TOC Operations General Appreciation

TOC for Operations

General Appreciation

The Theory of Constraints approach to
Operational Excellence

These Slides have been prepared and presented by Arrie
van Niekerk and form part of a series of presentations
that were developed over several years. They represent
a personal view of the subjects and are not to be
interpreted as official documents of any kind.

Heuristic
FLOW
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Goldratt Group (Southern Africa) © 2004
Heuristic Flow © 2008

TOC in Context

Own Distribution
Suppliers Purchasing Market
Processes Channel

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FLOW
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The Impact of Our Ideologies

RESULTS

WORDS ACTIONS

IDEOLOGY

We very seldom take a step back and challenge our core
beliefs as the reason why some things just do not work

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“The significant problems we face
today cannot be solved with the
same level of thinking we were at
when we created them.”
– Albert Einstein

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Basic Frame of Reference

Understanding the world of FLOW,
Variation and Interdependence

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Managing a Complex Environment
15

12 16 13 12
17

IN 11 15 16 14 10 13 12 9 OUT

11 18 11 20
19

• Complexity stems from the number of agents (21), number of
linkages (35), time dependence, time delays, technical details,
social considerations, cause and effect relationships, etc
Heuristic
FLOW Goldratt Group (Southern Africa) © 2004

Examples of sequential flow processes

Hydraulic Valve Manufacturing
Raw Machine Drilling Welding
Saw Assembly Packaging
Material Station Station Station Valve

Sand Mining
Sand Trucks Wash
Loader Screen Load Transport Product
Source (x2) & Dry

Occupational Health Screening
BP &
Patients Admin Chest Hearing Eyes & Certify Patients
Lung
arrive Reception X-Ray Test Urine (Nurse) Leave
Capacity

Heuristic
FLOW Goldratt Group (Southern Africa) © 2004

A Few Trivial Questions

A B C D E F

• You are instructed to cut costs by 10% in order
to meet the challenge of a lower Sales Price
– How would you go about it?
– What process would you follow?
• Is there another, more meaningful way?

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A Few Trivial Questions
A B C D E F

65% 60% 72% 92% 75% 80%

• You are faced with the above efficiency report:
– Where will you focus most of your attention?
– Where will you not put any attention now?
• What is the most probable action you will
take in order to get quick results?

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A Very Basic Operation

A sequential flow line with processes of different average capacity
(e.g. Tons per Hour)

Mineral
Resource 15 16 14 10 13 12 Product

What bothers you about this chain?

Expected output of this chain = ?

How will you go about improving it?

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A Perfectly Balanced Chain?

Mineral

Output of the chain = ?

Mineral


What are the deep rooted beliefs that
cause us to develop chains like these?
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The World of
Local Efficiency

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THE WORLD OF Local Efficiency
When we prepare our budgets, what is
the governing mental model?

Mineral


What causes us to develop chains like these?

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The world of Local Efficiency:
A Perfectly Balanced Chain?
Mineral

For this system we believe that:

A The output of the chain will be 10 (or close to it)
If every resource in the chain is optimised,
B we will have an optimised chain
C Balancing Capacity results in Optimised Flow

D We have to utilise all resources to their full capacity

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Fact No1 in a Chain:
ALL RESOURCES VARY OVER TIME

Input Output
Resource

Max 12
Performance

Ave 10

Min 0
Time

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Fact No2 of a Chain:
RESOURCE DEPENDENCY IS HIGH
and works forwards and backwards

Mineral
Resource A B C D E F Product

Upstream: STARVATION

Downstream: BLOCKAGE

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In Combination: Variation and Interdependency
kills the synchronisation of FLOW

10 10 10 10 10 10

12
Performance

10

5

0

Time
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Context

“If a company tell me they have
moving bottlenecks, my response
is: You have no bottlenecks and
most of your resources have at
least 30% spare capacity”
– Dr Eli Goldratt

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How Much Will It Produce in Reality?

10 10 10 10 10 10 ?
Availability
94% (0.94)6 = 73% of design capacity
Availability
90%
(0.90)6 = 58% of design capacity
Availability
80% (0.80)6 = 31% of design capacity

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FLOW
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World of Local Efficiency
Mineral

Guaranteed Outcome: Performance well below standard,
Costs per part go through the roof!

What will the resulting behaviours be?
• Relentless cost control measures
• Adjustments of all input costs, downwards (easiest)
• Increased pressure on all levels to improve local efficiencies
• Focus on every link in the chain – cost and efficiency
• Undiscussable issues everywhere – “stop complaining and just do
your job!” (We know better)
• ………………
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How do we normally handle improvement?

Mineral
Resource
16 16 16 16 16 16 Product

Output of this chain = 8
We throw money at the problem
We start with … 6/7

Mineral
15 16 14 10 13 12 Improve!
Resource

Or we Cut Costs

Mineral
Resource
10 10 10 10 10 10 Product

Output of this chain = 5
These chains suffer from the same flaw!
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Another World,
The World of
OPTIMISED FLOW

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Every Chain has a Weakest Link and it
determines the FLOW of the total chain

10

• How well should it be run?
• What is the implication of standing time?
• What is required from Maintenance?
• What about operator availability and skill?
• What about quality control?
• What about product value?
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FLOW
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Next: Buffer the FLOW of the critical resource
from fluctuation in the rest of the chain

10

• We have to Protect the Constraint from the rest
of the chain by buffering
• We must effectively buffer the FLOW chain from
every possible negative effect
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FLOW
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Next: Ensure that the rest of the chain can support
the needs of the constraint

? ? ? 10 ? ?

10

Protective Protective
Capacity
10 Capacity
(Flexibility) (Flexibility)

We need 20% protective capacity in front and behind the constraint in order to maintain the FLOW
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Impact of Buffers on FLOW

? ? ? 10 ? ?

12
Performance

10
With buffers

5
Without buffers

0

Heuristic Time
FLOW
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Buffers & Protective Capacity

A B C D E F

Protective Capacity
• Establish and maintain a buffer of work in front of the
constraint
• Establish and maintain a space buffer behind the
constraint
• Without protective capacity, buffers
cannot be managed
• Making sure that we will not stop
the FLOW
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COMPARING
Local Efficiency
and
Optimised FLOW
in terms of ability to
MAKE MONEY
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Comparing the Production Costs
Availability (0.94)6 = 73% of design capacity
12 12 12 10 12 12
94% 10 10 10 10 10 10
A B C D E F A B C D E F

Costs 6 x 10 = 60 (5x12) + 10 = 70
Output 7,3 Units 9,4 Units
Cost/Unit 60/7,3 = 8,2 70/9,4 = 7,5

80% 10 10 10 10 10 10
16 15 14 10 13 12


Costs 6 x 10 = 60 (16+15+14)+10+(13+12)= 80
Cost/Unit 60/3,1 = 19,4 80/8,0 = 10
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Production Costs: Closer to REALITY
13 13 13 10 12 12
90% 10 10 10 10 10 10

Costs 6 x 10 = 60 (3x13)+10+(2x12) = 73
Cost/Unit 60/5,8 = 10,3 73/9,0 = 8,1

80%, but 10 10 10 10 10 10
16 15 14 10 13 12
Constraint 85% A B C D E F
A B C D E F

Costs 6 x 10 = 60 (16+15+14)+10+(13+12)= 80
Cost/Unit 60/3,1 = 19,4 80/8,5 = 9,4
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Comparing the Profit: 90% Availability
10 10 10 10 10 10 13 13 13 10 12 12

Costs 6 x 10 = 60 (3x13)+10+(2x12)= 73
Output 5,8 Units 9 Units
Cost/Unit 60/5,8 = 10,3 73/9 = 8

Reducing the Cost/unit produced by 22%
Income 5,8 x 15 = 87 9 x 15 = 135
Costs 60 73
Profit 87 - 60 = 27 135 - 73 = 62

Extra profit created through “additional costs”: 35
Costs of lost opportunity is not even measured and it is the biggest cost to the
company- buffering pays for itself many times over
Heuristic
FLOW
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Comparing the Profit: 90%BC vs 80%Flow
10 10 10 10 10 10 16 15 14 10 13 12

Costs 6 x 10 = 60 16+15+14+10+13+12= 80
Cost/Unit 60/5,8 = 10,3 80/8,5 = 9,4

Reducing the Cost/unit produced by 9%
Income 5,8 x 15 = 87 8,5 x 15 = 127
Costs 60 80
Profit 87 - 60 = 27 127 – 80 = 47

Extra profit created through “additional costs”: 20
Costs of lost opportunity is not even measured and it is the biggest cost to the
company- buffering pays for itself many times over
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Context

“If you want to make money, ...
most of your resources MUST be
IDLE form time to time”
– Dr Eli Goldratt

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Comparing the Chains: Operation
10 10 10 10 10 10 16 15 14 10 13 12

Balanced Capacity Balanced FLOW
Murphy Exposed Murphy Protected
Unstable Flow Stable Flow
Control Everything Control Leverage Points
Manage by Budget Manage by Constraint
Uncontrolled Idle Time Managed Idle Time
Higher Cost/Product Lower Cost/Product
World of Scarcity World of Abundance
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Comparing the Chains: Mental Models
10 10 10 10 10 10 16 15 14 10 13 12

Balanced Capacity Balanced FLOW

Can we describe the Can we try to describe
types of thinking the mental models
behind this type of behind this type of
chain? chain?

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IN SUMMARY

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IN SUMMARY

In the world of Local Efficiency:
– The overall performance will inevitably be well
below expectation,
– Deliveries will almost always be late
– Product availability will be low
– You are guaranteed to have frustrated customers
– The costs will inevitably be higher than expected
– Company performance is bound to go down

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FLOW
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IN SUMMARY

In the world of Optimised Flow:
– The overall performance will be better than
expected,
– Deliveries will almost always be on time
– Product availability will be exceptionally high
– You are guaranteed to have satisfied customers
– The costs will inevitably be lower than expected
– Company performance is bound to go up

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KEY FOCAL POINT / “Constraint”

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BUFFERING

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SUBORDINATION

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PROTECTIVE CAPACITY

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“The closer you are to a
balanced capacity chain, the
closer you are to bankruptcy”
– Dr Eli Goldratt

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It is all about FLOW, not CAPACITY

The flow through the bottleneck
determines the output of the chain as a
whole!

Key question to ask:
HOW CAN WE HELP THE BOTTLENECK
TO PERFORM BETTER?

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New Holistic Mechanism
In order to …
We must …
16 16 16 16 16 16
Maximise
A B C D E F
In order to … FLOW
Make More 16 15 14 10 13 12
Money We must …
A B C D E F
(Now and in the
Future)

Control 10 10 10 10 10 10
A B C D E F
COSTS
We must … In order to …

DIRECTION: Mental frameworks that are aligned
with the LAW that Governs Flow
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FLOW
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Our ‘logic’ is indeed flawed!
Mineral

A The output of the chain will be 10 (or close to it)
If every resource in the chain is optimised,
B we will have an optimised chain
C Balanced Capacity results in Optimised Flow

D We have to utilise all resources to their full capacity

A B C 10 E F
Protective Capacity
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The Theory of Constraints?

The Power of Leverage
“Doing the right thing”
A DIFFERENT WORLD!
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We followed the 5 focusing steps based on
the laws of FLOW

Continuously improve
overall performance

A chain is only as strong as its weakest link

Step 1: Step 2: Step 3: Step 5:
Subordinate Step 4: If you have
Identify Decide how
everything Elevate the broken a weakest
the to exploit
to the weakest link then go back
weakest the weakest
previous link to step 1
link link
decisions Remember: Old habits die
hard

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Enhanced Management

A B C D E F

70 80 90
60 100
Time
+
50
Buffer

• Key Focal point(s)
• Constraint Rate & Schedule
• Buffer Management
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Synchronized Flow
The DRUM-BUFFER-ROPE way

Raw Material Flow Time Finished
Space
Buffer Goods
Buffer

A B C D E F

“Rope” that ties the first process Constraint or “DRUM”
to the Constraint operation that determines the
flow rate of the system
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Management for Complex Production
= Active Constraint
100 –
= Next Constraint
90 –
= Near Constraint
Capacity (Items per hour)

80 – = Non Constraint

70 – = Sprint Capacity

60 – Internal Constraint
(Lowest Capacity)
50 –
Minimum Acceptable
Utilisation Level for Break Even
40 –

30 –

1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 10 |

Process / Line Number

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TOC Breakthrough Thinking
1. Optimised flow and optimised capacity cannot be
achieved simultaneously (except on the constraint itself)
2. In order to optimise flow you MUST have buffers and
protective capacity (resilience)
3. For services, the customer becomes the “raw material”
and any bottleneck causes a queue (and customer
dissatisfaction)
4. Superior Flow and/or Customer Service necessitates
protective capacity at all times
5. Optimised Flow paves the way for significant reduction
on costs per part produced

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TOC Operations General Appreciation

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