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TOC_PMPINSA_English_Version_20081219

The Theory of Constraints (TOC), developed by Eliyahu Goldratt in the 1980s, focuses on identifying and managing bottlenecks within a system to improve overall performance. TOC emphasizes the importance of throughput, inventory, and operational expenses as key metrics for measuring success. Successful implementation of TOC has led to significant improvements in various companies, including increased revenues and reduced lead times.

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0% found this document useful (0 votes)
4 views83 pages

TOC_PMPINSA_English_Version_20081219

The Theory of Constraints (TOC), developed by Eliyahu Goldratt in the 1980s, focuses on identifying and managing bottlenecks within a system to improve overall performance. TOC emphasizes the importance of throughput, inventory, and operational expenses as key metrics for measuring success. Successful implementation of TOC has led to significant improvements in various companies, including increased revenues and reduced lead times.

Uploaded by

nbhasarkar16
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 83

Introduction to the Theory of

Constraints
J.Skorkovský, PhD.; KPH ESF MU

1
Introduction

 Theory of Constraints - TOC) was formulated


approximately in 1980 in the USA. Some
important roots of this theory were connected
to the ideas incorporated in programs for
planning and production control (Optimized
Production Technology)

2
Introduction
 Author: Eliyahu Moshe Goldratt

3
The Goal by Eliyahu Goldratt
 The goal of a manufacturing company?

4
Introduction -novels
TOC has became popular particularly thanks to the novels :
 The Goal - A Process of Ongoing Improvement
 It
It´´s Not Luck
 The Race
 The Critical Chain
 The Haystack Syndrome
 Necessary But Not Sufficient
 Late night discussion
 TOC was together with TQM (Total Quality Management )
and JIT (Just-
(Just-In-
In-Time) TOC classified as one of the most
important managerial methods
methods of the last two decades of the
twentieth century .

5
Some impacts of TOC implementation

6
Some impacts of TOC implementation

Ford Motor – Electronics Div.

Revenue: $3,000,000,000
Number of employees: 15,000
Implementation Date: 1991
TOC Applications: DBR
Comment:: Drum-
Comment rum-Buffer
uffer--Rope : will be presented later in
this course)

7
Some impacts of TOC implementation

IMPLEMENTATION RESULTS
Inventory Decrease: Reduced 100 million dollars (50%)
On
On--time performance: From 89% - to 98%
Lead times: From 6.4 days with JIT to 2.6 days
Cost efficiency: Reduced floor space by 57%
Quality: Reduced quality defects by 50%

8
LEAD Time explanation-
explanation-purchase
Quantity

Ordered Quantity

Lead time

Date of Purchase order Date of Delivery


Placement
Time

9
LEAD Time explanation-
explanation-purchase

10
LEAD Time explanation-
explanation-production

11
Some impacts of TOC implementation

McDonagh Furniture Ltd

Revenue: $8,000,000
Number of employees: 100
Implementation Date: 2000
TOC Applications: DBR

12
Some impacts of TOC implementation

IMPLEMENTATION RESULTS
Revenue Increase: 28% Yr 1; 17% Yr 2
On
On--time performance: From 70% - To 98%
Lead times decrease: 20 %
Net profit increase: over 300%

13
Some impacts of TOC implementation

Some other companies using TOC applications:


 BOEING

 MOTOROLA

 GENERAL MOTORS

 LOCKHEAD MARTIN (F 22)

 BAE SYSTEMS

 ………

14
Measuring the goal (TOC metric)
 Net profit (NP=T=OE) : ( T,
T, I and OE will be explained later in
this course)
 Cash
 Return on Investment (ROI=NP/I)
(ROI=NP/I)
For a manufacturing enterprise, the goal can also be measured by:
by:

 Throughput
 Inventory
 Operating Expenses

15
Definition (TOC metric)

 Throughput: The rate at which the system generates


money through sales.
 Note that the money is generated through sales and not production
because if you produce something and don’t sell it, you have not really
had throughput. (You’ve just put it into inventory).

 Inventory: All the money that the system has invested in


purchasing things which it intends to sell.
 Operational Expense: All the money the system spends in
order to turn inventory into throughput.

16
TOC
A B

Which is harder to manage? Left or Right?


17
TOC
 It is based on system approach See next slide

 A company (enterprise) is to be understood as a


chain of dependent processes – this picture below is very
simplified

Marketing Orders Purchase Production Packaging Shipment

18
Process Theory – more complex than one way chain

Input Larger Process Output

Input Process Output

Input Process Output Input Process Output Input Process Output

19
Process Theory – more complex than one way chain

RM FG
Raw Material Linear or “I” system FG Finished Goods

Aircraft assembly is more of an “A” Plant


RM
RM

RM RM
RM
RM
RM
RM
20
RM
TOC – system approach
 Organizations / Systems exist for a purpose
 That purpose is better achieved by cooperation of
multiple, independent elements linked together
 Each Inter-
Inter-linked event depends in some detail upon
the other links.
 The system owner determines purpose

21
TOC
 Most real systems could be seen in such a way, that
there are only a few or better only one element
(factor),, which is the key point, where and only there
(factor)
all possible managerial methods have to be focused
in order to control whole system
 „Every system is based on inherent simplicity”.
simplicity”.
 This element in TOC is called Constraint of the
system = bottleneck

 Bottleneck: Any resource whose capacity is equal to


or less than the demand placed upon it.
Inherent : základní, podstatná. neodmyslitelná….

22
23
TOC-- bottleneck I
TOC
 Different link capabilities, normal variation
and changing workload make it impossible to balance
everything.
 One element of the system is more limited than another.

24
TOC-- bottleneck II
TOC
 When the whole system is dependent upon the cooperation
of all elements, the weakest link determines the strength of
the chain.
 An exactly balanced chain (system) is stronger than a non-
non-
homogeneous chain, but when close to the breaking point, all
links must be managed

25
TOC
 Why constraint ?
 Constraint pre
prevents to reach the goal (make money now
and in the future)

 The TOC goal : „Make money now and in the future“

 Every system has at least one such a constraint.


The system without such a bottlenecks would reach the
predefined business plans in infinite volumes.

26
TOC : of the costs
 Traditional approach – world of where the aim ooff
any endeavour is to optimize locally every segment
chain, meaning balancing the capacity of
of the chain,
every element and not the flow through the chain
Maximization of the efforts
Shipment
Marketing

Orders Packaging
Purchase Production

27
TOC : of the throughput

 Use of : „common sense“


 The consistent focus of the bottleneck-
bottleneck-
– global optimization

Maximization of the efforts

Marketing Orders Purchase Production Packaging Shipment

28
TOC

29
TOC
World of costs: World of throughput:
 main metric – the  main metric –the
weight of the chain compactness of the
(every decrease of the chain
weight of any  Only improvement of
components will result bottleneck will improve
in better efficiency performance of the
(performance) whole chain
 Total improvement =  Total improvement =
sum of local improvement of the
improvements bottleneck
30
Life show
 http://www.tocca.com.au/

31
TOC
Five steps process:
Step 0. Identify the Goal of the System/Organization
Step 0.5 Establish a way to measure progress to Goal
 Step 1. Identify the system’s constraint.
 Step 2. Exploit the system’s constraint.
 Step 3. Subordinate everything else to the above decision.
 Step 4. Elevate the system’s constraint.
 Step 5. If a constraint is broken (that is, relieved or improved), go back
to Step 1. But don’t allow inertia to become a constraint.

32
TOC
 „Cost Accounting is enemy number one of
productivity“.
productivity “. *
 Impact on the behaviour of the people and they
habits of finding and improvements of local elements
having reason in optimising of these particles.
 New metrics were introduced – already presented

* Eric Noreen, Debra Smith and James t. Mackey

33
34

Throughput
TOC –required trends

Operational Expense
Inventory
T,I,OE,NP and ROI example
 NP=T-OE
NP=T-
 ROI=(T--OE)/I=NP/I
ROI=(T
 where T=total throughput
A B C D E
10 13 7 9 11

1. Only one product


2. Unit Price (selling price) = 100 USD
3. Raw material /one product =35 USD CCR=Capacity
CCR=Capacity
4. T/product=100
T/product=100--35=65
Constraint Resource=
5. 176 hours/month
6. T=176 * 7 = 1232 parts/month =weakest link
7. Monthly T =1232 * 65 USD = 8 080 USD 35
T,I,OE,NP and ROI example
 1st suggestion is to optimize B from 13-
13->14 parts per hour
 T will not increase ->You cannot produce more than 7
 Investment to optimize B=5000 USD with depreciation 10 %
 OE/month =(5000 USD * 0,1)/12= 41,67 -> 42 USD

A B C D E
10 13 7 9 11

CCR=Capacity
CCR=Capacity
Constraint Resource=
=weakest link
36
T,I,OE,NP and ROI example
 T will not increase
 NP (net profit) will decrease based on increased OE (41,67 USD /month)
 Based on NP decrease ROI is negative
 Bad suggestion !!!!!!
A B C D E
10 13 7 9 11

CCR=Capacity
CCR=Capacity
Constraint Resource=
=weakest link
37
T,I,OE,NP and ROI example
 2nd suggestion is to optimize C from 7-
7->7,1 parts/hour
 part of the 2nd suggestion is an extra load of E so it goes
from 11-
11->10
 Necessary investment is 5000 USD
 Increase of the production/month = 0,1*176=17,6 parts
 Increase of the company T= 17,6*65 USD= 1 14 144 USD
 A B C D E
10 13 7->7,1 9 11
11-->10

38
T,I,OE,NP and ROI example
 Necessary investment is 5000 USD = I
 Increase of the production/month = 0,1*176=17,6 parts
 Increase of the company T= 17,6*65 USD= 1 1 14
44 USD
 OE/month =(5000 * 0,1)/12= 41,67 -> 42 USD
 OE will be increased by 41,67 USD/month
 Annual increase of the NP = (T-
(T-OE)*12=(
OE)*12=(11441144--42)*12 =13 244 USD
 ROI=NP/I = 13 244244//5000 = 265 % !!!
 T does not measure local efficiencies, except at the constraint

A B C D E
10 13 7->7,1 9 11
11-->10
39
Implementation of TOC is complicated switchover
process

 it represents challenging adventure, where


the invested efforts are often not predictable
 it requires cooperation, coordination and use
of well informed and trained teams on both
sides.
 you will certainly overcame natural resistance
against changes and persuade distressed and
indolent people
 no one is willing to change anything

40
Implementation of TOC is complicated switchover
process

 try to find somebody who could accept


changes
 you must persuade these guys, that the
suggesting changes are in fact their idea and
without their creativity TOC would be only
toothless beast.
 but how to achieve it ??

41
Implementation of TOC is complicated switchover
process

 Socratic teaching – proving the logic by use of


dialog
 Buy--in approach – initiator of the changes
Buy
must have interpersonal and communication
talents in order to persuade the targets and
squeeze from the people their best ideas.

42
Socratic teaching

43
Implementation of TOC is complicated switchover
process

We have to find out the answers to these questions:


questions:

1. What to change?
2. To what to change to ?
3. How to make the change happen?

44
Implementation of TOC is complicated
switchover process

What to change?
 Objectives : Situation assessment, description of “current
reality,” and identification of the core problem or conflict and
assumptions that sustain it. Diagnosis, systemic root cause analysis.

 Layers of resistance: Lack of agreement on the problem

45
RESISTANCE

46
Implementation of TOC is complicated
switchover process

To what
what to change?
 Objectives : Verbalization of vision/solution, description of strategy to attain
the desired state, and avoidance of undesirable side effects. Prescription, decision-
decision-
making, and solution development.

 Layers of resistance:
 Lack of agreement on a possible direction for a solution
 Lack of agreement that the solution will truly address the problem
 Concern that the solution will lead to new undesirable side effects (“Yes,
but…”)

47
Thinking Process Tools
 offer the answers to three TOC questions about
changes
 help to clear away every layers of resistance
 visualisation of the thinking process
 verbalization of the thinking process
 use of casual logic (cause ->effect)
 use of sufficiency logic - „IF - AND - THEN“
 use of necessity logic - „IN ORDER TO - THEN - BECAUSE“

48
Thinking Process Tools
Necessity logic
IN ORDER TO - THEN - BECAUSE

in order to survive i must


eat truffles

I am eating truffles
I will survive
every day

49
Thinking Process Tools
Sufficiency logic
IF - AND - THEN

I have in my room a
lot of light

AND

I have one good The chandelier is


bulb in my castle connected to the Switch is on
hall electric network

50
We have to solve the crucial question:
what is a core problem (what should be changed)
A tool for solving such a task : Current Reality Tree
 Why to change something and what is something (core
problem=constraint, bottleneck)
 Summary of all undesirable effects (UDE) and their layout
based on casual logic - sufficiency logic
 Core Problem – common cause of all UDE

51
We have to solve the crucial question: what is
a core problem (what should be changed)

UDE 1

UDE 2 UDE 3 UDE 4

UDE 5

Cause 1 UDE 6 UDE 7

UDE 8 UDE 9

Current Reality Three Cause 2


Root
problem

52
We have to solve the crucial question: what is
a core problem (what should be changed)
Causality:
IF a lot of snow AND snowboarding in restricted area THEN avalanche

I will burn I will not burn


my hand my hand

AND

I touch a hot I touch a hot I will use


cook stove cook stove “pot holder“

53
We have to solve the crucial question: what is
a core problem (what should be changed)
Necessity logic:

IN ORDER to avoid something I HAVE TO do this

BECAUSE IF I will touch


the hot cook I will be singed (wounded)

IN ORDER I may not touch a hot


to avoid to be singed cook stove

54
Current Reality Three
I am alone
I am obese
(overweight)

No rendezvous No girl
Oversupply of
calories
I am very shy I visit often
No time for
to negotiate
rendezvous
fast food
dating

I am very shy I am very busy No sporting


because of my (no time)
figure

I am surfing I am killing anxiety


on internet to much having reason in solitude
by eating and
drinking liquors
I cannot manage
my time
55
Current reality three

List of UDE´
UDE´s :
 UDE1 : lack of financial consultants (FC)
 UDE2 : late hand-
hand-over of required services during implementation and support
 UDE3 : a modern design of ERP is not easily understood by rigid customer´
customer´s
accountants
 UDE4 : the customer´
customer´s accountants tend to use old fashioned methods and
processes which are difficult to manage by using a modern ERP
 UDE5 : rigi
rigid
d remuneration do
doees not allow to pay more FC than the others
 UDE6 : high level of fluctuation and job-
job-hopping
 UDE7 : overburdened FC as a consequence of bad multitasking (will (will be explaine
explained
later in Critical Chain PWP)
 UDE8 : FC are fed up by permanent repetitive explanation to the customer
customer´´s
accountants who do no want to understand
 UDE9 : bad multitasking
 UDE10 : FC are unhappy because of a salary, which is much more lower then their
expectations
 UDE11 : The management sticks to Cost world and tend to decrease costs by
minimising payroll and having all resources as a CCR (Critical Constraint Resources)
 UDE12 : Customer is unhappy
56
Current reality three
Customer is unhappy
1
12

10

8
7

4
9

5 3

11

ROOT PROBLEM
57
We have to solve another crucial question:
the direction of solving a core problem
(what is the main reason (injection) supporting the change)
Evaporating Cloud Tree
 the change without any compromise - basic and starting
impulse for the change
 „necessity logic“
use of „necessity logic“ – common goal, necessary condition
to reach this goals, what have to be done and where is a
conflict
 „well thought out from the scratch“
scratch“ of the problem,
disclosure and verbal definition of hidden assumptions
 Win--win solution of the whole conflict = injection
Win

58
We have to solve another crucial question:
the direction of solving a core problem

Requirement Prerequisite

Necessary
Activity D
condition B
Objective

Goal A Conflict

Necessary
Activity D´
condition C

Requirement Prerequisite
Evaporating Cloud tree ( a conflict tree, a conflict resolution diagram) 59
How to read this Evaporation tree

In order to have objective A, we must have requirement B..

In order to have requirement B, we must have prerequisite D...

In order to have objective A, we must have requirement C...

In order to have requirement C, we must have prerequisite D'...

But prerequisites D and D' are in conflict...

60
Evaporation cloud tree-
tree- example 1

Performance Management
61
Evaporation cloud tree-
tree- example 2

Implementation of TOC
62
Evaporation cloud tree-
tree- example 3

Sales and prices


63
Transition Evaporation Cloud Tree Future Reality
Tree (FRT)

Common objective idea


Conflict

Evaporation Cloud Tree

idea FRT
64
Future Reality Tree (FRT)

 The FRT is similar to the CRT in structure, but with new proposed actions,
policies, and behaviour injected into it in order to create a new vision of
system.
the future reality of the system.
 "if--then
The power of the logical "if then"" construction is that if any one of the
lower--level causes are removed or mitigated, everything that is above it is
lower
subject to change.
 If any one of the three „IFs
„IFs“ are removed or modified, the „THEN „THEN“ may be
removed from consideration as a problem
I do not have

FRT a fire

CRT I have
a fire
INJECTION

I do not have
I have I have I have I have I have
oxygen in contact
fuel ignition oxygen fuel ignition
with fuel
65
Future Reality Tree (FRT)

 The objective of the FRT is to communicate a vision of how to change the


undesirable effects found in the CRT to desirable effects.

DE

DE
DE
DE

Injection
DE

DE DE

DE- Desirable effect Injection


Injection
66
Future Reality Tree (FRT)

Sales increase
Market share increase

Competitive
price More flexible reaction
Stock value
decreased to requirements
Cost Delivery due date
decrease performance improved
Better
liquidity

Higher efficiency
ATP,CTP
of resources

Finite Capacity Stock related costs


Data OK
Planning decreased

Improved logistics Business-Production


Reliable system OK Purchase
planning

NEW ERP
IMPLEMENTATION
67
YES,, this could be managed BUT
YES BUT……
……

Negative Branch Reservations (NBR):


 use of sufficiency logic – by taking into consideration
objections of other involved persons
 these objections were related to possible
undesirable impacts of the injection implementation
 NBR is often a part of FRT
 Evaporation Cloud Tree, FRT and NBR enable to
answer the second question : To What To change ?

68
YES,, this could be managed BUT
YES BUT……
……
FC will be partly satisfied The result could be worse that
others will be angry the current situation

FC fluctuation will stop These rules might be


mistakenly interpreted

Other consultants will


We will implement
not understand the
new remuneration
logic and the cause of
rules in order to pay
these new rules (UDE)
better FC

Negative Branch Reservations


69
We cannot implement it, because…..

(Prerequisite Tree):
Tree):
 use of necessity logic – identification of obstacles
 use of the human ability to invent any reason
WHY IT IS NOT FEASIBLE
 setup of the necessary intermediate objectives
 setup of the schedule for change process

70
We cannot implement it, because…..

(Prerequisite Tree):
Tree):
 The pre-
pre-requisite tree ought to be considered the most important tree in
the Thinking Process suite.
 It is the tree that allows us to overcome the obstacles that stop us from
implementing our plan.
 It is also the tree that in fact becomes the implementation plan. And it is
the tree to which timelines, responsibilities, and accountabilities can be
assigned to. It is also the tree that I have most often seen skimmed over.

 There is an English saying that you can plan to fail, or you can fail to plan.
The pre-
pre-requisite tree occupies the position of “plan” amongst the
Thinking Process tools.

71
Prerequisite tree - construction
So our first step will look like this

72
after obstacles
were overcome

73
Prerequisite tree - example

 Tea Mission (we want to have a nice cup of tea in the


wilderness))
wilderness
 Obs-1
Obs- : We do not have material to burn
Obs--2
Obs : Collection of such material is not allowed in the wilderness.
Obs--3
Obs : There could be a strong wind
Obs--4
Obs : We do not have matches
Obs--5
Obs : We do not have cups
Obs--6
Obs : We don’t have a container to boil the water
 IO
IO--1 : We have some pieces of wood in the trunk of the car.
IO
IO--3 : We have a sheltered place to light the fire
IO
IO--4.1 : We have a packing list for the tea activity
IO
IO--4.2 : The tea kit is loaded into the car

74
Prerequisite tree - example

75
We cannot implement it, because…..

(Transition Tree):
 detailed schedule of change implementation process
 what actions have to be taken in order to reach
intermediate objectives using sufficiency logic (IF-
(IF-
THEN--ELSE)
THEN

76
We cannot implement it, because…..

(Transition Tree) http://www.thedecalogue.com/Tools/trt/TREE.html


http://www.thedecalogue.com/Tools/trt/TREE.html::

77
We cannot implement it, because…..

Action
Reason
Need

I do not know in details


costs assignment
by departments

78
Thinking Process Tools Relationships
DE
CRT FRT
UDE DE
DE
DE
UDE UDE
UDE
Injection
UDE (DE) NBR-
DE
UDE
UDE (DE)
Příčina UDE UDE Evaporating DE DE

cloud tree
UDE Příčina Injekce
UDE
Injekce
Injekce
Injekce
CP Opposite OBJ
Top
Objective=injectio
n O
Injection
B
5
OB
OB 4
3 IO 7
TT IO 2
IO 2
IO 6
O
O B
REASON NEED ACTION 2
B
1 IO 5
IO 4
IO 1
Prerequisite tree
Starter IO 3
REASON NEED ACTION

79
Additional metrics of TOC (appendix 1)
 Inventory dollar days (IDD)
 A measure of the effectiveness of a supply chain – i.e., did it do things that
it shouldn’t have done and as a result is the supply chain holding
inventory of products the customer doesn’t want? IDD accounts for two
things: 1. the time from when a unit is placed in stock until it is actually
needed by a customer; and, 2. the monetary value of the inventory being
held. IDD is calculated by multiplying the monetary value of each
inventory unit on hand by the number of days since that inventory
entered the responsibility of that link. The system should strive for the
minimum IDDs necessary to reliability maintain zero throughput dollar
days.
 NOTE: The resulting unit of measure is "dollar-
"dollar-days". It is neither
monetary nor time based. Attempts to compare dollar-
dollar-days to other
monetary measures are invalid. IDDs can be compared only to other IDD
levels.

80
Additional metrics of TOC (appendix 2)
 Throughput dollar days (TDD)
 A measure of the reliability of a supply chain. TDD considers two things: 1.
the monetary value of the things a link is committed to deliver but does
not; and, 2. the number of days by which the link misses its commitment
to deliver. TDD is the summation of the commitments not delivered on
time during the chosen time period. The TDD value of individual missed
commitments is calculated by multiplying the dollar value of the end
product times the number of days the commitment is/was overdue. The
system should strive for zero throughput dollar-
dollar-days.
 NOTE: The unit of measure "dollar-
"dollar-days" is neither monetary nor time
based. Attempts to compare dollar-
dollar-days to other monetary measures are
invalid. TDD levels can be compared only to other TDD levels.

81
Literature
Goldratt, E., M.:
 The Goal

 The Race

 The Critical Chain

 Necessary But Not Sufficient

 The Haystack Syndrome

 It is Not Luck

82
Internet
 www.goldratt.cz
 www.goldratt.com
 www.toc--goldratt.com
www.toc
 www.focusedperformance.com
 www.tocc.com
 www.tocca.com.au
 www.ciras.iastate.ecu/toc/
 http://www.ciras.iastate.edu/library/toc/measurements.a
sp

 ……...

83

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