Operations Management

Theory of Constraints
(Synchronous Manufacturing)
M4

An Introduction and
Overview of TOC
 Start of Module
(Acknowledgement)

◼ The concepts and ideas presented in the following slides

are based on concepts and ideas in the books mentioned
in your sessions plan and material freely available on the
internet, journals and other sources. These have been
put together for teaching, easy understanding and study
purposes only. The concepts or ideas do not belong to
the undersigned.
◼ Therefore,
◼ Read from Books
◼ Thank You
◼ Prof. Pintoo Shome
“If I always think the way I’ve always
thought I will always feel the way I’ve
always felt;
And
If I always feel the way I’ve always felt, I
will always do the way I’ve always done;
And
If I always do what I’ve always done, I will
always get what I’ve always got.”
 Learning outcomes
After going through this module participants should be able
to do the following:
◼ Explain the importance of a comprehensive (systems
point of view), that is the ‘Goal of the Firm’.
◼ List and use the FIVE focusing steps of TOC and NINE
scheduling rules to manage production systems.
◼ Explain the TOC way of determining Financial and
Operational health of organisations.
◼ Distinguish between bottlenecks, non bottlenecks and
capacity constrained resources and use the drum, buffer
and rope principle for control systems.
◼ Explain briefly the Thinking Processes of TOC.

◼ Describe briefly the other application areas of TOC such

as CCPM etc.
 A Hike to Devil’s Gulch

◼ Alex was on a 20 km overnight hike to Devil’s Gulch with his son

Dave and his friends. They would go 10 Km up to it , camp for the
night, and return the 10 km down in the morning.
◼ They were already on their way but way behind schedule. Herbie ,
called Fat Herbie by his friends was lagging too far behind and Andy
the fastest was too far ahead.
◼ Alex was trying to figure out how to stay together and move faster.
He figured that at this rate after an hour Andy would be two miles
ahead of Herbie and he would require to run two miles to catch up
with him. They are required to cover 10 miles in 5 hours and time is
running out --------------------

From “The Goal” - by Eli Goldratt

 Eliyahu M Goldratt
◼ A physicist turned Optimized Production
Technology specialist
◼ Pioneer of Synchronous manufacturing
and the Theory of Constraints
◼ His bestseller – The Goal
System Complexity

System 1 System 2

Which system is more complex?

What is the Systems Approach?
◼ Originally proposed by Dr. W. Edwards Deming

◼ Holistic thinking

◼ The whole is not the sum of its parts.

◼ Interaction-interdependencies-among components are as
important, or more important, than the performance of the
components themselves
◼ The whole system can’t be managed effectively by
suboptimizing.

◼ Avoid Sub-optimization.
◼ Not all components are created equal.
◼ Some may accept inefficiencies so that more critical
components can succeed.
 What is Constraint
Management?
◼Constraint Management is a system-level
management philosophy developed by Dr.
Eliyahu Goldratt that can be viewed as three
separate but interrelated areas:

1. Performance Measurements: Throughput Decision Support

and the Five Focusing Steps
2. Logistics: Drum-Buffer-Rope Production Scheduling and Buffer
Management.
3. Logical Thinking: Logical Thinking Process (Current Reality
Tree, Future Reality Tree, Conflict Resolution Diagram, Prerequisite
Tree and Transition Tree)
4. Project Management: Critical Chain Project Management
Assumptions Underlying Constraint
Management
◼ Every system has a goal and a set of
necessary conditions that must be
satisfied in order to maximize
achievement of the goal.

◼ All systems are subject to logical cause-

and-effect.

◼ Organizations live or die as integrated

systems, NOT as a collection of discrete,
independent processes.
Assumptions Underlying Constraint
Management
◼ Systems are analogous to chains.
◼ The performance of a system is limited by very
few links at any given time, usually only one.

◼ The global organization is greater than

the sum of its parts.
◼ The way to improve company performance
(global optimum) is NOT through achieving local
improvements (local optimum) everywhere.

◼ Constraints can never really be

eliminated – they just move to a
different place.
How do you strengthen a chain?
 The Manufacturing Chain

Machine #1 #2 #3 #4 #5 #6 #7
Capacity (2) (1) (1) (1) (1) (1) (2)
Utilization 57% 19% 71% 32% 36% 41% 42%
(Monthly)

Which is likely to be the weakest link

(system limitation)?
 The Manufacturing Chain
(Expanded)
External
Service
Marketing & Sales

CUSTOMER
Supplier #1
#1 #2 #3 #4 #5 #6 #7
Distribution
Production

Supplier #2

The chain really extends from the market demand, through the entire
organization chain, to the external customer who pays for our products
Goldratt’s 9 Rules for Production Scheduling

◼ 1. Do not balance capacity – balance the flow

◼ 2. The level of utilization of a non bottleneck
resource is determined not by its own potential but
by some other constraint in the system
◼ 3. Utilization and activation of a resource are not
the same
◼ 4. An hour lost at a bottleneck is an hour lost for
the entire system
◼ 5. An hour saved at a non-bottleneck is a mirage

See next page

Goldratt’s Rules for Production Scheduling
(continued)

◼ 6. Bottlenecks govern both throughput and

inventory in the system
◼ 7. The transfer batch may not and many
times should not be equal to the process
batch
◼ 8. A process batch should be variable both
along its route and in time
◼ 9. Priorities can be set only by examining the
system’s constraints. Lead time is a derivative
of the schedule
 Goldratt’s Theory of Constraints

Five Focusing Steps:

◼ 1. Identify the system constraint
(No improvement is possible unless the weakest link is found)
◼ 2. Decide how to exploit the system
constraints
(Make the constraints as effective as possible)
◼ 3. Subordinate everything else to that
decision
(Align every other part of the system to support the constraints even
if this reduces the efficiency of the non-constraint resources)
See next page
 Goldratt’s Theory of Constraints

Five Focusing Steps (continued):

◼ 4. Elevate the system constraints
(If output is still inadequate acquire more of this resource so it no
longer remains a constraint)

◼ 5. If, in the previous steps, the constraints

have been broken, go back to Step 1, but do
not let inertia become the system constraint
(After this constraint problem is solved, go back to the beginning and
start all over. This is a continuous process of improvement:
identifying constraints, breaking them, and then identifying the new
ones that result)
 Goal of the Firm - as per Goldratt

◼ THE GOAL OF THE FIRM IS TO MAKE MONEY

All other goals are subordinate to this goal.

Other goals such as providing jobs, increasing sales,
increasing market share, developing technology,
producing high quality products etc. are only means to
achieve the GOAL, not the goal itself – these do not
guarantee long term survival for the firm.
If a firm makes money it can place emphasis on other
objectives.
 How to Measure Performance of a Firm?

To adequately measure performance, two

sets of measurements must be used:
Net profit
◼ Financial measurements Return on Investments
Cash Flow

Throughput
◼ Operational Measurements Inventory
Operating Expenses
 Performance Measurements

Definitions by Goldratt

Financial
◼ 1. Net Profit – an absolute measurement in Rupees
◼ 2. Return on Investments – a relative measure based on
investments
◼ 3. Cash flow – a survival measurement
Operational
◼ 1. Throughput – the rate at which money is generated by
the system through sales
◼ 2. Inventory – all the money that the system has invested
in purchasing things it intends to sell
◼ 3. Operating Expenses – all the money that the system
spends to turn inventory into throughput
 Financial and Operational Goals

Financial Goals of the Firm

Net Profit Return on investment
Cash Flow

CF
NP
ROI

Operational Goals of the Firm

Throughput
I
OE

Inventory
T
Operating Expenses
Why are all of these performance measures necessary?

◼ Finanacial
◼ A net profit of Rs. 2 lakhs is an important
measurement but has no real meaning unless we
know whether we had invested Rs 10, 100 or 1000
lakhs to produce it.
◼ Cash flow is very important. A firm with very high
net profits and ROI can go bankrupt if it has
invested all of it in new projects or inventory and
does not have cash to operate.
Why are all of these performance measures necessary?

◼ Operational
◼ A Throughput of Rs. 10 million per day gives some
volume indication but nothing about performance
unless considered along with Inventory and
Operating Expenses
◼ Walmart may be having a Throughput of billions of
dollars whereas a local supermarket store may have
only a few million. To compare their peformances
we need to consider how much money each has
invested in raw material and how much money each
has spent in turning the raw material into
throughput.
 A Note on the Operational Measures

◼ Throughput is specifically defined as money generated through

goods sold because finished goods is just an inventory. It is done
this way to prevent further production under the illusion that goods
would be sold. Such action simply increases costs, builds inventory
and consumes cash.

◼ Also note that in this approach inventory is valued only at raw

material prices unlike normal accounting procedures to avoid any
inflation in assets valuation due to wrong assumptions.

◼ Operating expenses does not distinguish between direct and indirect

costs. It includes all costs including administrative expenses,
depreciation, inventory carrying costs etc.
 How to know whether Productivity has
increased?
Ask these questions:
◼ Has throughput increased?

◼ Has inventory decreased?

◼ Has Operational expense decreased?

If the answer to any or all of these is yes

then productivity has increased. Not
otherwise. This leads us to a new
definition of productivity.
 A New Definition of Productivity

◼ PRODUCTIVITY IS ALL THE ACTIONS THAT BRING

A COMPANY CLOSER TO ITS GOALS

Note
The conventional definition of productivity as output
per labour hour does not ensure that the firm will
make money ( for example the extra output might
accumulate as inventory)
 Bottlenecks & Capacity Constrained Resources

◼ Bottlenecks: any resource whose capacity

is less than the demand placed on it.

Note:
◼ A bottleneck may be a machine, skilled labour, a special tool etc.

◼ Observations in the industry has shown that most plants have a

very few bottleneck operations.
◼ If there is no bottleneck then there is excess capacity and the
system should be changed to create a bottleneck, such as more
set ups or reduced capacity.
 Bottlenecks & Capacity Constrained Resources

◼ Capacity: is the available time for production excluding

maintenance and other downtime
◼ Non Bottleneck : is any resource whose capacity is
more than the demand placed on it. Therefore it
should not be working continuously.
◼ CCR ( capacity constrained resource) : is any resource
whose utilisation is close to its capacity and could
become a bottleneck if not scheduled carefully
 Methods for Control

The industry practice of using resource utilisation as a measure of

performance can encourage the overuse of non bottlenecks and
result in excess inventory.
To control effectively consider these:
◼ Know the Time Components first
◼ Find the bottleneck
◼ Save time on the bottleneck as much as you can (better tooling,
labour, lower set up times, larger batches). These time savings
are of immense value.
◼ Do not bother to save time on non bottlenecks. In fact use up the
extra time available by having smaller batches, more set ups etc.
This will all result in reduced inventory and / or reduced
throughput time.
◼ Avoid changing a non bottleneck into a bottleneck by scheduling
larger batches on these. (slide 27)
 Finding the Bottleneck

Two ways:
1. Run a capacity resource profile

ex: M/c 1 is loaded 130 % of capacity,

M/c 2 - 120%; M/c 3 – 90% etc.
1. Use our knowledge of the particular
plant and / or talk with supervisors and
workers.
 Methods of Control
Drum – Buffer - Rope

◼ A bottleneck controls the throughput of the system

like a drum beat controls sets the pace. So, this is
the control point which we call the drum
◼ We need to keep a buffer inventory in front of the
bottleneck so that it canNA
work continuously
◼ A rope back to the starting process for information
to flow regarding how much to release is necessary
◼ Level of buffer can be calculated statistically based
on past data or experimentally
 Methods of Control
Drum – Buffer - Rope

◼ If there is no bottleneck then the control point

(drum) should be the CCR
◼ We would require two inventory buffers, one in front
of the CCR and the other in Finished goods
◼ Two ropes , one from the CCR back to the starting
point and the other from the Finished goods back to
the CCR , would be required to pass information on
how much to produce to upstream stations.
 The Drum, Buffer and Rope
Rope Buffer Drum (bottleneck)

A B C D E F G

Buffer CCR
Buffer

A B C D E F G

Two Ropes

Note : In front of the bottleneck the inventory required may be higher

as compared to the inventory in the case of CCR with two inventory points
 Drum, Buffer and Rope

Customer orders and /or forecasts

Sub assembly
Buffer
Inventory
Sub assembly Sub assembly
M/c Centre
Buffer
Bottleneck
Parts Inventory
and
processing Time
sequences Buffer
Inventory

Raw
materials
 TOC THINKING PROCESS
A. A generic approach for continuous
improvement:
◼ What to Change?
◼ To What to Change to?
◼ How to Cause the Change?

B. “… the biggest obstacle to successful

implementation is to overcome
resistance to change.”
1.Current Reality Tree: 4. Prerequisite tree:
2. Evaporating Cloud: What currently prevents the implementation
Why is the system sick? What conflict is preventing the cure of the injection(s)?
UDE
Injection Injection
UDE
UDE Obst. Obst. Obst.
Cloud’s injection
Objective IO IO IO
UDE
Obst.
Core Obst.
Problem IO IO IO
Obst.
DE
IO
3. Future Reality Tree: DE
Will the injection lead to DE
all desired effects
without creating Inj 5. Transition tree:
Objective
new UDE’s? What actions does the initiator have to take to
DE effectively implement the cure?

IO
Inj
Initiator’s
action
Injection
IO Initiator’s
action

Initiator’s action
38
(which deals with
Obstacle)
 TWO PRODUCT EXAMPLE
P Q
100 unit/wk 80unit/wk
$90/unit $100/unit

Mach A Mach D
10 min 10 min

Mach C Mach C Mach B

10 min 5 min 10 min

Mach D Mach B Mach A

10 min 10 min 10 min

RM X RM Y RM Z
$25 $20 $20

(1) One unit for each machine type; 8 hrs/day & 5 days/wk;
(2) Labor & OH = $6,000/wk.
 End of Module
(Acknowledgement)
◼ The concepts and ideas presented in the slides are
based on concepts and ideas in the books mentioned in
your sessions plan and material freely available on the
internet, journals and other sources. These have been
put together for teaching, easy understanding and study
purposes only. The concepts or ideas do not belong to
the undersigned.
◼ These slides are meant as a guide and revision notes
only and are not sufficient.
◼ Therefore, Reading from Books is a MUST
- Thank you -
◼ Prof. Pintoo Shome
 EVOLUTION OF TOC

A. Creative Output Inc., 1976

B. The Goal: An On-Going Improvement
Process, 1984
C. Avraham Y. Goldratt Institute (AGI), 1986
D. It’s Not Luck, 1994
E. The Theory of Constraints & Its Implications
for Management Accounting, 1995
F. Critical Chain, 1997
G. Necessary but not Sufficient, 2000