TOC Workshop Agenda

TOC Workshop AgendaTOC AgendaTimeTopic15h30Introduction and Session Review15h35 Operations the TOC WayUsing TOC to analyze Operations16h05 Distribution the TOC WayUsing TOC to analyze Distribution16h40Insights and QuestionsCopyright © TOCICO, 2012. All rights reserved
Supply Chain Logistics the TOC Way

A number of the slides in this presentation were used with permission:
Copyright ©Goldratt Schools, 2005 slides were created by Alan Barnard and Lisa A. Ferguson
Emrysslides were created by Yohyon van Zantwijk
Vector Strategiesslides were created by Danny Walsh
Copyright © Dr. Lisa A. Ferguson, 2005
Copyright © TOCICO, 2012. All rights reserved

Operations the TOC Way
Objectives:
Demonstrate understanding of the TOC Operations solution. Demonstrate the ability to compare and contrast Drum-Buffer-Rope (DBR) and Buffer Management with Lean/Just-in-Time (JIT) and Material Requirements Planning.
•Can effectively compare and contrast conventional rules and practices (i.e. process layout, capacity, scheduling of work and control metrics) with those of DBR and Buffer Management, along with an explanation of the impact of each on the operational and financial measures of performance.
•Demonstrates ability to apply the solution in the four possible plant types (VATI).
•Understands when Critical Chain should be applied in a plant instead of DBR.

Learning Outcomes (cont’d)
•Understands how to apply DBR in make-to-stock (MTS), make-to-order (MTO) and combination environments (MTS and MTO).
•Create a schedule based on DBR principles. Establish buffer(s) required, their location(s) and size. Establish a raw material release schedule. Set and execute policies on batch sizes and on dealing with idle time onnon- constraints.
•Explain the appropriate measures of performance.
•Able to effectively apply buffer management:
•Know how and when to expedite, and
•Understand buffer resizing, and
•Explain how to use buffer management statistics to improve the system.
•Explain how to effectively overcome the layers of resistance (tochange) through application of the buy-in steps.

Operations the TOC Way
The Goal
Throughput:
•On Time Delivery is constantly improving.
•Operational systems are predictable and reliable.
•Lead Time is significantly shorter than competitors.
•Quality has increased.
•Operational response times are constantly improving.
Operating Expense:
•Cost of Production is constantly reducing.
Investment (formerly Inventory):
•WIP is reducing and controllable.
Current Level of Performance of most operations:
We are perceived as an average supplier in our market space –
nothing exceptional (no real competitive advantage).

What to Change
Operational concerns, issues, problems
•Lead Time vs. our competitors is the same at best –no advantage.
•WIP is increasing.
•Too many delayed orders.
•We are constantly rescheduling operations.
•RM is often unavailable when required.
•FG yield rates are too low.
Impact on other Functions
Procurement:
•Procurement is in constant expedite mode.
•Procurement costs are escalating –overnight express.
Distribution:
•We are constantly suffering from high inventory levels and stockouts.
•Offering a competitive lead time just causes us to expedite every product.
Marketing & Sales:
•We are perceived as an unreliable supplier.
•Missing due dates means customers assume we are overloaded.
•Sales staff are fighting fires rather than negotiating new orders.

The Production ConflictManage wellUse local efficiencies as a prime measurementConstantly fight to reduce wasteConstantly fight to increase flowNot use local efficiencies as a prime Measurement
Conflict!
In order to: We must: In order to:
We must:
We must:
We must:
In order to:
Because:
A resource standing idle is a major waste?
Because:
It is not possible to maximize throughput performance by achieving high local performance levels everywhere. Increase ServiceReduce CostCopyright © TOCICO, 2012. All rights reserved

1090%
= ?1090% 1090% 1090% 1090% Local Efficiency versus Maximizing Flow1475%
= ?1069% 995% 1679% 1287% Copyright © TOCICO, 2012. All rights reserved

Lean & Mean
Eliminate waste
Balance CapacityBalance Flow1475% 1069% 995% 1679% 1287% 1090% 1090% 1090% 1090% 1090%
Buffering against dependence. Protective CapacityProtective Capacity√CorrectX Wrong approachInformal pre- improvementCopyright © TOCICO, 2012. All rights reservedLean versus Drum-Buffer-Rope (DBR)

RM foot pathRM foot path
The Boy Scout Analogy
“Expedite” Management Style–“Everyone sprint as fast as you can.”
“Control” Management Style(control everything) –Finite / Balanced Scheduling. Compliments of

The 5 Focusing Steps of TOC
1.Identifythe system’s constraint(s). 2.Decide how toExploitthe system’s constraint(s). 3.Subordinate everything else to the above decision. 4.Elevatethe system’s constraint(s). 5.If in the previous steps a constraint has been broken GO BACK to step 1. Warning: Do not allow inertia to cause a system’s constraint. Copyright © TOCICO, 2012. All rights reserved

RM foot path
Classic TOC Scheduling: Drum-Buffer-RopeRope: The signal
Drum: The pace-setter
Buffer: Sum of times Compliments of

“Free” Product or The Market is the Constraint
•Not all products use the constraint resource.
•Very often there is no internal constraint.
•In these cases, we use a Shipping Buffer. RM foot pathCustomer Demand SequenceShipping BufferCompliments of Compliments

D’ (But) We Also feel Pressure toNot increase work-in- progressD’ (But) We Also feel Pressure toNot increase work-in- progressDWe Feel Pressure toIncrease work-in- process (WIP) DWe Feel Pressure toIncrease work-in- process (WIP) BWe mustProtect ThroughputBWe mustProtect ThroughputCWe mustControl costsCWe mustControl costsAManage wellAManage well
Conflict regarding WIP
Objective
Requirement / Strategy
Prerequisite / Tactics
D-D’Assumption: We can’t increase and decrease WIP at the
same time.
Solution:Decrease TOTAL WIP, while increasing WIP in
strategic locations (buffers).
Copyright © Goldratt Schools, 2005

D’ (But) We Also feel Pressure toReduce the batch sizeD’ (But) We Also feel Pressure toReduce the batch sizeDWe Feel Pressure toEnlarge the batch sizeDWe Feel Pressure toEnlarge the batch sizeBWe mustSave setup cost-per-unitBWe mustSave setup cost-per-unitCWe mustSave carrying cost-per- unitCWe mustSave carrying cost-per- unitASave cost per unitASave cost per unit
Conflict regarding Batching
Objective

Assumption 1:Complete order shipment: 20 unitsAssumption 2:Sufficient Setup Crew exists. Min/UnitSU1 hour0 ½ hour2 hours1 hour81512510Batch of 20 units versus Non-Batching 20 UnitsCopyright © TOCICO, 2012. All rights reserved

Process Batch versusTransfer BatchA: 10 minutes/unitB: 11 minutes/unitC: 10 minutes/unitTransfer Batch of 10 unitsTransfer Batch of 1 unitTotal 310 minutesTotal 130 minutesProcess Batch = Transfer BatchProcess Batch ≠Transfer BatchCopyright © TOCICO, 2012. All rights reserved

D’ (But) We Also feel Pressure toReduce the batch sizeD’ (But) We Also feel Pressure toReduce the batch sizeDWe Feel Pressure toEnlarge the batch sizeDWe Feel Pressure toEnlarge the batch sizeBWe mustNot turn a non-bottleneck into a bottleneckBWe mustNot turn a non-bottleneck into a bottleneckCWe mustReduce production lead timeCWe mustReduce production lead timeARun production effectivelyARun production effectively
Conflict regarding Batching in T World
Objective
D-D’Assumption: We can’t enlarge the batch
size and reduce it at the same time.
Solution:Enlarge the PROCESS batch size
and reduce the TRANSFER batch size.

The Important Role of Protective Capacity
Balance Flow
To protect the chosen Constraint –the non-constraint resources need to
provide protective “sprint” capacity.
This immunizes the Constraint from normal upstream fluctuation. Protective CapacityProtective CapacityNormal daily disruptionNormal daily disruptionCopyright © TOCICO, 2012. All rights reserved

Buffer Sizing
•Start with half of the current Lead Time.
•Buffer Includes:
−Rope Length and the small level of Buffer inventory used for BM.
−Use the last part of the Buffer as an early warning system.
RMTouch TimeThe RopeSchedule -signals raw material release“Pulls” in accordance with drum beat90%+ of all orders should complete in this timeExpediteThe Drum(Delivery schedule) Sets the pace1/31/31/3Copyright © TOCICO, 2012. All rights reserved

What to Change To
Basic TOC Operational Concepts
The Impact of Dependency:
•It is NOTpossible to utilize all resources to their full
potential and still maintain acceptable system
performance.
The Assumption an inherent Constraint:
•Only very few resources,perhaps only one,can be utilized
to almost their full capability/capacity.
Local Efficiency is no indication of Global Performance:
•Protective capacity at the non-constraints is essential for the stability of the system. Compliments of

σ
Step 1
Taming External Variance
Step 2
Scheduling the Internal System via DBR
Step 3
Monitor emerging overloading
at non-constraints.
σ
Step 1
Taming External Variance
Taming Internal VarianceSprint CapacityConstraint BufferSprint CapacityShipping Buffer
Basics of DBR DBRFGManagementRMManagementCopyright © TOCICO, 2012. All rights reserved

VATI Plant Types
“V” Plant
“A” Plant
Inputs
Inputs
End Products
End Products
One or few raw materials, many end products
Many raw materials, one or few end products
Steel, metals
Wood ProductsAircraft, ships
Electronics“Rope” Example: Repair Centers / Assembly Plants
Example: Steel ProductionCompliments of Compliments

VATI Plant Types
“T” Plant
Inputs
End ProductsFew Components
Exploding into many
similar end products
Printed Circuit Assembly
Automobile Assembly“Rope”
Primary Production for Assembly CustomersCompliments of Compliments

Assumption 1:Complete order shipment: 20 unitsAssumption 2:Sufficient Setup Crew exists. Min/UnitSU1 hour0 ½ hour2 hours1 hour81512510Batch of 20 units versus Non-Batching 20 Units“I” PlantVATI Plant TypesCopyright © TOCICO, 2012. All rights reserved

Desired Inventory LevelsHigherLowerMaybeEliminateFastSporadicFrequentIn-FrequentFast Moving InventoryAged Inventory To-StockTo-ReplenishmentTo-OrderDead SKUsToo-BadNumber of SKUs
Managing Inventory

•Identify the DRUM RESOURCE•Schedule the DRUM•Correctly size and install BM•Ensure protective SPRINT CAPACITY•Tie the ROPE•Choke and Release RM according to DRUM schedule
How to Cause the Change

Five Focusing Steps Applied
1.Identify the System’s Constraint(s)
The constraint is the internal resource (person/department/machine) in operations that does not have enough capacity to meet demand or peak demand.
2.Decide How to Exploit the System’s Constraint(s)
Ensure the constraint’s time is not wasted and that its time is used to generate more “goal units”.
3.Subordinate Everything Else to the Above Decision
•The constraint only processes quality (non-defective) inputs.
•The constraint processes work that will generate throughput in the short term.
•Reduce total setup time at the constraint and non-constraints that are close to becoming a constraint.
•Ensure that it does not process work that could be completed by another resource.

•Resources providing inputs to the constraint keep it adequately supplied with work (supply and constraint buffers) ensuring that starvation does not occur
•Work processed by the constraint does not wait to be completed (assembly/integration buffers) to generate throughput
•A space buffer is placed after the constraint to allow it to produce (prevent blockage)
•Batch sizes at non-constraints to support supply of constraint, not to maximize their efficiency.
•These buffers listed, including the finished goods buffer, protect timely completion of the work.
4.Elevate the System’s Constraint(s)by further increasing the capacity of the constraint by hiring/buying more capacity.
5.If the Constraint is broken, go back to step 1.

Distribution the TOC Way
Objectives:
Demonstrate understanding of the TOC Distribution solution. Demonstrate the ability to compare and contrast the TOC Distribution Solution with other Supply Chain Solutions that are explained in the exam.
•Can compare and contrast conventional rules and practices for distribution/logistics with the TOC distribution solution, alongwith an explanation of the impact of each on the operational and financial measures of performance.
•Explain the appropriate measures of performance.
•Demonstrate the understanding of and ability to apply the Distribution solution in environments with and without aggregation of demand:
•Determine the size and location of buffers, and
•Explain the impact of the solution on inventories and lead time.
•Explain how to effectively overcome the layers of resistance (tochange) through application of the buy-in steps.

Typical supply chain UDEs
Lost or Low sales
High inventories
Unresponsiveness
What does the end user / customer often want?
The product within their tolerance time at a low price

Distribution/Supply Chain:
Motivation for Change
Why Change?
Our frequent stockoutslead to lost sales and customer dissatisfaction. At the same time, we have too much inventory of other items, causing our costs to increase. Our lead times, when compared to customer tolerance time is too long, and compared to our competitors, is not an advantage.
List of typical Undesirable Effects:
−Sometimes we do not have the inventory of what people want
−We often try to “push” customers to buy what we have in stock
−We have obsolete inventory
−We sometimes lose sales
−Raw materials (inputs) are not always available when needed
−We have too much inventory of stock which is not in demand

D’ (But) We Also feel Pressure toHold high inventoryD’ (But) We Also feel Pressure toHold high inventoryDWe Feel Pressure toHold low inventoryDWe Feel Pressure toHold low inventoryBWe must Reduce costsBWe must Reduce costsCWe mustProtect SalesCWe mustProtect SalesAHave a profitable systemAHave a profitable system
Distribution/Supply Chain Core Conflict
As long as … •(Not DD’) The reliable replenishment time is longer than the customer tolerance time•(Not D’B) There is no agreement on how to calculate the requiredtime, stock buffers and capacity buffers (to protect against peak consumption within the reliable replenishment time) •(Not DC) We are “forced” to order in large batches / long order intervals (requiring us to place orders a long time in advance based on inaccurate forecasts) As long as … •(Not DD’) The reliable replenishment time is longer than the customer tolerance time•(Not D’B) There is no agreement on how to calculate the requiredtime, stock buffers and capacity buffers (to protect against peak consumption within the reliable replenishment time) •(Not DC) We are “forced” to order in large batches / long order intervals (requiring us to place orders a long time in advance based on inaccurate forecasts)
Objective
Prerequisite / TacticsWhat Conditions “cause” the Conflict? What Conditions “cause” the Conflict? We typically hold more inventory. When sales are not as high aswe expected, we are pressured to reduce inventory to increase inventory turns. Since the fast-moving inventory is the first to run out, we start losing sales as a result, which then triggers holding more inventory. We typically hold more inventory. When sales are not as high aswe expected, we are pressured to reduce inventory to increase inventory turns. Since the fast-moving inventory is the first to run out, we start losing sales as a result, which then triggers holding more inventory. What is the current way of dealing with the conflict? What is the current way of dealing with the conflict? Copyright © Goldratt Schools, 2005

Realities of Distribution
What are the realities of Distribution?
−It takes time to move the inventory between the links in the supply chain
−Demand is not known with certainty
−Forecast accuracy is better at the aggregate level, not the store level
How do we manage Distribution?
We push inventory out to the stores/retailers. Min-max replenishment rules are used to move the inventory –when we reach the minimum, we place an order to reach the maximum in order to fill the truck in order to reduce transportation costs.

Retailer
Typical undesirable effects (UDEs):
−Low sales
−Supplies are not always received on time in full
−Excess inventories of some products
−High markdowns
−ROI is too low
−Inventory turns are low
−Cash flow problems
−High employee turnover
Typical physical constraint: shelf space

D’ (But) We Also feel Pressure toPurchase in large quantitiesD’ (But) We Also feel Pressure toPurchase in large quantitiesDWe Feel Pressure toPurchase in small quantitiesDWe Feel Pressure toPurchase in small quantitiesBWe must Protect our cash flowBWe must Protect our cash flowCWe mustProtect our profitsCWe mustProtect our profitsAManage WellAManage Well
Retailer Conflict
As long as … •(Not D’B) We are not buying on consignment. •(Not DC) Costs increase due to the inability to obtain a volume discount. As long as … •(Not D’B) We are not buying on consignment. •(Not DC) Costs increase due to the inability to obtain a volume discount.
Objective
Prerequisite / TacticsWhat Conditions “cause” the Conflict? What Conditions “cause” the Conflict? When we have cash, we purchase in large quantities to obtain thediscount on price per unit and/or shipping charges. Otherwise, we purchase in small quantities. When we have cash, we purchase in large quantities to obtain thediscount on price per unit and/or shipping charges. Otherwise, we purchase in small quantities. What is the current way of dealing with the conflict? What is the current way of dealing with the conflict? Copyright © Dr. Lisa A. Ferguson, 2005

Retailer’s Local Policies
•Forced (late) returns
•Order batching
•Sales periods
•Postponing stock clean-ups
•Avoiding returns from stores to DC

Wholesaler/Distributor
Typical UDEs
−Margin erosion
−High returns or conflicts over returns
−Inventory of some products are too high, while others are out-of-stock
−Late orders to the customers
Typical constraint: cash

D’ (But) We Also feel Pressure toNot reduce inventory levelsD’ (But) We Also feel Pressure toNot reduce inventory levelsDWe Feel Pressure toReduce inventory levelsDWe Feel Pressure toReduce inventory levelsBWe must Manage cash flow effectivelyBWe must Manage cash flow effectivelyCWe mustSatisfy our customersCWe mustSatisfy our customersAManage WellAManage Well
Wholesaler/Distributor Conflict
As long as … •(Not DD’) We do not distinguish between total inventory and inventory of particular items. •(Not D’B) The cash-to-cash cycle time is long. •(Not DC) The inventories reduced are for fast movers that are not currently overstocked. As long as … •(Not DD’) We do not distinguish between total inventory and inventory of particular items. •(Not D’B) The cash-to-cash cycle time is long. •(Not DC) The inventories reduced are for fast movers that are not currently overstocked.
Objective
Prerequisite / TacticsWhat Conditions “cause” the Conflict? What Conditions “cause” the Conflict? We reduce inventories and change the assortment to try to satisfy both needs.We reduce inventories and change the assortment to try to satisfy both needs. What is the current way of dealing with the conflict? What is the current way of dealing with the conflict? Copyright © Dr. Lisa A. Ferguson, 2005

Wholesaler/Distributor Local
Policies
•EOQ/MOQ
•Transportation batching
•Quantity discounts
•Any form of push

A distribution solution
DynamicBuffer ManagementEliminateOscillationLeverageAggregationReduceLead TimeIntegrated Measurements
3 building blocks
2 requirements

1010101010
σAmplified “Batching “ effect of the Order-Entry process. Amplification of VarianceAmplification of VarianceσBalance Manufacturing Capacity amplifying production delays ManufacturingDistribution

TOCICO 2005 Conference

Lead Time Reduction
Increasing degrees of freedom
Increasing Lead Time
Variability of demand

How to cause the change
•Establish intermediate warehouse –(decouple Production from Distribution).
•Correctly size the inventory buffers. Both manufacturer and customer-site Buffer Management.
•Move to report daily consumption from the customer - replenish frequently to maintain buffer integrity.
•Monitor and regulate inventory levels and buffer sizing -in real time.
•Separate inventory into Make-to-Stock, Make-to- Replenishment, Make-to-Order only, and Dead Inventory.
•Introduce T$Dayand I$Daymeasurements with feedback mechanism.

Measurements
Throughput Dollar Days (TDD):
−Summation (over all products not yet supplied) of the throughput (of the final product) times the number of days from due date of the order to shipment.
−Target: 0 TDD
−Focuses on achieving reliability and quality.
Inventory Dollar Days (IDD):
−Summation (over all products in inventory) of the value of the inventory (at its truly variable cost) times the number of days each stays in the link.
−Target: reduce IDD
−Reduces inventory and speeds work flow

CustomersCustomersDistributorsDistributors
2nd nd Tier
Suppiers
EndEndCustomerCustomer
Suppliers
Supply Chain Synchonization
0102030405060123456789101112131415Physical InventoryGreen BufferRed BufferYellow Buffer0102030405060123456789101112131415Physical InventoryGreen BufferRed BufferYellow Buffer0102030405060123456789101112131415Physical InventoryGreen BufferRed BufferYellow Buffer0102030405060123456789101112131415Physical InventoryGreen BufferRed BufferYellow BufferThroughput Dollar DayInventory Dollar DayAssembly
ManufacturingCopyright © TOCICO, 2012. All rights reserved

1.Identify the System’s Constraint(s)
Customers who come to buy
2. Decide How to Exploit the System’s Constraint(s)
Have the right inventory in the right place at the right time
•Each link in the supply chain holds inventory to cover the maximum expected demand within the reliable replenishment time from the next link
•Hold aggregated inventory where the forecast is most reliable (plant level)

•Buffer management is used to resize the buffers based on long-term forecasts (i.e. expected increase/decrease in demand for the season or holiday) and usage (lack of or too much red zone penetration)
•Each link orders based on actual consumption together with buffer management (status of buffer)
4.Elevate the System’s Constraint(s)
Elevate distribution capability to improve availability and extend the variety offered to existing clients and to new clients.
5.If the Constraint is broken, go back to step 1.

Sample case question
ABC Furniture Company manufactures a variety of furniture (dining, living/family room and bedroom) that it sells through its own retail stores. ABC has three manufacturing plants, eight regional warehouses and 100 retail stores throughout the U.S. ABC is currently using a make-to-stock (MTS) strategy (produces for stock, not for customer order). The lead time for manufacturing is five weeks. ABC purchases raw materials from a number of suppliers.
Efficiencies and balanced capacity policies are used to manage production. Their lead times, which are long, and due date performance, which is low, are similar to those of their competitors. They have lost some clients recently.

Case question (cont’d)
Answer the following questions:
1.Where is the constraint in the supply chain? Explain the logic of why you think it is the constraint.
2.Describe your solution for dealing with the constraint using the five focusing steps (process of ongoing improvement).
3.Recommend existing policies that should be changed.
4.In order to improve due dates and lead time performance, they are considering reducing product variety. Define their cloud.
5.The solution has doubled the available capacity. The company realizes that they have to sell more. If they can’t do it fast enough, they have to lay off in the near future. Create and trim the negative branch.
6.The ambitious target is to reduce the current finished goods inventory that is in the wrong places in supply chain. Raise five obstacles and overcome them.

About Lisa A. Ferguson
•Lisa A. Ferguson, Ph.D. is an Associate Professor in the H. Wayne HuizengaSchool of Business and Entrepreneurship at Nova Southeastern University. She teaches in the doctoral and MBA program. Lisa is also a faculty member of Goldratt Schools and has worked with a number of Fortune 500 companies to improve using TOC. Copyright © TOCICO, 2005. All rights reserved

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