2.  2008, M. Srinivasan 1 The Theory of Constraints  Eli Goldratt, a physicist.  OPT: a scheduling package.  The Goal and the Theory of Constraints.  TOC provides a way of thinking globally.  Goldratt challenges the conventional approach to managing organizations.

3.  2008, M. Srinivasan 2 Traditional Decision Making The “Cost World” Perspective

4.  2008, M. Srinivasan 3 Traditional Decision Making How are investment decisions usually made?  Usually based on cost considerations (right)?  “The Cost-World” Perspective  Consider how the cost-world perspective affects the push towards parts per million (PPM) quality and “Zero” inventory.

5.  2008, M. Srinivasan 4 The Cost World Perspective: Cost and PPM Quality Do It! Maybe? Do NOT Do 8%2% 0.5% 0.1% $60,000 $15,000 $4,000 $20,000

6.  2008, M. Srinivasan 5 Is 99.5% Quality Good Enough For You? Doctors in New York State hospitals drop 1,291 babies per year  Chicago O’Hare International Airport has 4,197 unsafe arrivals / departures per year  Post Offices in New York State lose 9,315 pieces of mail per day No problem. Everything is OK! If it is, then you won’t mind if: I’ll do better next time!

7.  2008, M. Srinivasan 6 The Cost World Perspective: Cost and Inventory Turns * Assuming starting inventory of $15M and 25% carrying cost Do It Maybe? Do NOT Do

8.  2008, M. Srinivasan 7 The Real Cost of Inventory Inventory adversely affects all the factors that give you a competitive edge (namely, Price, Quality, and Delivery). Higher inventory leads to:  Longer lead times and poorer delivery performance,  Defects not being detected soon enough,  Increased costs due to obsolescence, storage costs, overtime, etc.

9.  2008, M. Srinivasan 8 Systems Thinking and the Theory of Constraints The “Throughput World” Perspective

10.  2008, M. Srinivasan 9 The Theory of Constraints The Theory of Constraints (TOC) is based on two premises:  The Goal of a business is to make more money, … in the present and in the future.  A system’s constraint(s) determine its output.

11.  2008, M. Srinivasan 10 TOC Performance Measures Throughput (T): The rate at which the system generates money through sales. Inventory (I): All the money invested in purchasing things needed by the system to sell its products. Operating Expenses (OE): All the money the system spends, turning inventory into throughput.

12.  2008, M. Srinivasan 11 The Goal: To Make Money Bottom Line Measurements NET PROFIT RETURN ON INVESTMENT CASH FLOW (Relative) (Survival) (Absolute)

13.  2008, M. Srinivasan 12 The Theory of Constraints The Five-Step Focusing Process

14.  2008, M. Srinivasan 13 The Throughput World: The Five Step Focusing Process of TOC 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

15.  2008, M. Srinivasan 14 Types of Constraints  Physical Constraints  Physical, tangible; easy to recognize as constraint. Machine capacity, material availability, space availability, etc.  Market Constraints  Demand for company’s products and services is less than capacity of organization, or not in desired proportion.  Policy Constraints  Not physical in nature. Includes entire system of measures and methods and even mindset that governs the strategic and tactical decisions of the company.

16.  2008, M. Srinivasan 15 Policy Constraints Mindset Constraints  A constraint if thought process or culture of the organization blocks design & implementation of measures & methods required to achieve goals Measures Constraints  A constraint if the measurement system drive behaviors that are incongruous with organizational goals Methods Constraints  A constraint when procedures and techniques used result in actions incompatible with goals

17.  2008, M. Srinivasan 16 Effect of Performance Measures “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.”

18.  2008, M. Srinivasan 17 Effect of Performance Measures “If you measure me in an unreasonable way, no one knows how I will behave...”. “Not even me.”

19.  2008, M. Srinivasan 18 Identifying Constraints Identifying Physical Constraints:  A Typical WIP Inventory Profile: Ave. WIP Inventory R1R2R3R4R5R6

20.  2008, M. Srinivasan 19 How can we get the most from Physical Constraints? Techniques for getting the most from capacity constraints:  Eliminate periods of idle time  Reduce setup time and run time per unit  Improve quality control  Purchase additional capacity  Is there anything else we can do?

21.  2008, M. Srinivasan 20 Do We Shut The Plant Down?  Is this a “throughput world” perspective?  We dealt with “product profits.” Are there any product profits in the throughput world?  What is the second focusing step?  DECIDE HOW TO EXPLOIT THE CONSTRAINT.

22.  2008, M. Srinivasan 21 Throughput World vs. Cost World The throughput world perspective indicates that we should first focus on producing product. P  The cost world perspective had indicated that we should first focus on producing product. Q

23.  2008, M. Srinivasan 22 Produce P first: 100 / week. Requires minutes of B. Leaves minutes to make Q. Each Q requires minutes on resource B. Can produce units of Q. With 100 units of P and units of Q, we get 100 x $45 + x $60 = $ each week. After subtracting $6,000 for operating expenses, we obtain a net profit of 1500 900 30 900/30 = 30 30 6300 $300 Which Perspective Is Correct?

24.  2008, M. Srinivasan 23 Cost World or Throughput World? What product will you focus on? P But in the long run, “Yes, there are two paths you can go by, … There’s still time to change the road you’re on.”

25.  2008, M. Srinivasan 24 The 5 Focusing Steps (Contd.) What is Step 4?  Elevate the System’s Constraints  How does it affect us here?  The Marketing Director Speaks Up :  “Another constraint in our company.”  It is the market  A Great Market in Japan!  “Have to discount prices by 20%”

26.  2008, M. Srinivasan 25 Maybe We Should Not Sell in Japan? Right now, we can get at least $ per constraint minute in the domestic market. 2 B  Okay, suppose we do not go to Japan  Is there something else we can do?  So, should we go to Japan at all?  Let’s buy another machine! Which one?  How soon do we recover investment?  Cost of the machine = $100,000.  Cost of operator: $400 per week. Perhaps not.  What is weekly operating expense now? $6,400

27.  2008, M. Srinivasan 26 Welcome to the “Paradise Plant!”

28.  2008, M. Srinivasan 27 IF: Clients never change their mind, Vendors always supply what we ask for, on time, We do not have any absenteeism, Our workers are excellently trained, Our processes are extremely reliable, Our quality is superb, Data is readily available and accurate, and Managing production will be a piece of cake, … THEN: You can decide on whatever policies you want. right? The Paradise Plant!

29.  2008, M. Srinivasan 28 The Simulator provided you with a paradise plant because all external causes were eliminated. Nevertheless, Was it easy to manage production? The Paradise Plant!

30.  2008, M. Srinivasan 29 Rethinking Project Management The Critical Chain

31.  2008, M. Srinivasan 30 Generally a “one-off” type of activity Typically involves completing a set of tasks Tasks typically have long durations that are also highly variable Project Management: Characteristics

32.  2008, M. Srinivasan 31 Project Management: Problems Usually Faced Project is not clearly defined  “Known Work” + “Known Unknown Work” + “Unknown Work” Existing project work is not complete before new projects shift priorities leading to multi-tasking Problems in a project cascade into another project Constant pressure to increase staff for peak loads A lot of uncertainty involved in estimating task durations

33.  2008, M. Srinivasan 32 First, consider a simple project with 2 tasks performed by 2 different operators: Managing Projects Under Uncertainty Task 1 Task 2 If each task takes 15 days on average, what is average project completion time? 30 days Assume task durations are uniformly distributed (5,25) 5 25

34.  2008, M. Srinivasan 33 What else makes project management complex?  Consider a slightly more complex project: Task 1 Task 2 Task 3 As before, each task takes 15 days on average. 36% Probability of completing project in 30 days? 33 days 5 25 Assume task durations are uniformly distributed (5,25) What is the average project completion time? Managing Projects Under Uncertainty

35.  2008, M. Srinivasan 34 The affect of resource interdependencies on a simple project: Task 1 Task 2 Task 3 Task 4 Task 5 If each task takes 15 days on average, what is the probability that the project finishes in 45 days? Srini; Here we get about 30% < 25% 5 25 Managing Projects

36.  2008, M. Srinivasan 35 Conclusion: A project’s most likely completion time is much larger than the sum of the averages of the tasks making up it’s longest path (due to synchronization or due to task dependencies) So, how do we quote estimated completion time of the project?  Do people give a number that they know has a high (50% or more) chance of missing? Determining Task Durations

37.  2008, M. Srinivasan 36 Determining Task and Project Durations – the Traditional Way So, the average task times are “padded” to accommodate any possible delays. Instead of specifying a 50% time estimate (which fails half the time), a 98% confidence estimate is developed for the tasks and project duration. The project is now estimated to take 70 days, not 45. What is the chance the project will complete in 70 days? Srini 98% of [5,25] = 5+.98*20 = 5+19.6 = 24.6 5 25 Task 1 Task 2 Task 3 Task 4 Task 5

38.  2008, M. Srinivasan 37 A network is drawn up, representing tasks, and precedence relationships between tasks The task durations are buffered to accommodate uncertainty surrounding the tasks. Milestones (due dates) are developed for each task. The Critical Path is determined. The padded project duration (with safety buffers) is conveyed to the customer and to supervisors The project is monitored.  So, why is it very unlikely that the project will complete on time? Project Management - The Traditional Way

39.  2008, M. Srinivasan 38 Project Management The TOC Way The Genesis of the Critical Chain

40.  2008, M. Srinivasan 39 Theory of Constraints and the Critical Chain  Eli Goldratt, a physicist.  The Goal (1982, 3 rd edition published 2004)  The Critical Chain (1997)  Goldratt challenges the conventional approach to managing organizations.  TOC tools for  Production: Drum-Buffer-Rope  Project Management: Critical Chain

41.  2008, M. Srinivasan 40 The Critical Chain implementation begins with 3 questions: What to change? What to change to? How to cause the change? Managing the Critical Chain

42.  2008, M. Srinivasan 41 Erroneous assumptions:  It is good to induct work as soon as possible  Protecting task times with buffers will improve on-time performance (this is a biggie)  Multitasking is beneficial  Providing milestones for each task is good  … What to Change?

43.  2008, M. Srinivasan 42 Parkinson’s Law: “Work expands to fill the time available.” People tend to continue working on a task that could have been completed earlier if they are given a pre-specified completion time. The Continue to Polish syndrome (aka: the 3-Minute Egg Rule): “It’s not quality if it’s finished before time is up.” The Student Syndrome: When people feel there is plenty of time to complete a task, other things become important and they procrastinate on the task. What to Change: Behavioral Effects

44.  2008, M. Srinivasan 43 Behavioral Effects: The Student Syndrome Time Elapsed Project Due Date Percent of Project Completed 25% 50% 75% 100% Completion Date

45.  2008, M. Srinivasan 44 People do not want to hurt their future negotiating power by finishing too soon. There is a sense of urgency, promoting a tendency to induct work as soon as possible. More Behavioral Effects that Increase Task and Project Durations

46.  2008, M. Srinivasan 45 Losing Time & Capacity Due to Uncertainties, & by Inducting ASAP: An MRO Example Resource contention  (Queues  ) Lead time  Delays/ Shortages  Backshops Start Early (CT  ) High no. of jobs in progress Uncertainties multiply Delays  Induct Asset ASAP Start repairs ASAP Start buildup ASAP Lines Intrinsic Uncertainties Pressure to deliver on time Pressure to expedite  Cascade effect within & across projects Multi-tasking Priority changes De-synchronization Push parts to Back shops ASAP Pull parts from Back shops ASAP Expediting  Multi-tasking De-synchronization Early release for production  Realization Technologies, Inc.

47.  2008, M. Srinivasan 46 Summary: Sources of Project Delays A. Synchronization Delays  Integration (assembly) points  Resources and tasks B. Delays due to Behavioral Effects  Parkinson’s Law  “Student” Syndrome  “Continue to Polish” Syndrome C. Queuing Delays  Induct work ahead of schedule  Multitasking  Realization Technologies, Inc.

48.  2008, M. Srinivasan 47 The Affect of Multitasking 3 Tasks, A, B, C, each of duration 6 days, that have to be executed by one resource.  How should you schedule these tasks? A2B2C2A2B2C2A2B2C2 A6B6C6 Lead Time for Task A?

49.  2008, M. Srinivasan 48 Project Planning (aka Network Building): A meeting of project stakeholders for clarity on intended objectives and success criteria (how to deliver on the order winners) Identify resource dependencies Capture time estimates – and build the right safety net – determine “Aggressive But Possible” times What to Change to?

50.  2008, M. Srinivasan 49 Identify the longest path of dependent events. This is the Critical Chain Put in place Project Buffer and Feeding Buffers Avoid displaying milestones ( EST, EFT, LST, LFT ).  Rather, emphasize the “Relay Runner” work ethic (this is a biggie). What to Change To?

51.  2008, M. Srinivasan 50 What to Change to? The Rules of the Critical Chain: 1.Do not schedule Project tasks/ resources precisely at planning time. 2.Pipelining: Do not start projects ASAP. 3.Allow explicit buffer time in projects.  Realization Technologies, Inc.

52.  2008, M. Srinivasan 51 Rationale: Project Buffers are more efficient than safeties within each task 1.Critical Chain Buffering: Aggressive plans without precise resource schedules Determine “Aggressive but Possible” times for each activity – remove the padding within each task. Determine the critical chain of tasks with these times. Provide a project buffer to protect the critical chain. Traditional Approach: Critical Chain Approach:  Realization Technologies, Inc.

53.  2008, M. Srinivasan 52 Most heavily loaded shared resource (constraint), determines throughput Project starts are based on constraint’s capacity, Pressure to multitask also comes down Most heavily loaded resource Pipelining Pipelining is more efficient than starting projects ASAP 2.Pipelining: Release Projects Based on Constraints Instead of Starting ASAP  Realization Technologies, Inc.

54.  2008, M. Srinivasan 53 3.Buffer Management: Allocate Resources to Tasks Based on “Buffer Burn Rate”  Realization Technologies, Inc. Buffer 50% work completed 60% buffer consumed Chain 2 Burn Rate: % of buffer consumed vs. % of work completed. Automatically calculated on an ongoing basis to assess how much buffer is still available for future uncertainties. Task Priorities: Tasks that lie on chains with less safety remaining are given top priority. This ensures that buffers are not wasted, and also reduces pressure to multitask. Buffer 33% work completed 20% buffer consumed Chain 1

55.  2008, M. Srinivasan 54 Secure agreement on problem to be solved and agreement on direction of solution Verify that proposed solution will deliver desired results. Ensure that all negative side effects are identified and prevented from happening Identify all significant potential obstacles that could block implementation of solution Ensure that necessary leadership is committed to making implementation successful – the RIGHT METRICS How to Cause the Change?

56.  2008, M. Srinivasan 55 MRO Setting: WR-ALC, NavAir – Cherry Point, MCLB – Albany, Israeli Air Force Software: Lucent, Microsoft, Intel Production Supply: Boeing, Lockheed Martin, Larsen & Toubro, Tata Iron & Steel Testing: AFOTEC, AFFTC (C-17, F-15) Product Development: Seagate, Harris, BAE Systems The Critical Chain: Does It Work?