# Theory of Constraints

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Theory of Constraints

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### Theory of Constraints

1. 1. 1 Presented By:- Chirag Chauhan #303 Ishan Parekh #315 Ankit Shah #317
2. 2. 2 Theory of Constraints  Theory of Constraints is a method to identify bottlenecks or other constraints and exploit them to the extent possible.  Identification of constraints allows management to take action to alleviate the constraint in the future  Reduce cycle time  Time from receipt of customer order to shipment  Improve manufacturing cycle efficiency (MCE)  Processing time / total cycle time
3. 3.  Goldratt contends that systems are analogous to chains, or networks of chains. Like a chain, the system performance is limited by the weakest link.  This means that no matter how much effort you put into improving the processes of a system, only the improvements to the weakest link will produce any detectable system improvement.  Throughput is limited by the weakest link... the constraint! Theory of Constraints
4. 4. Identification and Management of Bottlenecks  A Bottleneck is the process or step which has the lowest capacity and longest throughput.  Throughput Time is the total time from the start to the finish of a process.  Bottlenecks can be internal or external to a firm.
5. 5. Significance of bottlenecks  Maximum speed of the process is the speed of the slowest operation  Any improvements will be wasted unless the bottleneck is relieved  Bottlenecks must be identified and improved if the process is to be improved 6
6. 6. Where is the Bottleneck? It takes 10 + 20 + max (15, 12) + 5 + 10 = 60 minutes to complete a loan application. Unless more resources are added at step B, the bank will be able to complete only 3 loan accounts per hour, or 15 new load accounts in a five-hour day. 1. Check loan documents and put them in order (10 minutes) 2. Categorize loans (20 minutes) 3. Check for credit rating (15 minutes) 6. Complete paperwork for new loan (10 minutes) 4. Enter loan application data into the system (12 minutes) Customer 5. Is loan approved? (5 min) Yes No Bottleneck
7. 7. Measurement for TOC  Throughput  Inventory  Operating expense
8. 8. What is Throughput  The rate at which the system generates money through sales minus raw materials and purchased parts. All the money received from customers minus raw materials cost. The rate at which the system makes money(sales minus totally variable costs). Direct labor should not be deducted in calculating Throughput. Sales are only recognized when money is available to the firm, i.e., production for inventory is not a part of throughput.
9. 9. What is Inventory  All the money that system has invested in purchasing things which it intends to sell Some insights  Inventory is liability not an asset  Raw materials and finished good are inventory  Machines and fixtures are inventory  Scrap material is inventory
10. 10. What is Operating Cost  All the money the system spends in order to turn inventory into throughput All employee time is operating expense Depreciation of a machine is a operating expense. Scrap material thrown away. All expenses not deducted in arriving at throughput. This includes direct labor and all operating and maintenance expenses
11. 11. Drum Buffer Rope Five Focusing Steps Critical Chain Thinking Processes Theory of Constraints Covers Many Things
12. 12. Five Focusing Steps
13. 13. 1. Identify the Constraint 2. Exploit the Constraint 3. Subordinate everything to the Constraint 4. Elevate the Constraint 5. Repeat for the new Constraint Theory of Constraints - FIVE FOCUSING STEPS (Which will Strengthen the Chain)
14. 14. Step 1: Identify the system’s constraint(s).  What is the Goal?  What is Throughput?  What is Inventory?  What is Operating Expense? 15 1. Identify the System's constraints. The process is analyzed so that a task or activity that limits the productivity of an entire system can be identified. A system constraint may be identified by a long queue of work or long processing times.
15. 15. Step 2: Decide how to exploit the system’s constraint(s).  What is the constraint?  How do we get as much throughput as possible? 16 2. Decide how to exploit the system's constraints. In this step, decisions must be made on how to modify or redesign the task or activity so that work can be performed more effectively and efficiently.
16. 16. Step 3: Subordinate everything else to the decisions of Step 2  Throughput?  Inventory?  Operating Expense? 17 3. Subordinate everything else to the above decision. (step 2) Now, management directs all its efforts to improving the performance of the constraining task or activity and any other task or activity and any other task or activity that directly affects the constraining task or activity.
17. 17. Step 4: Elevate the system’s constraint(s).  Throughput?  Inventory?  Operating Expense? 18 4. Elevate the system's constraint. In this step, additional capacity is obtained that will increase (elevate) the overall output of the constraining task or activity. This differs from step 2 in that the added output comes from additional purchased capacity, such as buying a second machine tool or implementing a new information technology.
18. 18. Step 5: If a constraint is broken in Step 4, go back to Step 1.  What might happen if the constraint is elevated? 19 5. If, in the previous step, a constraint has been broken, go back to step 1 but do not allow inertia to cause a new constraint This sets up a process of ongoing improvement. As a result of the focusing process, the improvement of the original constraining task or activity may cause a different task to become a constraining task or activity. Inertia could blind management from taking steps to improve the system's output now limited by a new constraint.(1)
19. 19. THE THINKING PROCESSES (TP) OF TOC  Tools that enable us to use logic to gain an understanding of our reality and then to find ways of improving it.  BASIC CONSTRUCTS OF THE TOC TP:-  Causality: “If…then…”  Necessity: “In order to…I must…”
20. 20. EXAMPLE OF CAUSALITY  “IF…THEN…” I get burned. I touch a hot stove. I don't get burned I touch a hot stove I am wearing an oven mitt.
21. 21. EXAMPLE OF NECESSITY  “In order to…I must…” Avoid getting burned. Do not touch a hot stove. Touching a hot stove will burn me.
22. 22. CASE STUDY
23. 23. Applying TOC at the Marine Corps Maintenance Center
24. 24. The Marine Corps – Maintenance Center Intro:  Responsible for the regeneration & reconstitution of equipment  Complex maintenance operations  Repairs & overhauls of obsolete equipments Needs:  Increasing backlog  Production not able to meet demands
25. 25. Identifying Constraints
26. 26. Managing Production
27. 27. Results
28. 28. 29 Conclusion  Advantages  Improves capacity decisions in the short-run  Avoids build up of inventory  Aids in process understanding  Avoids local optimization  Improves communication between departments  Disadvantages  Negative impact on non-constrained areas  Diverts attention from other areas that may be the next constraint  Temptation to reduce capacity  Ignores long-run considerations  Introduction of new products  Continuous improvement in non-constrained areas  May lead organization away from strategy  Not a substitute for other accounting methods
29. 29. THANK YOU