1. Module 10: Theory of Constraints Operations Management as a Competitive Weapon

2. 2 Module 10: Theory of Constraints OM Course Framework TOC JIT MRP Operational Issues Aggregate Planning Inventory Location Capacity Tactical Issues Manufacturing Design & Selection Process Analysis Operations Strategy Strategic Issues

3. 3 Module 10: Theory of Constraints Planning & Control Strategies

4. 4 Module 10: Theory of Constraints Learning Objectives At the end of this module, each student will be able to: 1.Discuss theory of constraints philosophy 2.Discuss bottleneck (constraint) utilization 3.Discuss drum-buffer-rope 4.Compare TOC with MRP and JIT

5. 5 Module 10: Theory of Constraints 1.TOC Philosophy  Theory of Constraints (TOC) Production process Performance

6. 6 Module 10: Theory of Constraints Firm’s Goal Make Money Increase Throughput While Simultaneously Reducing Inventory And Reducing Operating Expense

7. 7 Module 10: Theory of Constraints Performance Measures Relationship  Net Profit  ROI  Cash Flow  T T  OE  I I

8. 8 Module 10: Theory of Constraints 2.Constraint (Resource) Utilization $100/unit 90/wk $110/unit 100/wk RM1 $40/unit RM2 $20/unit M N C 5 min A 15 min B 10 min A 2,400 min/week/resource

9. 9 Module 10: Theory of Constraints Simple Contribution Margin  Preliminary: CM (M) = ($100 – $40) = $60/unit CM (N) = ($110 - $40 - $20) = $50/unit Make a lot of M’s

10. 10 Module 10: Theory of Constraints Simple Contribution Margin  Lets make 90 Ms 90 M @ 25 min = 2,250 min[A] 90 M @ $60/unit = $5,400 contribution 10 N @ 15 min = 150 min[A] 10 N @ $50/unit = $500 contribution  Total: $5,900 contribution margin

11. 11 Module 10: Theory of Constraints Alternative Contribution Margin  Now, lets Max N first 100 N @ 15 min = 1,500 min[A] 100 N @ $50/unit = $5,000 contribution 36 M @ 25 min = 900 min[A] 36 M @ $60/unit = $2,160 contribution  Total: $7,160 contribution margin

12. 12 Module 10: Theory of Constraints Product Mix - Summary  Maximum Ms (contribution margin)  Maximum Ns (alternative) Why?

13. 13 Module 10: Theory of Constraints Bottleneck (Constraint) Resource  Each M takes: 25 min. of A $60 CM / 25 min = $2.40 / min.  Each N takes: 15 min of A 10 min of B 5 min of C $50 CM / 15 min = $3.33 / min

14. 14 Module 10: Theory of Constraints 3. Drum-Buffer-Rope Purpose: Balance the flow Sets the pace Protects the pace Slowest scout The Constraint Slack in the rope Inventory in front of constraint Enforces the pace Between first and slowest scouts Pull system - kanban

15. 15 Module 10: Theory of Constraints DBR Example A 460 B 400 C 240 D 460 Assembly 300 F 360 E 400 240

16. Comparison Assembly Line Var. demand Assembly Line Level demand High Low LongShort Frozen Level Batch Low Short Changed daily

17. 17 Module 10: Theory of Constraints Comparison (cont.) Terrible Balanced Specialized Multi-skilled Larger lot sizes Rejects Balanced capacity No rejects Founded on capacity limits Specialized Excess capacity (bottleneck)