1. Throughput World

2. 2 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics Systems Thinking and TOC  TOC Premise 1: The Goal of a business is to make more money, … in the present and in the future  Max NPV.  TOC Premise 2: There is one or at most few constraint(s) determine its output.  Lean Principle: Time lost at a bottleneck resource results in a loss of throughput for the whole enterprise (entire supply chain). Time saved a non-bottleneck resources is a mirage.

3. 3 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics Systems Thinking and TOC  Just like the links of a chain work together to pull or lift objects, the processes within the enterprise work together to generate profit for the shareholders.  The ability of the chain is limited because the chain is only as strong as its weakest link.  Integrated decision making. “Big Picture” Thinking. Thinking “Globally” rather than “Locally”; understanding how localized decision making can affect the overall goal.

4. 4 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics Local vs. Global Optimization  Local optimization: the complex problem of optimizing system performance is addressed by breaking down the system into smaller, more manageable pieces.  Units were treated as either cost centers or profit centers and assigned targets.  The logic  if every unit improved then, ipso facto, the entire enterprise would improve. (Lean Principle)  However it is not enough to promote isolated efforts that focus on improving specific functions.

5. 5 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics Local Optimization vs. Global Optimization  Global Optimization: Install measures that are truly global, i.e., measures that encourage actions consistent with the overall goals of the enterprise.  These measures are based on the a throughput world perspective, an approach that focuses on meeting the goals through a growth strategy rather than through cutting costs.

6. 6 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics The 5 Step TOC Focusing Process Step 1: Identify the System’s Constraint(s) Step 2: Decide how to Exploit the System’s Constraints Step 3:Subordinate Everything Else to that Decision Step 4:Elevate the System’s Constraints Step 5:If a Constraint Was Broken in previous Steps, Go to Step 1 THIS IS THE PROCESS OF ONGOING IMPROVEMENT

7. 7 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics Types of Constraints  Physical Constraints. Physical, tangible; easy to recognize as constraint. Machine capacity, material availability, space availability, etc. H/C/F Resources. Eliminate periods of idle time Reduce setup time and run time per unit Improve quality control Purchase additional capacity  The easiest to identify

8. 8 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics Identifying Physical Constraints; Look for WIP A Typical WIP Inventory Profile Ave. WIP Inventory R1R2R3R4R5R6

9. 9 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics Market Constraints  Market Constraints. Demand for company’s products and services is less than capacity of organization, or not in desired proportion.  Harder to identify than physical constraints  A market constraint exists if the demand for the enterprise’s products and services is less than the enterprise’s installed capacity or limits the bottom-line performance  Excess capacity is easily identified as a market constraint

10. 10 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics Policy Constraints  Policy Constraints. Not physical in nature. the system of measures, methods and mindset that governs the strategic and tactical decisions of the company. Mindset Constraints. When thought process or culture of the organization blocks design & implementation of measures & methods required to achieve goals. Example: Shop Supervisor has the attitude that all operators should be busy all of the time. Measures Constraints. When the measurement system drive behaviors incongruous with organizational goals. Example: Aggressively seeking quantity discounts would lead to increased raw material inventory. Methods Constraints. When procedures and techniques used result in actions incompatible with goals. Example: Never producing a batch of units below an EOQ.

11. 11 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics  A 1% sales commission: 2 products: Cadillacs:$40,000 Beetles:$20,000  Which product will the sales person push?  Suppose the profit margins are Cadillac:$1,500 Beetle:$2,500  Which product will the CEO want you to push?  Conflicting goals (local and global). Example of a Measures Constraint

12. 12 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics  Tell me how you will measure me and I will tell you how I will behave.  If you measure me in an illogical way, … do not complain about illogical behavior.  If you measure me in an unreasonable way, no one knows how I will behave....  Not even me. Effect of Performance Measures

13. 13 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics Long-term Increase or Short-term Gain?  A chain can demonstrate how the cost world focus sacrifices long term throughput increases for short-term gains  Instead of strengthening the weakest link (improving T), we focus on improving efficiency at the current level of performance (improving OE)  Example: Assume a chain of 10 links Each link = 100 lbs of carrying capacity except for one link has only 50 lbs of carrying capacity  Management unhappy with cost of maintaining the nine strong links so it sells the nine heavy links

14. 14 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics Long-term Increase or Short- term Gain?  It replaces each link with a carrying capacity of 50 lbs which makes a truly efficient chain since every link is capable of carrying exactly same load  What is the problem? The problem is the enterprise is locked into the current performance level  It now has ten links, any one of which can break  In the future, if improved performance is desired, it will have to work all ten links in the chain  The same problem occurs when enterprises eliminate overcapacity. If business picks up, it will be harder to recruit employees, why?  Fearful of being fired in the next downsize

15. 15 Ardavan Asef-Vaziri Nov-2010Theory of Constraints: 2- Basics The Throughput World: Five Step Focusing Process of TOC  Step 1  Identify the System’s Constraint(s)  Step 2  Decide how to Exploit the System’s Constraint(s)  Step 3  Subordinate Everything Else to that Decision  Step 4  Elevate the System’s Constraints  Step 5  If a Constraint Was Broken In a Previous Step, Go Back to Step 1