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Introduction to the Theory of Constraints of E. Goldratt

Introduction to the Theory of Constraints of E. Goldratt

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  • 1. 1
    THEORY OF CONSTRAINTS
    Presented by
    Rajeev Athavale
  • 2. What is TOC?
    Putting more money in your pocket now, and even more money in your pockets in the future
    HOW???
    By exploring the idea that every business system has a weakest link
    By turning the weakest link into a leverage point for increased throughput by applying a rigorous "cause and effect" approach
    2
  • 3. Theory of Constraints
    There is and always will be limiting factors that work to prevent the achievement of success
    If you don’t learn to manage these limiting factors they will most definitely manage your ability to succeed
    Understanding those limiting factors and learning how to deal with them offers a path to breakthrough solutions that will greatly increase your probability of success. The inverse is that if you don’t learn to manage them some limiting factors also have the ability to bring you to your knees
    3
  • 4. TOC IS ABOUT ANSWERING THREE FUNDAMENTAL QUESTIONS
    4
  • 5. WHAT TO CHANGE?
    TO WHAT TO CHANGE TO?
    HOW TO CAUSE CHANGE?
    5
    Three Questions
  • 6. TOC is About Paradigm Shift
    Paradigms are sets of concepts, patterns or assumptions to which those in a particular group (culture or professional community) are committed to and which form the basis of all their decisions
    Paradigms are frame of references we use to “see” the world and make decisions. Paradigms let through data that match our “expectations” and block data that don’t. What may be impossible to do with one paradigm may be easy to do with another
    In TOC we define “Paradigms” simply as sets of assumptions we believe are valid. We go through a ‘paradigm shift’ when we realize one or more of our assumptions are (no longer) valid
    6
  • 7. The Problem with “Paradigms”
    PARADIGMS are necessary for helping us achieve both Survival & Growth but….
    Paradigm Problem 1 – Limiting Paradigms
    Sometimes “Paradigms” (the rules in our Rule Book) can limit or even block us from seeing & solving the right problems or solving them in the best way for the system as a whole i.e. some paradigms can cause “Bad” decisions when we don’t take the time to “think it through”
    Paradigm Problem 2 – Conflicting Paradigms
    Some of our “Paradigms” are in conflict / inconsistent with other paradigms i.e. some paradigms can make our decisions / behaviors “Unpredictable” / “Irrational” (making decisions depend more on where we open our “rulebook” than on situation itself…)
    7
  • 8. Limiting & Enabling Paradigms
    Constraints
    Limiting Paradigm - Most “constraints” are “Out-of-my Control” – blame them for gaps and focus on “in-my-control” stuff
    Enabling Paradigm - Most “Constraints” are “In-my-Control or Influence” – find ways to EXPLOIT or ELEVATE
    Complexity
    Limiting Paradigm - Complexity is inherent - Simplify it by Breaking up into simpler parts and optimize each part
    Enabling Paradigm – Assume Inherent Simplicity, find it and focus all efforts on finding it and capitalizing on it
    Conflicts
    Limiting Paradigm – For me to win, you must lose – Find compromises or even win / lose solutions
    Enabling Paradigm – Win / win is ALWAYS possible – just find for it
    8
  • 9. Limiting & Enabling Paradigms
    Uncertainty
    Limiting Paradigm - Assume inherent Certainty - Look for “Formulas” to calculate Optima
    Enabling Paradigm - Find “Good Enough” & use Feedback to Improve & Sustain
    Bad Behavior
    Limiting Paradigm - Some people are just Inherently BAD – get rid of bad people
    Enabling Paradigm – People are Inherently GOOD – get rid of Bad Assumptions
    9
  • 10. TOC is About…
    Focusing
    Improving the Flow
    Weakest Link
    Inherent Simplicity
    Finding WIN-WIN-WIN --- Always
    Making an ever flourishing Company
    10
  • 11. What is TOC?
    Theory of Constraints
    provides a set of holistic processes and rules,
    all based on a systems approach,
    that exploits the inherent simplicity within
    complex systems
    through focusing on the few “leverage points”
    as a way to synchronize the parts
    to achieve ongoing improvement in the
    performance of the system as a whole
  • 12. TOC Knowledge in the Areas of:
    Operation
    Project management
    Distribution & Supply Chain
    Finance & Measurements
    Sales
    Marketing
    Managing People
    Thinking Processes
  • 13. The Evolution of TOC – 30 years
    TOC & Business Strategy
    - Viable Vision
    TOC & Technology
    – Necessary but not Sufficient
    The TOC Holistic Approach
    – 8 Video Sessions
    TOC Evolution over last 30 years
    Project Management
    – Critical Chain
    Distribution, Marketing, Management Skills
    – It’s Not Luck
    The Thinking Processes
    – Jonah Program
    Production, Throughput Accounting
    – OPT, The Goal, The Race, The Haystack Syndrome
    1975 1985 1990 1995 2000 2005
  • 14. What is TOC?
    THEORY OF CONSTRAINTS
    After more than 30 years of Development and Evolution…
    Five Focusing Steps
    Thinking Processes
    Throughput Accounting
    TOC Generic Solutions
    Six N&S questions on Technology
    UDE Evaporating Cloud
    Current Reality Tree
    Core Conflict Cloud
    Future Reality Tree
    Negative Branch Reservations
    Pre-requisite Tree
    Transition Tree
    Strategy & Tactics
    Throughput (T): The rate at which the system generates money through Sales (SR - VC)
    Investment (I): The money tied up in the organization
    Operating Expenses (OE): All the money spent by the system to convert investment into throughput
    Net Profit (NP) = T – OE
    Return on Investment (ROI) = NP/I
    Identify the System’s Constraint
    Decide how to Exploit the Constraint
    Subordinate everything to the above decisions
    Elevate the System Constraint
    If in the previous steps a constraint has been broken, Go back to step 1.
    What is the power of the technology?
    What limitation does it diminish?
    What old rules helped accommodate the limitation?
    What are the new rules that should be used now?
    In light of the change in rules, what changes are required to the technology?
    How to cause the change (the new win/win business model)?
    Operation – Drum-Buffer-Rope
    Finance – Throughput Acct.
    Projects – Critical Chain
    Logistics – Pull Replenishment
    Marketing – “UnRefusable Offer
    Sales – “Buy-in” Process
    People – “Empowerment”
    Strategy – “S&T”
  • 15. The report published by Steven J. Balderstone and Victoria J. Mabin shows the following data where TOC was used:
    Lead Times: Mean reduction 69%
    Due Date Performance: Mean improvement 60%
    Inventory levels: Mean reduction 50%
    Revenue / Throughput: Mean increase 68%
    15
    What are the Results Achieved by Implementing TOC?
  • 16. TOC is based on Inherent Simplicity
    System B
    System A
    TOC is a body of knowledge about systems and systems behaviour.
    TOC is driven from the concept of Inherent Simplicity:
    Everything within a system is connected by cause and effect relationships - there are no complex systems in reality
  • 17. TOC is based on 3 basic assumptions
    X
    X
    X
    X
    Basic Assumption 1:
    Everything within a system is connected by cause and effect relationships. Identification of the causes leads us to converge onto an apparent core problem / contradiction / conflict
    CONVERGENCE
  • 18. TOC is based on 3 basic assumptions
    2 metres
    1.5 metres
    Basic Assumption 2:
    All contradictions can be resolved without compromise - our level of understanding and our assumptions hold the contradiction in place. A compromise is not usually a win-win solution.
    NO CONFLICT BETWEEN LOCAL AND GLOBAL
  • 19. TOC is based on 3 basic assumptions
    Basic Assumption 3:
    There is no resistance to improvement - people do not embrace change because we have not brought them to see the win for them.
    RESPECT
  • 20. What is unique about TOC? Summary
    Search for a logical reasoning
    The use of Cause & Effect relationships to structure our thinking, record our analysis and understand the suggested solution for any problem (based on Convergence)
    2. Resolve conflicts
    A strong belief that there should be no conceptual conflict within our reality – hence – striving to find a win-win solution to any perceived “no solution situation”(Local & Global)
    3. Seek for collaboration and contribution
    The use of TOC logical tools logic to communicate to ourselves and thereafter to the team with the view of working together to achieve the desired improvement (based on Respect)
  • 21. Management
    Managing Systems:
    The Leader of a system sees their role as to ever improve the performance of the system under their responsibility
    Key Words:
    • Area of responsibility
    • 22. Performance measurement
    • 23. Improvement
    • 24. Continuous – POOGI*
    *: Process Of Ongoing Improvement
  • 25. Ever Improve
    The Managerial Challenge
    Improve the performance of the system
    TARGET LEVEL
    TARGET LEVEL
    There is a strong belief that the system can perform better up to the Target Level
    The GAP
    PERFORMANCE
    CURRENT LEVEL
    TIME
    THE PAST
    TODAY
    THE FUTURE
  • 26. Continuous Improvement - The Plan
    TARGET LEVEL
    CURRENT LEVEL
    THE PAST
    TODAY
    THE FUTURE
    The GAP
    There is always a plan!
    If we keep on doing what we have been doing we will continue to get what we are getting!!!
    Improved performance
    Improved performance is a result of implementing a new idea (“solution”) onto the existing system
    Current System
    Proposed Solution
  • 27. Continuous Improvement - Reviewing the Plan
    TARGET LEVEL
    CURRENT LEVEL
    THE PAST
    TODAY
    THE FUTURE
    The GAP
    It can be that there are procedures and policies that are in conflict with the new solution and hence prevent getting the benefits of the new solution
    We need to know:
    Which parts of the system are “erroneous” and have to be replaced
    The new parts must be introduced to replace the erroneous parts
    All the other parts of the system stay as they are!
    Improved Performance
    Current System
    Stay
    Current System
    Stopped/Replaced
    Proposed Solution
    New
  • 28. Improving with TOC
    TOC provides the way to identify and provide what is missing in the pursuit of a significant improvement of any system
    Problem
    Solution
    Implementation
    POOGI
    WHAT to change?
    Pinpoint the core problem
    WHAT to change TO?
    Construct simple practical solutions
    HOW to cause the change?
    Induce the proper people to make the change
    (to invent such solutions)
    What creates POOGI?
    Institute a process that facilitates continuous improvement
  • 29. WHAT IS THE GOAL?
    26
  • 30. 27
    A Dialogue
    Alex Jonah
    Click Here
  • 31. 28
    Better Service /
    Product?
    Global Solutions?
    Survival?
    WHAT IS THE GOAL?
    Larger Market
    Share?
    Knowledge
    Base?
    High Quality?
    Lower Cost?
    Customer
    Satisfaction
  • 32. Finding the Focal Point
    Before a business can properly focus, one necessary condition is that they answer the following question:
    What is the Goal of a for profit enterprise?
  • 33. 30
    The Goal
    To make more money
    now as well as in the
    future
    What is the GOAL?
    Provide satisfaction to
    the market now as well
    as in the future
    What are the
    necessary conditions?
    Provide secure &
    satisfying environment
    to employees ...
  • 34. The Goal?
    To make money now and in the future!
  • 35. The Goal (continued)
    Some would argue that the goal of their company is to...
    To satisfy customersnow and in the future!
    Or to..
    Provide a secure and satisfying jobs for employees now and in the future!
  • 36. The Goal (continued)
    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.
  • 37. The Goal (continued)
    That is…
    If your goal is to satisfy customers, it is absolutely necessary that you make money and that you provide security and satisfaction to employees...
    Likewise, if your goal is to provide secure and satisfying jobs, you also have to make money and satisfy your customers...…or you won’t be in business in the future!
  • 38. The Goal (continued)
    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 money now and in the future!
  • 39. Measuring Progress
    Once the Goal is identified, the next crucial need for success in achieving the goal is to identify which measurements will be used to judge success
  • 40. 37
    Measurements
    Tell me how you measure me and I’ll tell you how I’ll behave!
    Tell me how you'll measure me, and I'll tell you what damned stupid things I'll do to make the measurement look good
    If the measurements are absurd, my behavior will also be absurd!
    If my Performance Measurements are not clear, even I will not know how will I behave!
  • 41. What measurements should we use?
    Conventional Wisdom
    Net profit?
    Efficiency?
    Utilization?
    Return On Investment?
    Cash Flow?
  • 42. What measurements should we use? (continued)
    Generally Accepted Performance Measures
    Net Profit
    Return on Investment/Equity/Assets
    Cash Flow
    TOC does not question the validity of these 3 measures; they are vital and must be satisfied. However, TOC does question their usefulness as Operational Measures.
  • 43. What measurements should we use? (continued)
    For the average worker it is almost impossible to see the effect that any of their actions has on Net Profit (NP) or ROI.
    As a result we have created measures like efficiency and utilization because we believe they are linked to NP and ROI.
    But are they?
  • 44. 41
    Utilization
    Suppose more material is released for the purpose of improving the Utilization of a certain resource. Further suppose that this resource can produce faster than the pace setter resource. This “improvement” in utilization will not increase shipments but will increase your investment in inventory. Does that improve net profit and/or ROI?
  • 45. 42
    Efficiency
    In a similar fashion, suppose you spend money to “improve” the Efficiency of a non-bottleneck resource. You will not increase shipments, you will probably increase WIP, and (depending on the nature of the expenditure) you will either increase your investment or operating expenses. Does that improve NP and/or ROI?
  • 46. What measurements should we use? (continued)
    TOC Operational Measures
    Throughput
    Inventory & Investment
    Operating Expense
  • 47. 44
    How do we Measure the Goal?
    NET PROFIT
    ABSOLUTE
    ROI
    RELATIVE
    CASH FLOW
    SURVIVAL
  • 48. 45
    NET PROFIT
    ROI
    Bottom line MEASURES
    CASH FLOW
    BRIDGE?
    BR I
    DGE?
    Cost?
    OPERATINGDECISIONS
  • 49. 46
    THE COST CONCEPT BLOCKS BETTER QUALITY
  • 50. Theory of Constraints
    What is blocking you from getting more ofyour Goal?
  • 51. 48
    The Current State of Affairs
    You want/need this
    You’re getting more of this.
    BUT...
    OR...
    This.
  • 52. 49
    Cost World Thinking Has Paid Off for Many…Until Now...
    CostWorld Exploited
    Exploiting CostWorld
    ???
    Cut Waste
    Identify Waste
  • 53. 50
    What Now?Continue to Cut?
    Cut Protective Capacity?
    Cut Waste
    Identify Waste
  • 54. 51
    Enterprises are paid to create wealth, not control costs. But that obvious fact is not reflected in traditional measurement
    Peter F Drucker
  • 55. 52
    THE COST CONCEPT MUST BE REPLACED BY GLOBAL OPERATIONAL MEASURES
    THROUGHPUT
    OPERATING
    EXPENSES
    INVENTORY
    The rate at which the system generates money through sales
    All the money the system invests in purchasing things the system intends to sell
    All the money the system spends in turning inventory into throughput
  • 56. 53
    Throughput (T)
    Production people believe that it is production
    Even Finance people believe it!
    It is money entering from outside rather re-allocation of money within the system - Income produced through sales per unit time
    T=Sales Price – TVC i.e. Truly Variable Costs such as Raw Material Price etc.
    Only the money generated by your system get counted; i.e., raw materials and purchased services (like heat treating) don’t count
    Building to stock does not generate throughput
  • 57. 54
    Inventory (I)
    Inventory in the form of raw materials, work in process (WIP), and finished goods (FG)
    Investment in machinery, buildings, etc. (if owned)
    Things we buy with the intent to sell
    Record at purchase price * days held ($-Days)
    Is Inventory an asset or a liability?
    To the extent that it protects against lost sales it is an asset
    To the extent that too much (especially WIP and FG) ties up cash and retards responsiveness to market preferences (causing lost sales) it is a liability
  • 58. 55
    Operating Expense (OE)
    All the money the system spends to turn inventory into throughput
    All expenses are lumped together and usually considered as one big expense
    All employee labor expenses are almost always Operating Expense (direct, indirect, sick, operating, etc.)
  • 59. THE WEAKEST LINK
    CHAIN ANALOGY
    56
  • 60. 57
    Chain Analogy
    View a company as a chain, a physical chain
    One link, the Marketing Department,
    Another link, Bidding Department
    Procurement Department
    Manufacturing Department
    Packaging Department
    Shipping Department ...
  • 61. 58
    Chain Analogy
    Marketing
    Bidding
    Procurement
    Marketing
    Manufacturing
    Bidding
    Packaging
    Procurement
    Shipping
    Manufacturing
    Minimize Costs Everywhere
    Packaging
    Shipping
    Global Improvement =
    Sum(Local Improvements)
    Cost World
  • 62. 59
    Conventional Wisdom
    This is analogous to saying the primary measurement of success in managing the chain is the weight of the chain i.e. cost
    An improvement to any link in the chain is considered to be an improvement to the chain
    System wide or "global" improvement is believed to be the sum of all the "local" improvements made within each link
  • 63. 60
    ToC Wisdom
    What determines the strength of the Chain?
    What happens if one of the links drops the ball?
  • 64. 61
    ToC Wisdom
    Most improvements to most links do NOT improve the chain
    System wide, or "global" improvement, then is NOT the sum of the local improvements
    The way to improve the organization is, definitely not through inducing many local improvements
    Thus a company should focus on "chain strength" (not link weight) by working to strengthen the weakest link – the constraint!
  • 65. 62
    Cost World versus Throughput World
  • 66. 63
    There is a weakest link
    100
    Can we ever balance the capacity?
    Weakest Link
  • 67. 64
    Where Do We Stand?
    In order to control cost, managers must manage according to “Cost World” while in order to protect the throughput they must manage according to “Throughput World”
    Can they manage both at the same time?
    We actually do it!?
  • 68. 65
    Do we really manage it?
    At the beginning of the month, we control cost, tight fist on overtime, optimal batch sizes
    At the end of the month, forget it, do everything to ship, do overtime. Ship! “End of the month Syndrome”
    At the beginning of the month, these companies are managed according to the cost world, at the end of the month according to throughput world
  • 69. 66
    Fewer and fewer of these companies survive today
    Why?
    The compromises that were acceptable yesterday are intolerable today
    Ten years ago we shipped 80% on time and everything was okay. Today we ship 95% on time and clients still bitch and moan
    Ten years ago we shipped the best quality we could produce, today if we ship that same quality, our clients will ship it back
    Protecting throughput has become much harder
    The margins that enabled us to live with compromises are no longer there
  • 70. 67
    How can we manage?
    There is no acceptable compromise between the cost world and throughput world
    Managers must “FOCUS”
    What is focusing? - Pareto?
    Focus on 20% of the problems and you will reap 80% of the benefits
    This is true for independent variables
    So many of this 20% improvements could be local and may not contribute to improving the organization
    In the chain, linkages are important and the variables are dependent
    The Pareto principle is not applicable
  • 71. 68
    “It is not enough to do your best;
    you must know what to do,
    and THEN do your best.” -- Deming
  • 72. 69
    So, How Can we Find out on What to Focus?
    Look at the chain analogy
    The answer is hidden there!
  • 73. 70
    Dr. Eliyahu Goldratt
    Speech
    ToC Success Stories
  • 74. 71
    Bibliography & References
    Dr. Goldratt’s Books
    www.goldratt.com; www.goldratt-toc.com
    http://toc-goldratt.com
    PDI Website
    Dr. James Holt’s Website
    http://www.toc.co.uk/tocworld/TOC/tochome.html
    www.focusedperformance.com
    www.ciras.iastate.edu
    www.thedecalogue.com
    http://www.vancouver.wsu.edu/
    http://www.dbrmfg.co.nz/
    http://www.advanced-projects.com/
    youtube.com