
need for close control of other points.
• Four categories of schedule release points: Raw materials release points,

CCRs, assembly points, and divergent points.
• In this context, the location of schedule release points in the flow

depends on the types of production systems.

IIT KHARAGPUR 45
Types of Production Systems
• Under TOC, the production systems are grouped under three categories:
V-plant, A-plant, and T-plant.
• A V-plant has a V-shaped or divergent process flow and has a single (or a
few) raw material and a wide variety of end items.
• An A-plant has an A-shaped or convergent process flow and has many

types of raw materials with different routings, and a single (or a few) end
items.

IIT KHARAGPUR 46
• A T-plant has a T-shaped or divergent process flow with limited number of
components or subassemblies that can be combined into a large number
of end items.
• For any plant, there are interdependent activities. As it is a discrete-part

manufacturing system, the flow of materials across the series of
interdependent activities may be affected negatively due to three main
reasons: (i) overactivation of resources, (ii) misallocation of resources, and
(iii) misallocation of materials.

IIT KHARAGPUR 47
 Types of Production Systems

 Typical Questions

IIT KHARAGPUR 48
• Under TOC, the production systems are grouped under three categories:
V-plant, A-plant, and T-plant.
• A V-plant has a V-shaped or divergent process flow and has a single (or a
few) raw material and a wide variety of end items.
• An A-plant has an A-shaped or convergent process flow and has many

types of raw materials with different routings, and a single (or a few) end
items.

IIT KHARAGPUR 49
• A T-plant has a T-shaped or divergent process flow with limited number of
components or subassemblies that can be combined into a large number
of end items.
• For any plant, there are interdependent activities. As it is a discrete-part

manufacturing system, the flow of materials across the series of
interdependent activities may be affected negatively due to three main
reasons: (i) overactivation of resources, (ii) misallocation of resources, and
(iii) misallocation of materials.

IIT KHARAGPUR 50
• A V-plant is presented schematically.
End items
Inputs

IIT KHARAGPUR 51
• This plant mainly faces the problem of misallocation of material.
• Time buffers are placed at CCRs and before shipping.

IIT KHARAGPUR 52
• An A-plant is schematically presented below:
End items
Inputs

IIT KHARAGPUR 53
• This plant mainly faces the problem of misallocation of resources.
• Time buffers are placed at CCRs, before assembly, and before shipping.

IIT KHARAGPUR 54
• A T-plant is schematically presented below:
End items
Inputs

IIT KHARAGPUR 55
• It mainly faces the problem of misallocation of material at the final
assembly stage.
• Time buffers are placed before CCRs, before assembly, and before
shipping.
• Among the three plants, T-plant is designed and operated under

assemble-to-order marketing strategy.
• Problem of controlling inventory and increasing throughput is common

for all three plants.
IIT KHARAGPUR 56
• TOC is a well-accepted technique, a type of stepwise optimization.
• It uses systems approach for system performance improvement.
• Though it is considered a generic approach suitable for any type of

manufacturing system, it is most suitable for job shop and
repetitive/discrete-part manufacturing system.
• TOC is an application-oriented technique based on constraint

optimization.

IIT KHARAGPUR 57
Typical Questions
i. Compare and contrast MRP, JIT, and TOC.
ii. Mention the steps involved in TOC to achieve global optimization in a

plant.
iii. An organization utilizing TOC logic has a throughput of Rs 100,000, an

inventory of Rs 50,000, and an operating expense of Rs 40,000.
Calculate the net profit, return on investment, inventory turnover, and
productivity of the organization.

IIT KHARAGPUR 58
Typical Questions
iv. A firm produces two products (X and Y) on seven resources (A, B, C, D, E,

F, and G) using four raw materials. Operating expenses are Rs 5,000 per
week, and weekly production time is 40 hours (2,400 minutes). From
the additional information below, identify the constraint resources. How
many units should be produced? What is the weekly throughput?
Assume setup times are zero.

IIT KHARAGPUR 59
Typical Questions
Product Weekly Unit Processing time per unit Raw

market selling material
potential price A B C D E F G cost per
(units) unit
X 150 Rs 15 20 15 10 8 Rs 65
100
Y 100 75 25 15 10 8 20 55

IIT KHARAGPUR 60
Typical Questions
X Y
A B
C D G
Rs 20 Rs 10
E F
Flow process chart for X and Y Rs 30 Rs 15

IIT KHARAGPUR 61
List of Reference Textbooks
• Starr, M K and Miller, D W, Inventory Control: Theory and Practice,

Prentice Hall.
• Tersine, R J, Principles of Inventory and Materials Management, PTR

Prentice Hall.
• Silver, E A, Pyke, D F and Peterson, R, Inventory Management and

Production Planning and Scheduling, John Wiley.
Prof Pradip Kumar Ray

Department of Industrial and Systems Engineering 62
Thank You!!
63

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MANAGEMENT OF INVENTORY SYSTEMS

Theory of Constraints and Materials Management

PROF PRADIP KUMAR RAY

2. Bottleneck and Non-bottleneck Resources

3. Process and Transfer Batches, Dependent Events and Statistical Fluctuations,

4. How to achieve Continual Improvement of System Performance using TOC

5. Types of Production Systems, Typical Questions

 Basic concept and Issues

PROF PRADIP KUMAR RAY

PROF PRADIP KUMAR RAY

• TOC is a continual improvement methodology that focusses on identification

• In majority of the cases, only a few or limited number of constraints may

• TOC, developed by Eliyahu Goldratt, is applied at plant level of an

• The starting point for development of TOC methodology is defining a

• A constraint is defined as anything that prevents a system from

PROF PRADIP KUMAR RAY

• Examples of external constraints: market demand limitations, supply

• Examples of internal constraints: capacity limitation of resources, say

• Internal constraints are basically bottlenecks.

PROF PRADIP KUMAR RAY

• There are three goals to be achieved simultaneously:

i. Increasing net profit

ii. Increasing return on investment

iii. Increasing cash flow

PROF PRADIP KUMAR RAY

• Throughput: It is defined as the quantity of money that the system

• Inventory: It is not defined as it is usually defined elsewhere. It is

• Operating expense: It is defined as the quantity of money spent by the

• Understood simply, throughput is money coming into the system,

• The financial performance of the system is evaluated with respect to a

PROF PRADIP KUMAR RAY

i. Net profit = throughput – operating expense

ii. Return on investment = (throughput – operating expense)/inventory

iii. Inventory turnover = throughput/inventory

iv. Productivity = throughput/operating expense

PROF PRADIP KUMAR RAY

• However, idle resource time is not considered waste.

• By employing TOC logic and methodology, we need to improve the

• As increased performance of individual resources does not guarantee

 Bottleneck and Non-bottleneck Resources

PROF PRADIP KUMAR RAY

• For TOC concept to be used in a manufacturing plant, the first

• A resource may be a workcentre, a process, a machinery, a facility, a

PROF PRADIP KUMAR RAY

i. Bottleneck resource: capacity is less than demand placed on the

ii. Non-bottleneck resource: capacity is more than demand placed on it.

• Bottleneck resource should process those materials providing throughput.

PROF PRADIP KUMAR RAY

• The excess capacity of non-bottleneck resource can be used in a number

• There must be a proper plan of work considering possible future

PROF PRADIP KUMAR RAY

i. Production time: processing time of the ‘throughput time’.

ii. Setup time: one of the important components in throughput time.

iii. Idle time: waiting time at the resource.

PROF PRADIP KUMAR RAY

PROF PRADIP KUMAR RAY

• Controlling idle time at a resource is an important issue. For non-

PROF PRADIP KUMAR RAY

• An hour lost at a bottleneck resource is an hour lost for the plant.

• If we increase the productivity of a bottleneck resource, productivity of

PROF PRADIP KUMAR RAY

i. Activation of resource: an act of processing at a resource, not

ii. Utilization of resource: an act of processing at a resource resulting in