Constraint Management
Overview
Chris Zephro
Director, Finance - Seagate Technology
TOC-ICO Certified Practitioner
Six Sigm...
System Complexity
System 1 System 2
Which system is more complex?
What is the Systems Approach?
• Originally proposed by Dr. W. Edwards Deming
• Holistic thinking
• The whole is not the su...
The “Archimedes Point”
“Give me a lever long enough and a place to stand, and I can move the world.”
Constraint
Management
What is Constraint Management?
• Constraint Management is a system-level management
philosophy developed by Dr. Eliyahu Go...
Assumptions Underlying Constraint
Management
• Every system has a goal and a set of necessary conditions that must be
sati...
How do you strengthen a chain?
The Manufacturing Chain
Which is likely to be the weakest link
(system limitation)?
#1
(2)
57%
#2
(1)
19%
#3
(1)
71%
#4
(1...
Marketing & Sales
Supplier #2
Supplier #1
Production
External
Service
Distribution#1 #2 #3 #4 #5 #6 #7
The chain really ex...
Constraint
Management
Fundamentals
The Five Focusing Steps
The Five Focusing Steps of
Constraint Management
1. Identify the System’s Constraints.
2. Decide how to Exploit the System...
Step 1 - Identify the System’s Constraints
• What limits the system performance now?
• Is it inside the system (a resource...
What is a Constraint?
Anything that limits a system in reaching its goal.
Types of Constraints:
1. Market – Not enough dem...
Examples of Policy Constraints
• “We will not approve new projects if the projected IRR is less than 20%
in three years.”
...
Other Constraints
• Material
• Unavailable
• Slow
• Vendor / Supplier
• Unreliable
• Slow
• Financial
• Cash Flow
• Knowle...
Step 2 - Decide how to Exploit the System’s
Constraints
Exploit means to get the most out of the constraining
element with...
Step 3 - Subordinate everything else to the
above decision
• All parts of the system that are NOT constraints are
required...
Step 4 - Elevate the System’s
Constraints
• Evaluate alternative ways to ELEVATE one or more
constraints.
• Predict where ...
The Five Focusing Steps
Strategic & Tactical Implications
ELEVATE
SUBORDINATE
IDENTIFY
EXPLOIT
TACTICALDECISIONS
STRATEGIC...
Step 5 - The Five Focusing Steps
• Go back to step one. Beware of inertia in identifying
constraints.
• The actual new con...
Red Curve & Green Curve
• Repeated application of the Five Focusing Steps
• Successive constraints broken
• Cost reduction...
Constraint
Management
Evaluating Operating Decisions
Evaluating Operating Decisions
The Traditional Approach
• The financial standard for most decisions is profit
• A decision...
Evaluating Operating Decisions
The Traditional Approach
• NP and ROI are very difficult concepts to apply to day-to-
day d...
Evaluating Operating Decisions
The Constraint Management Approach
• Throughput (T)
• Investment (I)
• Operating Expense (O...
Throughput (T)
• The rate at which the organization generates “goal units.”
• In a for profit organization, “goal units” e...
Throughput Hierarchy
• Company Level
• Marginal contribution to profit of ALL sales in ALL product lines.
• Sales revenue ...
Investment (I)
• All the money the system invests in assets and materials
that are used to produce the products or service...
Operating Expense (OE)
• All the money the organization spends in generating “goal
units / Throughput.” The money flowing ...
T, I & OE Flow
$$$
Investment
Money Tied Up
Inside the System
(System)
$$$
Throughput
Money Coming In
$$$
Operating Expens...
Relation of T, I and OE to Traditional
Business Measures of Merit
• Net Profit = T-OE
• Return on Investment = (ΔT-ΔOE)/ΔI...
Using T, I, & OE for
Decision Making
Thinking Bridge Example
Demand = 3,500 Drives
Price = $400 each
Raw Material = $80/Drive
Employee Wage = $18/hr
Number of ...
Labor & Overhead Allocation
Cost
Elements
Calculation Rate per
Direct Labor
Minute
Direct Labor $18/hr / 60 minutes / hour...
Standard Cost of One Drive
Cost Element Cost
Raw Materials $ 80.00
Direct Labor (55 minutes @ $ 0.30) $ 16.50
Overhead (55...
Scenario 1
• An Engineer proposes buying a new fixture to reduce total processing
time by 3 minutes.
• The new fixture wou...
Scenario 1 – New Drive Cost
Cost Element Cost
Raw Materials $ 80.00
Direct Labor (52 minutes @ $ 0.30) $ 15.60
Overhead (5...
Scenario 1 – Cost Savings per Drive
Original standard unit cost $195.66
New standard unit cost $189.35
Cost savings per un...
Scenario 1 – Global Measurements Thinking Bridge
Analysis
• When using the global measurements (T, I, & OE)
technique for ...
Scenario 1 – The Five Questions
1. What prevents the firm from increasing Throughput?
• Note: This question does not arise...
Scenario 1 – The Five Questions
5. Will the amount of Investment of the firm change?
• Investment increases by $5,000
6. W...
Scenario 2
• Everything is the same as in scenario 1, except the firm is
currently producing and selling at its capacity o...
Scenario 2 – Cost Savings per Unit
Original standard unit cost $195.66
New standard unit cost $189.35
Cost savings per uni...
Scenario 2 – The Five Questions
1. What prevents the firm from increasing throughput?
• Strategic Control Point (Capacity ...
Scenario 2 – The Five Questions
2. Will the total amount of throughput change?
Lost Sales Volume:
Original capacity 4,992 ...
Scenario 2 – The Five Questions
3. Will the operating expenses of the firm change?
• No, these all remain the same
4. Will...
Scenario 2 – The Five Questions
5. What is the real economic effect of the proposal?
Global
Measurements
First Year Subseq...
Scenario 3
• Let’s start with the original case.
• Demand is 6,000 drives.
• The firm is currently operating at a level of...
Scenario 3 – Proposed Change
Workstation Original
Processing Time
Proposed
Processing Time
101 15 minutes 20 minutes
102 2...
Scenario 3 – Least Product Cost Thinking Bridge
Cost Element Cost
Raw Materials $ 80.00
Direct Labor (58 minutes @ $ 0.30)...
Scenario 3 – The Five Questions
1. What prevents the firm from increasing throughput?
• Workstation 102 restricts our abil...
Scenario 3 – The Five Questions
2. Will the total amount of throughput change?
Additional Sales Volume:
Capacity if propos...
Scenario 3 – The Five Questions
3. Will the operating expenses of the firm change?
• No, these all remain the same
4. Will...
Summary - Examples
Least Product
Cost
Global
Measurements
(T, I, OE)
Scenario 1 $17,085 ($5,000)
Scenario 2 $26,500 ($123,...
Constraint Management Strategy
Lessons from the T, I, OE Example
• Primary focus on increasing “T”
• Allow “I” to seek its...
Why Gross Margin is Problematic
• Assumes cost per product is a reality.
• Assumes that all operations are equal.
Fixed Co...
Throughput Decision Support – Focusing on
TU/Hr at the System Constraint?
• The Capacity Constrained Resource at the this ...
How Can We Increase TU/Hr?
1. Raise prices
2. Reduce the time a product spends on the Capacity
Constrained Resource/Primar...
Throughput Decision Support
Transition Timing
• Takes into consideration Yield at the constraint and Truly Variable Cost.
...
Impact of Yield & Test Time Improvements
• Based on Current Quarter Forecast – Impact on improvements to
Disty 200GB only....
Analysis with Throughput Decision
Support
1. Product Emphasis
2. Product Transitions
3. Product Design
4. Product Pricing
...
The Challenge
PROBLEM… Many of these constraints are not easy to
identify
 How do we identify and manage constraints that...
Logical Thinking Process
The means to IDENTIFY the system
constraint and plan EXPLOITATION,
SUBORDINATION, and ELEVATION.
Six Logical Tools
An Integrated Thinking Process
Intermediate Objective Map
Six Logical Tools
An Integrated Thinking Process
Six Logical Tools
An Integrated Thinking Process
Six Logical Tools
An Integrated Thinking Process
Other Constraint
Management Tools
“Drum-Buffer-Rope”
Production Scheduling
“DRUM” : The maximum PACE of the most restricted (capacity-
constrained) resourc...
“Critical Chain”
Project Scheduling and Resource Allocation
• Similar to DBR
• Avoids multi-tasking & student syndrome
• E...
References
1. Steven Bragg, Throughput Accounting, A Guide to Constraint Management.
2. John A. Caspari, Management Dynami...
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Theory of Constraints

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An excellent introduction to the theory of constraints - I wish it was by me!

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  • Let’s see how this thinking might apply to a simple manufacturing process
    Here’s a manufacturing “chain” composed of seven “links.” The first and last links have two machines each and the people to operate them. The rest have only one each. These represent the CAPCITY of the chain
    As you look at the monthly utilization percentages of these machines, can you tell where the SYSTEM CONSTRAINT lies? [WAIT FOR GUESSES]
    If you said “Machine #3,” you’re CLOSE, but not quite right. At the MOMENT, the system constraint is market demand--not enough sales to fill up available capacity. Even though Machine #3 is the most heavily loaded, it doesn’t limit the whole system. The entire manufacturing process CAN DO MORE than it is doing now
    But if we were to increase sales to the point that the system were overloaded, which resource would be overloaded FIRST? [ANS: Machine #3]
    So we’ve identified an important fact: We can’t determine whether a system in INTERNALLY constrained without knowing BOTH what its capacity is AND the demand placed on that capacity
  • With so many different kinds of constraints, and with policy constraints underlying most of them, how can we identify what specific changes we should be working on?
    Many of these constraints aren’t easy to identify
    Often, they’re not PHYSICAL
    Or they’re not easy to MEASURE
    They sometimes extend BEYOND the boundaries of production processes alone, although they STILL affect manufacturing
    And sometimes--especially if they’re POLICIES-- they pervade the whole organization
    To help us zero in on the real constraint, it’s useful to look at constraint theory as a hierarchical structure… [NEXT SLIDE]
  • The Current Reality Tree is the first of the five logical tools
    It enables management to start with observable Undesirable Effects in the system’s performance and work backward through an unbroken chain of cause-and-effect to the ROOT CAUSE of these visible problems
    Once the root cause is identified, the Conflict Resolution Diagram helps define possible conflicts that might arise in CHANGING the root cause
    The conflict diagram helps express the nature of that conflict and develop creative ways to resolve it to the satisfaction of all parties
  • The solutions generated with the Conflict Resolution Diagram are TESTED with a FUTURE REALITY TREE for their effectiveness at relieving the Undesirable Effects identified earlier
    If the solution proves to be valid, the Prerequisite Tree can help identify and overcome implementation obstacles in the order that they must be addressed for quick, effective execution
  • Once the obstacles are identified and ways around them determined, the structure of the Prerequisite Tree--which looks a LOT like a flow chart or PERT diagram-- can be converted into a series of step-by-step actions for achieving the objective
    The value of the Thinking Process lies in its capability to start with an ill-defined problem and work methodically through to a clearly defined series of prescriptive steps for overcoming the problem
  • The “Drum-Buffer-Rope” method of production scheduling does three important things for the manufacturer or service provider:
    It synchronizes, or optimizes the entire production process around the least-capable resource (the capacity-constrained resource, or “CCR”)
    It speeds flow of work through the production process, sometimes by an order of magnitude
    Sometimes, as in the cases of some of the example companies mentioned earlier, this reduction in processing time is so great that companies that once built to finished sConstraint Managementk can almost eliminate finished inventory and build directly to order and delivery
    It reduces the amount of physical inventory needed in the system to produce the product or service
    It provides “insurance” against disruptions of the production process caused by special cause variation (“Murphy”) or external uncertainty in demand
    The “Drum” is the pace of the capacity-constrained resource
    The “Buffer” is a protective mechanism (time and work-in-process) that keeps the CCR from being “starved” for work
    The “Rope” is basically a communication or regulating device that equalizes the acceptance of new work to the pace of the CCR
  • At the risk of oversimplifying the explanation, critical chain project scheduling is essentially “Drum-Buffer-Rope” thinking applied to a project environment (repetitive production principles applied to one-of-a-kind deliveries)
    Multitasking (responsibility for more than one task at a time) is discouraged
    Project activities that share resources are deconflicted in the schedule and sequenced to be completed in the shortest possible time
    Critical activities (assembly, final delivery) are protected with time buffers
    The net result is that scheduled overruns are virtually eliminated, along with their associated costs
    In many cases, expected project duration can actually be shortened--- in other words, early deliveries are more likely
  • Theory of Constraints

    1. 1. Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt Lean Master
    2. 2. System Complexity System 1 System 2 Which system is more complex?
    3. 3. What is the Systems Approach? • Originally proposed by Dr. W. Edwards Deming • Holistic thinking • The whole is not the sum of its parts. • Interaction-interdependencies-among components are as important, or more important, than the performance of the components themselves • The whole system can’t be managed effectively by suboptimizing. • Avoid Suboptimization. • Not all components are created equal. • Some may accept inefficiencies so that more critical components can succeed.
    4. 4. The “Archimedes Point” “Give me a lever long enough and a place to stand, and I can move the world.”
    5. 5. Constraint Management
    6. 6. What is Constraint Management? • Constraint Management is a system-level management philosophy developed by Dr. Eliyahu Goldratt that can be viewed as three separate but interrelated areas: 1. Performance Measurements: Throughput Decision Support and the Five Focusing Steps 2. Logistics: Drum-Buffer-Rope Production Scheduling and Buffer Management. 3. Logical Thinking: Logical Thinking Process (Current Reality Tree, Future Reality Tree, Conflict Resolution Diagram, Prerequisite Tree and Transition Tree) 4. Project Management: Critical Chain Project Management
    7. 7. Assumptions Underlying Constraint Management • Every system has a goal and a set of necessary conditions that must be satisfied in order to maximize achievement of the goal. • All systems are subject to logical cause-and-effect. • Organizations live or die as integrated systems, NOT as a collection of discrete, independent processes. • Systems are analogous to chains. • The performance of a system is limited by very few links at any given time, usually only one. • The global organization is greater than the sum of its parts. • The way to improve company performance (global optimum) is NOT through achieving local improvements (local optimum) everywhere. • Constraints can never really be eliminated – they just move to a different place.
    8. 8. How do you strengthen a chain?
    9. 9. The Manufacturing Chain Which is likely to be the weakest link (system limitation)? #1 (2) 57% #2 (1) 19% #3 (1) 71% #4 (1) 32% #5 (1) 36% #6 (1) 41% #7 (2) 42% Machine Capacity Utilization (Monthly)
    10. 10. Marketing & Sales Supplier #2 Supplier #1 Production External Service Distribution#1 #2 #3 #4 #5 #6 #7 The chain really extends from the market demand, through the entire organization chain, to the external customer who pays for our products CUSTOMER The Manufacturing Chain (Expanded)
    11. 11. Constraint Management Fundamentals The Five Focusing Steps
    12. 12. The Five Focusing Steps of Constraint Management 1. Identify the System’s Constraints. 2. Decide how to Exploit the System’s Constraints. 3. Subordinate everything else to the above decision. 4. Elevate the System’s Constraints. 5. If in the previous steps a Constraint has been broken, go back to Step 1.
    13. 13. Step 1 - Identify the System’s Constraints • What limits the system performance now? • Is it inside the system (a resource or policy) or is it outside the system (the market, material supply, a vendor . . . or another policy)? • When looking at a process, where is the one point people always have to go to expedite?
    14. 14. What is a Constraint? Anything that limits a system in reaching its goal. Types of Constraints: 1. Market – Not enough demand for a product or service. 2. Resource – Not enough people, equipment, or facilities. 3. Material – Inability to obtain required material. 4. Supplier/Vendor – Unreliability of a supplier or vendor, or excessive lead time in responding to orders. 5. Financial – Insufficient cash flow to sustain an operation. 6. Knowledge/Competence – Information or knowledge to improve business performance is not resident within the system or organization. 7. Policy – Any law, regulation, rule, or business practice that inhibits progress toward the system’s goal.
    15. 15. Examples of Policy Constraints • “We will not approve new projects if the projected IRR is less than 20% in three years.” • Reason given for not pursuing new technology development. • “If we can’t manufacture a component for less than we can buy it, we will outsource that component.” • International Harvester policy in the 3 years before bankruptcy. • “We are a metal-stamping company.” • Reason given for not investing in laser-cutting technology. • “We can not add components that will increase BOM cost or negatively impact gross margins.” • Policy that makes decisions blind to impact at the system constraint. And the most common one of all . . . • “We strive for efficiency everywhere.”
    16. 16. Other Constraints • Material • Unavailable • Slow • Vendor / Supplier • Unreliable • Slow • Financial • Cash Flow • Knowledge / Competence • Lack of expertise, knowledge • Lack of competent skills
    17. 17. Step 2 - Decide how to Exploit the System’s Constraints Exploit means to get the most out of the constraining element without additional investment. • Change the way you operate so that the maximum financial benefit is achieved from the constraining element. • Understand the sales mix that maximizes the Capacity Constrained Resource (CCR) or identified Capacity Point. • Throughput Decision Support using Throughput per CCR Hour. Exploit: Use; develop; make use of; take advantage of; make the most of.
    18. 18. Step 3 - Subordinate everything else to the above decision • All parts of the system that are NOT constraints are required to do whatever they can to SUPPORT the plan to EXPLOIT decided on in step 2. • All non-constraints must NOT DO ANYTHING that would HURT the exploitation plan for the constraint. • Non-constraints (most of the system) recognize that THEIR OWN EFFICIENCY is not as important as supporting the system constraint.
    19. 19. Step 4 - Elevate the System’s Constraints • Evaluate alternative ways to ELEVATE one or more constraints. • Predict where the future constraint will be (after elevation) and its impact on the global performance. • Mentally apply the first three steps to each alternative • Where will the constraint go NEXT, and how difficult will it be to manage it THERE? • Select the best alternative to elevate the constraint. Elevate: To physically raise or increase the capacity to flow work through a resource or system component; acquisition of, or investment in, more resources.
    20. 20. The Five Focusing Steps Strategic & Tactical Implications ELEVATE SUBORDINATE IDENTIFY EXPLOIT TACTICALDECISIONS STRATEGIC DECISION STRATEGIC DECISION
    21. 21. Step 5 - The Five Focusing Steps • Go back to step one. Beware of inertia in identifying constraints. • The actual new constraint may be different from what was expected.
    22. 22. Red Curve & Green Curve • Repeated application of the Five Focusing Steps • Successive constraints broken • Cost reductions (efficiency target) • Single iteration of the Five Focusing Steps (inertia) Time $$$ Improvement
    23. 23. Constraint Management Evaluating Operating Decisions
    24. 24. Evaluating Operating Decisions The Traditional Approach • The financial standard for most decisions is profit • A decision that produces higher profit is GOOD. • A decision that produces lower profit is BAD. • Three key financial measures to evaluate the correctness of a decision . . . . • Net Profit (NP) • Cash Flow (CF) • Return on Investment (ROI)
    25. 25. Evaluating Operating Decisions The Traditional Approach • NP and ROI are very difficult concepts to apply to day-to- day decisions. • Effects of a decision on NP and ROI not easily quantifiable in financial terms. • How to determine the global (company-wide) financial impact of local (departmental) decisions? • Constraint theory provides a bridge between local operating decisions and global financial well-being . . .
    26. 26. Evaluating Operating Decisions The Constraint Management Approach • Throughput (T) • Investment (I) • Operating Expense (OE) These measures are predicated on the assumption that the organization's goal is to make more money, now and in the future.
    27. 27. Throughput (T) • The rate at which the organization generates “goal units.” • In a for profit organization, “goal units” equals money (i.e. incremental cash flows) through sales. New money coming into (and retained by) the system. – Sales minus Truly Variable Costs (TVC), where TVC is the costs that vary directly with the number of units sold, usually just materials. • Measured and assessed at the unit, product and organizational level.
    28. 28. Throughput Hierarchy • Company Level • Marginal contribution to profit of ALL sales in ALL product lines. • Sales revenue – Variable Cost of all Sales • Product Level • Marginal contribution to profit of ALL sales in ONE product lines. • Sales revenue – Variable Cost of all Sales • Unit Level • Marginal contribution to profit of ONE UNIT of product. • Unit Selling price – Unit Variable Cost
    29. 29. Investment (I) • All the money the system invests in assets and materials that are used to produce the products or services the system intends to sell. • Capital Assets • Facilities • Equipment • Stock of finished goods • Receivables
    30. 30. Operating Expense (OE) • All the money the organization spends in generating “goal units / Throughput.” The money flowing out of the system. • Normally, most categories of overhead (fixed expenses) • The money the organization constantly pays, even if production were to stop for a while. • Salaries • Rent • Insurance • Depreciation
    31. 31. T, I & OE Flow $$$ Investment Money Tied Up Inside the System (System) $$$ Throughput Money Coming In $$$ Operating Expense Money Going Out
    32. 32. Relation of T, I and OE to Traditional Business Measures of Merit • Net Profit = T-OE • Return on Investment = (ΔT-ΔOE)/ΔI • Productivity = T/OE • Investment Turns = T/I The profit from any decision is ΔT NOT ΔOE • The system constraint limits the level of Throughput that can be achieved. • Operating Expense is generated primarily by non- constraints.
    33. 33. Using T, I, & OE for Decision Making
    34. 34. Thinking Bridge Example Demand = 3,500 Drives Price = $400 each Raw Material = $80/Drive Employee Wage = $18/hr Number of Employees = 4 (1/workstation) Each Employee Works 2,080 hrs/year (40 hrs/week, 52 weeks/year) Other Expenses = $900,000 Drive Manufacturing Process: Workstation Processing Time 101 15 minutes 102 25 minutes 103 10 minutes 104 5 minutes Total Time 55 minutes
    35. 35. Labor & Overhead Allocation Cost Elements Calculation Rate per Direct Labor Minute Direct Labor $18/hr / 60 minutes / hour = $ 0.30 Overhead (4 direct labor employees) * (2,080 hrs/yr) = 8,320 direct labor hours per year (8,320 direct labor hours per year) * (60 min/hr) = = 499,200 direct labor minutes per year $900,000 / (499,200 direct labor minutes) $ 1.8029 Combined $ 2.1029
    36. 36. Standard Cost of One Drive Cost Element Cost Raw Materials $ 80.00 Direct Labor (55 minutes @ $ 0.30) $ 16.50 Overhead (55 minutes @ $ 1.8029) $ 99.16 Standard Unit Cost $ 195.66
    37. 37. Scenario 1 • An Engineer proposes buying a new fixture to reduce total processing time by 3 minutes. • The new fixture would allow some work to be transferred from workstation 101 to 102. Proposed Change: Workstation Original Processing Time Proposed Processing Time 101 15 minutes 10 minutes 102 25 minutes 27 minutes 103 10 minutes 10 minutes 104 5 minutes 5 minutes Total Time 55 minutes 52 minutes
    38. 38. Scenario 1 – New Drive Cost Cost Element Cost Raw Materials $ 80.00 Direct Labor (52 minutes @ $ 0.30) $ 15.60 Overhead (52 minutes @ $ 1.8029) $ 93.75 Standard Unit Cost $ 189.35
    39. 39. Scenario 1 – Cost Savings per Drive Original standard unit cost $195.66 New standard unit cost $189.35 Cost savings per unit $ 6.31 Cost savings per unit $ 6.31 Annual volume X 3,500 units Total annual cost saving $ 22,085 Less: Cost of fixture 5,000 First year cost savings $ 17,085 IRR = 400%, Payback Period < 3 Months Is this proposal an improvement?
    40. 40. Scenario 1 – Global Measurements Thinking Bridge Analysis • When using the global measurements (T, I, & OE) technique for the financial analysis of a proposed expenditure, we need to ask 5 questions: 1. What prevents the firm from increasing throughput? 2. Will the total amount of throughput change? 3. Will the operating expenses of the firm change? 4. Will the amount of investment of the firm change? 5. What is the real economic effect of the proposal?
    41. 41. Scenario 1 – The Five Questions 1. What prevents the firm from increasing Throughput? • Note: This question does not arise in least product cost thinking bridge. • Strategic Control Point is 102, however the company could produce 4,622 drives/yr. (124,800 min. / 27 min. of 102) & demand is 3,500 drives. 2. Will the total amount of Throughput change? • No, the engineer’s proposal has no effect on volume of sales, neither sales revenue or variable cost (raw materials). 3. Will the Operating Expenses of the firm change? • Do we have the same number of employees? • Has our overhead changed? • No, these all remain the same
    42. 42. Scenario 1 – The Five Questions 5. Will the amount of Investment of the firm change? • Investment increases by $5,000 6. What is the real economic effect of the proposal? Global Measurements First Year Subsequent Years T no change no change I + $5,000 no change OE no change no change Cash Flow - $5,000 no change
    43. 43. Scenario 2 • Everything is the same as in scenario 1, except the firm is currently producing and selling at its capacity of 4,992 units. • The engineer makes the same proposal.
    44. 44. Scenario 2 – Cost Savings per Unit Original standard unit cost $195.66 New standard unit cost $189.35 Cost savings per unit $ 6.31 Cost savings per unit $ 6.31 Annual volume X 4,992 units Total annual cost saving $ 31,500 Less: Cost of fixture 5,000 First year cost savings $ 26,500 IRR = 630%, Payback Period about 2 Months Is this proposal an improvement?
    45. 45. Scenario 2 – The Five Questions 1. What prevents the firm from increasing throughput? • Strategic Control Point (Capacity Constrained Resource) is 102. • The proposal increases the time required at workstation 102 from 25 minutes to 27 minutes. • The company can only produce 4,622 drives/yr. (124,800 mins. / 27 min of 102) & demand is 4,992 drives.
    46. 46. Scenario 2 – The Five Questions 2. Will the total amount of throughput change? Lost Sales Volume: Original capacity 4,992 units/yr Capacity if proposal is implemented - 4,622 units/yr Reduction in productive capacity 370 units/year Throughput/Unit: Price $400 /unit Variable Expenses - 80 / unit Throughput $320/ unit $320 / unit x 370 units/yr Throughput lost - $118,400/yr
    47. 47. Scenario 2 – The Five Questions 3. Will the operating expenses of the firm change? • No, these all remain the same 4. Will the amount of investment of the firm change? • Investment increases by $5,000
    48. 48. Scenario 2 – The Five Questions 5. What is the real economic effect of the proposal? Global Measurements First Year Subsequent Years T - $118,400 - $118,400 I + $5,000 no change OE no change no change Cash Flow (= T-I-OE) - $123,400 - $118,400
    49. 49. Scenario 3 • Let’s start with the original case. • Demand is 6,000 drives. • The firm is currently operating at a level of 4,992 drives. • The plant engineer makes a similar suggestion, but this time the effect is to increase the time required to produce the product by 3 minutes. • 5 minutes is added to workstation 101’s processing time. • The processing time of 102 is decreased by 2 minutes.
    50. 50. Scenario 3 – Proposed Change Workstation Original Processing Time Proposed Processing Time 101 15 minutes 20 minutes 102 25 minutes 23 minutes 103 10 minutes 10 minutes 104 5 minutes 5 minutes Total Time 55 minutes 58 minutes
    51. 51. Scenario 3 – Least Product Cost Thinking Bridge Cost Element Cost Raw Materials $ 80.00 Direct Labor (58 minutes @ $ 0.30) $ 17.40 Overhead (58 minutes @ $ 1.8029) $ 104.57 Standard Unit Cost $ 201.97 Original standard unit cost $195.66 New standard unit cost $201.97 Cost increase per unit $ 6.31
    52. 52. Scenario 3 – The Five Questions 1. What prevents the firm from increasing throughput? • Workstation 102 restricts our ability to serve all of potential customers that would like to purchase our drives.
    53. 53. Scenario 3 – The Five Questions 2. Will the total amount of throughput change? Additional Sales Volume: Capacity if proposal is implemented 5,426 units/yr Original capacity 4,992 units/yr Increase in productive capability 434 units/yr Throughput/Unit: Price $400 /unit Variable Expenses - 80 / unit Throughput $320/ unit $320 / unit x 434 units/yr Additional Throughput $138,880/yr
    54. 54. Scenario 3 – The Five Questions 3. Will the operating expenses of the firm change? • No, these all remain the same 4. Will the amount of investment of the firm change? • Investment increases by $5,000 5. What is the real economic effect of the proposal? Global Measurements First Year Subsequent Years T + $138,880 + $138,880 I + $5,000 no change OE no change no change Cash Flow (= T-I-OE) + $133,880 + $138,880
    55. 55. Summary - Examples Least Product Cost Global Measurements (T, I, OE) Scenario 1 $17,085 ($5,000) Scenario 2 $26,500 ($123,400) Scenario 3 ($36,500) $133,880
    56. 56. Constraint Management Strategy Lessons from the T, I, OE Example • Primary focus on increasing “T” • Allow “I” to seek its natural level (usually less than before) • Capitalize on opportunities to reduce “OE” • But ENSURE that capacity to generate “T” is not compromised. • Don’t waste time or endanger future “T” by actively searching for reductions in “OE” today.
    57. 57. Why Gross Margin is Problematic • Assumes cost per product is a reality. • Assumes that all operations are equal. Fixed Cost + Variable Cost Volume Product Cost =
    58. 58. Throughput Decision Support – Focusing on TU/Hr at the System Constraint? • The Capacity Constrained Resource at the this example was developed was the Testers Fam Model Cust TestYield TestTime YieldTestTime GM AUP TVC TU AUC Tu/Hour Revenue/qtr TVC/qtr Throughput/qtr Alpine ST340014A Disty 79% 8.70 11.01 3% 43$ 31$ $12 $41 $1.09 $2,014,818,624 $1,447,782,336 $567,036,288 Alpine ST340014A OEM 79% 8.70 11.01 2% 42$ 31$ $11 $41 $1.03 $1,981,324,800 $1,447,782,336 $533,542,464 Alpine ST340014A Dell 79% 15.70 19.87 2% 42$ 31$ $11 $41 $0.57 $1,108,633,255 $810,094,157 $298,539,098 Alpine ST340014A HP 79% 18.70 23.67 2% 42$ 31$ $11 $41 $0.48 $930,777,653 $680,132,528 $250,645,125 Alpine ST380011A Disty 78% 13.60 17.44 7% 49$ 33$ $16 $45 $0.92 $1,463,090,318 $979,304,747 $483,785,571 Alpine ST380011A OEM 78% 13.60 17.44 6% 48$ 33$ $15 $45 $0.89 $1,444,136,032 $979,304,747 $464,831,285 Alpine ST380011A Dell 78% 20.80 26.67 7% 49$ 33$ $16 $45 $0.62 $963,914,515 $640,314,642 $323,599,873 Alpine ST380011A HP 78% 23.10 29.62 4% 47$ 33$ $14 $45 $0.49 $832,514,206 $576,560,371 $255,953,836 Alpine ST3120022A Disty 71% 21.30 30.00 20% 65$ 36$ $30 $52 $0.99 $1,141,309,758 $621,451,644 $519,858,114 Alpine ST3120022A OEM 71% 21.30 30.00 18% 64$ 36$ $28 $52 $0.95 $1,119,102,566 $621,451,644 $497,650,922 Alpine ST3120022A Dell 71% 28.80 40.56 16% 62$ 36$ $26 $52 $0.65 $801,804,931 $459,615,278 $342,189,653 Alpine ST3120022A HP 71% 31.30 44.08 16% 62$ 36$ $26 $52 $0.60 $737,763,004 $422,904,793 $314,858,211 Alpine ST3160021A Disty 68% 27.00 39.71 18% 68$ 36$ $31 $55 $0.79 $894,427,183 $481,035,358 $413,391,825 Alpine ST3160021A OEM 68% 27.00 39.71 17% 67$ 36$ $31 $55 $0.77 $885,179,044 $481,035,358 $404,143,686 Alpine ST3160021A Dell 68% 34.75 51.10 13% 64$ 36$ $28 $55 $0.54 $656,969,564 $373,754,091 $283,215,473 Alpine ST3160021A HP 68% 37.25 54.78 13% 64$ 36$ $28 $55 $0.50 $612,877,647 $348,669,924 $264,207,723 Alpine+ ST3200021A Disty 50% 54.00 108.00 32% 87$ 39$ $48 $59 $0.44 $420,974,911 $187,731,398 $233,243,512 Alpine+ ST3200021A OEM 50% 54.00 108.00 32% 86$ 39$ $47 $59 $0.44 $417,720,576 $187,731,398 $229,989,178 Alpine+ ST3200021A Dell 50% 54.00 108.00 27% 80$ 39$ $41 $59 $0.38 $388,577,280 $187,731,398 $200,845,882 Alpine+ ST3200021A HP 50% 54.00 108.00 27% 80$ 39$ $41 $59 $0.38 $388,577,280 $187,731,398 $200,845,882
    59. 59. How Can We Increase TU/Hr? 1. Raise prices 2. Reduce the time a product spends on the Capacity Constrained Resource/Primary Control Point. 3. Reduce Truly Variable Cost. 4. Increase the yields at the CCR. 5. Ensure that only high quality material goes through the CCR.
    60. 60. Throughput Decision Support Transition Timing • Takes into consideration Yield at the constraint and Truly Variable Cost. • The primary takeaway from this is example is not to kill a Cash Cow in the middle of it’s cycle, the time to transition a product is when you can get the TU/Hour to meet or exceed the product to be replaced. Fam Mod Cap Cust Yield TestTime Yield_TestTime AUC AUP Margin TVC TU Tu/Hour Revenue/qtr TVC/qtr Throughput/qtr CHEETAH 10K.6-36 FAMILY ST336607LC 36 Dell 85.00% 15.3 13 114$ 62$ $52 $3.40 $859,541,760 $467,470,080 $392,071,680 CHEETAH 10K.6-36 FAMILY ST336607LC 36 HP 85.00% 15.3 13 137$ 62$ $75 $4.90 $1,032,958,080 $467,470,080 $565,488,000 CHEETAH 10K.6-73 FAMILY ST373307LC 73 Dell 80.00% 23.8 19 100$ 143$ 30% 67$ $76 $3.20 $694,318,888 $325,310,248 $369,008,640 CHEETAH 10K.6-73 FAMILY ST373307LC 73 HP 80.00% 23.8 19 100$ 158$ 37% 67$ $91 $3.83 $767,149,541 $325,310,248 $441,839,293 CHEETAH 10K.7-73 FAMILY ST373207LC 73 Dell 66.00% 31.8 21 85$ 143$ 40% 65$ $79 $2.47 $518,259,456 $233,760,384 $284,499,072 CHEETAH 10K.7-73 FAMILY ST373207LC 73 HP 66.00% 31.8 21 85$ 158$ 46% 65$ $94 $2.94 $572,622,336 $233,760,384 $338,861,952 CHEETAH 10K.6-146 FAMILY ST3146807LC 146 Dell 73.00% 56.8 41.5 234$ 77$ $157 $2.76 $474,654,035 $156,189,576 $318,464,460 CHEETAH 10K.6-146 FAMILY ST3146807LC 146 HP 73.00% 56.8 41.5 239$ 77$ $162 $2.85 $484,796,216 $156,189,576 $328,606,640 CHEETAH 10K.7-146 FAMILY ST3146707LC 146 Dell 65.00% 56.3 36.6 234$ 81$ $153 $2.72 $479,219,725 $165,883,751 $313,335,974 CHEETAH 10K.7-146 FAMILY ST3146707LC 146 HP 65.00% 56.3 36.6 239$ 81$ $158 $2.81 $489,459,462 $165,883,751 $323,575,711 CHEETAH 10K.7-300 FAMILY 300 49.00% 215.1 105.4 418$ 82$ $336 $1.56 $224,087,849 $43,959,817 $180,128,032
    61. 61. Impact of Yield & Test Time Improvements • Based on Current Quarter Forecast – Impact on improvements to Disty 200GB only. 1. Reduce test time by 5% (from 54 hrs to 51 hrs) without improvement to yields: • T/Hr on the CCR goes from $.44 to $.47 • Gain an additional 2,838,869 hours of Gemini Capacity for other products. 1. Improve yields by 5% (from 50% to 55%) without improvement to test times: • T/Hr on the CCR goes from $.44 to $.49 • Gain an additional 4,645,421 hours of Gemini Capacity for other products. 1. Reduce test time by 5% and improve to yields by 5%: • T/Hr on the CCR goes from $.44 to $.52 • Gain an additional 7,226,211 hours of Gemini Capacity for other products.
    62. 62. Analysis with Throughput Decision Support 1. Product Emphasis 2. Product Transitions 3. Product Design 4. Product Pricing 5. Capital Investment & Process Improvement Expenditures 6. Capacity Constrained Resource Yield vs. Scrap 7. Outsourcing Decisions 8. Marketing Potential 9. Project Selection – Six Sigma & Lean
    63. 63. The Challenge PROBLEM… Many of these constraints are not easy to identify  How do we identify and manage constraints that are: • Not physical (not visible) • Not easily measurable • Apply to more than just manufacturing systems • Pervade the organization (complex interdependency) In other words... How to analyze complex system interactions?
    64. 64. Logical Thinking Process The means to IDENTIFY the system constraint and plan EXPLOITATION, SUBORDINATION, and ELEVATION.
    65. 65. Six Logical Tools An Integrated Thinking Process Intermediate Objective Map
    66. 66. Six Logical Tools An Integrated Thinking Process
    67. 67. Six Logical Tools An Integrated Thinking Process
    68. 68. Six Logical Tools An Integrated Thinking Process
    69. 69. Other Constraint Management Tools
    70. 70. “Drum-Buffer-Rope” Production Scheduling “DRUM” : The maximum PACE of the most restricted (capacity- constrained) resource “BUFFER” : A means to PROTECT the CCR and the Shipping Dock from “starvation” •TIME, not inventory “ROPE” : A communication mechanism to guarantee material release does not exceed the PACE of the CCR •Similar to kanban
    71. 71. “Critical Chain” Project Scheduling and Resource Allocation • Similar to DBR • Avoids multi-tasking & student syndrome • Eliminates resource contentions • Improves reliability of delivery date projections • Provides a project “delivery” buffer at the end • Smaller “assembly” buffers • No “pad” for individual activities CCPM track record: 85% of all projects completed on time or early Feeder Buffer Feeder Buffer Project Buffer Project Delivery
    72. 72. References 1. Steven Bragg, Throughput Accounting, A Guide to Constraint Management. 2. John A. Caspari, Management Dynamics: Merging Constraints Accounting to Drive Improvement. 3. Thomas Corbett, Throughput Accounting. 4. Debra Smith, The Measurement Nightmare: How the Constraint Management Can Resolve Conflicting Strategies, Policies, and Measures. 5. William Dettmer, the Logical Thinking Process. 6. William Dettmer, Breaking the Constraints to World-Class Performance. 7. Eliyahu M. Goldratt & Jeff Cox, The Goal. 8. Eliyahu M. Goldratt, Constraint Management Self Learning: Finance & Measurements. 9. Eliyahu M. Goldratt, Production the Constraint Management Way. 10. Eliyahu M. Goldratt, It’s Not Luck. 11. Eliyahu M. Goldratt, Constraint Management Self Learning: Project Management & Engineering. 12. Eliyahu M. Goldratt, Constraint Management Insights: Finance & Measurements. 13. Eliyahu M. Goldratt, Constraint Management Insights: Operations. 14. Lawrence Leach, Critical Chain Project Management. 15. William Dettmer, MBB 2004 Seagate Conference - Constraint Management Overview.
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