“THEORY OF CONSTRAINTS”
Eka Darmadi Lim 3094802
May Eka Saputri 3094814
Steven Auryn Hendro 3105812
University of Surabaya
Faculty of Business and Economics
STATEMENT OF AUTHORSHIP
This article about “Lucent Technology - TOC” created by our team ideas and
opinion, and this paper pure from our understanding not copy or paste from the
resource that “available”, we use the appendix and references to describe everything.
The person who signs this authorship statement, everything in this paper just for
internal use only, we consider as a student we have limitation, and mistakes, so the
whole paper is our group opinion for internal use only, for our case study. And we
consider if there is plagiarism in this paper, we as the team member, we are ready for
the consequences, that as our agreement before, and we understand that we must
deliver on-time as scheduled.
Eka Darmadi Lim May Eka Saputri
Steven Auryn Hendro
Each firm faces limited resources and limited demand for each product. These
limitations called “Constraint”, theory of constraint admit that the performance
of the company is limited by constraints. If the company wants to improve
their performance, a company must identify the constraints, exploit the
constraints in the short term and long term, and then find ways to overcome
Theory of constraints focus on 3 activities, they are Throughput, Inventory and
operating expenses. Management goals are increasing throughput; minimize
inventory and decreasing operating cost.
1. Throughput: rate at which an organization generates money through sales.
2. Inventory: all the money the organizations spend in turning materials into
3. Operating expense: all the money the organization spends in turning
inventories into throughput.
By increasing throughput, minimize inventory, and decrease operating
expense will give any impact on increasing finance performance, profit, return
on investment, and cash flow.
In traditional viewpoint, pressing in increasing throughput and decreasing operating
expense are very important, and minimize inventory are not really important.
TOC recognize that lowering inventory decreases carrying costs and thus
decreasing operating costs expenses and improves net income. More deeper, TOC
recognize lowering inventory helps produce a competitive edge by having, better
products and lower price and responsiveness to customer’s needs.
1. Better products higher quality
Company able to improve their products / product innovation, by
lowering inventory there is innovation, company can market their
product before their competitor market the same products, without
waiting for last stock.
2. Lower prices
1. Identify the organization’s constraint(s)
External constraints – limiting factors imposed on firm from external sources
( such as market demand )
Internal constraints – limiting factors on firm from internal sources
(Such as: product capacity, machine-time availability, etc.)
Loose constraints – constraints whose availability resources are not fully
Binding constraints – constraints whose availability resources are fully
Constraints are used to optimal mix reveals which is will maximize throughput
and how much of each constrained resources is used and which of the
organizations are binding.
Hello company produce 2 component of machine x and y, margin contribution for
each $ 300 for x and $ 600 for y. Operation work 5 days in a week.
In here we can said that Hello Company better produce and sell component y
because y has a biggest MC/Unit. But this solution is not hundred percent good.
One binding internal constraints:
Hour/unit 1 hour 3 hour
MC/Unit $ 300 $ 600
Constraints : work processes 120 hours / weak
We can produce 120/1 = 120 units 120/3 = 40 units
MC total $ 36,000 / weak $ 24,000 / weak
MC resources $ 300/1 = $ 300 ( TOP ) $ 600/3 = $ 200
Shown: Better just produce and sell product x, because x produce higher
MC/weak ( $ 36,000 for x and $ 24,000 for y ) its because MC/unit rare from
resources or constraints of product x higher than constraints of product y,
although MC/unit product y 2x bigger than MC/unit product x MC/unit
product is doesn’t matter but MC/unit unavailability resources is important.
Internal binding constraint and external binding constraint:
If hello company can sell maximum 30 units component x and 100 units
component y, so optimal mix will be:
Component x because MC/highest resources maximize first 30 X 1
hour unit = 30 hours, and 90 hours for component y 90 hours: 3 hours = 30
2. Exploit the binding constraint(S)
In many companies there is some binding constraint, the main binding
constraint is drummer, whereas level of productivity drummer constraint are
level of production in all factory.
TOC add 2 more feature:
Rope = actions taken to tie the rate at which material is released into the plant
(at the first operation) to the production rate of the constrained resource.
The standard of the process that have constraint continued upriver to
synchronize the basic materials used in accordance with the optimal product
mix eliminate raw materials unneeded.
Buffer : are made to ensure resource constraint that have kept busy, so for
scheduling, operations must produce the component required by the resource
drummer two days earlier before drummer constraints.
Hello Company has 3 processes
Drilling – Grinding – Polishing
Assumption: the only internal binding constraint is grinding which
spend 120 hours grinding/weak grinding process is drummer.
With optimal mix (calculation before) 30 x and 30 y maximum grinding
And, grinding and polishing loose constraints can produce more than of
product mix required.
3. Subordinate everything else to the decision made in step 2
The drummer constraint essentially sets the capacity for the entire plant. Which
make the company will change their way to think. This make the use of efficiency
measures at the department level may no longer be appropriate. Consider that
confer company once again. Encouraging maximum productive efficiency for the
grinding department would produce excess work-in process inventories. For
example assume that the capacity of the grinding department is 80 units per week.
Assuming the 2 day buffer is in place, the grinding department would add 20 units
per week to the buffer in front of the drilling department. Then there will be a
large work-in process inventories. Polishing will produce at the rate of drilling
since the polishing follows drilling in the sequential production process.
4. Elevate the binding constraints.
Once actions have been taken to make the best possible use of the existing
constraint, the next step is to embark on a program of continuous improvement by
reducing the limitations that the binding constraints gave on the organizations
performance. Assume that the polishing has 160 hours available. Part X uses 1
hours and part Y uses 3 hours and we want to produce 30 part x and 30 part Y.
The total hours we spend is 120 hours ((30x1)+(30x3)). If we want to add more
production to the product Y by 20 (from 30 to 50) is possible. Since the increase
of production of part Y by 20 will increase the throughput by 12000 (20 x $600)
per week. If the cost of adding the half shift is $50 per hour. Then the incremental
cost is $3000 per week. Then the decision to add the half shift is a good choice.
5. Repeat the process
Eventually the drilling constraint will be elevated to a point where the constraint is
no longer binding. Suppose for example that the company adds a full shift for the
drilling operation. Increasing the resource availability to 240 hours. both the
drilling and polishing constraints are capable of producing more of part X. but the
grinding cannot since the maximum production of product mix is only 80 per
week. Thus the new drumming constraint is grinding. Once the new drummer
constraints identified. Then the TOC process is repeated. The main objective is to
continually improve the performance by managing constraints
“Theory of Constraints” (TOC) is good theory for factory, because TOC will
help factory to manage and solve their problems. After manage and solve the
problems, are easy for factory to get more and more profit.
Actually the main problems in factory, are managing the inventories. And
TOC are really help in managing inventories. TOC has buffer and rope to
solve the inventories, rope are to tie the rate at which materials is released into
the plant to the production rate of the constrained resources. Buffer, are made
to ensure resource constraint that have kept busy, so for scheduling, operations
must produce the component required by the resource drummer earlier before
In our opinion, the main idea from TOC is Rope and Buffer, but all the
process is related each other. And it will make TOC, as a union idea to
managing inventories and be the first or main company in this or that product.
Lucent Technologies implement TOC
The Lucent Technology is a corporate owned by bell lab innovation, as we
know as AT&T (1970 – 2006) in United States America, but “The Lucent
Technology have different objective, “The Lucent Technology” build the
semiconductor, fiber optic, fiber cable. Means that the “Communication
The Lucent Technologies was built in 1970, and start producing wire, already
produce up to 107 Billion conductors that manufactured that year. The purpose
to build this company for takes a profit competing communication provider,
start from $8 / Share up to $84 / Share in 1999, and now in 2006 Lucent
bought by Alcatel and ready to start the most improvement ever, In 2011 for
implementing TOC inside.
After Lucent implement TOC inside the operational system, there are lots of
improvement that we get, for developing new product we need just half of
time needed, 100% of project can be done on time, we can 3x more for
product development capacity, 30% Revenue turnover, Multimillion dollar
1. How Lucent become more productive?
2. How Lucent can improve their performance?
3. How Lucent can win the competitor?
4. How Lucent can increase their profit?
By implementing TOC inside operation we can see lots of improvement that
we get, I will explain in a brief, using TOC system we can analyze which part
is our bottleneck, and the most inefficient one, before they implement TOC,
they kept producing in “continuous number” of a product, for example
Machine A Can Produce 100, Machine B can Produce 500. In the “old” time,
their flow is like that, so machine B can’t reach the maximum capacity, but
after implement TOC after Machine A produce 500, then they continue to
machine B, so machine B can maximize their capacity. When the machine A
produces 500, we improve machine B to double size, so we can increase the
Step by Step
A. Identify organization constrain
- Lack overload of some machine in production capacity
- Lack of innovation
Internal and External Factor
Internal: Lack of technology that we have
External: We can’t fulfill the request of the market, may be our competitor
can made product similar, and better. Or our production capacity is not
enough to fulfill our customer request
B. Exploit the binding constrain
Some machine need to be operated with more than 1 people, the
reason, because while this people take some rest, the production kept
going by the substitute people. And the process that breaks down
should be repaired as a priority.
A. Help the critically machine
B. Don’t allow the critically constrained resources run out of
C. Realize just enough WIP into the system
D. Remove all excess WIP from system, because WIP cost money,
clutter, and slows the flow.
C. Subordinate everything else to the decision meet in step 2
Remove all excessive WIP, then if the buffer still full, do not release
any work into the system. (Make done it first)
D. Elevate the binding constrain
After we implement step 1-3, now to elevate the constraint, get another
resource / workstation!
E. Repeat the process
Then we repeat the process to “test” if the system that already revised,
work or not. And do not let inertia become the constraint, because the
constraint becomes moved.
1. New Product can be developed twice fast.
2. Project can be completed on time
3. More production capacity
4. Increase in revenue and profit
Book of Managerial Accounting by: Maryanne M Mowen